Question: What are the main categories of ERISA fiduciary duties for employers sponsoring health and welfare employee benefit plans, and how does the J&J class action lawsuit turn on this issue?

Short Answer: Employers generally are subject to the ERISA plan administrator fiduciary duties of loyalty (the exclusive benefit rule), prudence, diversification, and to follow the plan terms. These duties are derived from trust law, and they are generally described by courts as the highest duties known to the law. The class plaintiff in the J&J case alleges that the company breached its fiduciary duties to participants and beneficiaries by not prudently monitoring the plan’s prescription drug costs.

Note: This is part of our series addressing practical considerations for employers related to the J&J case.

• J&J Case Practical Considerations: The Core Four ERISA Fiduciary Duties (Part 1)

• J&J Case Practical Considerations: The ERISA Trust Rules for Health Plans (Part 1)

• J&J Case Practical Considerations: The ERISA Trust Rules for Health Plans (Part 2)

The J&J Case: ERISA Fundamentals Revisited

In light of the recent class action lawsuit filed against Johnson & Johnson (“J&J”) as employer-plan sponsor of its group health plan (Lewandowski v. Johnson & Johnson, et. al., D.N.J., No. 1:24-cv-00671 (Feb. 5, 2024)), we are reviewing the ERISA basics that may both affect the outcome of the case and offer employers as interested observers the opportunity to revisit best practices to better avoid such potential liability.

The plaintiffs in the J&J case principally allege that the company breached its fiduciary duty by mismanaging the health plan’s prescription drug benefit program, costing their ERISA plans and their employees millions of dollars in the form of higher payments for prescription drugs, higher premiums, higher deductibles, higher coinsurance, higher copays, and lower wages or limited wage growth.

The complaint argues that J&J breached its fiduciary duty by failing to engage in a prudent and reasoned decision-making process that would have drastically lowered the cost of prescription drugs in general and generic-specialty drugs in particular, and would have resulted in other cost savings for the plan. The allegation is that a fiduciarily prudent approach would have saved the plan and employees millions of dollars.

The words “fiduciary” and “fiduciaries” are used over 150 times in the J&J complaint. The document walks through the fiduciary duties imposed by ERISA, and specifically homes in on the duty of prudence as the central focus of the allegations. These posts review the four foundational ERISA fiduciary duties imposed upon ERISA plan administrators, the key issues to be aware of, and the practical considerations for employers both generally and in light of the J&J case’s introduction of a new aspect of potential liability.

• Newfront Note: The J&J case is merely at the initial complaint stage. Before considering radical changes to plan governance that may be costly, time consuming, and of indeterminable benefit, our recommendation is that employers return to the basic ERISA principles that have proven effective at avoiding potential liability. This series is intended to focus on those concepts—while maintaining an eye to the horizon for how this case (and potentially others) develops in litigation. The outcomes will drive best practices, including whether new approaches and processes might be warranted.

ERISA Fiduciary Duty #2: The Duty of Prudence

The second fiduciary duty requires employers to act with the care, skill, prudence, and diligence under the circumstances of a prudent person acting in a like capacity with respect to any fiduciary function. This is an objective standard measured by the appropriateness of an act in relation to a hypothetical individual.

• The J&J Connection: This is the primary basis for the J&J breach of fiduciary duty complaint, which argues that “ERISA's duty of prudence requires plan fiduciaries to make a diligent effort to compare alternative service providers in the marketplace, seek the lowest level of costs for the services to be provided, and continuously monitor plan expenses to ensure that they remain reasonable under the circumstances.”

DOL guidance suggests that the duty of prudence is better viewed as a prudent “expert” standard, at least in situations requiring specialized knowledge and expertise. For example, in the retirement plan investment context, the DOL has stated that the fiduciary should determine whether it possesses the requisite expertise, knowledge, and information to understand and analyze the nature of the risk and potential returns involved in a particular investment. If the employer does not have personnel whose judgement meets that prudent expert standard, it should consult with someone who does have the appropriate level of expertise.

• The J&J Connection: The class plaintiff in the J&J case makes this very argument, stating in the complaint that a “fiduciary's process must bear the marks of loyalty, skill, and diligence expected of an expert in the field.”

More broadly, the duty of prudence commonly arises in the context of the fiduciary duty to prudently select and monitor plan service providers (e.g., third-party administrators) with an appropriate method based on the facts and circumstances.

