Settlor vs. fiduciary functions: which hat is your company wearing?
Deciding to adopt, change or end a health plan is a business decision. Running the plan is fiduciary work. Here is where the line sits and what to document.
Where The Line Sits.
ERISA does not make a company a fiduciary just because it sponsors a health plan. Under section 3(21)(A), 29 U.S.C. 1002(21)(A), a person is a fiduciary to the extent it exercises discretionary authority or control over the management of the plan, exercises any authority or control over its assets, or has discretionary authority or responsibility in the plan’s administration. The test follows what a person does, not the title on the door.
Courts use a word from trust law, settlor, for the person who creates and shapes a plan. When an employer decides what the plan will be, it acts as a settlor. When it carries the plan out, it acts as a fiduciary and must meet the duties in ERISA section 404(a), 29 U.S.C. 1104(a): act solely in the interest of participants and beneficiaries, act prudently, and follow the plan documents so far as they are consistent with ERISA. One company can do both jobs on the same day. That is the “two hats” idea. This page is general information, not legal advice.
Three Supreme Court Cases Employers Should Know.
Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73 (1995). This case involved a welfare plan. The Court held that the company’s reservation of the right to amend satisfied ERISA’s requirement, in 29 U.S.C. 1102(b)(3), that a plan state a procedure for amending it and identify who may amend it. The practical lesson is that the plan’s own amendment procedure matters, and that a change made outside it invites a challenge.
Lockheed Corp. v. Spink, 517 U.S. 882 (1996). The employer amended a defined benefit pension plan to add early retirement programs. The Court held that Lockheed, acting as plan sponsor, was not acting as a fiduciary when it amended the plan, extending the rule from the welfare-plan case to pension plans.
Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999). The Court again treated an employer’s plan amendment as a settlor act. It said that decisions about who receives benefits, in what amounts and how they are calculated fall within the settlor’s powers, whether the plan is contributory or not.
Spink and Hughes arose from pension plans, and Curtiss-Wright from a welfare plan. Whether a particular change to your health plan is purely a design choice is a question for your counsel.
Which Hat For Which Task.
Design choices, the settlor hat. Deciding what share of the premium the company will pay going forward, adding or dropping a benefit, changing deductibles or networks, or ending the plan are decisions about what the plan is. Make them as business decisions, and put them in writing under the plan’s amendment procedure, since Curtiss-Wright turned on that procedure. Other laws can still govern the change itself, even where fiduciary rules do not.
Administration, the fiduciary hat. Deciding a disputed eligibility question by interpreting the plan’s terms, deciding claims and appeals, and exercising discretion in running the plan are acts of administration. Section 1002(21)(A)(iii) covers any discretionary authority or responsibility in the plan’s administration.
Choosing and watching the carrier or TPA. Hiring a carrier or administrator to run the plan is generally treated as administration rather than design, which brings the prudence standard of section 404(a)(1)(B) into play. Read our guide to TPA contracts and fiduciary roles for the contract side.
Employee contributions. Under 29 CFR 2510.3-102, amounts withheld from pay for a plan become plan assets as of the earliest date they can reasonably be segregated from the employer’s general assets. For a welfare plan that date can be no later than 90 days after the employer receives them. Handling those dollars is not a design choice. See late health plan contributions.
Co-Fiduciary Liability And Delegation.
Section 405, 29 U.S.C. 1105(a), makes a fiduciary liable for another fiduciary’s breach of the same plan in three situations: knowingly participating in or concealing it, enabling it through the fiduciary’s own failure to act prudently in its own duties, or knowing of it and not making reasonable efforts to remedy it. A shared plan means shared watchfulness.
Responsibility can be allocated. Every plan must be established under a written instrument that names one or more fiduciaries with authority to run it, under 29 U.S.C. 1102(a)(1). Under 1105(c), the instrument may include procedures for allocating duties among named fiduciaries and for designating other people to carry them out. If the procedure is followed, the named fiduciary is generally not liable for the designee’s acts. The exceptions are a failure of prudence in making or continuing the designation, in setting up or carrying out the procedure, or liability under 1105(a). Delegation shifts the work, not the duty to supervise. For who holds which role, see plan administrator and named fiduciary designation.
What An Employer Should Document.
A fiduciary process is judged by its record. We suggest keeping these items together:
Plan design changes: the amendment, who approved it, and proof it followed the plan’s own amendment procedure.
Roles: the plan document’s list of named fiduciaries and any written allocation or designation under 1105(c).
Vendor decisions: why you chose the carrier or TPA, what you compared, and how you review it each year.
Money: the dates participant contributions were withheld and deposited.
Decisions: minutes noting which hat the group was wearing when it acted, and who decided claims and appeals.
Our fiduciary process review helps organize this, and counsel settles the close calls.
Laws And Sources
29 U.S.C. 1002: ERISA section 3 definitions, including fiduciary and administrator.
29 U.S.C. 1102: ERISA section 402, written instrument, named fiduciaries and amendment procedure.
29 U.S.C. 1104: ERISA section 404, fiduciary duties.
29 U.S.C. 1105: ERISA section 405, liability for breach by a co-fiduciary and allocation of responsibilities.
29 CFR 2510.3-102: when participant contributions become plan assets.
Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73
Lockheed Corp. v. Spink, 517 U.S. 882
Hughes Aircraft Co. v. Jacobson, 525 U.S. 432
General information, not legal advice.
Quick Answers.
Brief answers to what employers ask about settlor and fiduciary functions, each linked to a fuller page.
Is changing our company’s share of the premium a fiduciary decision?
Generally not. The Supreme Court has treated an employer’s amendment of a plan as a settlor act rather than a fiduciary act (Lockheed Corp. v. Spink, 517 U.S. 882; Hughes Aircraft Co. v. Jacobson, 525 U.S. 432). Carrying out the change, such as depositing withheld contributions, is separate work. Confirm the specifics with counsel.
Who is the fiduciary if our plan document does not say?
ERISA looks at function. Under 29 U.S.C. 1002(21)(A), a person is a fiduciary to the extent it has discretionary authority or control over plan management or administration. Separately, if the plan document names no administrator, the plan sponsor is the administrator under 1002(16)(A).
Can we hand fiduciary duties to our carrier or TPA?
Only through a procedure in the plan instrument, under 29 U.S.C. 1105(c). If it is followed, the named fiduciary is generally not liable for the designee’s acts, except for imprudence in making or continuing the designation or in the procedure itself. What a vendor agrees to take on is set by its contract.
What is co-fiduciary liability?
Under 29 U.S.C. 1105(a), a fiduciary can be liable for another fiduciary’s breach of the same plan if it knowingly participates in or conceals it, enables it by failing to act prudently in its own duties, or knows of it and does not make reasonable efforts to remedy it.
What should we document to show which hat we wore?
Keep the amendment and its approval, the plan’s named fiduciaries, any written delegation, the reasons for choosing and reviewing vendors, contribution deposit dates and meeting minutes. A fiduciary process review can help organize them.
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