The ERISA Report

To Breach a Fiduciary Duty One Must Be a Plan Fiduciary

ERISA imposes fiduciary responsibilities on certain persons who must act solely in the interest of plan participants and beneficiaries and act to “defray[ ] reasonable expenses of administering the plan.” 29 U.S.C. § 1104(a)(1)(A)(ii).

A service provider can become an ERISA fiduciary in one of two ways. First, a person is a fiduciary if the plan identifies them as such. See 29 U.S.C. § 1102(a). Second, ERISA specifies when a person or entity acts as a fiduciary with respect to a plan, including by exercising discretionary authority or discretionary control respecting plan management or disposition of its assets; rendering investment advice for a fee or other compensation; or having discretionary authority or discretionary responsibility in the administration of such plan. See 29 U.S.C. § 1002(21)(A).

“In order to state a claim that a service provider to an ERISA-governed plan breached a fiduciary duty by charging plan participants excessive fees, a plaintiff first must plead facts demonstrating that the provider owed a fiduciary duty to those participants.” McCaffree Financial Corp. v. Principal Life Ins. Co., 811 F.3d 998, 1002 (8th Cir. 2016). Service providers generally are not named fiduciaries in plan documents. Instead, the plan or its participants assert that the complained-of conduct falls within § 1002(21)(A) and the service provider therefore is acting as a “functional fiduciary.”

Initially, it is important to identify the alleged act which constitutes the supposed fiduciary breach. Courts recognize that an ERISA fiduciary duty claim must plead that the defendant was acting as a fiduciary when taking the specific action on which the claim is based. See Pegram v. Herdrich, 530 U.S. 211, 226, 120 S.Ct. 2143 (2000); see also Santomenno ex rel. John Hancock Trust v. John Hancock Life Insurance Company, 768 F.3d 284, 296–297 (3rd Cir. 2014). For example, in ordering dismissal of a breach of fiduciary duty claim against a service provider, the Ninth Circuit noted “the challenged action is the withdrawal of predetermined fees” (deemed not a fiduciary act) and not the “management of the pooled accounts” (likely a fiduciary act), and thus the challenged action did not give rise to fiduciary liability under ERISA. See Santomenno, 883 F.3d 833, 840–41.

Receiving Contractually Agreed Upon Compensation Is Not a Fiduciary Act

Most circuits hold that a service provider’s collection of contractually negotiated compensation, for the services provided to the plan or its participants, is not a fiduciary function, even though the services themselves constitute fiduciary acts. As stated by the Eighth Circuit, “a service provider’s adherence to its agreement with a plan administrator does not implicate any fiduciary duty where the parties negotiated and agreed to the terms of that agreement in an arm’s-length bargaining process.” McCaffree, 811 F.3d 998, 1003. The Second Circuit echoed this sentiment:

When a person who has no relationship to an ERISA plan is negotiating a contract with that plan, he has no authority over or responsibility to the plan and presumably is unable to exercise any control over the trustees’ decision whether or not, and on what terms, to enter into an agreement with him. Such a person is not an ERISA fiduciary with respect to the terms of the agreement for his compensation.

F.H. Krear & Co. v. Nineteen Named Trustees, 810 F.2d 1250, 1259 (2nd Cir. 1987); see also Santomenno, 883 F.3d 833, 837–38. “Insurance companies do not normally exercise discretion over plan management when they negotiate at arm’s length to set rates or collect premiums. That is because these negotiations occur before the agreement is executed, at which point the insurer has no relationship to the plan and thus no discretion over its management.” Depot, Inc. v. Caring for Montanans, Inc., 915 F.3d 643, 654 (9th Cir. 2019). According to the Ninth Circuit, these arm’s length negotiations presumably are governed by the marketplace. See id. at 655.

However, gray areas arise where the contract authorizes particular action by the service provider which ultimately determines its compensation, and this action arguably is subject to discretion. Thus, “after a person has entered into an agreement with an ERISA-covered plan, the agreement may give it such control over factors that determine the actual amount of its compensation that the person thereby becomes an ERISA fiduciary with respect to that compensation.” F.H. Krear at 1259.

The Tenth Circuit has articulated a two-step analysis to determine whether a service provider is a functional fiduciary in such situations:

First, courts decide whether the service provider’s alleged action conformed to a specific term of its contract with the employer plan. By following the terms of an arm’s-length negotiation, the service provider does not act as a fiduciary. Second, if the service provider took unilateral action beyond the specific terms of the contract respecting the management of a plan or its assets, the service provider is a fiduciary unless the plan or perhaps the participants in the plan . . . have the unimpeded ability to reject the service provider’s action or terminate the relationship with the service provider.

