© copyright 2013 saul ewing llp mitigating employee benefit risks through contract negotiations...
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© Copyright 2013 Saul Ewing LLP1
Mitigating Employee Benefit Risks Through Contract Negotiations
Sarah (“Sally”) ChurchKevin A. WigginsSaul Ewing LLPOne PPG Place, 30th FloorPittsburgh, PA 15222
© Copyright 2013 Saul Ewing LLP
IRS CIRCULAR 230 DISCLOSURE
TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, WE INFORM YOU THAT ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THIS COMMUNICATION (INCLUDING ANY ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED HEREIN.
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Brief Summary of ERISA Title I
• Part 1: Reporting and Disclosure• Parts 2 – 3: Retirement Plan
Minimum Standards• Part 4: Fiduciary Duties and
Prohibited Transactions• Part 5: Enforcement and Other• Parts 6 – 7: Health Plan Minimum
Standards
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Selecting a Service Provider
• Engage in objective process designed to elicit information necessary to assess: Qualifications of provider Quality of services offered Reasonableness of fees charged in light
of services provided No self-dealing or prohibited
transactions• DOL Advisory Opinion 2002-08A4
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Selecting a Service Provider
• Ascertain Whether Service Provider Fees are Reasonable Compared to Industry Standards in Light of: Services to be performed Service provider’s qualifications Scope of provider’s obligations
• Report of 1996 ERISA Advisory Council www.dol.gov/ebsa/publications/
srvpro.htm 5
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Fiduciary Duties and Prohibited Transactions
• Duty of Prudence Satisfaction measured by conduct – a prudent
process – not results• Prohibited Transactions
ERISA requires fiduciaries to engage in a prudent process to avoid prohibited transactions
Fiduciaries are not necessarily liable if the process was prudent, even if the transaction turns out to be a prohibited transaction• Parties in interest and disqualified persons have strict
liability for excise taxes, regardless of process
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Fiduciary Duties and Prohibited Transactions
• ERISA Duty of Prudence Applies: At initial engagement On an ongoing basis (duty to monitor)
• RFP Every 3 Years? At termination of engagement
• Which outsourcing strategy better documents a prudent process?
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Outsourcing Strategies
• Sole Source Strategy• Competitive Strategy• Colloborative Strategy
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Sole Source
• Negotiate with only one vendor• Advantages
Builds on existing relationships Reduced costs Reduced processing time May be required by CBA
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Sole Source
• Disadvantages Less market information Less competition Less likely to find highest value vendor Less of a fiduciary process
• Hire advisor to benchmark• George v. Kraft Foods Global
Increased potential for self-dealing
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Competitive Strategy
• Negotiate with a broad range of vendors in an auction-like process
• Advantages More market information and
competition More likely to find highest value vendor More showing of fiduciary process
• Less need to hire independent advisor to benchmark
Reduced potential for self-dealing
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Competitive Strategy
• Disadvantages More time and costs
• RFI and RFP Adversarial process tends to reduce
trust May inhibit vendor’s response and
interaction during process
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Collaborative Strategy
• Negotiate with Two (or a Few) Select Vendors
• Engage in Parallel Negotiations with Each Vendor Similar to Sole Source Negotiations
• Advantages Less adversarial More trust More responsive vendors
• Disadvantages Less competition and market information
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Common Employee Benefit Contracts
• Retirement Plans Legal Trust/custodial services Recordkeeping and administration Audits Investment advisers and managers Investments Consultants
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Common Employee Benefit Contracts
• Health and Welfare Plans Legal Insurance contracts Administrative services/claims processing Network agreements Business associate agreements Pharmacy management Brokers Consultants Payroll (for new ACA reporting)
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Master Service Agreements
• Scope of Services Clear and comprehensive If the vendor promises it, they should
put it in writing• “Don’t worry, we never do that.”
