ERISA and the CAA: Best Practices for Contracting with Service Providers to Meet Your Fiduciary Responsibility

The Employee Retirement Income Security Act of 1974 (ERISA). External Link. Opens in new window. was enacted to protect employee benefit plan participants by establishing clear fiduciary responsibilities. Over the years, additional regulations, including the Consolidated Appropriations Act (CAA),. External Link. Opens in new window. have enhanced transparency and accountability in managing retirement and welfare plans. One of the most critical aspects of ERISA compliance is contracting with service providers in a way that upholds fiduciary duties.  

The Alliance recently held a webinar with John Barlament, a Shareholder at Reinhart Boerner Van Deuren. External Link. Opens in new window. to help employers understand best practices for engaging service providers to meet regulatory requirements. Keep reading to get the key insights from the presentation. You can also watch the webinar on-demand.. External Link. Opens in new window.   

The History of ERISA and the Need for Reform

Before ERISA, the rapid expansion of defined benefit pension plans in the 1950s and 1960s led to significant vulnerabilities for employees. Employers often used plan assets for purposes other than providing retirement benefits. At that time, employers could terminate unfunded pension plans without any legal obligation to cover the shortfall. Employees had no legal recourse if a plan’s assets were insufficient to meet promised benefits. This led to devastating consequences when companies faced financial hardship.  

In response to these issues, ERISA was enacted in 1974 to establish comprehensive protections for retirement and welfare plan participants. Today, multiple federal regulators, including the Department of Labor (DOL). External Link. Opens in new window., Internal Revenue Service (IRS). External Link. Opens in new window., Centers for Medicare & Medicaid Services (CMS). External Link. Opens in new window., and Equal Employment Opportunity Commission (EEOC). External Link. Opens in new window., oversee ERISA enforcement, ensuring that plan fiduciaries meet their obligations. 

ERISA covers a broad range of employee benefit plans, including retirement and welfare plans. Even if a plan lacks tax benefits, it likely falls under Title I, which sets fiduciary and reporting requirements. Employee welfare benefit plans include medical, disability, life insurance, and other employer-sponsored benefits. However, some plans are excluded, such as those sponsored by churches, government entities, “top hat” plans, and excess benefit plans. 

ERISA Fiduciary Responsibilities

Fiduciary responsibility is a cornerstone of ERISA. The law requires fiduciaries to act solely in the interest of plan participants. Key responsibilities include: 

Failure to meet these responsibilities can result in liability for employers, including financial penalties and legal action. 

Best Practices for Contracting with Service Providers

Many services, such as claims processing, recordkeeping, benefits consulting, and stop-loss insurance, are typically outsourced. So, selecting the right service providers is a critical part of fulfilling fiduciary responsibilities. To ensure compliance with ERISA and CAA requirements, plan sponsors should follow these best practices when contracting with service providers. 

1. Conduct Thorough Due Diligence

Before engaging a service provider, fiduciaries must conduct a detailed evaluation of the provider’s qualifications, financial stability, experience, and compliance history. This includes: 

2. Assess Reasonableness of Fees

Under ERISA Section 408(b)(2), contracts are only reasonable if required fee and compensation disclosures are made to the plan fiduciary. So, plan sponsors must: 

3. Clearly Define Scope of Services

A well-drafted contract should clearly outline: 

4. Ensure Compliance with the CAA’s Enhanced Transparency Rules   

The CAA introduced new disclosure requirements for brokerage and consulting services. Vendors providing services such as stop-loss insurance, pharmacy benefit management, and medical management must disclose compensation structures and potential conflicts of interest. Plan sponsors should: 

5. Include Key Contractual Protections

Contracts with service providers should contain essential provisions to protect the plan and its participants, including: 

6. Monitor Performance Regularly

Fiduciaries must routinely monitor ventures to ensure they meet their contractual and regulatory obligations. This includes regular performance audits, data reviews, and compliance assessments.  

Addressing Vendor Fiduciary Status

Many service providers include clauses in contracts stating they are not ERISA fiduciaries. However, if a vendor makes final determinations on claims appeals, they may qualify as a fiduciary under ERISA. Plan sponsors should: 

Additional Risk Mitigation Strategies

Beyond contractual safeguards, plan sponsors can take further steps to minimize fiduciary risk: 

Ensuring Compliance and Protecting Plan Participants

ERISA fiduciary duties require diligent oversight when selecting and contracting with service providers. With increasing regulatory scrutiny under the CAA, plan sponsors must adopt best practices to protect plan participants and minimize legal risks. By utilizing thorough due diligence, clear contracts, and proactive monitoring, plan sponsors can fulfill their fiduciary obligations and ensure compliance with evolving regulations. 

For more insights on regulatory best practices, watch this webinar, and our Mental Health Parity and Addiction Equity Act (MHPAEA) series on our YouTube channel.. External Link. Opens in new window.  

The Alliance helps employers meet their fiduciary responsibilities by making sure their benefit plans act in their employees’ best interest. Contact your Account Executive to learn how you can ensure you fulfill your fiduciary duties under regulations like ERISA and the CAA.