Hammer v. Johnson Senior Ctr., 2020 WL 7029160 (W.D. Va. 2020)

When the employee in this case was diagnosed with cancer, she took a medical leave and began treatment. Around the same time, her employer was experiencing internal upheaval and financial pressures, and it failed to pay its health insurance premiums (both employee and employer portions). Amounts withheld from employees’ paychecks for their portion of medical insurance premiums typically had not been separated from other funds in the employer’s general operating account, and it appeared that the employer used the funds to pay operating expenses. The employer also did not cure the failure and restore the coverage, despite the insurer’s offer to do so, ultimately leaving the now former employee with over $286,000 in uninsured medical expenses. She sued the employer and certain management employees for breach of ERISA fiduciary duties of loyalty, care, and prudence (for misuse of plan assets and failure to segregate plan assets) and COBRA violations (for failure to issue a COBRA notice upon loss of coverage).

The court ruled, without a trial, that the employer and certain management employees were ERISA fiduciaries who breached their duties of loyalty, care, and prudence by misusing the participant’s funds and by not notifying her of the lapse in coverage. It determined that the employee contributions were plan assets and discussed at length whether they had to be held in trust or could qualify for an exemption from ERISA’s trust requirement. Because the court was unable to reach a conclusion on issues related to the failure to segregate employee contributions, those claims were allowed to proceed to trial. However, the court dismissed the COBRA claim because the employee’s loss of coverage was caused by the employer’s failure to pay premiums, not by any triggering event.

EBIA Comment: This case serves as a warning for businesses that may be facing financial pressure: do not misuse plan assets. Failure to use plan assets for the exclusive benefit of participants and beneficiaries is a familiar compliance problem. And mishandling participant contributions can result in a breach of ERISA fiduciary duties and constitute one or more prohibited transactions, for which fiduciaries may be personally liable. For more information, see EBIA’s ERISA Compliance manual at Sections XIV.C (“Plan Asset Category #1: Participant Contributions Are Always Plan Assets”), XIV.D (“Plan Asset Category #2: Employer General Assets Can Become Plan Assets”), XVI.A (“Overview: Trust and Exclusive Benefit Requirements”), XVII.B (“ERISA Fiduciary Implications of Participant Contributions”), and XXVIII.C (“Fiduciary Responsibilities Imposed by ERISA”). See also EBIA’s COBRA manual at Section VII.A (“Overview of Qualifying Events”) and EBIA’s Self-Insured Health Plans manual at Section VIII.C (“Overview of ERISA Fiduciary Responsibilities”).


Contributing Editors: EBIA Staff


[SOURCE: Thomson Reuters]