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: 1 investigator for every 12,000 plans: Employee-benefits scammers are on the loose and leaving workers in the lurch

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When the U.S. Department of Labor filed a lawsuit against a Chicago-area employee benefit fund early this year, it alleged a litany of improper loans, transfers of fund assets, and unreasonable compensation had siphoned more than $2.8 million from the plan since 2015. But there was far more to the story than what the Labor Department outlined in its complaint. 

The United Employee Benefit Fund, the fund targeted in the lawsuit, provides life insurance to about 63 employer-sponsored benefit plans nationwide, according to regulators. The Labor Department started investigating alleged mismanagement and inflated compensation at the fund more than 16 years ago, according to regulatory case summaries released in response to a Freedom of Information Act request by Georgetown University’s Center on Health Insurance Reforms. Some of the same players named in the complaint this year were scrutinized by the Labor Department for violations at the same fund at least as early as 2006, the case summaries show. A decade ago, the Labor Department reached a settlement with the fund relating to nearly 200 improper loans that hadn’t been repaid–only to see millions of dollars allegedly misappropriated from the fund in the years that followed. 

The case is part of a broader pattern of regulators struggling to catch up with fraud involving multiple employer welfare arrangements, or MEWAs, according to Labor Department veterans and employee-benefits experts. These plans provide benefits–often health insurance coverage, but also in some cases life insurance, disability coverage or other benefits–to the employees of two or more employers. In 2021, there were over 700 such plans covering roughly 3 million participants ranging from Major League Baseball team employees and Nashville musicians to farmers and construction workers, according to regulatory filings–although that’s likely an undercount because many MEWAs fail to file the required forms, according to regulators.  

MEWAs can allow smaller employers to pool their resources and obtain cheaper health insurance and other employee benefits than they might find on their own. But they’ve also been plagued for decades by fraud and insolvencies that can leave piles of unpaid claims, researchers say. Last year, a MEWA providing health coverage to employees of several thousand New Jersey small businesses declared bankruptcy, saying it couldn’t withstand the volume of members’ COVID-related claims. 

Concerns about MEWA mismanagement and fraud are growing as litigation and state legislative changes pave the way for broader use of these plans and similar arrangements, employee benefits experts say. The ongoing legal and political battle over the Affordable Care Act has contributed to a recent uptick in scams involving MEWAs, said Robert Wake, general counsel at the Maine Bureau of Insurance and chair of a National Association of Insurance Commissioners working group that helps monitor and coordinate the state and federal regulatory response to sham health plans. “Where there is legal confusion, there is a business opportunity for scammers,” Wake said. Like bootleggers, he said, many MEWAs “try to sell a cheap product, and it’s often toxic.”  

In some cases, MEWA operators tap-dance between federal and state regulators, who have joint responsibility for overseeing the arrangements, researchers say. States vary widely in their approach to regulating the plans. In response to questions about the United Employee Benefit Fund, an Illinois Department of Insurance spokesperson said the state does not have a MEWA registration statute, and the department has no record of any regulatory or enforcement action against the fund.  

In another sign of the regulatory challenges, the United Employee Benefit Fund in a statement to MarketWatch disputed the Labor Department’s assertion that it is a MEWA, saying the fund is a “Taft-Hartley” trust, which would make it subject to a different regulatory regime. The fund said it “has successfully provided death benefits to union employees who subscribed to its benefits and thereby provided security to working families.” The fund said it disputes the Labor Department’s complaint against the fund and its current trustees, adding that allegations involving those trustees relate to a period when they were advised by service providers and attorneys who are no longer involved with the fund. The fund has filed lawsuits against its former service provider, fund manager, and attorneys, looking to recover over $5 million allegedly “wrongfully dissipated” by those people, the fund said. 

The federal agency that oversees employee benefit plans has noted in its recent Congressional budget requests that it has been outgunned by MEWA fraudsters. The agency’s inability to effectively protect participants from fraudulent and mismanaged MEWAs is “an especially stark example” of the impact of its limited budget, the Labor Department’s Employee Benefits Security Administration said in a fiscal year 2023 budget document. The agency lost 89 investigators, or 22 percent of its current investigative staff, in the five years ending with the 2020 fiscal year, and it can’t afford to replace them, the document said. The agency now has less than one investigator for every 12,000 employee benefit plans, according to the document. 