Teets v. Great-West Life & Annuity Insurance Company, 921 F.3d 1200, 1212 (10th Cir. 2019) (citations omitted). The second step provides an additional defense and shifts the focus to whether the plan or its participants possessed the ability to reject the allegedly discretionary action.

In Central Valley Ag Cooperative v. Leonard, 986 F.3d 1082, 1084 (8th Cir. 2021), a large Nebraska agricultural cooperative offered its employees the opportunity to participate in a self-funded health care plan. The Co-op subsequently sued various defendants who either marketed or administered those health care plans alleging they breached ERISA fiduciary duties and engaged in prohibited transactions, including arising from the TPA’s receipt of a set compensation based on the review of medical bills submitted to the plan and payment recommendations as to those bills, i.e., 30% of the savings resulting from the review were paid to the TPA.    

The Eighth Circuit reiterated, “[a] service provider does not act with the ‘discretion’ required to establish a fiduciary relationship if its actions (1) conform to specific contract terms, or (2) can be freely rejected by the plan sponsor.” Id. at 1087 (emphasis added). In the subject arrangement, the defendants satisfied both prongs of this test: (1) the compensation paid to the TPA was set forth in the contract and (2) the plan “ultimately decided what portion of each medical bill was paid.” Id. Although plaintiff argued the defendants had expanded the number of medical claims subject to review which had the potential to increase their own compensation, the Court noted that plaintiff still had to approve the payment recommendations and decide what portion of each medical bill was paid. The defendants therefore were not plan fiduciaries as to the alleged conduct as a matter of law, and summary judgment was affirmed in their favor.

Another example, which pre-dates Teets, is Insinga v. United of Omaha Life Insurance Company, 2017 WL 6884626 (D. Neb. Oct. 26, 2017), where the subject 401k plan negotiated a contract with United of Omaha to provide investment services for employees. The plan had the option to invest in three different accounts, including a Maturity Account. Under the Maturity Account, the contract allowed United of Omaha, at least once a month, to declare a Guaranteed Interest Rate for any contributions directed to the account and the Guaranteed Interest Rate would be declared before contributions were made. As summarized by the district court, “United guarantees the principal in the Maturity Account as well as the Guaranteed Interest Rate. The difference between the Guaranteed Interest Rate and the return that United actually earns on the funds in the Maturity Account (“spread”) is kept by United as its compensation.” Id. at *2. Insinga, a plan participant, alleged the defendant breached fiduciary duties by setting the Guaranteed Interest Rate for its own benefit, retaining the spread, and charging excessive administrative fees. United of Omaha argued its monthly declaration of the new interest rate was “merely a term of the Contract.”

The Insinga Court agreed with United of Omaha and dismissed this fiduciary duty claim, finding the insurer did not change the contract terms by declaring a new Guaranteed Interest Rate every month and therefore “does not become a fiduciary by declaring the monthly Guaranteed Interest Rate.” 2017 WL 6884626, at *3. Second, the district court found “the connection between the Guaranteed Interest Rate and United’s compensation is too attenuated as to give United discretion over its compensation” and “its compensation is largely controlled by the Plan’s choices and other factors outside United’s control” such that the effect of the Guaranteed Interest Rate on United’s compensation does not make it a fiduciary. Id. at *4. Specifically, “[i]f the Plan determines that the declared interest rate is too low, it has full discretion to invest in a different fund.” 2017 WL 6884626, at *3.

Similarly, the First Circuit recently affirmed the dismissal of fiduciary duty claims against a service provider where fees were allowed by the contract with the plan and numerous intervening and independent decisions by other plan fiduciaries negated the argument the defendant was controlling its own compensation. See In re Fidelity ERISA Fee Litigation, 990 F.3d 50 (1st Cir. 2021).

However, a different result was reached in Rozo v. Principal Life Insurance Company, 949 F.3d 1071 (8th Cir. 2020), where Principal offered a 401(k) plan that gave participants a guaranteed rate of return, i.e., “the Composite Crediting Rate” or CCR. Here, in reversing the lower court’s ruling in Principal’s favor, the Court noted the contract allowed Principal to set the CCR every six months, but the actual rate is not a specific contract term. According to the Rozo Court, Principal

unilaterally calculates this CCR every six months. Before the CCR takes effect—typically a month in advance—Principal notifies plan sponsors, which alert the participants.

