Employer Fiduciary Duties - J and J Lawsuit

Employer Fiduciary Duties

February 2024

The recent class action lawsuit against Johnson and Johnson (J and J) has received a lot of attention from employers. The suit accuses J and J of breaching its duties as a fiduciary of their employer-sponsored health plan. The case is based primarily on how J and J handled the plan’s purchase of prescription drugs. While there are some unique aspects to the case, it serves as a reminder to employers that as fiduciaries they have a responsibility to act in the best interest of plan participants.

J and J Lawsuit

J and J is accused of overpaying for certain drugs that were available at much lower costs, causing participants to spend significantly more than necessary for similar medications. The suit also accuses J and J of profiting from the plan because some of the more expensive medications paid for by the plan were actually sold by J and J. Another important aspect of the J and J case is that, unlike most employers, the J and J health plan assets are held in trust, meaning that all participant and employer contributions to the trust are plan assets subject to ERISA fiduciary requirements.

Employer Fiduciary Responsibility Basics

ERISA §404 outlines the duties of a plan fiduciary and requires fiduciaries to perform their duties:

• solely in the interests of participants and beneficiaries;
• for the exclusive purpose of providing plan benefits, or for defraying reasonable expenses of plan administration;
• with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use; and
• in accordance with the documents and the instruments governing the plan insofar as those documents and instruments are consistent with ERISA.

Fiduciary duties include, among other things, setting and following plan terms such as benefit inclusions and exclusions, eligibility for coverage, and claims procedures; adopting formal plan documents; providing participant disclosures; reporting certain information to the government (e.g., Form 5500s); and perhaps most importantly, properly handling plan assets.

ERISA’s fiduciary responsibilities apply when plan assets are involved. For most employer-sponsored health benefits, plan assets consist of employee contributions and other plan funds that are held in trust. Very few employers who are subject to ERISA use a trust to fund their employer-sponsored health insurance plans, so it is principally the use of employee contributions and how benefits are paid that is relevant to most employers.

It can be difficult to say whether any particular action or decision would be considered a breach of fiduciary duty. Employers should perhaps think more broadly, taking into consideration all the facts and circumstances of the situation and how someone manages a plan. For example, an employer choosing a vendor that is not the “cheapest option,” but that provides value to the plan in other ways, would not be a breach of the employer's fiduciary responsibility. However, a CFO choosing to work with a vendor owned by his son that charges significantly higher fees than other available options could be grounds for a claim of a breach of fiduciary duties.

Who is a Plan Fiduciary?

Employer-sponsored plans subject to ERISA should have a named fiduciary. Typically, this is an individual, or sometimes a committee of people, working for the plan sponsor with decision-making authority. However, fiduciary status can also flow from the plan functions performed by a person who is not otherwise named as a fiduciary. It is not person's title, office, or other formal designation that determines fiduciary status.

Specifically, under ERISA §3(21), a person is a “fiduciary” with respect to an employee benefit plan to the extent that the person:

• exercises any discretionary authority or discretionary control respecting management of the plan or exercises any authority or control respecting management or disposition of plan assets;
• renders investment advice for a fee or for any other compensation, direct or indirect, or has any authority or any responsibility to do so; or
• has discretionary authority or discretionary responsibility in the administration of the plan.

In practical terms, this often means a vendor has some fiduciary responsibility for an employer’s plan, even if they are not formally named as a fiduciary or claim that they are not a fiduciary.

Employer Actions & Concerns

Employer plan sponsors have an obligation to regularly monitor benefit compliance requirements and to operate their employer-sponsored plans accordingly. It is important for employers to document and communicate their plan terms and administrative procedures and to follow such procedures whenever possible. Employers must also be thoughtful in how employee contributions are collected and how quickly they are deposited or used toward elected benefits.

For fully insured plans, the carriers play a significant role and share in the compliance responsibility with the employer plan sponsor. For employers who offer level-funded or self-funded plans, there is an increased level of responsibility for the employer, although the employer will typically contract with third party vendors to assist in meeting its obligations.

Employers have a responsibility to do their due diligence when selecting plan vendors, and to monitor, to the best of their abilities, the actions of those vendors. New rules contained in recent legislation like the Consolidated Appropriation Act of 2021 (CAA) and the Transparency in Coverage (TiC) regulations have made vendor management even more important. Most employers cannot comply with many of these requirements without the assistance of one or more of their health plan vendors. Prescription drug (RxDC) reporting and compliance with the non-quantitative treatment limitation (NQTL) rules contained in the mental health parity regulations are examples of compliance obligations where the employer may not even have the data or information necessary for compliance. In these situations, the employer’s fiduciary responsibility is primarily to carefully select vendors and monitor their compliance with applicable rules to the best of their ability. Obviously, the more direct involvement an employer has in plan operations and decisions, the more responsibility the employer has. In addition, the CAA and TiC regulations may provide access to more information that is helpful to employers as plan sponsors, as well as to participants, but may also heighten the employer’s fiduciary responsibilities to appropriately respond to such information.

The following are some steps employers can take to minimize the risk of fiduciary liability:

• Include a compliance responsibility analysis as a critical part of the vendor selection process.
• Review vendor contracts and consider including indemnification provisions that protect the employer as plan sponsor.
• Consider purchasing fiduciary liability insurance.

Summary

It will be interesting to see how the J and J lawsuit turns out, but many of the specifics of the case would not apply to most employers. Most employers choose their carrier, TPA, and/or PBM and have little control over the exact drugs that are covered or are included in their formulary. While the specific facts of the J and J lawsuit are unlikely to apply to most employers, the case serves as a reminder that employer plan sponsors have a responsibility to operate their plans in the best interest of the participants, and that vendor selection and management is one of the most important fiduciary duties of many employers.

More information regarding Fiduciary Responsibilities are outlined on the Department of Labor website.

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