The Labor Department’s inspector general said in November that it plans to audit the effectiveness of certain related enforcement efforts, including those involving MEWA sustainability and fraud. The Labor Department said in comments to MarketWatch that it “continues its long-standing efforts to seek out and shut down abusive” MEWAs and proactively identify known fraudulent operators. As its budget declined in real dollars, the EBSA agency responsible had “no option but to downsize,” the Department said, adding that “the impact on the enforcement program has been particularly severe.” 

The public remains largely in the dark about the scale and extent of scams and mismanagement in these plans, experts say. Researchers, consumer advocates, and other groups have pushed the Labor Department in recent years to release records on MEWA compliance and enforcement. The Department ultimately released thousands of pages of MEWA investigative files in response to Georgetown’s open-records request. The files included hundreds of cases, many involving repeat players and impacting participants in multiple states, as well as many plans failing to file required forms and regulators struggling to catch up.

Fund assets allegedly diverted into a foreclosed home

Some of the money allegedly siphoned from the United Employee Benefit Fund was poured into a five-bedroom brick home in Wilmette, Ill., according to the fund’s complaint. A real estate listing for the home shows an interior filled with high-end decor: A grand piano in the living room, a crystal chandelier in the dining room, monogrammed towels in the bathroom, a bedroom closet overflowing with clothes. A sign on a rec room wall reads, “McDowell.” 

Herbert McDowell III is a former fund trustee and service provider who was instrumental in creating the fund in the early 1990s, according to court filings. Through a series of transactions in 2016 and 2017, fund assets were diverted in an elaborate plan to rescue McDowell’s home from foreclosure, the Labor Department alleged in its complaint filed early this year. Fund officials and McDowell terminated several whole life insurance policies owned by the fund to get the cash surrender value and applied, on behalf of the fund, for a loan on a participant’s policy, funneling the money into transactions that ultimately led to McDowell’s home being purchased by a company owned by a Chicago real estate attorney, the Department alleged. McDowell, who had been evicted from the home with his personal property remaining locked up inside, then moved back into the home as a renter–but he couldn’t afford his rent, the Department alleged. By mid October 2017, the fund had allegedly paid $85,000 in rent on McDowell’s behalf, the Department said.     

“‘Where there is legal confusion, there is a business opportunity for scammers’”

— Robert Wake, general counsel at the Maine Bureau of Insurance

Even as the alleged scheme to rescue McDowell’s home was unfolding, the Labor Department was scrutinizing at least two McDowell-affiliated entities, United Preferred Companies and American Workers Master Contract Group, according to the case summaries. The Department decided to take no legal action despite its findings of violations of federal law and failures to take corrective steps, the case summaries show–only to open a fresh investigation into the United Employee Benefit Fund in spring 2018, according to court documents. 

The Labor Department said it does not comment on decisions regarding investigations. Nearly $1.4 million was restored to the fund after the Labor Department told the parties it intended to file the 2022 complaint, the department said. Darren VanPuymbrouck, an attorney for McDowell, said that McDowell has denied the Labor Department and fund allegations against him and filed a lawsuit against a former fund attorney L. Steven Platt, alleging that he relied on Platt’s advice in determining that the transactions at issue were legal. Platt directed questions to his attorneys, who did not respond to requests for comment. Platt, who is also a defendant in the lawsuits filed by the Labor Department and the fund, denied in court filings that he provided substandard legal advice and alleged that he relied on misrepresentations of fact by McDowell and fund officials in providing legal services to the fund. 

In April, McDowell was indicted on federal tax evasion charges for allegedly causing money to be paid to his company United Preferred Companies and spending it for his personal benefit. He pleaded not guilty. 

The Labor Department’s scrutiny of the fund goes back at least as far as 2006, according to the case summaries, when the Department found that no payments of principal or interest had been made on millions of dollars worth of defaulted participant loans. In 2012, the Department said that fund trustees had approved at least 194 improper loans from the fund to individual participants and allegedly made no effort to collect payments. One of those trustees, David Fensler, is also a defendant, along with McDowell, in the 2022 lawsuits filed by the Labor Department and the fund. Attorneys for Fensler did not respond to requests for comment. In court filings, Fensler has denied allegations that he failed to act in the interest of fund participants and violated his fiduciary obligations to the fund. 