If a plan sponsor wants to reject the proposed CCR, it must withdraw its funds, facing two options: (1) pay a surrender charge of 5% or (2) give notice and wait 12 months. If a plan participant wishes to exit, he or she faces an “equity wash.” They can immediately withdraw their funds, but not reinvest in plans like the PFIO for three months.

Id. at 1073.

Under this scenario, the Eighth Circuit ruled Principal was a fiduciary in setting the CCR. Applying the two-part Teets test, the Rozo Court explained:        

At Teets step one, Principal’s setting of the CCR does not “conform[ ] to a specific term of its contract with the employer plan.” Every six months, Principal sets the CCR with no specific contract terms controlling the rate. Principal calculates the CCR based on past rates in combination with a new rate that it unilaterally inputs . . .

At Teets step two, the plan sponsors here do not “have the unimpeded ability to reject the service provider’s action or terminate the relationship.” If a plan sponsor wishes to reject the CCR, it must leave the plan, with two options: (1) pay a 5% surrender charge or (2) have its funds remain in the plan for 12 months. Charging a 5% fee on a plan’s assets impedes termination. Likewise, holding a plan’s funds for 12 months after it wishes to exit impedes termination. Principal, therefore, is a fiduciary exercising control and authority over the CCR.

949 F.3d 1071, 1074–75 (citations omitted). This Court held the CCR was a new contract term because plan sponsors did not have an opportunity to agree to the CCR until after it was proposed. The case was remanded for trial on the breach of fiduciary duty claims.

No Party in Interest Status Absent a Prior Relationship

Even where the service provider is not a fiduciary with respect to the subject act (such as the receipt of agreed upon fees), potential liability exists for the alleged participation in a prohibited transaction with a plan fiduciary under 29 U.S.C. § 1106.

Section 1106 restricts transactions between fiduciaries and non-fiduciary third parties, referred to as “parties in interest.” The latter can include service providers. See 29 U.S.C. § 1002(14)(B). The Supreme Court generally described the type of transactions prohibited by § 1106 as follows: “These are commercial bargains that present a special risk of plan underfunding because they are struck with plan insiders, presumably not at arm’s length. What the ‘transactions’ identified in § [1106(a) ] thus have in common is that they generally involve uses of plan assets that are potentially harmful to the plan.” Lockheed Corp. v. Spink, 517 U.S. 882, 893, 116 S.Ct. 1783 (1996) (citation omitted). Violation of § 1106(a) can subject the plan fiduciary or party in interest to liability.

Numerous courts have held the initial contract with the service provider, before the provider has any relationship to the plan, cannot serve as the prohibited transaction under § 1106. This straight-forward principle presents an ideal basis for a motion to dismiss.  

In Sellers v. Anthem Life Insurance Company, 316 F.Supp.3d 25, 34–35 (D.D.C. 2018), the court focused on the express language of § 1106(a)(1), as well as the statute’s purpose, to reject the “circular reasoning” that the subject transactions were prohibited because the insurer was a party in interest, and the insurer was a party in interest because it engaged in the prohibited transactions. “Rather, the statute only prohibits such service relationships with persons who are ‘parties in interest’ by virtue of some other relationship - for example, with the employer who sponsors the plan. It does not prohibit a plan from paying an unrelated party, dealt with at arm’s length, for services rendered.” Id. at 35.

As recognized by Sellers, some unpublished district court decisions support a contrary view. However, the weight of authority follows the reasoning in Sellers.

In Chavez v. Plan Benefit Services, Inc., 2018 WL 6220119 (W.D. Tex. Sept. 12, 2018), for example, plan participants sued entities that marketed and administered their retirement, health and welfare benefit plans alleging they charged excessive fees and the plans’ contractual arrangement with the defendants was a prohibited transaction. Plaintiffs did not contend the defendants were plan fiduciaries but only parties in interest to the prohibited transaction. The “first pertinent question” was when the defendants became parties in interest under § 1002(14). The district court answered that defendants “were not parties in interest when they initially contracted to provide services because, at that time they were not yet ‘providing services to the plan’” and the initial contract to provide services to the plan does not qualify as a prohibited transaction. Id. at *3.

The plaintiffs conceded this point but asserted a separate transaction under § 1106(a) occurred each time fees were paid to the defendants under the contracts. The Chavez Court also rejected this argument and, as in Sellers, focused on the statutes themselves to reach the conclusion that “the crux of a transaction under both § 1106 and § 1108 is the act of contracting that establishes the legal rights and obligations between the parties.” Id. Payment of fees in fulfillment of an existing contractual obligation failed to qualify as a separate transaction under the statutes because it was neither “contracting” nor “making reasonable arrangements.” Id. The prohibited transaction claim therefore was dismissed as “a plan fiduciary does not cause a plan to engage in a presumptively prohibited transaction under § 1106(a) when it pays the fees of a party in interest so long as the contractual obligation to pay those fees arose before that party assumed party in interest status.” 2018 WL 6220119, at *4.    

