Home Care Agencies Sued for Illegal Use of Captive Insurance Company

Executive Summary. Class action attorneys recently filed a first-of-its-kind class action against Edison Home Health Care (“Edison”) and Preferred Home Care of New York (“Preferred”) alleging that the home care agencies used a “captive” insurance company to cheat their home care workers out of millions of Wage Parity Act (“WPA”) dollars. This is the first lawsuit targeting use of captive insurance companies to provide health benefits and was brought under ERISA, the federal statute governing employee benefit plans, as well as the WPA. The suit claims that the agencies used a captive insurer to avoid paying their Medicaid funded home care workers the full $4.09 WPA package of additional wages and benefits (“WPA Package”) and, instead, returned WPA-credited benefit dollars to the agencies and their owners. No prior lawsuit has targeted use of captive insurance companies in this way, and the progress of this lawsuit will be closely watched.

How Did This Arrangement Work to Return WPA-Credited Dollars?

The captive insurance company funding the health plan allegedly held some 35.5 million WPA-credited benefit dollars earmarked to pay for home care worker health insurance benefits for 4,000 workers, but paid out less than 10 million in health benefits from 2015 to 2017, at an administrative cost of $.50 per hour, and returned the remaining dollars as “surplus” or other direct or indirect financial benefit to the agencies and their owners. The return of this purported “surplus” is the focus of the suit, because the WPA prohibits any “refund” or “dividend” to an agency of monies contributed toward the WPA Package, and an agency must guarantee that the WPA credit taken is not more than the amount of the contribution actually used for benefits.

What Provisions of ERISA and the WPA Were Allegedly Violated?

ERISA precludes “fiduciaries,” that is, those who exercise discretionary authority and control over a benefit plan, or the distribution or administration of its assets, and “parties in interest,” (e.g. fiduciaries, employers, directors, officers, or employees, including affiliates and relatives) from engaging in “prohibited transactions.” Among other transactions, the transfer or use of benefit plan assets to or by a party in interest is expressly prohibited, as are acts by fiduciaries that result in such assets being used for their own benefit, or the benefit of others in whom they have an interest. The lawsuit alleges that all the named defendants, Edison, Preferred, Healthcap Assurance (the captive insurance company), Berry Weiss, Samuel Weiss (owners of Preferred and Edison, respectively), and 15 unnamed individuals are fiduciaries who breached their fiduciary responsibilities and/or parties in interest who benefitted from prohibited transactions. The lawsuit further alleges that the agencies and their owners violated the WPA by taking a full credit against the WPA Package for the entire amount of 35.5 million dollars, despite this amount not being the cost of benefits actually incurred.

What Is the Liability Exposure of the Agencies and Their Owners?

Under ERISA, the agency owners (and other plan fiduciaries) can be held personally liable to make the plan whole for any losses resulting from their fiduciary breaches, or the breaches of co-fiduciaries, and for disgorging assets and profits wrongfully taken. There is also a mandatory civil penalty of 20% that is assessable by the US Department of Labor on any recovery for a fiduciary breach. Separate from the civil liability, parties in interest (whether or not fiduciaries) are liable for an excise tax penalty with respect to prohibited transactions in which they engage, which ranges between 5% and 100% of the “amount involved.” Finally, improperly benefiting from the assets of an ERISA plan, such as receiving “kickbacks” or anything of value, is a felony prosecutable by the Justice Department. Under the WPA, which is enforced by the New York State Departments of Health and Labor, as well as the State Attorney General’s Office, the penalties for non-compliance with the WPA are severe, including liability for unpaid wages and benefits, withdrawal of an agency’s home care license, and potential civil and criminal Medicaid fraud prosecution.

What Can You Do to Prevent a Lawsuit Against You and Your Agency?

It is important to take the above lawsuit and the issues it raises seriously before you are sued, audited or investigated. If you participate in any type of health plan utilizing a captive insurance company, carefully scrutinize the legality of the plan with the help of a law firm knowledgeable about both the WPA and ERISA compliance. If these issues concern you, it is time to address them so you are not violating the law.

FordHarrison LLP advises and counsels home care agencies on WPA, ERISA and­ Internal Revenue Code Issues. If you have any questions regarding this Legal Alert or would like our advice about particular facts and circumstances at your agency, please contact one of the authors, Stephen Zweig at szweig@fordharrison.comPhilip Davidoff at pdavidoff@fordharrison.com, or Eric Su at esu@fordharrison.com of the firm’s Homecare Industry Law Group in its New York City Office at (212) 453-59000. Also, please visit our blog at www.homecareemploymentlaw.com for additional developments and information.

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