Executive Summary: The TPA Is the Plan
TOS.05 — The Other Side#
The legal framework governing self-funded and level funded health plans rests on a specific fiction: the employer is the plan sponsor. The employer establishes the plan, maintains the plan document, and bears fiduciary responsibility for plan administration. The TPA executes. In operational reality, the relationship runs the other direction.
For the typical small employer operating a level funded plan, the TPA writes or substantially controls the plan document, selects or strongly recommends the provider network, sets adjudication criteria, manages prior authorization, processes every claim, handles every appeal, manages the stop loss relationship, and produces the renewal analysis that determines whether the employer continues with the current structure. The employer’s active decision-making typically consists of selecting how much to contribute and signing where the broker directs. The employer’s meaningful choices are bounded by three decisions: which TPA to use, how much to contribute, and whether to renew.
The TPA makes every operational decision that determines what the plan covers, how it pays, and what the member experiences when care is needed. Many TPAs include language in their service agreements explicitly reserving interpretive authority to themselves. When a claim is disputed and the plan document is ambiguous, the TPA interprets it. The TPA determines prior authorization requirements: which services require advance approval, what clinical criteria must be satisfied. When a member appeals a denial, the TPA’s decision is final unless the employer intervenes, and the employer lacks the clinical expertise to evaluate whether the TPA’s clinical determination was correct. The TPA produces the renewal analysis the employer relies on, and the TPA’s financial interest changes depending on which structure the employer selects. Several TPA service agreements examined in published ERISA litigation contain provisions that limit the employer’s audit rights, require extended advance notice before an audit, or restrict the auditors the employer may engage. These provisions are structurally incompatible with the employer’s fiduciary duty to monitor service providers, a duty the DOL has stated applies to plan sponsors of self-funded health plans.
ERISA Section 3(16) makes the plan sponsor the plan administrator. The DOL has consistently held that the plan administrator role is inherently a fiduciary position. When the TPA makes the operative decisions and the employer signs the documents, fiduciary responsibility and decision-making authority are misallocated. The employer bears liability for decisions it did not make. The ERISA Advisory Council recommended in 2005 that TPAs’ fiduciary status for initial benefit determinations be formally affirmed. That recommendation has not been implemented. In the intervening two decades, the small group level funded market has grown substantially while the regulatory framework governing TPA decision-making authority has not evolved to reflect it.
Three regulatory consequences follow logically. TPAs making fiduciary decisions should bear fiduciary liability. Employers functioning as nominal plan sponsors should have access to practical oversight tools: preserved audit rights, standardized data reporting, and independent advisory services. TPA regulation should reflect operational reality, with capital adequacy, bonding, and oversight standards that match the functional role rather than the contractual label. When the arrangement breaks, it breaks for the employer.