United States Department of Labor

Fact Sheet

MEWA Enforcement

U.S. Department of Labor
Employee Benefits Security Administration
December 2011

Background

EBSA’s newest national initiative, Health Benefits Security Project, is an expansion of the Health Fraud/MEWA initiative. Multiple Employer Welfare Arrangements (MEWAs) provide health and welfare benefits to employees of two or more unrelated employers who are not parties to bona fide collective bargaining agreements. In concept, MEWAs are designed to give small employers access to low cost health coverage on terms similar to those available to large employers. For certain employers they represent the only available option for providing employees with health care because insurance companies often will not insure small employers who do not fall within their desirable risk category.

MEWAs generally operate in one of two ways. Employers forward money to the MEWA (often including employee contributions) which is used either to pay premiums for a health insurance policy or to pay for benefits directly from the MEWA. It is the latter arrangement which more often causes problems. The MEWA organizers may not have conducted a prudent analysis to determine the amount of contributions needed in order to fully pay claims.

Although MEWAs can be provided through legitimate organizations, they are sometimes marketed using attractive but actuarially unsound premium structures that generate large administrative fees for the promoters. These high fees are often paid before any claims are paid, leaving insufficient funds available to pay for the benefits promised by the promoters. In addition, certain promoters will set up arrangements that they claim are established pursuant to a collective bargaining agreement and, therefore, are not MEWAs but legitimate benefit plans free from state insurance regulations. Often, however, these collective bargaining agreements are nothing more than shams designed to avoid state insurance regulation.

States and the federal government coordinate the regulation of MEWAs pursuant to a 1982 amendment to the Employee Retirement Income Security Act (ERISA). This dual jurisdiction gives states primary responsibility for overseeing the financial soundness of MEWAs and the licensing of MEWA operators. The Department of Labor enforces the fiduciary provisions of ERISA against MEWA operators to the extent a MEWA is an ERISA plan or is holding plan assets. State insurance laws that set standards requiring specified levels of reserves or contributions are applicable to MEWAs even if they also are covered by ERISA.

EBSA Enforcement Efforts

The Department has devoted significant resources to investigating and litigating issues connected with abusive MEWAs created by unscrupulous promoters who sell the promise of inexpensive health benefit insurance, but default on their obligations. Particular emphasis has been put on identifying ongoing abusive and fraudulent MEWAs, and working to shut down such operations.

Through September 2011, the Department has:

• Initiated 821 civil and 314 criminal investigations and obtained monetary results of over $226 million. There are currently 57 civil and 109 criminal investigations open.
• Filed 99 civil complaints.
• Indicted 184 individuals with 133 convictions or guilty pleas.
• Published technical assistance materials, including a booklet explaining federal and state regulation of MEWAs.
• Issued numerous advisory opinions to assist state prosecutors and regulators to enforce state insurance laws against MEWAs.
• Convicted individuals have been sentenced to total prison terms of approximately 500 years. Most of these investigations have been jointly investigated with other agencies, including the Department's Office of Labor Racketeering and Fraud Investigations, the FBI, the U.S. Postal Inspection Service, and the Internal Revenue Service's Criminal Investigative Division.

Recent Civil Litigation Cases

W.I.N. Association (WIN) - The Department filed a complaint on February 22, 2011 in District Court against the W.I.N. Association, Michael Ray Bianchi, President, and the W.I.N. Association Health Plan for the failure to make payments on health care claims, excessive fees, disgorgement of profits, self-dealing, and the non-disclosure of fees to the employers. The complaint was filed in the U.S. District Court, Southern District of Texas, Houston Division. The Department's suit alleged that Michael Bianchi withdrew funds from the Plan with no justification that such expenditures were associated with reasonable and necessary expenses for the Plan's administration and management. The suit also alleged that Bianchi and W.I.N. mismanaged Plan assets causing the Plan to incur unpaid health claims, failed to prudently operate the Plan, and failed to properly segregate Plan assets and corporate funds. The Department's investigation found at least $198,000 in unpaid claims to be outstanding.

On March 31, 2011, the Department obtained a Consent Judgment and Order against W.I.N. Association, LLC, Bianchi, and the W.I.N. Association Health Plan. The Consent Judgment and Order confirmed that the defendants violated ERISA from April 2006 through April 2008, when they failed to pay approximately $341,215 in health care claims and withdrew approximately $238,383 without authorization from the Plan. Additionally, the Consent Judgment and Order permanently enjoined the defendants from violating ERISA or from acting as fiduciaries, and authorized the Secretary to bring a collection action for the Plan losses of $579,597 if defendants are found to have assets to effect restitution.

