Question: What are the main categories of ERISA fiduciary duties for employers sponsoring health and welfare employee benefit plans, and how does the J&J class action lawsuit turn on this issue?

Short Answer: Employers generally are subject to the ERISA plan administrator fiduciary duties of loyalty (the exclusive benefit rule), prudence, diversification, and to follow the plan terms. These duties are derived from trust law, and they are generally described by courts as the highest duties known to the law. The class plaintiff in the J&J case alleges that the company breached its fiduciary duties to participants and beneficiaries by not prudently monitoring the plan’s prescription drug costs.

Note: This is part of our series addressing practical considerations for employers related to the J&J case.

• J&J Case Practical Considerations: The ERISA Trust Rules for Health Plans (Part 1)

• J&J Case Practical Considerations: The ERISA Trust Rules for Health Plans (Part 2)

The J&J Case: ERISA Fundamentals Revisited

In light of the recent class action lawsuit filed against Johnson & Johnson (“J&J”) as employer-plan sponsor of its group health plan (Lewandowski v. Johnson & Johnson, et. al., D.N.J., No. 1:24-cv-00671 (Feb. 5, 2024)), we are reviewing the ERISA basics that may both affect the outcome of the case and offer employers as interested observers the opportunity to revisit best practices to better avoid such potential liability.

The plaintiffs in the J&J case principally allege that the company breached its fiduciary duty by mismanaging the health plan’s prescription drug benefit program, costing their ERISA plans and their employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth.

The complaint argues that J&J breached its fiduciary duty by failing to engage in a prudent and reasoned decision-making process that would have drastically lowered the cost of prescription drugs in general and generic-specialty drugs in particular, and would have resulted in other cost savings for the plan. The allegation is that a fiduciarily prudent approach would have saved the plan and employees millions of dollars.

The words “fiduciary” and “fiduciaries” are used over 150 times in the J&J complaint. The document walks through the fiduciary duties imposed by ERISA, and specifically homes in on the duty of prudence as the central focus of the allegations. These posts review the four foundational ERISA fiduciary duties imposed upon ERISA plan administrators, the key issues to be aware of, and the practical considerations for employers both generally and in light of the J&J case’s introduction of a new aspect of potential liability.

• Newfront Note: The J&J case is merely at the initial complaint stage. Before considering radical changes to plan governance that may be costly, time consuming, and of indeterminable benefit, our recommendation is that employers return to the basic ERISA principles that have proven effective at avoiding potential liability. This series is intended to focus on those concepts—while maintaining an eye to the horizon for how this case (and potentially others) develops in litigation. The outcomes will drive best practices, including whether new approaches and processes might be warranted.

Employer Fiduciary Duties

ERISA is designed to impose on employers the same type of fiduciary obligations as apply to trustees of a trust, who must act in the best interest of trust beneficiaries. These fiduciary duties are commonly described by courts as “the highest known to the law.” Employers in a fiduciary role must act in accordance with that same “best interests” standard with respect to plan participants and their dependents based on the fiduciary duties set forth under ERISA.

In the vast majority of situations, the employer is an ERISA fiduciary. Employers sponsoring a single employer plan are the default ERISA “plan sponsor,” which in turn means they are the default ERISA §3(16) plan “administrator”. The DOL has confirmed that the ERISA plan administrator role is always a fiduciary position by the nature and responsibilities of its position.

• The J&J Connection: The J&J complaint alleges that the company delegated “administrator” status to a benefits committee comprised of the CHRO, VP of HR, and others. Board delegation of fiduciary duties to a committee with oversight of health and welfare plan benefits has traditionally been a practice reserved almost exclusively for very large employers. The committee delegation process is much more common with respect to 401(k) and other retirement plan governance, where excessive fee litigation has been broadly pervasive.

Note that employers delegate many aspects of plan administration to outside service vendors, frequently referred to as “third party administrators” or “TPAs”. However, these TPAs almost uniformly are not acting as the ERISA §3(16) plan administrator—that fiduciary role is almost always occupied solely by the employer.

• For more details: Newfront ERISA for Employers Guide

When Do the ERISA Fiduciary Duties Apply?

ERISA requires that all plans be established and maintained pursuant to a written plan document that sets forth one or more named fiduciaries. In most health and welfare plans, the named fiduciary is the ERISA plan administrator, which is almost always the employer.

• The J&J Connection: Many commentators have suggested that the appropriate response to the J&J case is to establish a benefits committee to which the employer delegates named fiduciary status. Employers considering this approach should keep in mind that J&J allegedly had a fiduciary benefits committee, yet J&J was nonetheless the target for the first major health plan class action lawsuit to test this excessive fee breach of fiduciary duty theory. Furthermore, if the allegations in the complaint are correct, the company appears to have made clear missteps in controlling the plan’s prescription drug benefit costs despite delegating oversight to a committee with such authority. Employers should therefore carefully consider whether this type of knee-jerk reaction to the J&J complaint is appropriate given that the establishment and maintenance of a benefits committee would involve a considerable commitment of time (and likely funds), and it appears to have been an ineffective strategy for J&J itself.

