Your ERISA Watch – Sixth Circuit Rules That Employers Act in a Fiduciary Capacity When They Mishandle Premium Payments for Employee Benefit Plans

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Chelf v. Prudential Ins. Co. of Am., No. 20-6097, __ F.4th __, 2022 WL 1090168 (6th Cir. Apr. 12, 2022) (Before Circuit Judges Moore, Clay, and Stranch)

Elmer Chelf, a Wal-Mart employee, passed away while on disability leave. His wife, plaintiff Ruth Chelf, submitted a claim under Wal-Mart’s basic and optional life insurance employee benefit plans. The plan’s insurer, defendant Prudential Insurance Company of America, approved Ms. Chelf’s claim for basic life insurance. However, it denied her claim for optional life insurance benefits on the ground that Mr. Chelf’s life insurance coverage had terminated prior to his death.

After an unsuccessful appeal, Ms. Chelf filed this action against Wal-Mart and Prudential. After losing a partial motion to dismiss, Prudential settled with Ms. Chelf, leaving only Wal-Mart in the litigation.

Ms. Chelf alleged that Wal-Mart breached its fiduciary duty under 29 U.S.C. § 1132(a)(3) by mishandling his coverage under the optional life insurance plan. Specifically, Ms. Chelf argued that Wal-Mart did not inform Mr. Chelf of his right to convert his optional life insurance, did not communicate with him regarding the payment of premiums or the alleged termination of his insurance, and failed to apply his unpaid time off to cover the cost of the premiums while he was on disability.

Wal-Mart filed a motion to dismiss, which the district court granted. The district court ruled that Ms. Chelf failed to state a claim because Wal-Mart’s handling of premiums fell under an administrative, not fiduciary, function, and that Wal-Mart had no obligation under ERISA to provide notice of conversion rights outside of the plan documents. Ms. Chelf appealed this decision to the Sixth Circuit.

The Sixth Circuit separated Ms. Chelf’s allegations into two categories: allegations of “mishandling of plan assets,” and allegations of “failure to disclose.” Tackling the first category, the court noted that the district court relied on an ERISA regulation, 29 C.F.R. § 2509.75-8 (D-2), which explains that certain “person[s] who perform purely ministerial functions” for an employee benefit plan are not fiduciaries. However, the Sixth Circuit found that this did not apply to Wal-Mart because Wal-Mart “indisputably exercised control over the Plan’s assets when it handled Mr. Chelf’s premiums, exercised control over the disposition of the Plan’s assets, and had discretionary authority over the administration of the Plan.” As a result, the Sixth Circuit found that Wal-Mart was “acting in a fiduciary capacity” and not a “purely ministerial” capacity by mishandling Mr. Chelf’s premium payments, and thus Ms. Chelf’s allegations “suffice to state a claim for breach of fiduciary duty[.]”

Ms. Chelf had less luck with her claims regarding Wal-Mart’s alleged failure to disclose. The Sixth Circuit explained that in Sprague v. Gen. Motors Corp. it had only recognized a breach of fiduciary duty for failure to disclose information not expressly required to be disclosed by ERISA in three circumstances: “(1) an early retiree asks a plan provider about the possibility of the plan changing and receives a misleading or inaccurate answer or (2) a plan provider on its own initiative provides misleading or inaccurate information about the future of the plan or (3) ERISA or its implementing regulations required the employer to forecast the future and the employer failed to do so.”

The court ruled that none of the allegations in Ms. Chelf’s complaint fell into any of the three Sprague categories. It also rejected Ms. Chelf’s argument that she had properly alleged that the benefit plan imposed an affirmative duty on Wal-Mart to disclose certain information. The court noted that the complaint “did not allege that the terms of the life insurance policy required Wal-Mart to provide Mr. Chelf with notice of his right to convert. Nor did she allege that the Plan or [summary plan description] had any such requirement that would have given rise to such an independent duty.” As a result, the court affirmed the district court’s dismissal of the “failure to disclose” claims.
 
However, the court also noted that Ms. Chelf might be able to fix this problem by amending her complaint, although it left that issue for the district court to sort out on remand.

This case should serve as a warning to employers that they may be held liable if their employees lose coverage under their benefit plans due to a mishandling of premium payments. This only makes sense, as employees should be able to trust their employers to administer their benefit coverage properly, and should have a remedy under ERISA when employers fail to do so.

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