Recently, the Tenth Circuit agreed that to hold the initial service agreement constitutes the prohibited transaction “leads to an absurd result: the initial agreement with a service provider would simultaneously transform that provider into a party in interest and make that same transaction prohibited under § 1106.” Ramos, 1 F.4th 769, 787. According to the Tenth Circuit, “some prior relationship must exist between the fiduciary and the service provider to make the provider a party in interest under § 1106.” Id. This view also is supported by the Third Circuit. See Danza v. Fidelity Mgmt. Trust Co., 533 Fed.Appx. 120, 125–26 (3rd. Cir. 2013).

A Plaintiff Must Seek Appropriate Equitable Relief

A prohibited transaction claim against a non-fiduciary third party may seek an injunction or “appropriate equitable relief” under § 1132(a)(3), but not legal remedies such as monetary damages. In contrast, personal liability is imposed upon “[a]ny person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries . . .” 29 U.S.C. § 1109(a). Plaintiffs alleging prohibited transaction claims against service providers primarily desire to recoup the excessive fees collected under the subject contract rather than obtain an injunction, and therefore must allege a viable equitable remedy exists.

As a general rule, equitable remedies are directed against some specific thing and give a right to some particular thing, rather than a right to recover a sum of money generally from  the defendant’s assets. See Teets, 921 F.3d 1200, 1224. For example, equitable restitution cannot seek to impose personal liability on the defendant but must seek to restore to the plaintiff particular funds or property in the defendant’s possession. See id. at 1225 and Depot, Inc., 915 F.3d 643, 661. This pleading hurdle can be difficult for plaintiffs to overcome where the allegedly excessive fees paid to a service provider became part of the defendant’s general assets.

The Tenth Circuit has stated that satisfying the appropriate equitable relief prong of § 1132(a)(3) functions as an element of the ERISA claim, and “[i]f a plaintiff cannot demonstrate that equitable relief is available, the suit cannot proceed.” Teets, 921 F.3d 1200, 1223. Courts therefore have dismissed prohibited transaction claims where the complaint failed to identify specific property possessed by the service provider which could be recovered in equity. See Depot, Inc., 915 F.3d 643, 660–66; Sellers, supra, at *42 (holding “Plaintiffs’ own pleadings establish that the funds they seek are not recoverable from Anthem in equity; rather, Plaintiffs seek legal relief from Anthem’s general assets” and the prohibited transaction claim therefore could be resolved by motion to dismiss); and Insigna, supra, at *5.

The Subject Contract May Provide the Winning Defense 

At first glance, defending ERISA claims against service providers can appear daunting and for good reason. In Teets, supra, the district court certified a class of 270,000 plan participants before granting summary judgment in defendant’s favor. Luckily, sound legal arguments, well-supported by case law, have proven effective in resolving breach of fiduciary duty and prohibited transaction claims, based on the alleged receipt of excessive compensation, at the pleading stage.   

As with most ERISA cases, the contract terms are critical. Where the disputed fees are expressly allowed by contract, and not subject to any discretionary actions by the service provider, the collections of such fees should not equate with a fiduciary act. Instead, the negotiations culminating in such agreements are considered arm’s length transactions governed by competition in the marketplace, and which the named plan fiduciary can freely reject. Even where subsequent discretionary actions by the service provider ultimately affect the amount of its compensation, fiduciary liability may be avoided where a plan fiduciary or participants possess the unimpeded right to limit or reject the discretionary action.

Two potential avenues exist to dispose of a prohibited transaction claim. First, where the subject contract is the initial contract entered between the service provider and plan, courts consistently hold this contract cannot constitute a prohibited transaction. The allegations of the complaint and the date of the contract often provide the necessary facts to support a motion to dismiss on this ground. Second, a defendant should examine whether the plaintiff has adequately alleged an equitable remedy required by § 1132(a)(3).

Given the important purpose served by a service provider’s relationship with a plan, more and more courts are taking a commonsense approach to validating the manner in which a service provider arrives at its fee structure.  

David T. McDowell is a founding partner and the current managing partner of McDowell Hetherington LLP, a national litigation firm specializing in, among other things, class action defense of life insurance and financial service entities. David represents life insurers in state and federal trial and appellate courts around the country.

