Implementing Regulations for the No Surprises Act

By Milanna Datlow

The No Surprises Act (NSA) was enacted as part of the Consolidated Appropriations Act of 2021. The NSA will take effect on January 1, 2022. It applies to group health plans (including grandfathered plans), health insurance issuers of group or individual health coverage for plans/policies, and Federal Employees Health Benefits (FEHB) Program carriers.

The NSA prohibits surprise (or balance) billing to patients for:

  • out-of-network emergency services;
  • out-of-network air ambulance services; and
  • non-emergency services rendered by out-of-network providers at facilities that are in the patient’s network in certain circumstances (also known as ancillary care).  

“Balance billing” refers to the practice of nonparticipating (out-of-network) providers billing patients for the difference between: (1) the provider’s billed charges; and (2) the amount collected from the plan or issuer plus the amount collected from the patient in the form of cost sharing (such as a copayment, coinsurance, or amounts paid toward a deductible).

The Departments of Health and Human Services (HHS), Labor, and Treasury (together, “the Departments”), and the Office of Personnel Management issued two parts of implementing regulations for the NSA on July 1, 2021 and September 30, 2021, respectively, which were titled Requirements Related to Surprise Billing (Interim Final Rules (IFR) with Request for Comments).

IFR Part I

The July 2021 IFR (Part I) details the general rule that out-of-network facilities and providers subject to the NSA may not balance bill patients for a payment amount that exceeds the patient’s cost share and provides step-by-step instructions how to determine the patient’s cost-sharing amount and the out-of-network rate. Key provisions in the July 2021 IFR are summarized below.

“Emergency Services”

The legal standard regarding the decision to seek emergency services is based on whether a prudent layperson (rather than a medical professional) would reasonably consider the situation to be an emergency. Accordingly, a denial of coverage must be based on the presenting symptoms and not solely on the final diagnosis codes. However, an approval of coverage for emergency services can be made solely on the basis of diagnosis codes. Additionally, in covering emergency services, plans and issuers must ensure that they do not restrict the coverage of emergency services by imposing a time limit between the onset of symptoms and the presentation of the patient at the emergency department.

Notice and Consent Exception

A patient may voluntarily consent to an out-of-network provider’s rate, thus agreeing to a balance bill, for non-emergency services. However, providers are prohibited from asking for a consent waiver if:

  • the facility does not have an in-network provider;
  • the care needed is unforeseen and urgent;
  • the provider delivers ancillary services not typically selected by the patient (e.g., services provided by assistant surgeons, hospitalists, and intensivists; diagnostic services, including radiology, anesthesiology, and laboratory services).

A provider may obtain a patient’s consent to post-stabilization services only if all of the following conditions are met:

  • the attending emergency physician or treating provider must determine that the patient is able to travel using nonmedical transportation or nonemergency medical transportation to a participating provider or facility located within a “reasonable travel distance”;
  • the provider or facility furnishing post-stabilization services provides written notice to the patient;
  • the patient must be in a condition to receive the information in the notice, as determined by the attending physician or treating provider using appropriate medical judgment, and to provide informed consent in accordance with applicable state law;
  • all additional requirements or prohibitions under applicable state law must be satisfied, as some states may not allow patient’s consent to waive balance billing protections at all.

Cost-Sharing Determination

Cost-sharing for the out-of-network emergency services and for the ancillary services subject to the NSA is limited to the “recognized amount,” which is:

  • the amount provided in any All-Payer Model (APM) Agreement that the state has entered into; or
  • if there is no applicable APM Agreement, the amount determined by state law; or
  • if neither of the above apply, the lesser of the billed charge or the median of the contracted rates of the plan or issuer for the item or service in the geographic region, referred to as the qualifying payment amount (QPA).

An APM Agreement is an agreement between the Centers for Medicare & Medicaid Services and a state to test and operate systems of all-payer payment reform for the medical care of residents of the state.

