Mitigating Employee Benefit Risks
Through Contract Negotiations
Sarah (“Sally”) Church
Kevin A. Wiggins
Saul Ewing LLP
One PPG Place, 30th Floor
Pittsburgh, PA 15222
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© Copyright 2013 Saul Ewing LLP
IRS CIRCULAR 230 DISCLOSURE
TO ENSURE COMPLIANCE WITH REQUIREMENTS
IMPOSED BY THE IRS, WE INFORM YOU THAT ANY
U.S. FEDERAL TAX ADVICE CONTAINED IN THIS
COMMUNICATION (INCLUDING ANY
ATTACHMENTS) IS NOT INTENDED OR WRITTEN
TO BE USED, AND CANNOT BE USED, FOR THE
PURPOSE OF (I) AVOIDING PENALTIES UNDER THE
INTERNAL REVENUE CODE OR (II) PROMOTING,
MARKETING OR RECOMMENDING TO ANOTHER
PARTY ANY TRANSACTION OR MATTER
ADDRESSED HEREIN.
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Brief Summary of
ERISA Title I
• Part 1: Reporting and Disclosure
• Parts 2 – 3: Retirement Plan Minimum
Standards
• Part 4: Fiduciary Duties and Prohibited
Transactions
• Part 5: Enforcement and Other
• Parts 6 – 7: Health Plan Minimum
Standards
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Selecting a Service Provider
• Engage in objective process designed to
elicit information necessary to assess:
 Qualifications of provider
 Quality of services offered
 Reasonableness of fees charged in light of
services provided
 No self-dealing or prohibited transactions
• DOL Advisory Opinion 2002-08A
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Selecting a Service Provider
• Ascertain Whether Service Provider Fees
are Reasonable Compared to Industry
Standards in Light of:
 Services to be performed
 Service provider’s qualifications
 Scope of provider’s obligations
• Report of 1996 ERISA Advisory Council
 www.dol.gov/ebsa/publications/srvpro.htm
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Fiduciary Duties and
Prohibited Transactions
• Duty of Prudence
 Satisfaction measured by conduct – a prudent
process – not results
• Prohibited Transactions
 ERISA requires fiduciaries to engage in a prudent
process to avoid prohibited transactions
 Fiduciaries are not necessarily liable if the process
was prudent, even if the transaction turns out to
be a prohibited transaction
• Parties in interest and disqualified persons have strict
liability for excise taxes, regardless of process
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Fiduciary Duties and
Prohibited Transactions
• ERISA Duty of Prudence Applies:
 At initial engagement
 On an ongoing basis (duty to monitor)
• RFP Every 3 Years?
 At termination of engagement
• Which outsourcing strategy better
documents a prudent process?
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Outsourcing Strategies
• Sole Source Strategy
• Competitive Strategy
• Colloborative Strategy
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Sole Source
• Negotiate with only one vendor
• Advantages
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Builds on existing relationships
Reduced costs
Reduced processing time
May be required by CBA
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Sole Source
• Disadvantages
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Less market information
Less competition
Less likely to find highest value vendor
Less of a fiduciary process
• Hire advisor to benchmark
• George v. Kraft Foods Global
 Increased potential for self-dealing
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Competitive Strategy
• Negotiate with a broad range of vendors in
an auction-like process
• Advantages
 More market information and competition
 More likely to find highest value vendor
 More showing of fiduciary process
• Less need to hire independent advisor to
benchmark
 Reduced potential for self-dealing
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Competitive Strategy
• Disadvantages
 More time and costs
• RFI and RFP
 Adversarial process tends to reduce trust
 May inhibit vendor’s response and interaction
during process
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Collaborative Strategy
• Negotiate with Two (or a Few) Select Vendors
• Engage in Parallel Negotiations with Each
Vendor Similar to Sole Source Negotiations
• Advantages
 Less adversarial
 More trust
 More responsive vendors
• Disadvantages
 Less competition and market information
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Common Employee
Benefit Contracts
• Retirement Plans
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Legal
Trust/custodial services
Recordkeeping and administration
Audits
Investment advisers and managers
Investments
Consultants
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Common Employee
Benefit Contracts
• Health and Welfare Plans
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Legal
Insurance contracts
Administrative services/claims processing
Network agreements
Business associate agreements
Pharmacy management
Brokers
Consultants
Payroll (for new ACA reporting)
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Master Service Agreements
• Scope of Services
 Clear and comprehensive
 If the vendor promises it, they should put it in
writing
• “Don’t worry, we never do that.”