Charan M. Higbee is a senior attorney in McDowell Hetherington LLP’s California office. For more than twenty-five years, Charan has handled insurance matters in state and federal court during every phase of litigation. Charan’s specialty is representing insurers in cases involving life, health and disability policies and group policies subject to ERISA.

Civil Enforcement Under ERISA

Congress enacted ERISA in 1974 to regulate employee pension and welfare benefit plans sponsored by private employers. The acknowledged purpose of ERISA was to establish nationally uniform regulation of employee benefit plans as “exclusively a federal concern.” Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 57 (1987). Congress accomplished this purpose in two ways: (a) by including an express statutory preemption clause in ERISA; and (b) by creating a broad and exclusive statutory civil enforcement provision.

ERISA contains one of the broadest preemption provisions in federal law. The federal statute “supersede[s] any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . . .” 29 U.S.C. §1144(a). The Supreme Court has recognized that the ERISA preemption clause “is conspicuous for its breadth. It establishes as an area of exclusive federal concern the subject of every state law that ‘relates’ to an employee benefit plan governed by ERISA.” FMC Corp. v. Holliday, 498 U.S. 52, 58 (1990).

A state law “relates to” an ERISA plan “if it has a connection with or reference to such a plan.” Shaw v. Delta Air Lines, 463 U.S. 85, 96–97 (1983). Where a state law claim is based on a dispute over ERISA plan benefits or a dispute over administration of an ERISA plan, as a matter of law, the state law claim “relates to” the plan and is preempted by ERISA. See, e.g., Aetna Health, Inc. v. Davila, 542 U.S. 200 (2004) (suit for wrongful denial of ERISA medical benefits is preempted by ERISA); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) (suit for wrongful denial of ERISA disability benefits is preempted by ERISA); Metropolitan Life Insurance Co. v. Taylor, 481 U.S. 58 (1987) (suit for wrongful denial of ERISA disability benefits is preempted by ERISA).

More important for purposes of this article, ERISA also includes a broad civil enforcement provision, 29 U.S.C. §1132(a). In Pilot Life, the Supreme Court held that when a plaintiff seeks benefits or other relief arising from an employee benefit plan, ERISA provides the exclusive remedy.  The plaintiff in that case brought a common law "tortious breach of contract" claim, described as arising under "the Mississippi law of bad faith," seeking compensatory and punitive damages allegedly resulting from an insurance company's denial of benefits under an insurance policy provided by his employer.  As the Supreme Court pointed out in Pilot Life, the most important consideration in determining whether a state law is preempted is Congress' clear intent that the civil enforcement scheme of ERISA, §1132(a), be exclusive.  481 U.S. at 51–57. 

ERISA provides a comprehensive, and therefore exclusive, mechanism for plan participants and beneficiaries to enforce their rights, bring claims, and monitor their fiduciaries, as well as specific remedies for parties that prevail.  Pilot Life, 481 U.S. at 52–56.  The comprehensive enforcement schemes set out in ERISA, §1132(a), “represent a careful balancing of the need for prompt and fair claims settlement procedures against the public interest in encouraging the formation of employee benefit plans.”  Pilot Life, 481 U.S. at 54. The policy choices reflected in the inclusion of certain remedies and the exclusion of others under the federal scheme would be completely undermined if ERISA-plan participants and beneficiaries were free to obtain remedies under state law that Congress rejected in ERISA. Id. Accord, Metropolitan Life Insurance Co. v. Taylor, 481 U.S. at 63 (suit by beneficiary to recover benefits under an employee benefit plan/insurance policy “falls directly under [§ 1132(a)(1)] of ERISA, which provides an exclusive federal cause of action for resolution of such disputes”).

Article III and ERISA

Although ERISA was enacted nearly 50 years ago and even though the Supreme Court has decided dozens of ERISA cases, until recently, the Court never addressed the aspects of Article III standing under ERISA’s civil enforcement provision. That changed when the Court decided Thole v. U.S. Bank, N.A., 140 S.Ct. 1615 (2020).

The plaintiffs in Thole were participants in a defined benefit pension plan. A defined benefit pension plan typically pays retirement benefits based on a formula that takes into account factors such as rates of pay, years of service, and age to determine the amount of fixed periodic pension payments. Defined benefit pension plans are funded by a trust. The plan sponsor or its designee determines the amounts to be paid into the trust and how trust assets are invested. Investment fluctuations in a defined benefit pension plan do not directly impact the amount of a participant’s retirement benefit, unlike a defined contribution pension plan (sometimes referred to as a “401(k)” or a “403(b)” plan) where participants are assigned individual accounts, decide how their assets are to be invested within a menu of investment options, and are directly impacted by the results of their investment choices.

