September 26, 2025

Earlier this year, the Sixth Circuit U.S. Court of Appeals issued an important decision of which all plan sponsors must be mindful. In this insightful article, members of QPWB's ERISA and Employee Benefits national practice group, Sydney Croft and Rob D'Anniballe, explain why an ounce of prevention is worth a pound of cure.

On May 21, 2025, the Sixth Circuit Court of Appeals reversed the Western District of Michigan’s grant of a Third Party Administrator’s (hereinafter “TPA”) motion to dismiss.  The Sixth Circuit found a luxury yacht manufacturer (hereinafter “Yacht Manufacturer”) sufficiently alleged a TPA was a fiduciary with respect to the Yacht Manufacturer’s self-funded health and welfare benefit plan (“Plan”).

Pursuant to an Administrative Services Contract (“ASC”), the Yacht Manufacturer employed a TPA. Therein, said TPA was responsible for interpreting the Plan’s terms, calculating benefits, granting/denying claims, and ultimately paying providers. As a contemplated benefit of employing the TPA, the Yacht Manufacturer believed they would take advantage; meaning, if one of the Yacht Manufacturer’s plan participants/beneficiaries sought services out of state, they would be entitled to take advantage of a serving plan’s pricing rather than be necessitated to pay  the provider’s unnegotiated pricing, which is likely to be higher than any negotiated pricing. However, the TPA was not billing according to that practice. Instead, they were reimbursing providers at the provider’s charge.

Within the ASC, the TPA implemented a Shared Savings Program (“SSP”) wherein, they hired third parties to claw back past overpayments from providers which were the result of the practice above and to detect/prevent future overpayments. In consideration of that service, the TPA was to keep thirty percent of the overpayments it recovered. The Sixth Circuit found the TPA was a fiduciary with respect to its overpayments to providers because it had the authority to grant or deny claims and then to pay those claims from the Plan assets. These actions satisfied the statutory definition of fiduciary where one acts with authority over plan assets because the TPA had “meaningful control” over the disposition of the Plan assets by deciding which claims to pay, at what rates, and then submitting the final payments. 

Further, the Sixth Circuit found that the TPA was a fiduciary with respect to its compensation from the overpayments. Their compensation was a percentage fee based on the amount of recovery from its services. The recovery was contingent on the TPA initially overpaying the providers. As a result, it was found to have discretionary authority over plan administration; thereby satisfying the definition of a fiduciary.

The complaint alleged breach of fiduciary duty and engagement in prohibited transactions. The Yacht Manufacturer alleged the TPA breached its fiduciary duty of care and to act in accordance with plan documents when they became aware of such provider abusive practices, refused to discontinue its improper billing system, and continued to process claims thereunder while knowing that self-insured customers were at risk of greatly overpaying for out of network services. Specifically, the Yacht Manufacturer alleged their TPA violated its fiduciary duty of loyalty when it engaged in a conflict of interest by knowingly permitting improper billing practices to occur and then to take advantage of the increased cost to its customers by agreeing to recover those overpayments and retain thirty percent of any recovery for itself. 

Sydney Croft, Associate in QPWB’s Pittsburgh, Pennsylvania Hub, offers the following thoughts: “Plan sponsors must take advantage of the plan language contained in the ASA.  I first raised my brow at this issue when reviewing a client’s administrative services agreement. I was bewildered by the fact that a service provider with fiduciary obligations to the plan it is servicing could fail to follow its own billing practices and then attempt to profit off its own failures. In my mind, this was a clear violation of a TPA’s fiduciary duty to the plan and perhaps even a prohibited transaction.”

“This decision hands the plan sponsors a double-edged sword. On one hand, plan sponsors have a mechanism to identify and recover overpayments. On the other hand, they are at risk from participant claims of breach of fiduciary duty for not utilizing available language in the ASA to identify and recover such overpayments,” observes Rob D'Anniballe, Managing Partner of QPWB’s Columbus and Charleston Hubs, and leader of the firm’s ERISA and Employee Benefits national practice group.

We have developed an effective process to best serve our plan sponsors’ interests on this all-important evolving issue.

This article is intended for informational purposes only and does not constitute legal advice. Please consult with an attorney to discuss your specific legal situation.