Castleton Group Health Plan - On January 4, 2010 the Department filed a District Court action against the Castleton Group, as well as Suzanne Clifton, the Castleton Group's owner and President, for failure to fund accounts maintained for the purpose of paying promised benefits. The Department filed a corresponding Bankruptcy Adversary Proceeding against Suzanne Clifton on January 5, 2010. The Department filed its action in the U.S. District Court, Eastern District of North Carolina.

The Castleton Group ceased operations and filed for Chapter 7 bankruptcy protection in December 2007. Suzanne Clifton subsequently filed for personal bankruptcy. The Department's suit alleged that the Castleton Group had failed to forward employee and employer contributions to the third party administrator, thereby underfunding benefits owed to participants. The amount not remitted to the Plan was estimated to be at least $247,000.

The Department filed a fully executed Consent Judgment with the District Court on January 7, 2011. The Consent Judgment was approved by the District Court on January 19, 2011, and the remaining settlement actions were taken, including: payment of insurance proceeds, distribution of $45,000 to the 401(k) Plan in the Castleton Group bankruptcy and subsequent reduction of the Plan's Proof of Claim; payment of $84,000 to the 401(k) Plan Special Counsel and subsequent withdrawal of application for fees; withdrawal of the 401(k) Plan Successor Trustee's Proof of Claim in the Clifton bankruptcy; recognition of a priority claim of $66,705 on behalf of the Health Plan in the Castleton Group bankruptcy; and forwarding of the insurance proceeds to the independent fiduciary, in the amount of $265,000 for deposit and distribution.

Mutual Employees Benefit Trust - The U.S. Department of Labor obtained a final consent order in 2010 which permanently bars Leonard Slutsky and Sharlene Slutsky from control over or serving in positions of responsibility to employee benefit plans governed by the Employee Retirement Income Security Act, except as outlined in the court order.

The defendants were sued by the department in 2001 for allegedly engaging in numerous violations of ERISA with regard to the Huntington, N.Y-based Mutual Employees Benefit Trust. MEBT was a multiple employer welfare arrangement that provided health and other welfare benefits to 1,912 participants in the Long Island and New York City areas.

Leonard Slutsky allegedly acted as a fiduciary to the MEBT plan. His wife, Sharlene Slutsky, was the owner and president of MEBT's third party administrator. The department's lawsuit alleged that they and other MEBT trustees diverted MEBT's assets to sham labor unions and corporations. The trustees were ordered to make restitution under a separate consent judgment.

The final consent order, entered in the U.S. District Court for the Eastern District of New York, also prohibits the Slutskys from providing or rendering to any employee benefit plan services of any kind, except in very limited circumstances, and from selling, leasing or otherwise transferring for a fee any interest in any property to any employee benefit plan.

Contractors and Merchants Association (CMA) and Small and Independent Business Associates, Inc. (SIBA) – The Department sued a purported employer association, a health fund trustee, and the fund's consultant over alleged imprudent management of the Manufacturing and Industrial Workers Benefit Fund (MIWU) of Bryan, Texas. The defendants' actions allegedly resulted in more than $3.4 million in unpaid health claims affecting participants in Arizona, California, Florida, Georgia, Illinois, Texas and other states.

According to the lawsuit, Raymond Palombo, Mitchel Coneley, Leonard Steinberg, Contractors and Merchants Association (CMA), and the Small and Independent Business Associates Inc. (SIBA) violated ERISA by causing the insolvency of the MIWU health fund and by their failure to hold the fund assets in trust. The defendants permitted Palombo to transfer the health claim liabilities of members of his alleged sham employer association, CMA, to the MIWU fund. Palombo allegedly diverted plan assets to benefit him, the defendants and others, improperly set contribution rates for 880 participants of CMA, enrolled ineligible individuals in the health fund, and failed to properly fund the plan.

The MIWU health fund became financially insolvent in 2005 due to the transfer of CMA members to the fund. At the time of the improper actions, Palombo was the president and sole shareholder of CMA, and Steinberg was the president of SIBA and provided consulting services to the MIWU health fund through SIBA. Coneley was the fund's trustee.

The amended complaint, filed July 2, 2008 in the U.S. District Court for the Northern District of Georgia in Atlanta, sought to have the defendants restore to the fund all losses with interest, undo all prohibited transactions, offset any claims for benefits against the MIWU fund, and permanently bar the defendants from serving in a fiduciary capacity to any ERISA-covered plan in the future. In related Department litigation, the court appointed an independent fiduciary to pay health claims of affected participants and beneficiaries and to manage the more than $1.9 million in fund assets recovered by the Department and collected by the independent fiduciary as of May 2008.