Self-insured plans are allowed to voluntarily opt in to state law that provides for a method for determining the cost-sharing amount. A plan that opts in to such a state law must do so for all items and services to which the state law applies and must prominently display in its plan materials describing the coverage of out-of-network services a statement that the plan has opted in to a specified state law, identify the relevant state (or states), and include a general description of the items and services provided by nonparticipating facilities and providers that are covered by the specified state law.

The NSA’s cost-sharing protections apply equally to air ambulances but there is no “recognized amount” because states are preempted from regulating these providers under the Airline Deregulation Act. However, consistent with the other services, plans and insurers must base any coinsurance or deductible for air ambulance services on the lesser of the provider’s billed charge or the QPA.

All cost-sharing for out-of-network providers must count toward in-network deductibles and out-of-pocket maximums.

Out-of-Network Rate Determination

The total amount paid by a plan or issuer for the services subject to the NSA, referred to as the out-of-network rate, must be equal to one of the following amounts, less any cost sharing payments:

  • an amount determined by an applicable APM Agreement; or
  • if there is no such applicable APM Agreement, an amount determined by state law; or
  • if there is no state law determined rate, an amount agreed upon by the plan/issuer and provider/facility; or
  • if no agreement is reached, an amount determined by an independent dispute resolution entity.

Public Disclosure Requirements

Providers and facilities must make publicly available, post on a public website, and provide to patients a notice with the following information:

  • the requirements and prohibitions under the NSA and implementing regulations;
  • any applicable state balance billing limitations or prohibitions; and
  • how to contact appropriate state and federal agencies if the patient believes the provider or facility has violated the requirements described in the notice.

Plans and issuers must make publicly available, post on a public website, and include on each explanation of benefits for an item or service with respect to which the requirements apply, information:

  • ·on all applicable state and federal laws on out-of-network balance billing; and
  • ·on contacting appropriate state and federal agencies in the case that an individual believes that such a provider or facility has violated the prohibition against balance billing.

Preemption Issues 

The NSA does not preempt provisions in state balance billing laws that address issues beyond how to calculate the cost-sharing amount and out-of-network rate. To the extent state laws do not prevent the application of a federal prohibition on balance billing, they are consistent with the statutory framework of the NSA and would not be preempted.


As noted above, IFR Part I indicated that an independent dispute resolution (IDR) process will determine rates for emergency care in the absence of an APM, governing state law, or an agreement between the provider and plan.

The September 2021 IFR (Part II) details the IDR process for settling out-of-network rate disputes between providers and payers. Key provisions in the September 2021 IFR are summarized below.

The Federal IDR Process

The parties must exhaust a 30-business-day open negotiation period before initiating the Federal IDR process. Either party may initiate the Federal IDR process during a 4-business-day period beginning on the 31st business day after the start of the open negotiation period. The parties may select a certified IDR entity, or if the parties do not select a certified IDR entity, the Departments will do so.

The certified IDR entity must review the information submitted by the parties to determine whether the Federal IDR process applies, including whether an All-Payer Model Agreement or specified state law applies. If the Federal IDR process does not apply, the certified IDR entity must notify the Departments and the parties within 3 business days of making this determination.

In instances in which the parties agree on the reimbursement amount after the Federal IDR process is initiated but prior to a determination by a certified IDR entity, the agreed-upon amount will be treated as the out-of-network rate and will be treated as resolving the dispute. The plan or issuer must pay the balance of the agreed-upon out-of-network rate (with any initial payment made counted towards the total plan or coverage payment) not later than 30 business days after the agreement is reached.

Factors for Consideration by Certified IDR Entities

Prior to the enactment of the NSA, a plan or issuer satisfied the Affordable Care Act’s minimum payment standards for out-of-network emergency care by providing benefits in an amount at least equal to the greatest of the following three amounts:

  • the median amount negotiated with in-network providers for the emergency service (i.e., QPA);
  • the amount for the emergency service calculated using the same method the plan generally uses to determine payments for out-of-network services (such as the usual, customary, and reasonable (UCR) amount); or
  • the amount that would be paid under Medicare Part A or Part B for the emergency service.

