ERISA Fiduciary Duties Under Scrutiny: Potential Third-Party Administrator Liability

Recent ERISA litigation has increasingly targeted third-party administrators (TPAs) and service providers for alleged mismanagement of self-funded health plans.

These lawsuits assert that TPAs acted as ERISA fiduciaries and breached their duties by failing to prioritize the interests of plan participants and beneficiaries in how they administered the plan and handled the disbursement of its assets.

In one such case, Tiara Yachts Inc. v. Blue Cross Blue Shield of Michigan, the Sixth Circuit opined that Blue Cross Blue Shield of Michigan’s (BCBSM) role in processing claims and profiting from overpayments gave rise to fiduciary responsibilities under ERISA. The Court rejected BCBSM’s argument that contractual arrangements shield TPAs from fiduciary liability.

Claims and Holdings

Tiara Yachts, which sponsors a self-funded plan, alleged that BCBSM systematically and intentionally overpaid health claims. These overpayments were allegedly the result of flawed “flip logic.” Specifically, BCBSM reimbursed out-of-state providers based on their billed charges rather than the discounted rates negotiated through its network.

Rather than correcting these errors in a manner that would be most beneficial to the plan, BCBSM allegedly implemented a Shared Savings Program (SSP). Under this program, BCBSM hired third-party vendors to recover past overpayments and prevent future ones. However, BCBSM retained 30% of the recovered or prevented amounts as compensation which raised concerns that it profited from its own mismanagement.

The district court initially dismissed Tiara’s claims, concluding that BCBSM was not acting as an ERISA fiduciary. The Sixth Circuit reversed, holding that Tiara had plausibly alleged fiduciary conduct.

The Sixth Circuit emphasized ERISA’s functional approach to fiduciary status, noting that fiduciary duties arise when a party exercises authority or control over plan assets or discretionary authority over plan management or administration. The Court clarified that fiduciary status is not an “all or nothing” concept. A party may be deemed a fiduciary when performing specific functions that involve discretion or control over plan assets.

The Sixth Circuit found that BCBSM had the authority to write checks from the plan account, exercised control over how and when plan funds were disbursed, determined which claims to pay and how much to pay, and used its discretion in administering the SSP to set its own compensation. The Court viewed these as fiduciary acts. The Court held that contractual performance can reveal fiduciary conduct, especially when discretion is exercised in a way that affects plan assets.

Implications for Plan Sponsors

This decision underscores the importance of scrutinizing how TPAs manage plan assets. Even when acting under a contract, TPAs may be deemed fiduciaries if they exercise discretion or control over plan funds. To mitigate fiduciary risk, plan sponsors should ensure that compensation arrangements with TPAs are transparent and do not incentivize behavior that conflicts with plan interests. Plan sponsors should also keep detailed records of their decision-making processes to support fiduciary oversight and demonstrate compliance.

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