The individuals who act in a fiduciary capacity for the employer are those who perform fiduciary functions for the plan. ERISA sets out those functions to include individuals who:

• Exercise any discretionary authority or discretionary control respecting management of the plan or disposition of its assets;

• Render investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the plan, or have any authority or responsibility to do so; or

• Have any discretionary responsibility in the administration of the plan.

In many cases, it can be difficult to determine exactly who is acting in a fiduciary function with respect to the plan—particularly as to whether the individual has discretionary responsibility in the administration of the plan. DOL guidance provides a helpful way to draw lines in this area by confirming that purely “ministerial” functions are not fiduciary functions. Those positions and duties that do not act with discretionary authority, control, or responsibility do not convey a fiduciary responsibility.

In other words, persons who have no power to make any decisions as to plan policy, interpretations, practices, or procedures are not acting as fiduciaries. Rather, such individuals are merely following administrative functions for the plan within a framework of policies, interpretations, rules, practices, and procedures.

Even those individuals who are a plan fiduciary will nonetheless act in a non-fiduciary role when making decisions relating to the establishment, design, amendment, and termination of the plan. The DOL refers to these roles as “settlor” functions, and it takes the position that such activities related to the formation (rather than the administration or management) of the plan are not within the scope of ERISA’s fiduciary obligations.

For example, employers are not bound to a best interest fiduciary standard when amending the plan to reduce benefits. It makes sense that such business-type decisions would not be subject to fiduciary restrictions because otherwise the plan could only be made richer. However, any activities undertaken to implement the employer’s settlor decisions (e.g., to implement the plan amendment) generally are fiduciary in nature and therefore would be subject to the ERISA fiduciary obligations.

The Core Four ERISA Fiduciary Duties

In sports, the “core four” typically refers to the key contributors on a “dynasty” championship team—most notably Jeter, Pettitte, Posada, and Rivera on the Yankees in the late 90s and early 2000s. In employee benefits, the “core four” concept represents the fiduciary duties imposed by ERISA—a dynasty of sorts in its own right since 1974. These four fiduciary duties form the foundation for employer responsibilities as the ERISA plan “administrator” with respect to employee benefit plans.

ERISA Fiduciary Duty #1: The Duty of Loyalty (Exclusive Benefit Rule)

ERISA’s first and most prominent fiduciary duty requires employers to act solely in the interest of plan participants and beneficiaries with respect to any fiduciary function. Such actions must be for the exclusive purpose of providing benefits and paying plan expenses.

This duty is most commonly referred to as the “Exclusive Benefit Rule.” The DOL describes the Exclusive Benefit Rule as the “primary responsibility of fiduciaries” under ERISA. Courts have interpreted the Exclusive Benefit Rule to require fiduciaries to act with complete and undivided loyalty to the participants and beneficiaries, and that their fiduciary decisions be made with an “eye single” to those interests.

• The J&J Connection: The breach of fiduciary duty claim brought in the J&J case does not appear to allege any self-dealing on the part of the company. In other words, there is no allegation that the company put its own interests ahead of the interests of plan participants, for example, to enrich the company through excessive plan payments for prescription drugs and other related products in which J&J has a revenue interest as a pharmaceutical corporation. Rather, the focus of the complaint is on J&J’s alleged failure to prudently monitor the plan’s prescription drug costs to ensure they were reasonable, as required to administer the plan in the best interest of plan participants.

Plan fiduciaries should treat the Exclusive Benefit Rule as the guiding North Star that should be the first reference point when making discretionary determinations in plan management and administration. The “Is this action in the best interests of participants?” question should undergird any good fiduciary pathway and be an omnipresent focus for fiduciaries when performing any fiduciary function.

Exclusive Benefit Rule Common Application Example: MLR Rebates

One common area where the Exclusive Benefit Rule is more explicitly at the forefront is with respect to medical loss ratio (MLR) rebates from insurance carriers, or other similar carrier rebates to the employer. The DOL has interpreted the application of the Exclusive Benefit Rule to MLR rebates in Technical Release 2011-04, treating such rebates as plan assets under ERISA to the extent they are attributable to employee contributions.

The DOL provides employers with three options for allocating these plan assets in a manner consistent with the Exclusive Benefit Rule. These fiduciary considerations also govern the timing restrictions to make such plan asset allocations (generally three months of receipt) and whether former participants must be included in such allocations (generally required unless the cost of distribution exceeds the amount of the rebate itself).

• For more details: MLR Rebates

Exclusive Benefit Rule Common Application Example: Health FSA Forfeitures

Another common area where employers directly confront limitations imposed by the Exclusive Benefit Rule is in the context of health FSA experience gains caused by employee forfeitures. In other words, where the total health FSA contributions exceed the total health FSA reimbursements for the plan year. This will occur where the health FSA forfeitures (employee failures to submit qualifying expenses sufficient to meet their contributions) are higher than the health FSA losses (employees terminating mid-year with an overspent account) for the plan year.

