By: HUB’s EB Compliance Team

A recent lawsuit filed against Johnson & Johnson (“J&J”) related to their health plan serves as a reminder to employers that fiduciary duties apply to health and welfare benefit plans regulated by ERISA. These duties often receive greater focus for retirement plans given the proliferation of 401(k) fee litigation over the last decade plus, however they apply to health and welfare plans just the same. This lawsuit is the latest indication that more litigation related to health and welfare plans may be on the way.

Summary of Allegations

The lawsuit principally alleges the mismanagement of J&J’s prescription drug plan and thus a breach of the fiduciary duties owed to plan participants. The complaint contains many allegations, but in brief:

  • The plan paid much higher rates for certain medications as compared to the cash prices available to those without insurance.
  • The plan used a traditional Pharmacy Benefits Manager (“PBM”) rather than a “pass through” PBM.
  • The plan’s contract with the PBM allowed the PBM to steer those needing specialty prescriptions to the PBM’s own pharmacy.

Per the complaint, these and other allegations resulted in “higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays and lower wages or limited wage growth” had the plan fiduciaries not allegedly breached their duties.

Fiduciary Duties

To make sense of the case, one must understand who fiduciaries are, what their duties are, and who these duties are owed to. Under ERISA, fiduciaries are those who (a) are named as fiduciaries under the terms of the plan; (b) exercise any discretionary authority or discretionary control over the management of the plan or exercise any authority or control over the management or disposition of plan assets; or (c) have discretionary authority or discretionary responsibility in the administration of the plan.

Plan documents are required to name fiduciaries, which may be done specifically (“Jennifer Taylor is a named fiduciary of the XYZ Corp Plan”) or generally (“the Benefits Director is a named fiduciary of the XYZ Corp Plan”). Plans often have unnamed, or functional, fiduciaries who are still ultimately responsible for administering the plan for the benefit of plan participants and in accordance with the plan’s written document.

Plan fiduciaries owe the following duties to plan participants and beneficiaries.

  1. To act solely in the interests of plan participants and beneficiaries. (This is sometimes called the “duty of undivided loyalty.”)
  2. To act for the exclusive purpose of providing them benefits and paying reasonable plan expenses. (This is sometimes called the “exclusive benefit rule.”)
  3. To act with the care, skill, prudence, and diligence under the circumstances that a prudent person acting in that capacity, and familiar with such matters, would. (This is sometimes called the “prudent expert” rule.) Note, this is the duty alleged to have been breached in the Johnson and Johnson case.
  4. To follow the terms of the plan documents and other instruments governing the plan, as long as they are consistent with the law.

Importantly, not all plan administration functions or plan related decisions involve fiduciary duties. Certain functions related to the plan administration that do not involve the exercise of discretion are ministerial functions rather than fiduciary functions. For example, a payroll employee who inputs deductions for a given employee is not typically a fiduciary as they are merely applying the terms of the plan.

Likewise, many plan design decisions, such as the decision to offer a plan in the first place or the decision to offer multiple plan options, are considered settlor (i.e., the plan sponsor) functions. These settlor functions are not subject to ERISA fiduciary duties. In other words, these types of decisions can be made with the employer’s interests in mind.

Personal Liability for Fiduciaries

Under ERISA, fiduciaries are personally liable for their actions, as well as the actions of co-fiduciaries. We see this with the J&J claim where J&J, The Pension & Benefits Committee of Johnson and Johnson plus three HR executives are individually named as defendants. Although this has long been the reality, seeing the names of individuals included in the complaint has caught the attention of those serving in similar capacities.

Transparency’s Role

The Consolidated Appropriations Act of 2021 (“CAA”) added several new transparency requirements related to group health plans, including posting Machine Readable Files, RxDC Reporting, Gag Clause Attestations, and compensation disclosure for brokers and consultants. These requirements are part of the broader push for transparency in health care and require employee benefits brokers and consultants to disclose their related compensation to all ERISA group health plans.

This additional disclosure regime has widely been speculated to prompt a wave of health plan related litigation. However, it makes but a small appearance in the J&J lawsuit. The complaint points out that brokers and consultants are required to disclose compensation but does not allege a failure to disclose, or that such compensation received is not reasonable. As a result, the speculation that the CAA may lead to more litigation is not at play in this case.

Next Steps

HUB previously highlighted several ways fiduciaries can limit their exposure. The J&J lawsuit emphasizes the importance of these steps for plan fiduciaries.

  • Establish a benefits Committee. As a protective measure, some employers have looked to form benefits committees within their organizations. These committees often include those from other areas within the organization who would not otherwise be involved in the benefits decision making process. Most often, all members are plan fiduciaries and the committee may be named as the named fiduciary in the plans. However, some members of the company or outside advisors (like legal advisors) may not be formal members of the committee, but could be invited to attend as advisors.
  • Complete fiduciary training. The idea behind fiduciary training is to give plan fiduciaries an understanding of the scope of their responsibilities. Training can take many forms, such as a presentation at a committee meeting or written materials that committee members should review and discuss. Because memories fade and members change, it is good to refresh fiduciary training periodically.
  • Conduct and document Requests for Information/Proposals. For key service providers to plans, it is good to conduct periodic requests for information (“RFI”) or requests for proposal (“RFP”). This is sometimes referred to as a “market check.” These market checks help ensure that the benefit plan services are being provided at the best price and that the plan is leveraging the latest services and features.
  • Understand the terms of the plan document. The main way to ensure the plan is administered according to the written document is to understand what the written document contains. If the plan fiduciaries don’t know the contents of the plan, they can’t administer the plan according to those contents.
  • Review existing fiduciary liability coverage or consider obtaining such coverage. While fiduciary liability coverage is not required by ERISA, this coverage can provide protection for the employer as well as the plan fiduciaries individually from lawsuits brought against the plan.
  • Ensure Compliance with CAA’s Transparency Requirements. Complying with these requirements requires understanding how insurance carriers, Third Party Administrators, and PBMs are supporting plan sponsors. Thus, by complying with these requirements, plan sponsors can potentially demonstrate they are monitoring existing vendors and this fulfilling their fiduciary duties to do so.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.