The Executioner’s Axim – Administrative Cost Reimbursement in Service Contract Fringe Benefit Plans Is Under Attack
“If we are not our brother's keeper, at least let us not be his executioner.”
― Marlon Brando
Back in the day, specifically 2018, I first blogged about the issue of administrative fees charged by brokers/third-party administrators (“TPAs”) to implement fringe benefit plans set up by employers under prevailing wage laws. See https://www.awrcounsel.com/blog/2018/8/29/the-service-contract-act-and-davis-bacon-act-plan-expense-conundrum?rq=fee%20.
The laws, specifically the Service Contract Act (“SCA”) and the Davis-Bacon Act (“DBA”), require contractors to offer employees certain fringe benefits specified in the prevailing wage determination. To do that, many contractors set up benefit plans and hire a TPA to run the plans. Under rules that have been in place since the 1980s, employers are barred from including its own costs (for example, compensation paid to their own staff who oversee the benefit plans); however, the employer’s costs are distinguishable from the costs incurred by the plans. In my 2018 blog, I told readers that:
Provided that TPA fee is paid for by the plan, and not the employer directly, it is just a plan expense. Plans have expenses, just like insurance companies do. And insurance companies make a profit, so why can’t TPA also do the same? Thus, next time you hear that administrative expenses are not bona fide SCA or DBA fringe benefits, remember that truism applies to the employer’s own administrative expense, but does not extend to the insurance company, plan or TPA expenses. This rule doesn’t affect the validity of the employer’s contribution when the plan pays the expense.
See https://www.awrcounsel.com/blog/2018/8/29/the-service-contract-act-and-davis-bacon-act-plan-expense-conundrum?rq=fee%20. Given that distinction, claims by the Department of Labor (“DOL”) that TPA fees paid by a plan should be treated as if they were an employer’s administrative expenses are mostly bogus when the plans and the TPAs have been operating under the SCA rules since at least the mid-1980s.
I returned to this subject in 2021. https://www.awrcounsel.com/blog/2021/3/19/7e82qfsbrmjtkstc89tv89fmlf5cgr?rq=administrative%20costs. I more recently reported that DOL had worked to close the gap I had noticed in their regulatory scheme, at least for DBA-covered contracts, and issued new rules (effective in October, 2023) meant to restrict the payment of certain administrative fees by DBA benefit plans. https://www.awrcounsel.com/blog/2023/9/11/who-will-be-the-bag-holder-the-tpas-or-the-employers-for-the-admin-fees-dol-recently-disallowed-for-davis-bacon-act-and-maybe-sca-hampw-plans?rq=administrative%20fees. I asked in that blog who was going to be the bag holder – the benefit plan or the third-party administrator/broker? While the perceived administrative cost loophole had supposedly been closed for DBA contracts, there was no similar rulemaking for SCA covered contracts. Nonetheless, I wrote then: “Stating the obvious — employers who have plans with these kinds of admin fees, and the TPAs who work for them, would be wise to review their plans and contractual agreements in light of the new regulations.” Id.
Fast forward now to February 21, 2024. DOL issued a press release about a suit it had filed against an insurance broker named AXIM and some of its affiliates and officers. AXIM is a broker-sponsored business that arranges fringe benefits for government contractors covered by the SCA. The DOL headline blared: “FRINGE BENEFIT PLAN FIDUCIARIES MISUSED MILLIONS OF DOLLARS TO PAY EMPLOYER EXPENSES[.] Suit seeks to bar James Campbell, associated companies from serving as Employee Retirement Income Security Act fiduciaries.” Https://www.dol.gov/newsroom/releases/ebsa/ebsa20240221.
You can find the complaint here: https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/2024/02/EBSA-2024-0047.pdf.
