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© Copyright 2013 Saul Ewing LLP Mitigating Employee Benefit Risks Through Contract Negotiations Sarah (Sally) Church Kevin A. Wiggins Saul Ewing LLP One PPG Place, 30 th Floor Pittsburgh, PA
© 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.
© Copyright 2013 Saul Ewing LLP 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 3
© Copyright 2013 Saul Ewing LLP 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 A 4
© Copyright 2013 Saul Ewing LLP Selecting a Service Provider Ascertain Whether Service Provider Fees are Reasonable Compared to Industry Standards in Light of: Services to be performed Service providers qualifications Scope of providers obligations Report of 1996 ERISA Advisory Council 5
© Copyright 2013 Saul Ewing LLP 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 6
© Copyright 2013 Saul Ewing LLP 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? 7
© Copyright 2013 Saul Ewing LLP Outsourcing Strategies Sole Source Strategy Competitive Strategy Colloborative Strategy 8
© Copyright 2013 Saul Ewing LLP Sole Source Negotiate with only one vendor Advantages Builds on existing relationships Reduced costs Reduced processing time May be required by CBA 9
© Copyright 2013 Saul Ewing LLP Sole Source Disadvantages 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 10
© Copyright 2013 Saul Ewing LLP 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 11
© Copyright 2013 Saul Ewing LLP Competitive Strategy Disadvantages More time and costs RFI and RFP Adversarial process tends to reduce trust May inhibit vendors response and interaction during process 12
© Copyright 2013 Saul Ewing LLP 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 13
© Copyright 2013 Saul Ewing LLP Common Employee Benefit Contracts Retirement Plans Legal Trust/custodial services Recordkeeping and administration Audits Investment advisers and managers Investments Consultants 14
© Copyright 2013 Saul Ewing LLP Common Employee Benefit Contracts Health and Welfare Plans Legal Insurance contracts Administrative services/claims processing Network agreements Business associate agreements Pharmacy management Brokers Consultants Payroll (for new ACA reporting) 15
© Copyright 2013 Saul Ewing LLP Master Service Agreements Scope of Services Clear and comprehensive If the vendor promises it, they should put it in writing Dont worry, we never do that. Identify whether services are provided as fiduciary 16
© Copyright 2013 Saul Ewing LLP 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 17
© Copyright 2013 Saul Ewing LLP 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 18
© Copyright 2013 Saul Ewing LLP Standard Clauses Source of Fees Plan/Participants 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 19
© Copyright 2013 Saul Ewing LLP Standard Clauses Source of Fees Investments (revenue sharing) Dates for crediting revenue sharing Who earns interest on revenue sharing Generally revenue sharing is not a plan asset Medium ERISA risk 20
© Copyright 2013 Saul Ewing LLP Standard Clauses Source of Fees Employer Lowest ERISA risk Watch for plan listed as secondary payor 21
© Copyright 2013 Saul Ewing LLP Standard Clauses Audits Permissible audits 5500 audits Financial audits Date revenue sharing is credited Compliance audits Other audits SSAE 16 Formerly SAS 70 22
© Copyright 2013 Saul Ewing LLP Standard Clauses Term of Contract Termination Reasons Notice Distinguish expiration from termination Automatic renewal or expiration? Unilateral option to renew Termination for cause or convenience Required notice 23
© Copyright 2013 Saul Ewing LLP 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 24
© Copyright 2013 Saul Ewing LLP 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 25
© Copyright 2013 Saul Ewing LLP 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 26
© Copyright 2013 Saul Ewing LLP 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 27
© Copyright 2013 Saul Ewing LLP 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 28
© Copyright 2013 Saul Ewing LLP Standard Clauses Limits on Liability 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 29
© Copyright 2013 Saul Ewing LLP Standard Clauses Limits on Liability Carve-outs Indemnification Breach of fiduciary duties Gross negligence/willful misconduct Cost to correct Hitech breaches 30
© Copyright 2013 Saul Ewing LLP 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 31
© Copyright 2013 Saul Ewing LLP Standard Clauses Indemnification Indemnify and hold harmless Defend and pay Consider Scope Plan Participants Fiduciaries (Committee) Employer (directors, officers, employees, etc.) Controlled group 32
© Copyright 2013 Saul Ewing LLP 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 33
© Copyright 2013 Saul Ewing LLP Standard Clauses Indemnification for Third Party Claims Cross indemnification Timely notice of action Right to control action No settlement clause 34
© Copyright 2013 Saul Ewing LLP 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 35
© Copyright 2013 Saul Ewing LLP Standard Clauses ABC v. BTC BTC defended that it was only following investment instructions from FedEx BTC also counterclaimed for indemnification 36
© Copyright 2013 Saul Ewing LLP 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 37
© Copyright 2013 Saul Ewing LLP 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 38
© Copyright 2013 Saul Ewing LLP Standard Clauses Arbitration/Mediation/ADR Not particularly unique to benefit plans Health plan claims cannot be arbitrated per DOL Regs 39
© Copyright 2013 Saul Ewing LLP QUESTIONS? 40
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