The plaintiffs in Thole filed a class action, alleging that the plan fiduciaries breached their duties by allowing certain risky investments to cause a $1.1 billion drop in plan assets in 2008, causing the plan to become underfunded. What that means is that the plaintiffs alleged that, from an actuarial perspective, there were not sufficient assets in the trust to fund pension benefits into the future. That said, none of this affected the named plaintiffs’ current pension benefits nor was there an allegation that there was an imminent negative impact on their pension benefits. Moreover, the plan sponsor subsequently contributed additional funds to the plan, resulting in overfunding. The district court granted the defendant’s motion to dismiss for lack of standing and the Court of Appeals for the Eighth Circuit affirmed. Specifically, the court held that the plaintiffs had no standing to sue absent a showing of actual or imminent individual financial loss and that there was no federal court subject matter jurisdiction.

The Supreme Court affirmed. The Court held that there is “no ERISA exception to Article III.” 140 S.Ct. at 1622. Article III requires a plaintiff to demonstrate (a) an injury in fact that is concrete, particularized, and actual or imminent, (b) the injury was caused by the defendant, and (c) the injury would likely be redressed by the requested relief. Id. at 1618. Here, the participants could not allege any losses or harm from the alleged mismanagement of plan assets. All participants received their full benefits and were unable to show any potential loss of benefits in the near future. Any relief would not yield the participants a “penny more” or a “penny less” than what they were already receiving in retirement benefits. In short, the participants were unable to assert that they suffered any personal harm from the defendant’s actions.

The Supreme Court also held that the participants did not have standing to bring their claims in a representative capacity on behalf of the plan under ERISA, 29 U.S.C. §1132(a)(2). That section allows participants, beneficiaries, and fiduciaries to bring actions for breach of fiduciary duties on behalf of a plan, primarily to recoup losses of plan assets. Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140–41 (1985). The Thole plaintiffs argued that they were entitled to sue on the plan’s behalf pursuant to §1132(a)(2) even if they did not suffer any personal harm. However, the Court held in Thole that “in order to claim ‘the interests of others, the litigants themselves still must have suffered an injury in fact, thus giving’ them a ‘sufficiently concrete interest in the outcome of the issue in dispute.” 140 S.Ct. at 1620. The Court acknowledged the possibility that defined benefit pension plan participants might have standing to sue if they can allege that mismanagement of plan assets was so egregious that it substantially increased the risk that the participants’ benefits would be adversely affected, but there was no such allegation in that case.

In the wake of Thole, it is now clear that ERISA plaintiffs must prove actual harm sufficient to satisfy the standing requirement of Article III and that Article III standing is a prerequisite for federal court subject matter jurisdiction over ERISA claims.

ERISA Statutory Standing

ERISA’s detailed civil enforcement section includes several causes of action related to employee benefit plans, prescribes the parties who may bring each type of action, and sets forth the available remedies under each type of action.

The statutory enforcement options are limited to four types of plaintiffs: the Secretary of Labor, plan participants, plan beneficiaries, and plan fiduciaries. This article will focus on plan participants and beneficiaries. A plan participant is defined by ERISA as:

[A]ny employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan… or whose beneficiaries may be eligible to receive any such benefit.

29 U.S.C. §1002(7). A plan beneficiary is defined as:

[A] person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder.

29 U.S.C. §1002(8).

The civil enforcement section makes several types of actions available to participants and beneficiaries, including the following:

1. A participant or beneficiary may bring an action for a statutory penalty applicable to an administrator or an employer’s failure to comply with certain procedural requirements of the statute, 29 U.S.C. §1132(a)(1)(A);
2. A participant or beneficiary may bring an action to recover benefits due under the terms of the plan, to enforce rights under the terms of the plan, or to clarify rights to future benefits under the terms of the plan, 29 U.S.C. §1132(a)(1)(B);
3. A participant or beneficiary may bring an action on behalf of the plan for a breach of fiduciary duties, 29 U.S.C. §1132(a)(2);
4. A participant or beneficiary may bring an action to enjoin “any act or practice” that violates ERISA or the terms of the plan or obtain “other appropriate equitable relief” to redress such violations or to enforce ERISA or the terms of the plan, 29 U.S.C. §1132(a)(3).