One participant who took loans from the fund roughly 20 years ago told MarketWatch that he was never asked to repay them–but for years, fund regulatory filings said his loans were in default or uncollectible. The fund’s most recent form 5500 regulatory filing, for plan year 2018, lists 11 defaulted or uncollectible loans taken between 2001 and 2007 by the participant, George Riskus, with a total unpaid balance including principal and interest of more than $305,000 at year-end 2018. Riskus, 66, of Burr Ridge, Ill., said he didn’t repay his loans because fund representatives told him the repayment would be deducted from his roughly $5 million death benefit after he dies. The fund took a similar position in a statement submitted with its 2013 plan year regulatory filing, saying it disagreed with its auditor’s opinion that certain participant loans listed in the filing–including Riskus’s–were in default because the borrowers’ death benefits would provide payment on the loans. Riskus also said he paid income tax on the loan proceeds around 2012. “Why would they say they’re in default?” he asked. 

The fund said in a statement to MarketWatch that while there are still some participant loans on the books, it is “attempting to collect these loans and will vigorously pursue repayment.” The fund said it is “unaware of any representations made to participants that the loans were excused.” 

Riskus first got involved in the fund more than 20 years ago, he said, after he’d sold off some land he’d developed and was looking for a tax-sheltered investment. He contributed roughly $600,000 to the fund over the years, he estimates, including a $55,000 contribution just last year to keep the policy in force. McDowell was his primary contact for information about the fund, he said. Then in August of this year, Riskus received a letter from the fund’s new acting manager, saying that his participation and benefits under the fund were being terminated because “you no longer have union employees who participate in the Fund,” according to a copy of the letter reviewed by MarketWatch. 

“This just came out of nowhere,” he said. “Not having any life insurance, that really fries me,” he said, noting that he was hoping the death benefit would provide for his three children. “I don’t know who the con artist is,” he said. “I’d like to get some money back. I’d like to know what is going on.”  

In recent weeks, McDowell was still suggesting that Riskus talk to him about insurance coverage, according to emails reviewed by MarketWatch. In a late October email, McDowell asked Riskus if he had been contacted by the fund. “If not, we should get together to discuss your options… including plan design for future coverage,” he wrote. 

Another fund participant, Ronald Futterman, alleged in a lawsuit he filed against the fund in late 2020 that he had also been burned. Futterman received a letter from the fund dated May 2020, saying that “suggestions have been made to improve the overall administrative efficiency of the Trust, strengthen the Trust’s legal position and longevity,” and therefore “for participants 65 and over there will be a 30% reduction of their life insurance death benefit.” Futterman, a retired lawyer in Riverwoods, Ill., who is now 79, claimed in court that the fund had no right to slash his death benefit, which was vested through approximately age 90. There was also a loan balance reflected on his 2020 life insurance policy statement, even though he had never requested a loan, Futterman claimed. 

Futterman paid about $300,000 over the years “for a policy that was the cornerstone of his estate planning,” Futterman’s attorney Peter Dowd told MarketWatch. The fund responded in court that Futterman had not been injured because “his Plan benefits were never reduced,” adding that his “benefits were never protected or vested.” In a statement to MarketWatch, the fund said that Futterman’s company had defaulted on the requirement that it remain a union employer and pay annual assessments to the fund and therefore all employees’ benefits had been terminated in 2013. The fund invented that argument this year, Dowd said, “because it was clear they were losing” the case. The fund has been telling Futterman for the past 20 years, he said, that he’s covered by the policy. 

“I’ve never seen anything this bad, in terms of the misconduct of people who are supposed to be fiduciaries,” said Dowd, who has been practicing employee-benefits law for nearly 50 years. “These people felt somehow they could operate in a gray area and avoid complying with the rules and regulations.”  