In this situation, the Exclusive Benefit Rule likely prevents employers from allocating health FSA experience gains from forfeitures to fund the administrative expenses of another employee benefit such as the employer’s health plan, dependent care FSA, wellness program, lifestyle spending account, or commuter benefits. Applying the health FSA experience gains to other benefits would likely breach the Exclusive Benefit Rule because not all of the health FSA participants would be participants in those other benefits, and therefore the funds would not be used for the exclusive benefit of the health FSA participants.

• For more details: FSA Experience Gains from Forfeitures

Our series exploring the J&J case practical considerations continues next time with Part 2 of the ERISA fiduciary responsibilities for employers with respect to their health and welfare plan benefits.

Relevant Cites:

ERISA §3:

(16)

(A) The term “administrator” means—

(i) the person specifically so designated by the terms of the instrument under which the plan is operated;

(ii) if an administrator is not so designated, the plan sponsor; or

(iii) in the case of a plan for which an administrator is not designated and a plan sponsor cannot be identified, such other person as the Secretary may by regulation prescribe.

(B) The term “plan sponsor” means (i) the employer in the case of an employee benefit plan established or maintained by a single employer, (ii) the employee organization in the case of a plan established or maintained by an employee organization, (iii) in the case of a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan, or (iv) in the case of a pooled employer plan, the pooled plan provider.

…

(21)

(A) Except as otherwise provided in subparagraph (B), a person is a fiduciary with respect to a plan to the extent (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, direct or indirect, with respect to any moneys 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. Such term includes any person designated under section 405(c)(1)(B).

ERISA §402(a):

(a) Named fiduciaries. (1) Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.

(2) For purposes of this title, the term “named fiduciary” means a fiduciary who is named in the plan instrument, or who, pursuant to a procedure specified in the plan, is identified as a fiduciary (A) by a person who is an employer or employee organization with respect to the plan or (B) by such an employer and such an employee organization acting jointly.

ERISA §404(a)(1):

(1) Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this title and title IV.

29 CFR §2509.75-8:

Q. D-2Are persons who have no power to make any decisions as to plan policy, interpretations, practices or procedures, but who perform the following administrative functions for an employee benefit plan, within a framework of policies, interpretations, rules, practices and procedures made by other persons, fiduciaries with respect to the plan:

(1) Application of rules determining eligibility for participation or benefits;

(2) Calculation of services and compensation credits for benefits;

(3) Preparation of employee communications material;

(4) Maintenance of participants' service and employment records;

(5) Preparation of reports required by government agencies;

(6) Calculation of benefits;

(7) Orientation of new participants and advising participants of their rights and options under the plan;

(8) Collection of contributions and application of contributions as provided in the plan;

(9) Preparation of reports concerning participants' benefits;

(10) Processing of claims; and

(11) Making recommendations to others for decisions with respect to plan administration?

A. No. Only persons who perform one or more of the functions described in section 3(21)(A) of the Act with respect to an employee benefit plan are fiduciaries. Therefore, a person who performs purely ministerial functions such as the types described above for an employee benefit plan within a framework of policies, interpretations, rules, practices and procedures made by other persons is not a fiduciary because such person does not have discretionary authority or discretionary control respecting management of the plan, does not exercise any authority or control respecting management or disposition of the assets of the plan, and does not render investment advice with respect to any money or other property of the plan and has no authority or responsibility to do so.

…

Q. D-3 Does a person automatically become a fiduciary with respect to a plan by reason of holding certain positions in the administration of such plan?

A. Some offices or positions of an employee benefit plan by their very nature require persons who hold them to perform one or more of the functions described in section 3(21)(A) of the Act. For example, a plan administrator or a trustee of a plan must, be the very nature of his position, have “discretionary authority or discretionary responsibility in the administration” of the plan within the meaning of section 3(21)(A)(iii) of the Act. Persons who hold such positions will therefore be fiduciaries.

DOL Advisory Opinion 2003-04A:

The Department has long taken the position that there is a class of discretionary activities which relate to the formation, rather than the management, of plans, explaining that these so-called “settlor” functions include decisions relating to the establishment, design and termination of plans, and generally are not fiduciary activities governed by ERISA. However, while such decisions may be settlor functions, activities undertaken to implement the decisions generally are fiduciary in nature and must be carried out in accordance with the fiduciary responsibility provisions.

Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982):

The fiduciary obligations of the trustees to the participants and beneficiaries of the plan are those of trustees of an express trust – the highest known to the law. Restatement of Trusts 2d § 2, comment b (1959).

Chao v. Hall Holding Co., Inc., 285 F.3d 415 (6th Cir. 2002):

Clearly, the duties charged to an ERISA fiduciary are “the highest known to the law.”

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).