decided April 17, 2025
The federal Employee Retirement Income Security Act, 29 U.S.C. §§ 1001 et. seq. (“ERISA”) regulates employee pension plans and other types of employee-group benefit plans. Because ERISA imposes fiduciary obligations on plan administrators, the statute prohibits transactions between a plan and a plan service provider unless certain conditions are met. Specifically, both the service provider himself or herself and the service he or she is to provide must be reasonably necessary for either the establishment or the operation of the plan. In addition, the compensation paid to the service provider must be “reasonable.” See 29 U.S.C. §1106 (a)(1)(C) and 29 U.S.C. §1108(b)(2)(A). These two Sections of ERISA are divided. Section 1106(a)(1)(C) sets out a general prohibition of all plan contracts with a service provider, while Section 1108(b)(2)(A) sets out the conditions that must be met before a plan service contract can be legally allowed.
In this case, the Court ruled that the general prohibition of Section 1106(a)(1)(C), standing alone, can serve as the basis for a lawsuit against a plan administrator or plan service provider, while Section 1108(b)(2)(A) can be used as an affirmative defense to that stand alone lawsuit. This arrangement of the two Sections imposes the burden of proving a “reasonable,” and therefor legal contract upon the defendant The Court explained that the procedural pleading rules that prevail in federal courts and in most state courts, impose this arrangement in a standalone “prohibited transaction” lawsuit. The vote on the Court for this ruling was unanimous.
Comment: Despite the Court’s unanimity, the ruling is wrong. To properly discern the controlling intent of Congress in enacting ERISA, the statute’s multiple sections must be interpreted holistically, instead of peace-by-peace. Neither of the cited Sections of ERISA refer to the pleading rules that might govern the process of a lawsuit. But together, the two Sections spell out the requirements for service contracts made with non-beneficiaries of ERISA plans, to assure that they are not made in violation of the plan administrator’s fiduciary duties to plan beneficiaries. The correct ruling in this case, to honor the controlling intent of Congress as stated and directly implied by the statutory text and structure of ERISA, would have required a standalone “prohibited transaction” plaintiff to plead and then prove that the transaction he or she is challenging under ERISA resulted from a forbidden conflict-of-interest in violation of the plan administrator’s fiduciary duties.
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