The NSA requires the certified IDR entity to begin with the presumption that the QPA is the appropriate out-of-network rate, but allows either party to submit credible information clearly demonstrating the QPA is materially different from the appropriate out-of-network rate. The types of additional credible information submitted by the parties that a certified IDR entity can consider are as follows:

  • Information that clearly demonstrates the QPA failed to take into account that the experience or level of training of a provider was necessary for furnishing the service to the patient or that the experience or training made an impact on the care that was provided. However, the Departments have expressed the view that an out-of-network rate higher than the QPA generally should not be based on the level of experience or training of a provider.
  • Information about the market share in the region where the service was provided held by the out-of-network provider, facility, the plan, or the issuer, which clearly demonstrates the QPA is materially different from the appropriate out-of-network rate. For example, a plan or issuer with a large market share in a geographic region may have created a QPA that is unreasonably low, in which case an out-of-network rate higher than the QPA may be appropriate. Alternatively, a provider with a large market share in a geographic region may have created a QPA that is unreasonably high, in which case an out-of-network rate lower than the QPA may be appropriate.
  • Information about patient acuity or the complexity of the service that clearly demonstrates the QPA is materially different from the appropriate out-of-network rate. The Departments have expressed the view that this will be a rare occurrence, because the QPA is calculated using median contracted rates for service codes and modifiers, and those codes and modifiers typically already reflect patient acuity and the complexity of the service provided. However, evidence that the particular service code does not accurately reflect patient acuity or complexity, or evidence that the wrong code was used (upcoding or downcoding) might justify a change in the QPA.
  • Information about the teaching status and scope of services of the out-of-network facility that clearly demonstrates the QPA is materially different from the appropriate out-of-network rate for the service. For example, a certified IDR entity could consider the trauma level of a hospital when the dispute involves trauma care that could not be performed at a lower-level hospital, but only to the extent the QPA does not otherwise reflect this factor.
  • Information about good faith efforts (or lack thereof) made by the out-of-network facility,provider, or the plan or issuer, as applicable, to enter into network agreements and, if applicable, contracted rates between the provider or facility and the plan or issuer, as applicable during the previous 4 plan years, that clearly demonstrates that the QPA is materially different from the appropriate out-of-network rate for the service. For example, a certified IDR entity must consider what the contracted rate might have been had the good faith negotiations resulted in the out-of-network facility or provider being in-network.

Beyond these enumerated factors, the certified IDR entity must also consider additional credible and relevant information submitted by the parties.

Factors Prohibited from Consideration by Certified IDR Entities

The NSA prohibits certified IDR entities from considering the following factors in determining the out-of-network rate:

  • usual and customary charges, also known as the UCR amount, referring to the amount providers in a geographic area usually charge for the same or similar medical service;
  • billed charges to the plan or issuer for the service;
  • payment or reimbursement rates payable by public payors (e.g., Medicare or Medicaid programs). However, in situations where the contracted rates are based off a percentage of the Medicare payment rate, the certified IDR entity must consider the QPA and in the Departments’ view, this does not constitute consideration of the payment or reimbursement rate payable by a public payor.


Starting January 1, 2022, out-of-network facilities and providers subject to the No Surprises Act will not be able to balance bill patients for a payment amount that exceeds the patient’s cost share. Pursuant to IFR Part I, in the absence of an All-Payer Model Agreement or governing state law, the patient’s cost share will be the qualifying payment amount, which is generally the insurer’s median in-network rate, and it will count toward in-network deductibles and out-of-pocket maximums.

Additionally, IFR Part I indicated that in the absence of an All-Payer Model Agreement, governing state law, or an agreement between the parties, the Federal IDR Process will settle out-of-network rate disputes between providers and payers for the services subject to the No Surprises Act. IFR Part II detailed the IDR process and instructed the IDR entities to defer to the qualifying payment amount as the appropriate out-of-network rate.