• The J&J Connection: With respect to the plan’s pharmacy benefits manager (PBM), the complaint argues J&J “failed to exercise prudence before selecting a PBM, failed to exercise prudence in agreeing to make its ERISA plans and beneficiaries pay unreasonable prices for prescription drugs, failed to exercise prudence in agreeing to contract terms with its PBM that needlessly allows the PBM to enrich itself at the expense of the company's ERISA plans and their beneficiaries, failed to actively manage and oversee key aspects of the company's prescription-drug program, and failed to take available steps to rein in its PBM's profiteering and protect plan assets and beneficiaries' interests.”

The DOL has summarized this obligation nicely in the health and welfare plan context as follows:

“In selecting a health care provider in this context, as with the selection of any service provider under ERISA, the responsible plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided. In addition, such process should be designed to avoid self-dealing, conflicts of interest or other improper influence.”

• The J&J Connection: The class plaintiff in the J&J case alleges that the company failed to “make a diligent and thorough comparison of alternative service providers in the marketplace, to seek the lowest level of costs for the services to be provided, and to continuously monitor plan expenses to ensure that they remain reasonable under the circumstances.”

Duty of Prudence Common Application Example: Monitoring the COBRA TPA

Although many aspects of health plan administration are delegated to third-party vendors, the employer will always retain the fiduciary duty to prudently select and monitor those outside service vendors. For example, employers almost always delegate COBRA administration services to a TPA. Although employers are generally “hands off” in this relationship (other than managing a feed of qualifying event information provided regularly to the COBRA TPA), employers still maintain the fiduciary responsibility to monitor the COBRA TPA’s performance and ensure it is still the appropriate TPA to delegate such services.

• The J&J Connection: The J&J case will likely drive intense focus on PBM oversight, and rightfully so given the high-profile nature of the case. However, PBMs are far from the only vendor employers work with to administer plan benefits. Employers should therefore avoid developing a myopic PBM-focused mindset in response to the J&J litigation.

If the COBRA TPA was consistently failing to send initial notices and election notices, forward premiums to the employer or carriers, or respond to qualified beneficiary concerns, the employer would have the fiduciary duty to ensure the COBRA TPA corrects its practices, or prudently move the services to a more capable TPA.

• The J&J Connection: The J&J case demonstrates the importance of monitoring similar aspects of the PBM. For example, the complaint walks through a laundry list of drugs that allegedly cost plan participants far in excess of their widely available cost outside the plan. Across a range of 42 drugs, the complaint alleges that the plan’s negotiated prices were dramatically marked up compared to the pharmacy acquisition cost, concluding that “[n]o prudent fiduciary would agree to pay their PBM an average 498% markup above cost.”

ERISA Fiduciary Duty #3: The Duty of Diversification

The third fiduciary duty requires employers to diversify investments of the plan to minimize the risk of large losses, unless it is clearly prudent under the circumstances not to do so. This duty commonly arises in the retirement plan context where there are plan assets held in trust.

Although the general rule under ERISA is that any participant contributions are plan assets that must be held in trust, the DOL has a longstanding nonenforcement policy (outlined in Technical Release 92-01) that avoids the need to create a trust for employee contributions to a health and welfare plan that are made through a Section 125 cafeteria plan. Typical employer-sponsored health and welfare plans therefore do not have a funded trust with plan assets to diversify, whether the plan is fully insured or self-insured with benefits paid from the general assets of the employer.

However, fiduciaries managing a health and welfare plan funded by a trust (e.g., a self-insured multi-employer plan, MEWA, or large employer plan utilizing a trust) would need to be cognizant of this diversification duty.

• The J&J Connection: The plan in the J&J case was funded by a voluntary employees’ benefit association (VEBA) trust. In some situations, typically limited to very large employers, companies choose to fund their health plan through a trust to address accounting and other similar considerations.

For more details:

• J&J Case Practical Considerations: The ERISA Trust Rules for Health Plans (Part 1)

• J&J Case Practical Considerations: The ERISA Trust Rules for Health Plans (Part 2)

ERISA Fiduciary Duty #4: Duty to Follow Plan Terms

The fourth and final core fiduciary duty requires employers to establish, maintain, and administer the plan in accordance with its written terms in the documents governing the plan.

This fiduciary duty commonly arises in the context of employee requests to make an exception to the plan’s eligibility or benefit written terms to approve coverage or benefits not otherwise authorized by those terms. These exception requests create significant fiduciary (among other) risks for employers to consider.

Duty to Follow Plan Terms Common Application Example: Eligibility Exceptions

Employees will frequently ask employers to make an eligibility exception to permit enrollment in a health and welfare plan option where not otherwise permitted by the written plan terms.

