Employers Act as Fiduciaries When Managing Premium Payments for Benefit Plans
The Sixth Circuit Court of Appeals, in Chelf v. Prudential Insurance Company of America, reversed a district court’s dismissal of a claim for breach of fiduciary duty based on ERISA’s “ministerial function” exception. This holding concludes that the employer (Wal-Mart) indisputably exercised control over the Plan’s assets as it handled the premium payments in question, thus acting as a fiduciary. The significance of fiduciary status is addressed below, as well as possible protection against this issue. The language of the employer’s Summary Plan Description may significantly mitigate its potential liability.
Elmer Chelf, a full-time, hourly associate at Wal-Mart, purchased basic life insurance, short-term disability, long-term disability, and optional term life insurance through Prudential and had any applicable premium payments deducted from his paycheck. In 2014, he requested a leave of absence from Wal-Mart and applied for short-term disability and, once that was maxed out in 2015, applied for long-term disability. While on disability leave, Mr. Chelf continued to make his life insurance premium payments and had accrued 50.8 hours of paid time off prior to his leave. His short and long-term disability premiums continued to be deducted from his paycheck, although this was not required per the Plan documents.
On April 17, 2016, Mr. Chelf passed away from natural causes, and Ms. Chelf filed a claim with Prudential for life insurance. Prudential approved the claim for basic life insurance but denied her claim for optional life insurance benefits. Ms. Chelf’s claim was also denied by Wal-Mart, upon voluntary appeal, and Wal-Mart upheld the denial of her appeal.
District Court Case
Ms. Chelf filed suit against Wal-Mart alleging the following breaches of fiduciary duty in violation of ERISA under 29 U.S.C. § 1132(a)(3): (i) “failed to disclose to [ ] Mr. Chelf that he had a right to convert his [optional] life insurance;” (ii) “failed to timely remit and to apply Mr. Chelf’s [optional] life insurance premium payments;” (iii) “failed to correctly advise Mr. Chelf concerning the actual [optional] life premiums due, if any;” (iv) “failed to apply Mr. Chelf’s unpaid time off to any past due [optional] life insurance premiums;” (v) “failed to advise Mr. Chelf that he could apply his unpaid time off to any outstanding [optional] life premiums paid;” (vi) “failed to comply with ERISA’s regulatory requirements, as well as the plan requirements, concerning Mr. Chelf’s [optional] life insurance coverage and adverse decisions; and” (vii) “failed to convey complete and accurate information material to Mr. Chelf’s circumstances.”
Wal-Mart filed a motion to dismiss, alleging that Ms. Chelf’s allegations “fell outside the scope of ERISA’s fiduciary requirements or administrative functions”, which the district court granted.
Ms. Chelf appealed.
The Sixth Circuit took issue with the district court’s assessment that Wal-Mart’s actions were “purely ministerial” and failed to rise to the level of fiduciary authority. Instead, the Sixth Circuit noted that those who collect premium payments as a “purely ministerial” function exercise “no discretionary authority or plan management” while Wal-Mart was clearly a fiduciary as it “indisputably exercised control over the Plan’s assets when it handled Mr. Chelf’s premiums, exercised control over the disposition of the Plan’s assets, and had discretionary authority over the administration of the Plan.” In fact, the very denial of Ms. Chelf’s appeal demonstrated Wal-Mart’s discretionary authority.
In addition, the Sixth Circuit held that Wal-Mart’s failure to correct the errors alleged by Ms. Chelf – the short and long-term premiums deducted in error, the failure to remit those premiums to Mr. Chelf’s optional term life insurance policy instead, the failure to apply accrued paid time off to the insurance premiums – demonstrated that Wal-Mart exercised control over the life insurance policy and premiums, which constituted a Plan asset, and that Wal-Mart owed a duty to correct these errors.
As a result of this analysis, the Sixth Circuit reversed the district court’s dismissal.
What Does This Mean?
Employers may be considered responsible if employees lose coverage under their benefit plans due to mishandling of premium payments. A properly worded Summary Plan Description may have mitigated the possibility of loss to the employer due to its nondisclosure of an employee’s rights following termination. A well-drafted Summary Plan Description should alert employees of their potential conversion rights regarding any insurance policies previously provided by the Plan.