IFR Part II prohibits the IDR entities from considering the UCR or providers’ billed rates in the out-of-network rate determination, which greatly limits providers’ ability to demand payments higher than insurers’ median in-network rates. This might make providers of emergency services more likely to enter into network contracts with plans. Further impact of the No Surprises Act on the disputes between out-of-network providers and plans remains to be seen.

DatlowMilanna-21-webMilanna Datlow is an associate at the Managed Care + Employee Benefit Litigation Group of Robinson & Cole LLP, Hartford Office.  She concentrates her practice in the areas of the Employee Retirement Income Security Act (ERISA); life, health, and disability benefit litigation; and related insurance coverage issues.  She has experience defending cases involving allegations of medical malpractice and hospital negligence.

The Role of Fiduciary Liability Insurance in ERISA Excessive Fee Class Actions

By Andy Portinga

In the last several years, a wave of ERISA class actions has swept the country.  The latest wave of cases focuses on the fees being paid by 401(k) and 403(b) retirement plans.  In general, these class actions allege that some retirement plans contain mutual funds with expense ratios that are higher than those of comparable funds.  The class actions also often allege that the plans pay excessively high record-keeping fees.  The plaintiffs allege that these fees injure plan participants by lowering net returns.

In 2019, only 20 excessive fee class actions were filed. In 2020, at least 90 were filed.  While we do not know the final numbers for 2021, the number of new cases has surely grown.  Recent cases have targeted Xerox, L Brands, and numerous universities and healthcare providers. Over $1 billion has been paid in settlement of these claims over the past decade and a half.   Some settlements have been very notable.  Lockheed Martin paid $62 million to settle an excessive fees class action; Boeing paid $57 million.

While most of the claims have been brought by a handful of boutique law firms, the success of those firms in securing settlements has caused more plaintiff-side lawyers to enter the practice area.  The plaintiffs’ bar originally focused on very large plans, but recent claims have targeted mid-sized plans.  About 75% of recently filed excessive fee cases have survived motions to dismiss under Rule 12, encouraging the plaintiffs’ bar.  Based on recent trends, one can reasonably expect that this wave of litigation will continue.

Claims against ERISA Fiduciaries

Excessive fee claims are brought against fiduciaries of the ERISA plans.   Fiduciaries of an ERISA plan owe a duty of prudence and must act in the best interest of the plan participants and beneficiaries.  29 U.S.C. § 1104.  The duty of prudence is one of the highest duties known in the law. In general, the plaintiffs in excessive fee class actions allege that fiduciaries failed to monitor or control plan costs.  In some cases, plaintiffs allege that the fiduciaries breached their duty of loyalty by choosing investment options in the face of a conflict of interest.

An ERISA fiduciary is any person that exercises decision-making authority or control over the management or administration of the plan.  29 U.S.C. § 1002(21).  For 401(k) or 403(b) plans, the fiduciaries may be a retirement committee or an investment committee that is responsible for administering the plan or choosing the funds that are contained in the plan.  In some cases, the plan might be administered by the company’s human resources department.  While many plans are managed by sophisticated professionals with investment experience, others may be run by someone who does not understand the importance of ERISA’s obligations.  In fact, in some cases, plan fiduciaries may not understand that they are fiduciaries under ERISA. 

This is significant because under ERISA, a fiduciary has personal liability for any breach of fiduciary duty.  29 U.S.C. § 1109. In some cases, a fiduciary may be liable for the breaches of a co-fiduciary.  29 U.S.C. § 1105.  Many people who serve on their company’s retirement plan committee may be surprised to learn that they are ERISA fiduciaries and that they may be personally liable on a breach of fiduciary duty claim.

Fiduciary Liability Insurance

Because ERISA fiduciaries are personally liable for breaches of their fiduciary duties, fiduciary liability insurance is very important.  ERISA expressly allows plans, plan fiduciaries, or employers to purchase insurance for any fiduciary liability.  Any person who serves as a fiduciary of an ERISA plan will want to make sure that she is protected by such a policy. 