‘The same old song with a different orchestration’ 

While lawsuits involving the United Employee Benefit Fund wind through the courts, more dubious benefit plans designed to skirt regulations are popping up, employee benefits experts say. One arrangement raising particular alarm among veteran regulators is Data Marketing Partnership, which allows individuals to obtain health-insurance coverage in exchange for downloading software that lets a third party track their internet activity. Despite what critics see as the lack of a genuine employment relationship, Data Marketing has successfully argued in court that it’s a self-funded single-employer benefit plan, allowing it to skirt state insurance regulation and some requirements of the Affordable Care Act. After an appeal from the Department of Labor, the Fifth Circuit court of appeals largely sided with Data Marketing in August. 

While it may not be a MEWA, “it’s the same old song with a different orchestration,” said Marc Machiz, former Philadelphia regional director for the Labor Department’s Employee Benefits Security Administration. “I fear that because of the Fifth Circuit opinion we’ll see a lot of copycat activity,” he said, as other operators following the same blueprint can say, “we’re going to sell insurance in the individual market and disguise it by pretending there’s an employer involved, when in fact the employer is a sham.” Attorneys for Data Marketing Partnership did not respond to requests for comment.

The pandemic, meanwhile, has raised new questions about MEWAs’ financial stability. Affiliated Physicians and Employers Master Trust, the New Jersey MEWA that declared bankruptcy last year, was a major provider of health coverage in New Jersey’s small group market, according to a letter the trust sent to state legislators last year. The trust was overwhelmed by COVID testing and treatment claims from members, which included many healthcare and other front-line workers, the letter said, adding that participating employers would have to cover about $18 million in losses as a result of those expenses. The trust told employers in a mid July 2021 letter that they’d have to get new coverage for workers and their dependents by the end of the year. 

Henry O. Baker Insurance Group, a Dover, NJ-based insurance agency that had roughly 30 employees and family members covered under the plan, scrambled to find new coverage for workers and had to pay a roughly $45,000 assessment to help cover the MEWA’s losses, said Staci Grant, the company’s vice president of benefits. 

Many other participating employers have been either unable or unwilling to pay the amounts demanded by the MEWA. About 1,200 employers are in a queue to be sued for the amounts owed, said Don Clarke, an attorney for the trust. “Many people were not certain what they were entering into” when signing up for the plan, he said, despite the trust’s disclosures that members would be on the hook for any shortfall in the trust. The trust is still working to pay off several million dollars’ worth of medical claims, he said. 

The legal limbo surrounding a Trump administration MEWA-related rule, meanwhile, heightens concerns about oversight of these arrangements, policy experts say. In 2018, the Trump administration proposed making it easier for businesses to band together to obtain health coverage through lightly regulated “association health plans,” a type of MEWA. Machiz, the former Labor Department official, wrote in a comment letter that the proposed rule “promises to unleash a wave of fraud on an unsuspecting public.” The rule was blocked by a federal court, but the federal government appealed the decision in 2019, and the case remains in a holding pattern with a federal appeals court. The situation alarms many employee benefits experts, who say the Labor Department should rescind the rule. 

“They need to rescind it, because it’s still a source of confusion, and some folks out there still use it in trying to get states to loosen up the rules” governing association health plans and similar arrangements, said Mila Kofman, a MEWA expert and former Labor Department regulator who is now executive director of the DC Health Benefit Exchange Authority, which oversees the District of Columbia’s Affordable Care Act marketplace.  

States are also opening the door to looser regulation of multiple employer arrangements. Virginia, for example, this year passed a law allowing association health plans similar to those in the Trump administration rule. 

The Labor Department’s Employee Benefits Security Administration started a MEWA solvency project in fiscal 2019, aiming to proactively identify plans heading for insolvency and protect participants. So far, the project has recovered more than $90.1 million, the Labor Department said. 

The Labor Department should also be required to provide annual analysis of MEWA regulatory filings and summarize its MEWA enforcement efforts for Congress, Kofman said. The Department said that it plans to publish details in the coming months on its MEWA enforcement activities over the past five years.  

The Department has acknowledged that those enforcement efforts often come too late. Describing the collapse of fraudulent and mismanaged MEWAs in its fiscal 2022 budget request, EBSA wrote, “as a rule… EBSA only learns about these cases after catastrophe has occurred.” 

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