ERISA and Personal Liability

A client asked me a few questions today about ERISA. I knew the answer but wanted to provide sources. I came across an article I had written for a Maine business publication in 2006. They gave me reprint rights. Here it is:

HR Managers May Be Personally Liable For Benefit Plan Mistakes

By Scott Simmonds, CPCU, ARM

Mainebiz 8/7/06 Reprinted With Permission

Sometimes uninsured exposures get business people riled up. About two years ago I was meeting with the owner of a small company in the Lewiston area and the head of the firm’s human resources department. I’d been hired a few weeks earlier to perform a due diligence review of the firm’s insurance, and we were going through a list of concerns I had identified in my analysis.

“Your ERISA exposure is not covered,” I said.

The owner’s eyebrows went up. The HR VP laughed. A few minutes later she was not laughing.

The Employee Retirement and Income Security Act, or ERISA, is the federal law passed in 1974 that governs employee benefit plans. Most people know it for its impact on pension plans but a lesser known provision makes administrators of employee benefit plans PERSONALLY liable for errors and mistakes. The act covers pension plans, group health insurance, disability coverage, dental, and any other employee benefit program an employer offers.

It was the “personally liable” part that got the HR manager’s back up. “Explain what you mean by personally liable,” she said.

The issue is pretty straightforward. If you administer a health insurance or pension plan, you are liable for any mistakes you make – you, not your company, is liable. If you forget to add an employee to the health insurance, it’s your house and bank account that is tapped to pay a claim. If the premium doesn’t get sent and the policy is cancelled, it’s your assets on the line. Fail to make decisions in a prudent manner about the 401k plan and guess what happens to your savings account?

The HR manager had even more to be upset about when I mentioned the next kicker: In addition to personal liability, ERISA specifically forbids indemnification by the administrator’s employer. If you make a mistake, your company cannot bail you out. Insurance is the only third party solution to the personal liability provision.

The Fiduciary Responsibility Insurance Policy is the solution to the ERISA problem. Also called a FRIP, the policy provides protection for “wrongful acts” that result in a claim against the administrator of benefit plans. Premiums range from a few hundred dollars to thousands, depending on the size of the employer.

By the way, many people confuse ERISA fiduciary liability with the ERISA bond requirement. The law mandates that employee pension and retirement plans have a bond of 10% of the assets (up to $500,000) to cover loss of the funds through embezzlement. Some fiduciary policies include the fidelity coverage. Most do not.

Some businesses and insurance agents confuse employee benefit liability insurance with the FRIP. Bad call! The FRIP covers errors and omissions in the administration of benefit plans. The employee benefit liability policy covers mistakes but excludes ERISA liabilities. The wrong claim against an employer with employee benefit liability could result in a “For Sale” sign going up in front of the HR manager’s house.

Talk to your insurance adviser about your options. You may have to do a bit of homework to come up with the data on your employee benefit programs. Most small and medium sized employers purchase at least $1 million, but look at your own exposures and the premiums your insurer will charge for more coverage. Just don’t let your ERISA exposures go uncovered.