Who buys the insurance is important.  ERISA not only imposes personal liability on fiduciaries, but it limits the indemnity that a fiduciary can receive.  29 U.S.C. § 1110. If the plan buys the insurance, the policy must permit recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation.  29 U.S.C. 1110(b)(1).  But an employer or a fiduciary may buy a fiduciary liability policy that does not allow for recourse against the fiduciary.  This is consistent with the principle in ERISA that a plan may not indemnify a fiduciary, but an employer may.  Obviously, a fiduciary would prefer to have a policy without a recourse provision.  Any policy purchased by the ERISA plan will necessarily leave the fiduciary exposed.

Fiduciary liability insurance protects ERISA fiduciaries against “wrongful acts” occurring in connection with the administration of an ERISA plan.  In general, “wrongful acts” is defined in the policies to include breaches of obligations or duties imposed on fiduciaries under ERISA.  In addition to covering fiduciaries, fiduciary liability insurance generally also protects the plan sponsor, which is often the employer, from errors in the administration of an ERISA plan. 

Fiduciary liability insurance policies are claims-made policies, covering claims that are first made during the policy period.  Importantly, these policies provide for the defense of covered claims.  Because of the expense of defending a class action, the provision of a defense is one of the key benefits of the policy.  The defense obligation generally comes in one of two forms.  Under a duty to defend policy, the insurer gets to pick defense counsel.  Under a duty to reimburse policy, the insured selects defense counsel and the insurer reimburses the policyholder for attorneys’ fees.  Typically, these policies are “wasting” or “burning limits” policies, where amounts spent in defense erode the policy limits.  This is significant because if a proposed class action survives a motion to dismiss, the cost of engaging in expensive discovery may significantly reduce the amount of coverage available for a settlement or judgment.  Policyholders may prefer to settle claims as opposed to risking an adverse judgment that exceeds the available policy limits.

Other Types of Insurance

Fiduciary liability insurance is different from other types of insurance.  Many policyholders may believe that their Directors and Officers insurance would cover an ERISA class action.  But D&O policies cover wrongful acts incurred in the administration of a company, not an ERISA plan.  Under ERISA, an ERISA plan is an entity to itself, separate from the company.  29 U.S.C. § 1132(d).  Additionally, most D&O policies contain an ERISA exclusion.

Fiduciary liability insurance is closely related to employee benefits liability insurance.  Employee benefits liability insurance covers mistakes in the administration of a plan, such as an error in properly enrolling an employee for life insurance coverage.  The line between the coverage is not always clear, because an error in plan administration is also a breach of fiduciary duty, which will likely fall within the scope of a fiduciary liability policy’s insuring clause. 

In addition, fiduciary liability insurance is different from an ERISA fidelity bond, which protects plan participants and beneficiaries from loss resulting from a criminal act, such as theft.  That is, while a fidelity bond protects participants and beneficiaries of an ERISA plan, fiduciary liability insurance protects the fiduciaries.

The Future

Because of the increasing number of class actions, one can reasonably expect that fiduciary liability insurance will become more expensive.  Many insurers are raising premiums, lowering limits, and insisting on higher self-insured retentions.  In some cases, insurers are imposing co-insurance.  Some insurers are writing exclusions for excessive fee claims. 

While fiduciary liability insurance will certainly become more expensive, it is still vital for ERISA plans.  Without it, few individuals would knowingly agree to act as ERISA fiduciaries.   If the cost of fiduciary liability insurance becomes prohibitive, employers may not purchase it, and they may decide to either indemnify fiduciaries out of company assets or not provide any indemnity at all.  Likewise, if the cost of administering ERISA plans becomes too high, employers may just terminate their 401(k) and 403(b) plans, to the detriment of employees. The success of excessive fee class actions may ironically cause the demise of some retirement benefit plans. 