The gist of DOL’s suit is that AXIM and its affiliated concerns took fees and revenue for services out of the plan proceeds and this deprived workers of their full SCA required health and welfare (“H&W”) benefits. DOL also alleges a series of other Employee Retirement Income Security Act (“ERISA”) fiduciary breaches, all of which are beyond the scope of this blog. DOL contends that AXIM allegedly mismanaged fringe benefits owed to employees working for at least 54 government service contractors across the United States and says the company misappropriated more than $5 million. This alleged misappropriation was apparently the result of the payment of contractually provided fees and expenses incurred by AXIM on behalf of the plan and then reimbursed by the plan to AXIM.
Now for a disclosure, I have represented one of those 54 contractors with an AXIM plan. Back in in my May 2021, blog, I set forth my own views:
[W]here the plan pays its own administrative costs, particularly indirectly through a trust, that charge is the plan’s own cost. And every plan has those costs.
Sometimes DOL fails to keep this distinction in mind and goes after the government contractor’s plan expenses and tries to collect additional back wages for what they call improper deductions. In those circumstances, it falls on the contractor to push back.
Id. Apparently, for the time being, push-back from contractors has kept the DOL from joining the contractors to the AXIM lawsuit (although DOL has exerted pressure on them to pay back the AXIM fees into their plans). Thus, DOL seemingly has changed course to focus on the broker. Good news for my client. Not so good news for AXIM and its owners.
Why is DOL picking on AXIM? Well, perhaps it is because AXIM allegedly has done bad recordkeeping and improperly transferred funds, and DOL sincerely believes that AXIM is a bad ERISA fiduciary which needs to be excised from the system. But the fact remains for SCA compliance purposes that AXIM likely is one of the weakest antelopes in a small herd of TPA/broker businesses. And the lion always hunts the weakest member of the herd. AXIM is one of the smaller TPA/brokers furnishing these plans. They likely have less resources to fight with DOL than some others.
DOL tried picking on one of the large TPA/broker plans back in the middle of the last decade, but that effort proved largely unsuccessful. See Acosta v. Chimes District of Columbia Inc., Case No. RDB-15-3315 (D.MD 2019) (Memorandum Opinion). The Chimes case involved both a contractor and a FCE Benefits Administrators (a TPA). The latter is a bigger player in the SCA benefit plan world. DOL was largely frustrated in that litigation effort. I speculate that DOL thinks it might have a better chance of prevailing if it isolates the weakest member of the herd, focuses its big guns on ERISA rather than SCA claims, and doesn’t sue any contractors.
What’s AXIM’s response to the suit? I have no insider information. But I see that AXIM responded publicly with its own press release and said:
AXIM is extremely disappointed by the DOL's lawsuit and accompanying press release, which suggested a lack of commitment on the part of AXIM and its employees with respect to complying with applicable law, including the Employee Retirement Income Security Act.
As the DOL is well aware, AXIM is fully committed to compliance, and, in fact, has been in frequent communication with the DOL for well more than a year regarding the issues raised in the DOL's complaint. AXIM has been entirely transparent and forthcoming with the DOL, and the DOL's suggestion that AXIM is not committed to full compliance is entirely without merit. AXIM is confident that the matter will be resolved in its favor and intends to vigorously defend its action and its good name”
https://www.prnewswire.com/news-releases/axim-responds-to-dol-allegations-302070199.html
Of course, AXIM is not the only insurance broker interested in these SCA compliance issues. As I noted, AXIM is just a little antelope. There are others whose current business model may rise or fall with what happens to AXIM. DOL’s suit endangers a business model followed by much larger insurance business concerns than AXIM. It may well be that each broker’s practices and contracts are different; that other brokers/third party administrators provide more or different services than AXIM; and that AXIM’s inadequate bookkeeping, lax payment practices, related party transfers, and other practices, left them uniquely exposed. But it is more likely that DOL (once it is done with AXIM) will try to leverage any success against the larger other players, whose scope of operations reach much further into the federal service contracts industry and thus represent the real prize for DOL enforcement.
As such, the outcome of DOL’s suit will be closely watched in the service contract fringe benefit plan provider industry.