Most employee benefit plans are administered by third-party administrators (TPAs) under the terms of signed service agreements. While the plan sponsor is generally the legal “plan administrator,” many administrative functions can be delegated to the TPA through these agreements. As benefit structures and related litigation grow more complex, the specific terms of service agreements have become increasingly important. Now is a good time to review potential risks.
The Employee Retirement Income Security Act (ERISA) imposes fiduciary duties on plan sponsors that affect certain aspects of TPA service agreements. For example, agreements must be in writing, the fees charged must be reasonable considering the services provided, and those services must be necessary for plan administration.
Whether entering into a new agreement, renewing a TPA relationship, or reviewing existing terms, here are some key points to consider:
Who is the TPA, and what services do they provide?
It is essential to clearly define the scope of services and fees, including how fees are paid and to whom. This transparency helps plan administrators meet their fiduciary duties and improves efficiency by clarifying contacts and avoiding duplication when multiple service providers are involved.
What is in the indemnification and limitations of liability provisions?
Indemnification clauses protect both the plan sponsor and the service provider. Indemnification generally means one party agrees to cover certain losses or damages incurred by the other. Plan sponsors typically seek broad indemnification from the provider and minimal limits on the provider’s liability. Service providers often seek to limit liability, for instance, to 12 months of fees. These provisions should clearly define what is covered, what is excluded, and the limits (if any) on liability. Sponsors should also consider insurance or separate indemnification to protect against liability arising from a provider’s actions, especially where the provider has limited fiduciary obligations.
What is the duration of the agreement, and how can it be terminated?
ERISA requires that agreements either have a defined term or include a termination clause allowing for reasonable notice.
What happens if the TPA makes an error?
Service agreements should address how errors are handled. It should clearly outline who is responsible for identifying and correcting mistakes, sending required notices, and covering any related costs. These obligations may intersect with indemnification terms.
Does the service agreement address data privacy and HIPAA compliance?
Benefit plans involve sensitive personal data. Service agreements should include strong provisions to ensure data protection and compliance with HIPAA and other applicable privacy standards. As with other fiduciary obligations, documentation is key.
Are agreements regularly reviewed?
Plan administrators have a fiduciary duty to monitor both their service providers and the activities performed under the agreements. It is best practice to review these relationships every two to three years. While not required, many sponsors use request-for-proposal (RFP) processes or detailed performance reviews to assess fees, service levels, and compliance with fiduciary duties.
Regular reviews of key relationships, including with recordkeepers, investment advisers, and welfare benefit administrators, can help ensure compliance, minimize risk and financial exposure, and improve the value of services received.