 Identify whether services are provided as
fiduciary
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Master Service Agreements
• Detailed Statement of Work
 Reporting and disclosure
• Vendor will provide all information in its
possession that plan needs to comply with ERISA
• Including 408(b)(2) for Retirement Plans
 Before you sign the agreement
 Fiduciary duties (standard of care)
 Minimum standards
 Other
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Master Service Agreements
• Identify Correct Parties to Agreement
 Employer
 Committee or other plan fiduciary
 Plan (Trustee)
• Parties Covered by Agreement
 Make sure all plans that should be included
are included
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Standard Clauses
• Source of Fees
 Plan/Participants
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Fiduciary duties and prohibited transactions
Most ERISA risk
Vendors prefer credit risk of plan over sponsor
Some contracts require plan to pay if sponsor in
bankruptcy
• Plan should be default payor only after deliberate
consideration and documented fiduciary process
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Standard Clauses
• Source of Fees
 Investments (revenue sharing)
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Dates for crediting revenue sharing
Who earns interest on revenue sharing
Generally revenue sharing is not a plan asset
Medium ERISA risk
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Standard Clauses
• Source of Fees
 Employer
• Lowest ERISA risk
• Watch for plan listed as secondary payor
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Standard Clauses
• Audits
 Permissible audits
• 5500 audits
• Financial audits
 Date revenue sharing is credited
• Compliance audits
• Other audits
 SSAE 16
• Formerly SAS 70
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Standard Clauses
• Term of Contract
• Termination
 Reasons
 Notice
• Distinguish expiration from termination
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Automatic renewal or expiration?
Unilateral option to renew
Termination for cause or convenience
Required notice
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Standard Clauses
• Termination
 Post-termination services are critical to
employee benefit plans
 Return, destruction, or retention of plan
information
 Data migration
 Claim runouts
 Survival clauses
• Indemnification for fiduciary breach should
survive for applicable SOL
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Standard Clauses
• Representations and Warranties
 Legal compliance
• Most benefit plan outsourcing includes
outsourcing of compliance functions
 Service warranties
• Services will be performed at a standard that is
generally accepted in the profession
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Standard Clauses
• Representations and Warranties
 Confidentiality of plan and participant
information
• Used only for services under agreement
 Commercially reasonable security
• Prevent access to plan information and plan assets
 Commercially reasonable disaster recovery
plan
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Standard Clauses
• Service level agreements not very common
in industry, but there are some general
categories
 General compliance
• E.g., timely reporting and disclosures
• Hitech breach notification rules
 Trust statements delivered monthly
 Stale checks posted back to trust at least
quarterly
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Standard Clauses
• Method of Communication
 Critical aspect of any agreement
 Investment directions
• Who authorizes money to be moved either within
the plan or outside of plan
 Allowable methods of communications
• Consider encryption for both moving money and
PHI
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Standard Clauses
• Limits on Liability
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Unilateral or mutual
Single or multiple caps
Per claim, aggregate, per plan year, etc.
Check for “hidden” limits
• Limits to E&O Insurance
• Limits on Fiduciary Insurance
 Ask to see policies
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Standard Clauses
• Limits on Liability
 Carve-outs
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Indemnification
Breach of fiduciary duties
Gross negligence/willful misconduct
Cost to correct Hitech breaches
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Standard Clauses
• Limits on Liability
 No indirect, special, or consequential damages
 Many vendors limit to fees paid
• Limited to 3 X fees paid
• Liability over term of contract limited to 3 X fees
paid during that term
 Watch for disclaimers and indemnification of
all HIPAA/HITECH liability
• Some vendors directly liable
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Standard Clauses
• Indemnification
 Indemnify and hold harmless
 Defend and pay
• Consider Scope
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Plan
Participants
Fiduciaries (Committee)
Employer (directors, officers, employees, etc.)
Controlled group
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Standard Clauses
• Indemnification for Third Party Claims
 Fraud, willful or intentional misconduct, gross
negligence, recklessness, negligence, breach of
agreement
• Materiality disclaimers
 Running from vendor in favor of employer
usually limited to failure to follow directions
• Sweep clauses
 Acts or failures to act
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Standard Clauses
• Indemnification for Third Party Claims
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Cross indemnification
Timely notice of action
Right to control action
No settlement clause
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Standard Clauses
• Indemnification for Your Claims
• ABC Co. v. Big Trust Co.
 ABC alleged Big Trust Co. (“BTC”) knew ABC
did not want plan assets involved in security
lending
 ABC alleged BTC allowed security lending
through CIFs (managed by an affiliate of BTC)
that engaged in security lending, causing plan
losses
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Standard Clauses
• ABC v. BTC
 BTC defended that it was only following
investment instructions from FedEx
 BTC also counterclaimed for indemnification
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Standard Clauses
• ABC v. Big Trust Co.
 Trust document provided:
[ABC agrees to indemnify BTC] “against any
loss or liability, including reasonable legal fees
and expenses, incurred by [BTC] solely as a
result of … following the direction of [ABC].”
 ABC filed a motion to dismiss the
counterclaim for contractual indemnification
 Motion denied
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Standard Clauses
• Protect your IP
• Generally Limited to a License to Use
Company Logo, Trademark, or Service Mark
 License should be revocable at any time for any
reason by any method
 Right to review and approve any use
 Vendor required to notify you of misuse by its
employees
 Revoked at contract termination
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Standard Clauses
• Arbitration/Mediation/ADR
 Not particularly unique to benefit plans
 Health plan claims cannot be arbitrated per
DOL Regs
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QUESTIONS?
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