An employee benefit plan that includes an alleged subsidization component for its basic and supplemental options is neither prohibited by the Employee Retirement Income Security Act of 1974 (ERISA) nor a violation of the plan sponsor or service provider’s fiduciary duties, a federal district court in Connecticut held on March 29, 2016. The district court dismissed a putative class action against The Hartford Financial Services, Inc. (the Insurer) and Family Dollar Stores, Inc. (the Company) filed in connection with the Company’s group and supplemental life insurance payment structure.1  

Plaintiffs—who were participants in the Company’s group life insurance plan— sought to recover for alleged “overcharges” they were assessed as premiums to obtain group life insurance coverage. Plaintiffs alleged that the Insurer and the Company engaged in a “cross-subsidization scheme” to overcharge plaintiffs for supplemental life insurance that was higher than called for by the underwriting and actuarial pricing experience for the purpose of lowering the price that the Company incurred for “non-contributory” basic group life insurance coverage. Plaintiffs alleged that the Insurer and the Company implemented and maintained their cross-subsidization scheme by misrepresenting that the Company was paying entirely for the basic non-contributory group life insurance and by not disclosing the inflated charges built into the supplemental life insurance policies in order to subsidize the basic life insurance. In connection with this payment structure and alleged misrepresentations, plaintiffs alleged that the Insurer and the Company violated ERISA’s prohibited transaction and fiduciary rules and were unjustly enriched under federal common law. The Insurer and the Company both separately moved to dismiss the action. 

In its motion to dismiss, the Company argued that under U.S. Court of Appeals for the Second Circuit precedent,2 setting premiums for basic and supplemental life insurance is part of plan design and is not a fiduciary function subject to ERISA’s fiduciary rules. Moreover, the Company argued that all of the premiums plaintiffs paid were used to pay for life insurance under the plan. Finally, the Company argued that plaintiffs’ state law claims were preempted by ERISA. If there were an ERISA breach, the Company argued that only ERISA could provide the remedy for that violation.

In its motion to dismiss, the Insurer argued that an insurance provider is not an ERISA fiduciary when negotiating the price of services it will provide to a plan.  Further, the Insurer argued that even if it were a fiduciary at the time, negotiating discounts for certain benefits does not constitute a violation of fiduciary duty, and the Insurer did not misrepresent the pricing structure of the life insurance coverage it provided because it accurately disclosed the premium for the supplemental insurance. Further, the Insurer argued that it had no duty to disclose the details of the pricing arrangement for the basic and supplemental life insurance coverage to the Company’s employees. 

The Insurer argued that plaintiffs’ claim that it knowingly participated in a breach of fiduciary duty should be dismissed because the Company’s decision to purchase insurance that contains cross-subsidization pricing was proper; the Company breached no fiduciary duty, and therefore it did not participate in a fiduciary breach. Finally, the Insurer argued that it was not liable for any alleged prohibited transaction under ERISA because none of the actions alleged against it constituted prohibited transactions. Moreover, as a non-fiduciary, it could only be liable for a fiduciary’s breach3 if it “knowingly participated” in the breach  and in any event, only for equitable relief, not money damages under ERISA.

In its decision on the motions, the court dismissed all counts against both the Insurer and the Company. First, the court acknowledged the Insurer’s position that it was not a fiduciary with respect to negotiating plan premiums, noting that plaintiffs may have conceded that position. In any event, however, the court rejected plaintiffs’ arguments that the Insurer could become a fiduciary via the terms of the arrangement, holding that “with respect to an agreement to provide a service to an ERISA plan, where a term of the agreement is bargained for at arm’s length, adherence to that term is not a breach of fiduciary duty.”4 

Turning to plaintiffs’ misrepresentation arguments, the court held that the Insurer had no duty to disclose cost-containment mechanisms or financial incentives for cost savings in its plans, relying on a New York federal district court decision5 that had considered an “identical omission claim.” Plaintiffs had attempted to distinguish that case and instead liken it to an Ohio case6 in which a defendant health insurer was held liable for its representation that policyholders would be responsible for a 20% co-payment for their medical expenses, when in reality, the insurer determined the co-payments based on the total amount billed by the healthcare providers (rather than the discounted amount that was actually paid to the providers by the insurer). The court found the Ohio case to be “plainly inapposite,” since in that case, the insurer misrepresented the amounts that the policyholder must pay for future medical expenses, whereas here, the sole allegation was that the Insurer and the Company misrepresented how plaintiffs’ premiums would be allocated by the plan sponsor after they were assessed. 

Since the court found that neither defendant had breached any fiduciary duties, it dismissed plaintiffs’ co-fiduciary liability claims. The court dismissed plaintiffs’ claim that the Insurer had engaged in a prohibited transaction, finding that Plaintiffs failed to allege that the Insurer breached any fiduciary duty owed to plaintiffs by engaging in self-dealing with plan assets. The court also dismissed plaintiffs’ unjust enrichment claim, finding that plaintiffs failed to properly respond to the Company’s argument that no independent federal common law cause of action for unjust enrichment exists where ERISA already provides for the sole and exclusive remedy for the alleged conduct.

On April 26, Plaintiffs appealed this case, which is currently pending before the Second Circuit. As it currently stands, this decision is helpful to plans and service providers in reconfirming situations where the service provider will not be deemed a fiduciary and in rejecting efforts to invalidate the structure of a basic/supplemental group life insurance arrangement.