The Department's Motion for Default Judgment was granted by the Court against four of five defendants. The June 9, 2009 Judgment enjoined the defendants from serving as fiduciaries or service providers, or having control over the assets of any ERISA covered employee welfare benefit plan. The Court concluded that defendants CMA, Coneley, Steinberg, and SIBA had breached their fiduciary duties under ERISA when the defendants failed to establish a reserve or a funding policy to ensure that the MIWU Fund could meet its financial obligations, neglected to perform any underwriting activities and failed to discharge their duties under the terms and requirements of the documents and instruments establishing the MIWU Fund. The defendants were further found to have engaged in self-dealing for their part in assisting Palombo in diverting MIWU Fund assets to CMA and others, and for assisting in schemes to allow the enrollment of ineligible participants, all of which personally benefited Palombo. The Court also found that Steinberg, as the consultant to the MIWU Fund, was a knowing participant who enabled Coneley to breach his fiduciary duties by assisting Coneley with transferring 880 participants into the MIWU Fund with unpaid health claims that could not be financially supported by the Fund. The motion against Palombo was initially dismissed without prejudice due to his Chapter 7 bankruptcy filing. The Department's motion that the ERISA claims be exempt from the Palombo bankruptcy stay was granted, however, on July 15, 2009, allowing the civil prosecution of Palombo to proceed.

On October 8, 2009, the U.S. District Court for the Northern District of Georgia permanently enjoined Palombo from serving directly or indirectly as a fiduciary or service provider to ERISA covered plans. The District Court found that Palombo was liable for multiple violations of ERISA for his part in the MIWU fund's insolvency. Further, within 60 days, Palombo must provide a copy of the Order to any person or entity through whom he solicited participants for the MIWU, IUPIW and IUIIW Funds. Palombo must also post a copy of the District Court Order on his website. The Order binds anyone who has notice of it and works in concert with Palombo. On October 26, 2009, the District Court granted the Secretary's Motion for Entry of Judgment Awarding Monetary Relief in the amount of $2.9 million.

On December 8, 2008, the Department filed an adversary complaint against Palombo's filing for Chapter 7 bankruptcy protection, to determine the non-dischargeability of any monetary judgment that the District Court might award against Palombo. On December 29, 2010, the Bankruptcy Court ruled in favor of both of the Department's two motions: 1) that Palombo was a functional fiduciary with respect to the assets of the Manufacturing and Industrial Workers Benefit Fund (MIWU Fund); and had breached his fiduciary duties committing an act of defalcation, and 2) the issues decided in an earlier District Court action (default judgment) were precluded from being relitigated in the Bankruptcy Court. As a result of the ruling on the first motion, Palombo's request in bankruptcy to discharge his debt of $2,958,681 for unpaid health claims to the MIWU Fund was denied.

On March 23, 2011, the Bankruptcy Court issued an order approving the Department's Motion for Summary Judgment. The Bankruptcy Court held that issues decided in the second Default Judgment were precluded from being re-litigated in the Bankruptcy Court action, that the District Court's findings supported a finding of defalcation against Palombo, and that Palombo was barred from relitigating facts and issues already adjudicated. As a result, the Bankruptcy Court refused to discharge Palombo's $2,958,681 debt to the MIWU fund.

Recent Criminal Prosecutions of Corrupt MEWA Operators

United States v. William Madison Worthy – On October 19, 2011 William Madison Worthy pleaded guilty in the United States District Court, District of South Carolina, Spartanburg Division to one count of a crime involving the business of insurance in interstate commerce.

For a number of years Mr. Worthy has been involved in various aspects of the insurance industry. One of his roles was as the owner of a company that served as Third Party Administrators (TPA) for self-insured health insurance plans. A TPA collects premiums, pays claims and other expenses out of the premiums and then earns a fee for this service. One such self-insured plan that Mr. Worthy served as TPA for was known as the Church Plan since the majority of its members were employed by churches. There were other members of this plan who were not churches making the plan subject to oversight by the Employee Benefits Security Administration which oversees non-religious employee benefit plans.

The investigation determined that Mr. Worthy had diverted approximately $972,000.00 of premium money which caused the insurance plan to fail. Based on this embezzlement and subsequent plan failure, approximately $1.7M in claims were either left unpaid or were paid out of pocket by those people who were members of the insurance plan. As part of the plea agreement Mr. Worthy agreed that in addition to any other sentence he will be ordered to make restitution for all such unpaid or self-paid claims. The investigation was conducted by EBSA’s Atlanta Regional Office and the FBI. The case was prosecuted by the United States Attorneys Office, District of South Carolina.

