A case from the US District Court of the Northern District of Ohio held that a third-party administrator (TPA) breached its fiduciary duty when it used plan assets to defray its own operating expenses. In this case, a company hired a TPA to administer the claims for its self-insured medical plan. Under the administrative services agreement, the TPA was responsible for paying medical claims from funds in a segregated bank account funded by the company. Periodically, the TPA would request a check from the company to cover medical claims. In response to the request, the company would send a check to the TPA to be deposited into the account used exclusively for the payment of benefits to plan participants. However, the TPA did not always deposit the funds in the account to pay for expenses incurred by the plan. Instead, the TPA deposited the funds in an account it used to pay for its own expenses. In all, the company transferred over $500,000 to the TPA for the payment of claims that were instead used by the TPA for its own purposes.
As a threshold issue, the court had to determine if the TPA was a fiduciary. ERISA Section 3(21) defines a person as a fiduciary if:
(i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation ... with respect to any money or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.
Although the administrative service agreement explicitly stated that “the claims administrator was not a fiduciary,” the agreement also gave the TPA authority over plan funds provided by the company. Because ERISA defines fiduciary in functional terms of control and authority, and because the TPA controlled plan assets and exercised its authority and control over the funds by determining the account into which the funds would be deposited, the court determined that the TPA was a fiduciary. The court granted the company's motion for summary judgment on the breach of fiduciary claim because, as a fiduciary, the TPA breached its duties by diverting the funds for its own uses rather than for the benefit of the plan's participants. This case can be instructive because it highlights that even if an administrative service agreement states that a party is not a fiduciary, ultimately the party's actions may cause it to be deemed a fiduciary. (Guyan International Inc. v. Professional Benefits Administrators, Inc., N.D. Ohio 2011)