A union discovered that its health insurance fund was paying a one percent surcharge to cover a state Medigap fee. Did the charges violate the Employee Retirement Income Security Act (ERISA)?

What happened. Pipefitters Local 636 Insurance Fund, an ERISA-governed health plan, was an insured group customer of Blue Cross/Blue Shield of Michigan (BCBSM) until June 2002, when it converted to a self-funded plan under an administrative services contract (ASC) with BCBSM. The ASC stipulated that BCBSM was “not the Plan Administrator, Plan Sponsor, or a named fiduciary for purposes of ERISA.” The ASC also provided that “any cost transfer subsidies or surcharges” required by Michigan law “will be reflected in the hospital claims cost contained in Amounts Billed.”

As a nonprofit insurer in Michigan, BCBSM must pay a one percent state Medigap fee on earned subscription income. BCBSM passed the fee on to the Pipefitters fund by building it into its claim cost structure from June 2002 to January 2004, when it discontinued the charges for business reasons.

In October 2004, the fund filed a lawsuit claiming that the charges violated BCBSM’s fiduciary duties under ERISA. The case was initially dismissed, but the fund won on appeal, receiving an award of $284,970 in damages plus $106,960 in interest. BCBSM appealed.

What the court said. The 6th Circuit Court of Appeals, which covers Kentucky, Michigan, Ohio and Tennessee, affirmed the judgment. The court noted that “an entity that exercises any authority or control over a plan’s assets becomes a fiduciary,” but that status depends on the “particular activity in question.” BCBSM argued that it merely acted as a “pass-through,” forwarding the state-imposed fee on to its customers.

The court found, however, that BCBSM had discretion in assessing the fee, as evidenced by the fact that BCBSM did not charge it to all clients and stopped charging it to the Pipefitters fund in 2004. The court, therefore, affirmed that BCBSM acted as a fiduciary when charging the fee.

The court further determined that BCBSM violated its fiduciary duties to act “solely in the interest of [plan] participants and beneficiaries” and to refrain from “self-dealing.” BCBSM “unilaterally determined whether to collect the . . . fee and determined the rate at which it would collect the fee from [the fund] despite the fact that the ASC did not authorize the exercise of such discretion,” and used the fees “to satisfy its independent Medigap obligation” to the state, the court found. Pipefitters Local 636 v. Blue Cross Blue Shield, 6th Cir., No. 12-2265 (7/18/2013).

Point to remember. As this case illustrates, fiduciary status under ERISA is based on the functions performed for the plan, not just an entity's stated role or a person’s title.