Common examples include:

• Mid-year enrollment requests outside of a permitted election change event;

• Ineligible part-time employee enrollment exception requests;

• New hire exception requests to enroll prior to satisfying the plan’s waiting period;

• Employee exception requests to enroll an ineligible dependent; and

• Requests to extend the COBRA election/premium payment deadline.

Within this framework, employers should not make “exceptions” to act contrary to plan terms because doing so could be a breach of fiduciary duty. However, plans will typically have a discretionary clause granting the employer the fiduciary right to interpret plan terms for purposes of eligibility and benefits. Employers can rely on that discretion to interpret plan terms in a manner permitting the enrollment.

The significant downside of this approach is that an employer’s broad interpretation of the plan’s terms beyond the standard denotation to permit enrollment effectively acts in the same manner as a plan amendment because the employer must then apply that approach consistently for all similarly situated employees. For example, an employer permitting a key recruit to enroll as a new hire prior to satisfying the waiting period (as a purported “one-off” needed to address a health concern) would generally have to accommodate the same early enrollment requests from all other eligible new hires making the same types of requests.

In other words, a health plan eligibility “exception” to enroll an individual or at a time not approved by the written terms creates an ERISA plan precedent requiring the plan to offer the same type of enrollment availability for all employees and dependents in similar circumstances. An employee or dependent denied benefits in similar circumstances (e.g., enrollment prior to satisfying the waiting period) would have a potential claim for ERISA breach of fiduciary duty.

Duty to Follow Plan Terms Common Application Example: Benefit Exceptions

Employees covered by a self-insured health plan will frequently ask employers to make a benefit exception to cover an item or service not otherwise permitted by the written plan terms. As with the eligibility exceptions discussed above, employers should not make “exceptions” to act contrary to plan terms because doing so could be a breach of fiduciary duty.

If the employer is inclined to extend benefits in this situation, one approach would be for the employer to amend the plan for all participants to accommodate the request by modifying the plan terms to specifically cover the item or service at issue.

Otherwise, an employer’s broad interpretation of the plan’s terms beyond the standard denotation to permit coverage effectively acts in the same manner as a plan amendment because the employer must then apply that approach consistently for all similarly situated employees. For example, a plan permitting in-network coverage for a procedure that would otherwise be subject to the plan’s out-of-network cost-sharing provisions would generally have to accommodate the same in-network coverage for all similar claims.

A health plan benefit “exception” to approve coverage for a benefit therefore creates an ERISA plan precedent requiring the plan to offer coverage for all employees and dependents in similar circumstances. An employee or dependent denied benefits in similar circumstances (e.g., the same type of out-of-network claim) would have a potential ERISA claim for breach of fiduciary.

For more details:

• Employee Requests for the Employer to Override the TPA’s Claim/Appeal Denial

• Newfront Compliance Considerations for Self-Insured Plans Guide

Enforcement

ERISA §502(l) provides that the DOL can enforce against an employer’s breach of fiduciary duty to recover amounts lost by participants and beneficiaries pursuant to a settlement agreement entered into with the DOL. The DOL can also initiate judicial proceedings to seek a court order for amounts to be paid by the fiduciary to a plan or its participants and beneficiaries.

Furthermore, the DOL may impose a civil penalty against the fiduciary committing the breach in an amount equal to 20% of the applicable recovery amount. The DOL may reduce or waive the penalty if it determines that the fiduciary acted reasonably and in good faith, or if it is reasonable to expect that the fiduciary will not be able to restore the losses to the plan without severe financial hardship.

Participants may also initiate litigation against an employer or other fiduciary based on a breach of fiduciary duty cause of action under ERISA §502(a)(2), as in the J&J case. Such fiduciaries can be held personally liable to make good to the plan any losses resulting from the breach. ERISA makes only equitable remedies available to inure to the plan as a whole (as opposed to monetary damages) for a breach of fiduciary duty action.

• The J&J Connection: The J&J complaint alleges that the company delegated fiduciary responsibility to a benefits committee. Nonetheless, employers with a benefits committee (which is typically only very large employers in the health and welfare plan context) retain the fiduciary duty to monitor appointed fiduciaries. The class plaintiff accordingly also named J&J itself (in addition to the committee) as a defendant, alleging that “it failed to adopt or follow sufficient procedures to review and evaluate the performance of the Committee and to remove fiduciaries whose performance was inadequate.”

Participants may also bring an individual-based claim for equitable relief under ERISA §502(a)(3), as also brought in the J&J case. In the landmark 2011 case CIGNA Corp. v. Amara, the U.S. Supreme Court set out reformation, estoppel, and surcharge as three such equitable forms of relief that may be available to individual participants harmed by a fiduciary breach.