Miller Johnson - Portinga, D. AndrewAndy Portinga is a member of Miller Johnson, PLC, in Grand Rapids, Michigan.  His practice focuses on insurance coverage, ERISA, and general commercial litigation.


Challenging Service Provider Liability Under ERISA 

By David T. McDowell and Charan M. Higbee

ERISA cannot be used to put an end to run-of-the-mill service agreements, opening plan fiduciaries up to litigation merely because they engaged in an arm’s length deal with a service provider. Instead, ERISA is meant to prevent fiduciaries from engaging in transactions with parties with whom they have pre-existing relationships, raising concerns of impropriety. Otherwise, a plan participant could force any plan into court for doing nothing more than hiring an outside company to provide recordkeeping and administrative services.

Ramos v. Banner Health, 1 F.4th 769, 787 (10th Cir. 2021).

One of the most common transactions made by an ERISA plan is the retention of a service provider to offer financial products and services to a plan. Before ever entering into a relationship with a plan, the service provider negotiates its fees. Assuming those negotiations take place at arms-length, neither the plan nor the provider has done anything wrong. To the contrary, they each have taken the basic steps to allow the plan to fulfill its purpose. As explained by the Ninth Circuit, “[b]ecause the daily administration of the plans often requires particularized expertise, employers commonly contract with third-party administrators to operate the plans.” Santomenno v. Transamerica Life Insurance Company, 883 F.3d 833, 835 (9th Cir. 2018).

Yet a growing wave of litigation seeks to turn these pre-relationship negotiations into a prohibited transaction under ERISA. Participants and plan sponsors suddenly unhappy with agreed-upon fees and charges contend the service provider was somehow in the wrong when it engaged in pre-relationship negotiations with the plan, alleging the receipt of such fees results in a breach of fiduciary duties under ERISA and/or equates with an ERISA prohibited transaction. Many of these lawsuits are filed as putative class actions brought on behalf of a group of participants or similarly situated plans. And while Benjamin Franklin famously wrote that nothing is certain but death and taxes, federal case law is beginning to deliver clarity and offer some reliable defenses to these claims.     

Although not entirely uniform, recent authority is establishing that the receipt of fees, expressly agreed to in a contract with the plan, is not a breach of fiduciary duty by the service provider. Regardless, disputes arise when a plaintiff contends the fees were set by discretionary acts of the service provider, rather than explicitly set forth in the contract, or that the contract itself constitutes a prohibited transaction with a plan fiduciary. The breach of fiduciary duty claims are subject to facial attack under Rule 12(b)(6) where the compensation is clearly set by the terms of the contract or the plan has the ability to reject the alleged act of discretion which sets the amount of compensation. A valid defense also exists that the initial contract with the service provider, containing the compensation agreement, cannot constitute an ERISA prohibited transaction, because the service provider had no relationship to the plan at the time of contracting. Lastly, the failure to seek appropriate equitable relief under the prohibited transaction claim affords another means of attacking the pleading. 

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 McDowellDavid 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 HigbeeCharan 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.

Standing to Sue Under ERISA: Is It Jurisdictional?

By Mark E. Schmidtke

The threshold question in every civil action filed in federal court is whether the plaintiff has standing to sue. Initially, that question is posed in the context of Article III of the United States Constitution. Generally, Article III requires the plaintiff to suffer sufficient personal harm to justify a claim for relief. Once the Article III hurdle is cleared, if the action is founded on a federal statute, standing is posed in the context of the statute at issue. More specifically, the question is whether the named plaintiff is within the zone of persons authorized to sue under the statute. The standing issue under Article III determines whether the matter is within federal court jurisdiction. But what about statutory standing? Is statutory standing jurisdictional or is it merely one of the elements of the statutory claim for which the plaintiff has the burden of proof?