United States v. Sean Alfortish and Mona Romero – Sean Alfortish, former president of the Louisiana Horsemen’s Benevolent & Protective Association (LHBPA) and Mona Romero, the LHBPA’s former executive director, pleaded guilty separately to charges arising from their conspiracy to falsify the 2008 executive elections of the LHBPA. Romero and Alfortish filed their guilty pleas in the U.S. District Court, Eastern District of Louisiana, on July 11 and August 31, 2011, respectively. Romero pleaded guilty to several counts of conspiracy to commit mail fraud, wire fraud, and fraud involving personal identification documents. As part of her plea, Romero agreed to submit to interviews whenever and wherever requested by law enforcement authorities. Alfortish’s plea similarly acknowledged charges of conspiracy to perpetrate mail, wire, and identification fraud. In addition, Alfortish admitted to conspiring to carry out fraud against the LHBPA’s health care plan.

The defendants were indicted in November 2010 with health care fraud in connection with payments made out of the Louisiana Horsemen’s Medical Benefit Trust administrative account. According to the indictment, the HBPA is the state’s official representative of horsemen under Louisiana law, and as such, certain payments in connection with horse racing are required to be paid to the HBPA for the express purpose of providing medical and hospital benefits. Louisiana law dictated that no more than 30% of the funds could be used for administrative costs. The indictment charges that where the administrative expenses of providing the medical and hospital benefits could be kept lower than the maximum 30% allowed, that Alfortish and Romero used the surplus to pay personal expenses or general expenses of the HBPA instead of using them for purposes allowed by law.

The indictment further alleged that Alfortish and Romero allowed expenses for spa treatments and late cancellation and “no show” fees for spa treatments; costs of personal attire such as evening gowns, shoes, and diamond cufflinks; costs of foreign travel; costs of political consultants; costs to attend the inauguration of a public official and to attend a fundraiser for that official in the State of California; a $10,000 loan to a political action committee to fund campaign contributions, as well as the costs of gifts, parties and celebrations as well as costs of rigging the 2008 election, to be paid out of the administrative account.

It was also charged that the defendants allowed the administrative account to advance payments for the HBPA for expenses other than medical and hospital benefits and related administrative expenses, which resulted in the HBPA owing the Medical Benefit Trust over $800,000 as of June 2010 which it did not pay back. Because the Medical Benefit Trust lacked funds, payments of claims were delayed, and coverage under the plan, including coverage for children formerly covered, had been reduced.

The Dallas Regional Office and the U.S. Postal Service Postal Inspector’s Office together conducted the criminal investigation. The case was prosecuted by the United States Attorneys Office, Eastern District of Louisiana.

United States v. Michael L. Millman – On March 24, 2011, Michael L. Millman was sentenced by the U.S. District Court, District of Connecticut in New Haven to 63 months of imprisonment, followed by five years of supervised release, and ordered to pay restitution of over $975,000 for stealing from a multiple employer welfare arrangement. Millman had pleaded guilty in April 2010 to embezzlement from an employee benefit plan of more than $1 million, wire fraud and bank fraud. He had owned and managed the Nutmeg Benefit Group, LLC and the Nutmeg Welfare Benefit Plan and Trust. The two entities provided life insurance benefits to employees of numerous companies. Millman failed to send premiums to insurance companies by taking policy loans against the value of participant policies. He also defrauded Essex Savings Bank, which had served as the trustee of the Nutmeg Welfare Benefit Plan and Trust. The case was prosecuted by the United States Attorney’s Office for the District of Connecticut. It was investigated jointly by the Boston Regional Office and DOL Office of Inspector General.

United States v. Jonathan Hogge – On March 28, 2011, Jonathan Hogge owner of My Smart Benefits was sentenced in Federal District Court in the Northern District of Indiana to 84 months in prison and two years of supervised release. Restitution was set at $254,425 to be paid to the victims with substantiated unpaid dental claims. Hogge had previously pled guilty to one count of conspiracy to commit theft or embezzlement from an employee benefit plan (18 U.S.C. 371); nine counts of mail fraud (18 U.S.C. 1341), and one count of wire fraud (18 U.S.C. 1343).

Jonathan Hogge and Amy Wadas Hogge had co-owned My Smart Benefits, Inc. (MSB), a third party administrator of self-funded direct reimbursement dental plans throughout the United States since February 2000. Jack Lait was the V.P. of Operation for MSB. Hogge closed MSB's doors in October 2003 because the company had insufficient funds to pay claims or employees' salaries. Hogge and Lait, along with other principals of MSB not charged, allegedly marketed and sold this direct reimbursement dental plan to various insurance agents and employers as though the plan had a stop loss component, knowing full well that there was no stop loss insurance in place. The case was a joint investigation of EBSA's Chicago Regional Office and the Office of the Inspector General of the U.S. Department of Labor.

This fact sheet has been developed by the U.S. Department of Labor, Employee Benefits Security Administration, Washington, DC 20210.  It will be made available in alternate formats upon request: Voice phone: 202-693-8664; TTY: 202-501-3911.  In addition, the information in this fact sheet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996.