mitigating employee benefit risks through contract negotiations

© 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.


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


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


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


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


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?


Outsourcing Strategies

• Sole Source Strategy• Competitive Strategy• Colloborative Strategy


Sole Source

• Negotiate with only one vendor• Advantages

Builds on existing relationships Reduced costs Reduced processing time May be required by CBA


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


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


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


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


Common Employee Benefit Contracts

• Retirement Plans Legal Trust/custodial services Recordkeeping and administration Audits Investment advisers and managers Investments Consultants


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)


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



• 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



• 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


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


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


Standard Clauses

• Source of Fees Employer

• Lowest ERISA risk• Watch for plan listed as secondary payor


Standard Clauses

• Audits Permissible audits

• 5500 audits• Financial audits

Date revenue sharing is credited• Compliance audits• Other audits

SSAE 16• Formerly SAS 70


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


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


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


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


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


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


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


Standard Clauses

• Limits on Liability Carve-outs

• Indemnification• Breach of fiduciary duties• Gross negligence/willful misconduct• Cost to correct Hitech breaches


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


Standard Clauses

• Indemnification Indemnify and hold harmless Defend and pay

• Consider Scope Plan Participants Fiduciaries (Committee) Employer (directors, officers, employees,

etc.) Controlled group


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


Standard Clauses

• Indemnification for Third Party Claims Cross indemnification Timely notice of action Right to control action No settlement clause


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


Standard Clauses

• ABC v. BTC BTC defended that it was only following

investment instructions from FedEx BTC also counterclaimed for

indemnification


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


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


Standard Clauses

• Arbitration/Mediation/ADR Not particularly unique to benefit plans Health plan claims cannot be arbitrated

per DOL Regs


QUESTIONS?

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mitigating employee benefit risks through contract negotiations

Documents

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