Identify whether services are provided as fiduciary
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Master Service Agreements
• Detailed Statement of Work Reporting and disclosure
• Vendor will provide all information in its possession that plan needs to comply with ERISA
• Including 408(b)(2) for Retirement Plans Before you sign the agreement
Fiduciary duties (standard of care) Minimum standards Other
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Master Service Agreements
• Identify Correct Parties to Agreement Employer Committee or other plan fiduciary Plan (Trustee)
• Parties Covered by Agreement Make sure all plans that should be
included are included
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Standard Clauses
• Source of Fees Plan/Participants
• Fiduciary duties and prohibited transactions• Most ERISA risk• Vendors prefer credit risk of plan over
sponsor• Some contracts require plan to pay if
sponsor in bankruptcy• Plan should be default payor only after
deliberate consideration and documented fiduciary process
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Standard Clauses
• Source of Fees Investments (revenue sharing)
• Dates for crediting revenue sharing • Who earns interest on revenue sharing• Generally revenue sharing is not a plan
asset• Medium ERISA risk
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Standard Clauses
• Source of Fees Employer
• Lowest ERISA risk• Watch for plan listed as secondary payor
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Standard Clauses
• Audits Permissible audits
• 5500 audits• Financial audits
Date revenue sharing is credited• Compliance audits• Other audits
SSAE 16• Formerly SAS 70
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Standard Clauses
• Term of Contract• Termination
Reasons Notice
• Distinguish expiration from termination Automatic renewal or expiration? Unilateral option to renew Termination for cause or convenience Required notice
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Standard Clauses
• Termination Post-termination services are critical to
employee benefit plans Return, destruction, or retention of plan
information Data migration Claim runouts Survival clauses
• Indemnification for fiduciary breach should survive for applicable SOL
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Standard Clauses
• Representations and Warranties Legal compliance
• Most benefit plan outsourcing includes outsourcing of compliance functions
Service warranties• Services will be performed at a standard
that is generally accepted in the profession
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Standard Clauses
• Representations and Warranties Confidentiality of plan and participant
information• Used only for services under agreement
Commercially reasonable security• Prevent access to plan information and plan
assets Commercially reasonable disaster
recovery plan
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Standard Clauses
• Service level agreements not very common in industry, but there are some general categories General compliance
• E.g., timely reporting and disclosures• Hitech breach notification rules
Trust statements delivered monthly Stale checks posted back to trust at
least quarterly
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Standard Clauses
• Method of Communication Critical aspect of any agreement Investment directions
• Who authorizes money to be moved either within the plan or outside of plan
Allowable methods of communications• Consider encryption for both moving money
and PHI
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Standard Clauses
• Limits on Liability Unilateral or mutual Single or multiple caps Per claim, aggregate, per plan year, etc. Check for “hidden” limits
• Limits to E&O Insurance• Limits on Fiduciary Insurance
Ask to see policies
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Standard Clauses
• Limits on Liability Carve-outs
• Indemnification• Breach of fiduciary duties• Gross negligence/willful misconduct• Cost to correct Hitech breaches
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Standard Clauses
• Limits on Liability No indirect, special, or consequential
damages Many vendors limit to fees paid
• Limited to 3 X fees paid• Liability over term of contract limited to 3 X
fees paid during that term Watch for disclaimers and indemnification
of all HIPAA/HITECH liability• Some vendors directly liable
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Standard Clauses
• Indemnification Indemnify and hold harmless Defend and pay
• Consider Scope Plan Participants Fiduciaries (Committee) Employer (directors, officers, employees,
etc.) Controlled group
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Standard Clauses
• Indemnification for Third Party Claims Fraud, willful or intentional misconduct,
gross negligence, recklessness, negligence, breach of agreement• Materiality disclaimers
Running from vendor in favor of employer usually limited to failure to follow directions• Sweep clauses
Acts or failures to act
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Standard Clauses
• Indemnification for Third Party Claims Cross indemnification Timely notice of action Right to control action No settlement clause
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Standard Clauses
• Indemnification for Your Claims• ABC Co. v. Big Trust Co.
ABC alleged Big Trust Co. (“BTC”) knew ABC did not want plan assets involved in security lending
ABC alleged BTC allowed security lending through CIFs (managed by an affiliate of BTC) that engaged in security lending, causing plan losses
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Standard Clauses
• ABC v. BTC BTC defended that it was only following
investment instructions from FedEx BTC also counterclaimed for
indemnification
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Standard Clauses
• ABC v. Big Trust Co. Trust document provided: [ABC agrees to indemnify BTC] “against any loss or liability, including reasonable legal fees and expenses, incurred by [BTC] solely as a result of … following the direction of [ABC].” ABC filed a motion to dismiss the
counterclaim for contractual indemnification Motion denied
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Standard Clauses
• Protect your IP• Generally Limited to a License to Use
Company Logo, Trademark, or Service Mark License should be revocable at any time
for any reason by any method Right to review and approve any use Vendor required to notify you of misuse by
its employees Revoked at contract termination
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Standard Clauses
• Arbitration/Mediation/ADR Not particularly unique to benefit plans Health plan claims cannot be arbitrated
per DOL Regs
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QUESTIONS?
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