• The J&J Connection: Among other demands, the J&J case complaint seeks for the court to “[a]ward surcharge or other make-whole equitable relief to Plaintiff and members of the class to remedy all losses resulting from Defendants' breaches of fiduciary duty, including but not limited to amounts paid in premiums, claim payments, co-insurance, deductibles, and lost wages attributable to the conduct described [in the complaint].”

Fiduciary Indemnification and Insurance

Because plan fiduciaries may be held personally liable for a breach of fiduciary duty, employers often indemnify plan fiduciaries for liability incurred in carrying out their duties. Typically, this would include liability derived from the fiduciary’s acts or omissions that are not intentional (and, in some cases, that also do not rise to the level of gross negligence). ERISA prohibits, however, a plan provision exculpating fiduciaries from liability or an indemnification of plan fiduciaries that involves plan assets.

ERISA also permits the plan or employer to purchase fiduciary liability insurance to cover liability or losses resulting from acts, or failure to act, of a fiduciary. The cost of the policy can be paid by the plan only to the extent it permits recourse against the individual fiduciary in the event of a breach of fiduciary duty. To address this potential liability for individuals, the employer or the fiduciary (but not the plan or with plan assets) can purchase a “no recourse rider” at an additional cost to cover that personal liability for fiduciaries.

• The J&J Connection: The individuals who serve on the J&J benefit committee as fiduciaries are personally named in the complaint, including the CHRO and VPs of HR. This should serve as a wake-up call to all plan fiduciaries to review their employer indemnification and fiduciary liability insurance coverage to address potential personal liability concerns derived from a breach of fiduciary duty claim.

Summary

ERISA’s core four fiduciary duties should be key considerations for employers in any discretionary plan administration or management determination. While these posts highlight a number of the most common scenarios where employers must grapple with fiduciary considerations in day-to-day health and welfare plan operations, employers (as the ERISA plan administrator) should keep these foundational duties in mind for any plan interaction that may be viewed by the DOL or courts to constitute a fiduciary function.

• The J&J Connection: The overarching allegation of the J&J case is that the company and its benefits committee failed to prudently manage the plan’s prescription drug program, causing the plan and participants to pay extraordinarily high prices for prescription drugs. As a fiduciary, the class plaintiff argues J&J had the duty to ensure that decisions were made in the best interest of the plan and its participants, including reviewing the plan’s prescription drug costs and taking steps from such reviews to save the plan and participants millions of dollars. If J&J is ultimately found to have breached its fiduciary duties in this area, there could be a wave of claims targeting similar situations. Most likely, the initial targets of such claims would be very large employers with plans funded by a trust to establish both a significant area of liability and a clear connection to ERISA plan assets subject to fiduciary duties.

Relevant Cites:

ERISA §502(l):

(l) Civil penalties on violations by fiduciaries. (1) In the case of—

(A) any breach of fiduciary responsibility under (or other violation of) part 4 by a fiduciary, or

(B) any knowing participation in such a breach or violation by any other person,

the Secretary shall assess a civil penalty against such fiduciary or other person in an amount equal to 20 percent of the applicable recovery amount.

(2) For purposes of paragraph (1) , the term “applicable recovery amount” means any amount which is recovered from a fiduciary or other person with respect to a breach or violation described in paragraph (1) —

(A) pursuant to any settlement agreement with the Secretary, or

(B) ordered by a court to be paid by such fiduciary or other person to a plan or its participants and beneficiaries in a judicial proceeding instituted by the Secretary under subsection (a)(2) or (a)(5).

(3) The Secretary may, in the Secretary's sole discretion, waive or reduce the penalty under paragraph (l) if the Secretary determines in writing that—

(A) the fiduciary or other person acted reasonably and in good faith, or

(B) it is reasonable to expect that the fiduciary or other person will not be able to restore all losses to the plan (or to provide the relief ordered pursuant to subsection (a)(9)) without severe financial hardship unless such waiver or reduction is granted.

ERISA §409(a):

(a) Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. A fiduciary may also be removed for a violation of section 411 of this Act.

ERISA §410:

(a) Except as provided in sections 405(b)(1) and 405(d), any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy.

(b) Nothing in this subpart shall preclude—

(1) a plan from purchasing insurance for its fiduciaries or for itself to cover liability or losses occurring by reason of the act or omission of a fiduciary, if such insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by such fiduciary;

(2) a fiduciary from purchasing insurance to cover liability under this part from and for his own account; or

(3) an employer or an employee organization from purchasing insurance to cover potential liability of one or more persons who serve in a fiduciary capacity with regard to an employee benefit plan.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).