A health plan’s fiduciaries are responsible for administering the health plan. Because most employers are not in the business of administering health benefits, they outsource the day-to-day health plan administration to a third-party health plan administrator (TPA). This outsourcing does not mean the employer is off the hook for their fiduciary obligations under ERISA. Even the evaluation and selection of a TPA is itself a fiduciary act, and employers must follow a prudent process.

Below, we provide information for employers regarding the selection, evaluation, and contracting with a TPA:

Rely on the Experts

Just as most employers are not in the business of administering health benefits, most employers are not in the business of evaluating and selecting TPAs. To help ensure this process complies with ERISA’s fiduciary duties, employers often rely on a broker or consultant and legal counsel. Brokers and consultants will identify TPAs that are appropriate for the employer’s size, industry, and location, provide guidance regarding the reasonableness of the TPA’s fees, and help with fee negotiation. Legal counsel will help the fiduciary with legal compliance and contract negotiation. 

Conduct a Request for Proposal

The broker/consultant and legal counsel will help conduct a request for proposal (RFP) for a TPA. The RFP will invite potential TPAs to submit bids and information regarding the health plan’s administration. With the RFP, the fiduciary should: 

• Invite several providers to respond to the request for proposal;
• Prepare specific questions that are relevant and important to the plan’s administration;
• Make sure the TPA’s fees are reasonable;
• Request sample contracts to identify any “dealbreaker” provisions; and
• Identify potential internal conflicts that could taint the process (e.g., TPAs with other relationships with the employer). 

Thorough Review and Negotiation of Services Agreement

The employer should select a potential TPA well before the implementation date so that there is time for legal counsel and the broker/consultant to negotiate the services agreement and fees and, if necessary, select an alternate TPA if the negotiations fall apart. Key contractual provisions include: 

1. Indemnification provisions. TPAs expect plan fiduciaries to indemnify the TPA against third-party claims, losses, or suits based on the services provided by the TPA to the plan and the participants. However, the plan fiduciaries should not indemnify the TPA for claims based on the TPA’s negligence, misconduct, or fiduciary breach. Instead, the TPA should be liable for any claims based on the TPA’s “bad actions,” and the TPA should indemnify the plan against those claims.
2. Accepting fiduciary responsibility. If the TPA is authorized to interpret the plan provisions, for example, if the TPA is delegated the authority to handle claims and appeals under the plan, the TPA is acting as a fiduciary under ERISA. In that case, the services agreement should expressly state that the TPA acknowledges its fiduciary status. 
3. Audit rights. Reserving the right to audit the TPA’s performance under the service agreement is important. Beware of onerous restrictions on “claims” audits. To avoid negative findings in audit reports, some service providers limit the number of audits a plan sponsor may undertake, establish long notice periods, or, in extreme cases, provide an exclusive list of auditors or prohibit certain auditors from conducting audits.
4. Termination provisions. ERISA generally prohibits fiduciaries from entering into contracts that cannot be terminated without substantial penalties or within a reasonable period. The service agreement should give the employer the flexibility to terminate. 
5. Claims litigation. Make sure the agreement clearly states which party will handle claims litigation and which party will indemnify the other for any damages.

Measure Twice, Cut Once

The process of selecting and contracting with a new TPA can seem overwhelming, time-consuming, and exhausting. However, taking the proper steps to ensure that the process is completed in accordance with ERISA’s fiduciary duties can save employers from costly mistakes.