Mitigating Employee Benefit Risks Through Contract Negotiations

1. Mitigating Employee Benefit Risks Through Contract Negotiations Sarah (“Sally”) Church Kevin A. Wiggins Saul Ewing LLP One PPG Place, 30th Floor Pittsburgh, PA 15222

2. 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.

3. 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

4. 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 2002-08A

5. Selecting a Service Provider • Ascertain Whether Service Provider Fees are Reasonable Compared to Industry Standards in Light of: • Services to be performed • Service provider’s qualifications • Scope of provider’s obligations • Report of 1996 ERISA Advisory Council • www.dol.gov/ebsa/publications/srvpro.htm

6. 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

7. 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?

8. Outsourcing Strategies Sole Source Strategy Competitive Strategy Colloborative Strategy

9. Sole Source • Negotiate with only one vendor • Advantages • Builds on existing relationships • Reduced costs • Reduced processing time • May be required by CBA

10. 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

11. 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

12. Competitive Strategy • Disadvantages • More time and costs • RFI and RFP • Adversarial process tends to reduce trust • May inhibit vendor’s response and interaction during process

13. 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

14. Common Employee Benefit Contracts • Retirement Plans • Legal • Trust/custodial services • Recordkeeping and administration • Audits • Investment advisers and managers • Investments • Consultants

15. 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)

16. Master Service Agreements • Scope of Services • Clear and comprehensive • If the vendor promises it, they should put it in writing • “Don’t worry, we never do that.” • Identify whether services are provided as fiduciary

17. 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

18. 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

19. 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

20. 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

21. Standard Clauses • Source of Fees • Employer • Lowest ERISA risk • Watch for plan listed as secondary payor

22. Standard Clauses • Audits • Permissible audits • 5500 audits • Financial audits • Date revenue sharing is credited • Compliance audits • Other audits • SSAE 16 • Formerly SAS 70

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. Standard Clauses • Limits on Liability • Carve-outs • Indemnification • Breach of fiduciary duties • Gross negligence/willful misconduct • Cost to correct Hitech breaches

31. 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

32. Standard Clauses • Indemnification • Indemnify and hold harmless • Defend and pay • Consider Scope • Plan • Participants • Fiduciaries (Committee) • Employer (directors, officers, employees, etc.) • Controlled group

33. 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

34. Standard Clauses • Indemnification for Third Party Claims • Cross indemnification • Timely notice of action • Right to control action • No settlement clause

35. 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

36. Standard Clauses • ABC v. BTC • BTC defended that it was only following investment instructions from FedEx • BTC also counterclaimed for indemnification

37. 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

38. 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

39. Standard Clauses • Arbitration/Mediation/ADR • Not particularly unique to benefit plans • Health plan claims cannot be arbitrated per DOLRegs

40. QUESTIONS?