A benefit plan administrator is a person or company that is responsible for the day-to-day management and operations of health benefits and pension plans on behalf of their participants and beneficiaries. Before you set up one of these plans and consider appointing or hiring a plan administrator, learn what these important managers do.
Benefit Plan Administrators: Definition and Types
Benefit plan administrators perform duties related to the operation of a company’s employee benefits plan or retirement plan. The business or organization that offers the benefits or retirement plan to its employees or members is the plan sponsor. Plan administrators essentially operate the same for the two types of plans:
- Employee benefit plans: These plans offer specific types of health and welfare benefits, like health care plans, cafeteria plans, COBRA plans, health savings accounts (HSAs), health reimbursement arrangements (HRAs), and flexible spending accounts.
- Retirement plans: These plans provide retirement benefits to employees, including 401(k), 403(b), and Keogh (HR-10) plans.
The plan administrator can be:
- The plan sponsor (the employer or organization)
- A committee of employees
- A company executive
- Someone hired to administer the plan (a third-party administrator, or TPA)
Federal Laws and Plan Administrators
Employee benefit plans (both retirement plans and welfare benefit plans) are regulated by the U.S. Department of Labor under the Employee Retirement Income Security Act (ERISA). Under this law, plan administrators must meet specific standards of conduct in their plan duties.
In addition, employers may choose these plans to be qualified by the IRS in order to receive tax benefits. The qualification process, though, is complicated and has many specific requirements.
How Do Benefit Plan Administrators Work?
When a business forms a benefits or pension plan, it must designate a plan administrator, naming that person or TPA in the plan documents.
Fiduciary Duties of Plan Administrators
Every retirement or benefits plan under ERISA must name at least one fiduciary in the written plan document. A fiduciary is someone who acts with the responsibility of care for the money, property, or interests of someone else. A plan may have several fiduciaries, including a trustee, an investment manager, as well as the plan administrator.
The plan sponsor also has duties to comply with IRS requirements, administer the plan to follow its terms in operation, and review the plan to make sure it’s operating according to its terms and the law.
Under federal law, the employee plan administrator must perform these duties:
- Act solely in the interest of plan participants and their beneficiaries
- Carry out their duties with skill, prudence, and diligence
- Follow the plan documents, making sure they are consistent with ERISA
- Diversify plan investments
- Pay only reasonable expenses of administering the plan and investing assets
- Avoid conflicts of interest
There are even more specific responsibilities that plan administrators have, such as:
- Giving participants periodic reports on the status of the plan, including summary plan descriptions, summary annual reports (Form 5500), and change notices in a manner easily understood by the participants
- Managing participant accounts, determining eligibility, processing claims, and calculating benefits
- Avoiding discriminating against or favoring different groups of employees
- Complying with funding requirements to be sure there are adequate funds to pay benefits
Some plan administrators manage investments for plans and their participants; in other cases, the investment function is administered separately. Giving “investment advice” is a specific fiduciary function under ERISA.
The Society of Professional Benefit Administrators (SPBA) warns that fiduciary duty under ERISA is very different and much stricter than fiduciary duty in insurance and normal business law. The fiduciary must always make sure that the plan and participants get the best possible deal.
Liability and Plan Administrators
Plan administrators, whether they are company insiders or TPAs, potentially have liability (legal responsibility) for their actions. If a fiduciary doesn’t follow the basic standards of conduct, they can be personally liable for any losses to the plan, or to restore any profits made from improper use of plan assets.
If the plan sponsor hires a TPA to handle the fiduciary duties, the employer is liable for the selection of the TPA but not for the TPA’s decisions. However, hiring and managing a TPA is also a fiduciary function, so make sure you thoroughly vet applicants and document your process.
Some more tips:
- Make sure you set up the agreement so that it specifies that the TPA assumes liability for specific functions.
- Monitor the TPA to make sure they are handling the plan’s administration according to the standards of conduct.
- Consider getting a fidelity bond for a smaller TPA or individual fiduciary.
ERISA Fidelity Bonds for Plan Administrators and Others
Anyone who handles “funds or other property” of an employee benefit plan (like investments, for example) must be bonded under an ERISA fidelity bond. This bonding protects the plan from losses due to fraud or dishonesty (theft) and other breaches of fiduciary responsibility.
The bonding requirements, though, do not apply to completely unfunded plans (those that are paid directly out of an employer’s or union’s general assets), or plans not subject to Title I of ERISA like those provided by churches and governments.
Those that generally must be bonded include:
- Plan administrators
- Officers and employees of the plan
- Plan sponsors
- Service providers of the plan
Bonding requirements must apply to a “natural person or persons” (individuals, not companies), and they must be named specifically in the document.
To get an ERISA fidelity bond for your plan administrator, you must use one of the Treasury Department’s approved companies.
Reasons to Hire a TPA for an Employee Benefit Plan
There are certain reasons why you may want to hire a TPA for plan administration duties instead of handling the matter internally. With a TPA, you can:
- Avoid liability for internal administrators
- Leave claims administration to the party or parties you hired
- Eliminate the need to hire additional administrative employees
- Cut overhead (office equipment and supplies, for example)
- Limit liability for managing participant money
However, If you decide to self-administer your employee benefit plan, take a look at this guide to self-administration first to see what it takes.
- Every employee welfare and retirement plan must have a benefit plan administrator to manage the day-to-day operations of the plan.
- A benefit plan administrator may be a company official or an outside company, called a third-party administrator (TPA).
- Plan administrators have a fiduciary responsibility to comply with employment and tax laws and only for the benefit of participants.
- Hiring a TPA should be done carefully to make sure the company is reputable and has a clean record.