On November 9, 2015, Minnesota Federal District Judge Susan Richard Nelson ruled that the president and CEO of Faribault Woolen Mills Company breached his fiduciary duties under ERISA by diverting Employee health insurance premiums toward corporate and personal use. The lawsuit was brought by the U.S. Department of Labor.
Faribault Woolen Mills (the “Employer”) sponsored a group health insurance policy issued by HealthPartners, a Minnesota based health plan provider. The Plan was funded entirely by Employee pre-tax payroll contributions. Between January and April of 2009, the Employer withheld over $55,000 in premiums from Employee paychecks that were to be remitted to HealthPartners for Employee and dependent health coverage. Instead of remitting these amounts for premiums, the Employer used these funds to pay the fiduciary’s expenses and other corporate creditors, as the Company was experiencing financial difficulties. Ultimately, after an attempt to reorganize, the Company failed and was liquidated leaving unpaid insurance premiums.
Judge Nelson ruled that the employee payroll deduction health insurance contributions became ERISA plan assets on the dates that the Employees’ wages were otherwise paid. She further found that the President and CEO, as plan fiduciary, breached his duty of loyalty by failing to remit the plan assets to the plan and using the assets to pay other corporate creditors and personal expenses. The president, Michael Paul Harris, was ordered to pay restitution to the Plan in the amount of $55,040.61 plus prejudgment interest.
Harris was found to be a fiduciary (and ultimately responsible for the breach) as he controlled the finances of the Company and directed the finance department with respect to the payment of creditors. The redirection of funds from the Employee withholdings toward other creditors was deemed to be a discretionary use of plan assets resulting in fiduciary status.
It should be noted that fiduciaries of ERISA pension, health and welfare plans are personally liable for fiduciary breaches of loyalty and prudence. The fact that this was a corporate obligation (the HealthPartners contract) did not shield the corporate officer from personal liability for his actions with respect to the health plan.
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