Fiduciary Duty and the Health Plan: What Every Employer Needs to Understand

ERISA imposes fiduciary obligations on anyone who exercises discretionary authority or control over the management of an employee benefit plan or its assets. For a self-funded health plan, that typically includes the employer as plan sponsor, the plan administrator (often the same entity), and any named fiduciary designated in the plan document.

The core fiduciary duties under ERISA are the duty of loyalty — acting solely in the interest of plan participants and beneficiaries — and the duty of prudence — acting with the care, skill, prudence, and diligence that a knowledgeable person familiar with such matters would use. These are not aspirational standards. They are legally enforceable obligations that can result in personal liability for plan fiduciaries who breach them.

The Consolidated Appropriations Act of 2021 included provisions that significantly strengthened health plan fiduciary obligations. The CAA requires self-funded plan sponsors to ensure that their service providers — TPAs, PBMs, brokers, and consultants — disclose all direct and indirect compensation they receive in connection with the plan. It also prohibits gag clauses in contracts with TPAs and health care providers that prevent the plan from accessing claims data.

These provisions were not merely administrative. They were designed to give plan fiduciaries the information they need to fulfill their duty of prudence. A plan sponsor who signs a TPA contract without understanding how the TPA is compensated, or who accepts a PBM contract without reviewing rebate arrangements, is arguably not meeting the prudent person standard.

In 2023, a class action lawsuit was filed against Johnson & Johnson by plan participants alleging that the company breached its fiduciary duty by overpaying for prescription drugs through its PBM arrangement. The lawsuit alleged that J&J paid significantly more than necessary for certain medications and that a prudent fiduciary would have negotiated better terms or selected a different PBM.

This case — and others like it that have followed — signals that health plan fiduciary duty is no longer a theoretical concern. Plan participants and their attorneys are beginning to apply the same scrutiny to health plan costs that they have long applied to 401(k) fees. The question is no longer whether employers can be sued for imprudent health plan management. The question is whether your plan can withstand that scrutiny.

Prudent management of a self-funded health plan requires more than signing the renewal documents your broker presents each year. It requires active engagement with plan costs, vendor performance, and the quality of care your plan is delivering.

At a minimum, a prudent fiduciary process includes regular benchmarking of plan costs against comparable employers, periodic review of TPA and PBM contracts to ensure terms remain competitive, documentation of the process used to select and monitor service providers, review of all compensation disclosures required under the CAA, and analysis of claims data to identify cost drivers and opportunities for intervention.

It also requires asking hard questions of your broker and advisors. How are they compensated? Do they have relationships with the vendors they are recommending? Are they recommending solutions that are in the plan's best interest, or solutions that generate the most revenue for them?

One of the most important — and most overlooked — aspects of fiduciary compliance is documentation. A fiduciary who makes a reasonable decision through a prudent process but fails to document that process is in a much weaker position than one who can demonstrate, through contemporaneous records, that they followed a thoughtful, informed decision-making process.

This means keeping records of vendor selection processes, documenting the basis for key plan design decisions, retaining benchmarking analyses, and maintaining records of service provider compensation disclosures. If your plan is ever audited by the DOL or challenged in litigation, the documentation you have — or do not have — will be central to the outcome.

Health plan fiduciary duty is not a burden to be minimized. It is a framework for making better decisions on behalf of your employees. Employers who embrace it tend to build better plans, pay less for care, and face less legal exposure. Those who ignore it are taking on risk they may not fully appreciate.