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Reviewing Service Agreements Can Mitigate Risk for Employer Benefit Plans

July 1, 2024

An employer can mitigate compliance, tax, and litigation risk by carefully reviewing its agreements with service providers to its benefit plans. Service providers assist with coordinating, administering, and communicating many benefits. However, even after working hard to select your service providers, getting your agreement right is essential to legal compliance and risk mitigation. Service providers often draft long and technical documents as their “standard” service agreements, and they can sometimes be one-sided in favor of the service provider. Here are a few of the many reasons legal review is critical. 

Reasonable Agreements  

ERISA requires service agreements to be “reasonable” under the circumstances and in light of the services provided. This standard requires clear explanations of fees, accurate description of the services provided and other regulatory language. Even if an agreement is the “standard” agreement used by a large service provider, that is not a guarantee it will be reasonable in your circumstances. A review of key required terms can help ensure ERISA compliance and satisfaction of your fiduciary duties. 

Anti-Gag Rules

Rules prohibiting language requiring silence or nondisclosure now apply and are increasingly being enforced. A quick review by legal counsel can help ensure compliance. The rules are technical and new, resulting in even some large service providers still using contract language that is now prohibited. As the plan sponsor, you bear part of the risk and compliance obligation. Many service providers have been quick to agree to reasonable requests, making review of new agreements, renewals and amendments more efficient and effective. 

Know What You Are Getting

Benefits agreements are often long and full of technical language to cover different contingencies or choices regarding the scope of service that might be provided. An employer may end up with gaps in services or more expensive services than expected if the employer pays for common services that it does not need. A review can help ensure you will get the services you need and expect. 

Protect Yourself 

Service agreements almost always have caps on the liability and responsibility of the service provider. These are sometimes reasonable, but sometimes they can result in the service provider partially or completely dodging responsibility for claims or losses. In such cases, negotiating liability and indemnification language can ensure that the service provider’s responsibility is consistent with your plan’s best interest and your circumstances. 

Have an Advocate 

Service providers almost always draft the service agreements for their relationship with employers and benefit plans. This makes it important to have someone who represents your interests reviewing the agreement, even if the agreement is described as “standard,” reasonable or legally compliant. Not only is it wise to ensure the agreement is fair, but your business and benefits are unique, and your agreements should reflect that. A review of the agreement can point out language that needs changing and which standard language works for your circumstances. Many agreements are reasonable. However, what you and the service provider think are reasonable many be very different. For that reason, all parties should reach an understanding of what will work for everyone and be reasonable to everyone before signing. Your legal obligations and requirements are different from those of the service provider. Without your own review, it is difficult to know whether the agreement meets your legal requirements.

Set the Scope

Some agreements only need a quick review of key terms. Others will need a more detailed review. After a quick review, what changes to request and who negotiates any changes will be key drivers in how long a review takes. For most agreements, legal review can be done promptly, with limited cost (especially compared to risk of noncompliance). The review process can be used to help document your fiduciary duties. By explaining what you need and expect before the review starts, you can limit the review to what you have determined is appropriate for the circumstances.

If you want more information on why agreement review is so important, contact a member of the Varnum benefits team

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