In adjudicating lawsuits under the civil enforcement provision of the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §1132(a) (ERISA), this question has perplexed federal courts for nearly five decades. The answers have not been consistent among the circuits nor have they been static. Recent United States Supreme Court decisions have moved the ball somewhat, but it has taken the lower courts time to catch up. It is important for those who litigate ERISA disputes to be aware of the current law in the applicable venue, but litigators must also recognize that the law is evolving and that existing case law in the applicable venue may or may not be current.

So why is it important to know whether standing is a jurisdictional issue or merely an element of the plaintiff’s claim? For one thing, subject matter jurisdiction requirements cannot be waived, whereas defendants can waive challenges to a plaintiff’s elemental burden of proof if not raised in a timely manner. Second, federal courts have a duty to raise jurisdictional issues sua sponte, even if the parties do not raise them. Finally, at the pleading stage, questions about whether or not a plaintiff has stated a claim upon which relief can be granted are raised pursuant to Federal Rule of Civil Procedure 12(b)(6). In deciding such issues, courts are limited to the pleadings and must err on the side of the allegations in the complaint to the extent they are sufficient to state a plausible claim. In contrast, jurisdictional issues are raised under Rule 12(b)(1). Courts are permitted, even required in some instances, to consider evidence outside the pleadings and to make factual findings in determining their subject matter jurisdiction. In a given case, these differences can be crucial in determining whether the case gets past the pleading stage. 

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”).


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.

Schmidtke 2016 highresMark 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.


ERISA Update

Recent Cases of Interest

By Joseph M. Hamilton, ERISA Update Editor


  • Plan Not Arbitrary or Capricious in Finding Chronic Fatigue and Fibromyalgia Encompassed Within Self-Reported Symptoms Limitation Provision
  • No Violation of Chapter 93a for Mere Breach of Contract


  • California Anti-Discretion Law Applies Only to California Residents, and Pre-2018 Claim Regulations Do Not Require Disclosure of Information Developed on Administrative Appeal


  • Court Revives ERISA Litigation Accusing Aetna and OptumHealth of Tricking Patients into Paying Unbillable Administrative Fees
  • Mandatory Victims Restitution Act Authorizes Government Seizure of ERISA-Governed Retirement Benefits


  • Estoppel Claim Under ERISA Not Established


  • Insurer Did Not Abuse Discretion by Applying Preexisting Condition Clause
  • On Remand, Plan Failed to Engage in Meaningful Dialogue with Claimant

HamiltonJoseph-21-webJoseph M. Hamilton is a partner of Mirick O'Connell DeMallie & Lougee LLP in Worcester, Massachusetts, where he concentrates his practice in life, health and disability insurance defense, ERISA, and land use litigation, including environmental litigation. He is a past member of the Firm’s Management Committee and the former chair of the firm's Litigation Group. Joe serves as counsel for numerous life, health and disability insurers, and self-insureds at all levels of state and federal courts throughout Massachusetts. His representation includes the full spectrum of issues arising from both individual and group coverage, under both state and federal law, including ERISA. Joe also represents business clients in addressing litigation issues that arise in the context of land use and environmental concerns.

Life, Health, and Disability Committee Leadership

TragerScott-21-webCommittee Chair
Scott M. Trager

Funk & Bolton PA
Baltimore, MD

CzapskiMichelle-21-webCommittee Vice Chair
Michelle Thurber Czapski

Bodman PLC
Troy, MI

SeybertJohn-21-webCorporate Vice Chair
John T. Seybert

Dearborn National Life Insurance Company
Lombard, IL

AndrewsAnnMartha-21-webNewsletter Editor
Ann-Martha Andrews

Ogletree Deakins Nash Smoak & Stewart PC
Phoenix, AZ

View Full Committee Leadership
Scott M. Trager
Funk & Bolton PA
Baltimore, MD
Scott M. Trager
Funk & Bolton PA
Baltimore, MD
Scott M. Trager
Funk & Bolton PA
Baltimore, MD
Scott M. Trager
Funk & Bolton PA
Baltimore, MD