Standing of ERISA Participants and Beneficiaries Generally

For most of ERISA’s existence, the lower courts have consistently held that only the specifically enumerated parties in the statute are entitled to bring the claims described in ERISA, §1132(a). See, e.g., Amalgamated Clothing & Textile Workers’ Union v. Murdock, 861 F.2d 1406 (9th Cir. 1988) (allowing a non-enumerated party to bring an action under ERISA where the party can demonstrate that he has suffered an injury in fact, that he arguably falls within the zone of interests protected by the statute, and where the statute does not preclude the party from bringing suit).

The Supreme Court endorsed this reading of the statute in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). The issue in that case was whether former employees were considered “participants” under ERISA for purposes of standing to bring penalty claims under ERISA. The Third Circuit held that anyone “who claims to be” a participant had standing. The Supreme Court held that the court of appeals read the statute too broadly. The Supreme Court held that “the term ‘participant’ is naturally read to mean either ‘employees in, or reasonably expected to be in, currently covered employment’ . . . or former employees who ‘have . . . a reasonable expectation of returning to covered employment’ or who have ‘a colorable claim’ to vested benefits . . . .” 489 U.S. at 117. The Court went on to explain what it means for a person to show that he or she “may become eligible” for benefits: “a claimant must have a colorable claim that (1) he or she will prevail in a suit for benefits, or that (2) eligibility requirements will be fulfilled in the future. Id. at 118. The Court also explained the circumstances under which a former employee would not “become eligible” for benefits: “A former employee who has neither a reasonable expectation of returning to covered employment nor a colorable claim to vested benefits, however, simply does not fit within the [phrase] ‘may become eligible.’” Id.   

Historical View that ERISA Standing Is Jurisdictional

Unfortunately, the Supreme Court did not decide in Firestone whether or not participant status was jurisdictional or merely an element of a plaintiff’s claim under ERISA, §1132(a). Until recently, most circuit courts that addressed the issue held that statutory standing was jurisdictional. For example, in Curtis v. Nevada Bonding Corp., 53 F.3d 1023 (9th Cir. 1995), the Ninth Circuit reiterated its longstanding position that “federal courts lack subject matter jurisdiction if the plaintiff in an action for benefits owed under an ERISA plan lacks standing to bring a civil action enforcing ERISA under 29 U.S.C. §1132(a)(1)(B).” Id. at 1026–27 (“a plaintiff’s standing under section 1132(a)(1) is a prerequisite to ERISA jurisdiction”). In Miller v. Rite Aid Corp., 334 F.3d 335 (3d Cir. 2003), the Third Circuit likewise held that “[t]he requirement that the plaintiff be a plan participant is both a standing and subject matter jurisdiction requirement.” Id. at 340. Even as recently as 2012, the Eighth Circuit held that “[s]tanding to sue under ERISA is a jurisdictional issue.” A.J. v. Unum, 696 F.3d 788, 789 (8th Cir. 2012) (citing Wilson v. Sw. Bell Tel. Co., 55 F.3d 399, 403 n. 3 (8th Cir. 1995)). See also Helfrich v. Carle Clinic Assoc., 328 F.3d 915, 917 (7th Cir. 2003) (“§1132(a) does not make federal jurisdiction depend on the plan’s inclusion as a defendant. It is enough if the plaintiff is a plan participant and makes a claim for benefits.”). But see Blue Cross & Blue Shield of Alabama v. Sanders, 138 F.3d 1347, 1351–52 (11th Cir. 1998) (whether a plaintiff qualifies for standing as a fiduciary under ERISA involved the merits of the claim, not subject matter jurisdiction).

Evolving View that ERISA Standing Is an Element of a Claim

Despite relative unanimity in holding that participant or beneficiary standing was necessary for a court to have subject matter jurisdiction to hear an ERISA civil dispute, the view of the circuit courts began to change after the Supreme Court decision in Arbaugh v. Y&H Corp., 546 U.S. 500 (2006).

Arbaugh was not an ERISA case. It was a suit alleging employment discrimination under Title VII. Like ERISA, Title VII has its own jurisdictional provision, 42 U.S.C. §2000e-5(f)(3). Also, like ERISA, jurisdiction over Title VII claims exists under the general federal question statute, 28 U.S.C. §1331. A key difference between ERISA and Title VII, however, is that Title VII includes a numerical threshold (i.e., “employers” who can be sued are defined to only include those who have fifteen or more employees). 42 U.S.C. §2000e(b).

The plaintiff in Arbaugh sued under Title VII and various state laws. The case went to trial and judgment was rendered against the defendant. It was at that point the defendant employer raised lack of subject matter jurisdiction based on the argument that it did not satisfy the numerical threshold of Title VII. After further discovery, the district court ruled that the numerical threshold was not satisfied and it dismissed the matter for lack of jurisdiction. The Fifth Circuit affirmed. Thus, whether or not the numerical threshold was jurisdictional impacted whether the defendant waived the defense by not raising it in a timely fashion.

