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The Affordable Care Act’s Impact on Fiduciary Liability Insurance


The Affordable Care Act’s Impact on Fiduciary Liability InsuranceFiduciary Liability and ACA Compliance

As with other emerging litigation trends, the fiduciary liability landscape has become increasingly riskier today.  Allegations against fiduciaries and plan sponsors of employee benefits (medical, life, disability) involve inappropriate investment options, misrepresentation of the risks of employer securities, allowance of excessive fees and expenses charged to plans and failure to administer plans as per the plan terms. What’s more, the Affordable Care Act (ACA), or Obamacare, passed into law in 2010 and now underway may further complicate the fiduciary liability environment.

The ACA has dramatically amended and expanded Employee Retirement Income Security Act of 1974 (ERISA) and the Public Health Services Act by adopting the ACA’s coverage provisions for individual, group, self-insured and fully insured employer-sponsored health plans. ERISA requires accountability of plan fiduciaries and gives participants the right to sue for benefits and breaches of fiduciary duty regarding the administration of plan benefits. ERISA itself does not require any employer to establish a plan, but it does require that those who establish plans meet certain minimum standards for reporting plan information to participants, participation levels, vesting of benefits, benefit accrual and plan funding.

The ACA applies to midsize employers – those with between 50-100 employees – in addition to large companies with more than 100 employers and self-funded plans. The law also makes a distinction in terms of mandated coverage between full-time workers (those with 30 or more hours per week) and part-time workers, who aren’t required to be covered under the ACA. Since the initial legislation and subsequent enrollment from October through March, there have been a number of delays in some of the provisions and compliance issues as well as exceptions made. Even more recently, there have been proposals in the Senate to change the number of employees considered full time from 30 to 40. How the ACA implementation in addition to provision delays and exceptions all play out in terms of increased fiduciary liability exposure will depend on how well employers understand and implement the reforms.  We have already seen employers re-classifying full-time employers as part-timers to get around ACA compliance. This could potentially increase an employer’s exposure to allegations that health insurance benefits are being denied if benefits were once available to these workers previously.

Also, under the ACA, employers can charge a 30% healthcare premium differential to employees based on participation or performance in health promotion; smokers can be charged up to a 50% difference. According to the Towers Watson, this year, almost four in 10 (36%) U.S. companies will use penalties such as an increase in premiums and deductibles for individuals who do not complete the requirements of health management activities (with a jump to 61% for 2015/2016). Outcome-based incentives that reward or penalize employees based on tobacco use will grow from 54% next year to 71% in 2015/2016. Moreover, rewards or penalties for other biometric outcomes (e.g., health-contingent targets such as BMI, blood pressure or cholesterol level) will dramatically increase from 26% in 2014 to 68% in 2015/2016. These penalties could add to increased fiduciary liability exposure and allegations of discrimination under federal laws.

Another potential area of fiduciary liability concern is with self-funded plans and the possibility of more frequent and intensive ERISA compliance reviews. Findings of errors in plan administration can result in fines and potential civil or even criminal action against the plan administrator. The trustee(s) of self-funded plans can also face significant personal liability for discrepancies, miscalculations or violations of guidance or rules. Some examples of these violations would include: failure to properly choose or monitor plan services providers; use of plan assets to discriminate by benefiting selected parties relating to the plan; bringing action or retaliation against a plan participant for asserting or exercising his plan-given rights, such as termination of coverage, and several others.

Protection for Fiduciaries

Fiduciary insurance protects entities, their officers, directors, stockholders, partners and partnerships, as well as employees who are authorized to act in the administration of any plan, in the event of a claim against them by former, present, or future employees, their beneficiaries, or legal representatives. The damages, if covered, depend in part on negligent acts, errors or omissions in the administration of various benefit plans.

With today’s new healthcare environment, it’s critical that a company’s Fiduciary insurance is reviewed carefully and that coverage is broad enough to include penalties arising from ACA non-compliance. At Axis Insurance Services, LLC, we specialize in Fiduciary insurance and would be happy to review your coverage and go over what policies are available today that address emerging exposures. Give us a call at (877) 787-5258.

Sources: Rough Notes, Chubb Insurance, Travelers Insurance

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Blogged on: April 28, 2014 by Mike Smith
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