The Supreme Court reversed. The Court noted that “’[j]urisdiction . . . is a word of many, too many meanings.’” 546 U.S. at 510. The Court also noted that general federal question jurisdiction existed in that case because the plaintiff pled a claim under federal law and that “neither §1331 nor Title VII’s jurisdictional provision . . . specifies any threshold ingredient.” Id. at 515. Thus, the Court held that the numerical threshold of Title VII was not jurisdictional:

[W]e think it the sounder course to refrain from constricting §1331 or Title VII’s jurisdictional provision . . . and to leave the ball in Congress’ court. If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue . . . But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.

Id. at 515–16.

Shortly after Arbaugh was decided, lower courts began to question whether ERISA’s statutory civil enforcement criteria were jurisdictional after all. In Thomas v. Miller, 489 F.3d 293 (6th Cir. 2007), the plaintiff sued her former employer, alleging violations of the COBRA amendments to ERISA, 29 U.S.C. §1160–1167. Because COBRA only applies to employers of a certain size and the parties agreed that the employer was below the numerical threshold, the court of appeals addressed whether the issue was jurisdictional. It held that it was not jurisdictional. Relying on Arbaugh, the Sixth Circuit held that COBRA’s numerical threshold was an element of the plaintiff’s claim under COBRA but did not determine federal court jurisdiction. Id. at 299.

Several circuit courts have extended the reasoning in Arbaugh to hold that standing as a participant or beneficiary under ERISA’s civil enforcement provision is not jurisdictional but is instead an element of the plaintiff’s claim under §1132(a). For example, in Lanfear v. Home Depot, Inc., 536 F.3d 1217 (11th Cir. 2008), a district court dismissed an ERISA suit for lack of subject matter jurisdiction based on its conclusion that the plaintiffs, who were former employees of the defendant, did not qualify as “participants.” The court of appeals reversed, holding that where a plaintiff pleads a colorable claim for vested benefits under an ERISA plan, the court has jurisdiction to hear the matter and whether or not the plaintiff can prove his status as a plan participant is an element of the plaintiff’s claim for benefits. Id. at 1222–23. In Leeson v. Transamerica Dis. Income Plan, 671 F.3d 969 (9th Cir. 2012), a former employee sued an employee benefit plan challenging the termination of his long-term disability benefits. The district court ruled in favor of the defendant but the Ninth Circuit reversed and remanded. On remand, the defendant raised lack of standing as a basis to dismiss the case for lack of subject matter jurisdiction. The district court agreed but on appeal, the Ninth Circuit reversed. Overturning several earlier decisions holding that ERISA statutory standing was jurisdictional, the Ninth Circuit held statutory standing is a merits issue and not a subject matter jurisdiction issue. Id. at 978. See also Harzewski v. Guidant Corp., 489 F.3d 799 (7th Cir. 2007) (“Except in extreme cases . . . the question whether an ERISA plaintiff is a ‘participant’ entitled to recover benefits under [ERISA] should be treated as a question of statutory interpretation fundamental to the merits of the suit rather than as a question of the plaintiff’s right to bring the suit.”). Even the Eighth Circuit, which as recently as 2012 held that participant status under ERISA is jurisdictional in Dixon v. Unum, supra, may modify its position. Cf. Sanzone v. Mercy Health, 954 F.3d 1031, 1040 (8th Cir. 2020) (following Arbaugh to hold that whether a benefit plan is exempt from ERISA is “an element of the plaintiff’s case and not a jurisdictional inquiry”).

Conclusion

The question of whether statutory standing to bring an ERISA civil action is jurisdictional can have a profound impact on the outcome of a lawsuit. It is always critical that defendants raise standing issues sooner rather than later so as to avoid potential waiver of a viable defense. It is also important to know the status of current law in the applicable venue to determine whether the standing issue is jurisdictional or merely an element of the plaintiff’s claim. This distinction impacts not only whether the issue can be waived, but also the proper procedural mechanism for raising the issue. As this issue continues to evolve, if case law in the applicable venue suggests that statutory standing is jurisdictional, counsel needs to determine whether the case law accurately reflects the current state of the law.

Mark E. Schmidtke is a shareholder in the law firm of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.   He has represented clients in ERISA and non-ERISA employee benefit disputes in courts throughout the United States for nearly 40 years.