Section 406 has two lists, and they work in different ways.
Subsection (a) bars certain transactions with parties in interest. Subsection (b) bars fiduciary self-dealing. This page walks through both in group health plan terms.
Start With The Overview.
General information, not legal or tax advice. Check the cited sources before you act.
ERISA Prohibited Transactions Overview
Start here for the whole picture: the rule, who it reaches, the exemptions, the consequences and the coverage questions.
Who Is a Party in Interest
The statutory list of people and businesses around a plan, with plain examples labeled as our reading.
Prohibited Transaction Exemptions
The reasonable arrangements exemption, the new group health text and the exemption authority.
Transactions Between The Plan And A Party In Interest.
Under 29 U.S.C. 1106(a)(1), a fiduciary may not cause the plan to engage in a transaction if the fiduciary knows or should know that it is, directly or indirectly, one of four things between the plan and a party in interest: a sale, exchange or lease of property; a loan of money or other extension of credit; a furnishing of goods, services or facilities; or a transfer to, or use by or for the benefit of, a party in interest of plan assets. A fifth item and paragraph (a)(2) deal with employer securities and employer real property, which we do not cover here.
The words “directly or indirectly” matter. On the face of the statute, running a payment through an intermediary does not move it outside the list.
In group health plan terms, the item most likely to come up is the furnishing of services, because a plan pays administrators, pharmacy benefit managers and other vendors. The transfer-or-use item can come up where plan money or participant contributions are used for something other than the plan. That reading is ours, not a Department of Labor statement.
Self-Dealing Rules For Fiduciaries.
Subsection (b) does not ask who the other party is. It asks what the fiduciary is doing. A fiduciary may not deal with plan assets in the fiduciary’s own interest or for the fiduciary’s own account. A fiduciary may not act, in any capacity, in a transaction involving the plan for a party whose interests are adverse to the plan, its participants or its beneficiaries. And a fiduciary may not receive consideration for the fiduciary’s own personal account from a party dealing with the plan in connection with a transaction involving plan assets.
A plain example of the last rule: a person who helps choose a vendor for the plan and is paid personally by that vendor for the choice. We describe the idea here, not any specific arrangement, and whether a given payment crosses the line is for counsel.
Unlike subsection (a), subsection (b) has no “except as provided in section 408” opening. The exemptions page explains how the Department of Labor’s regulation treats that difference.
Why Small Employers Meet This Rule First.
Under 29 U.S.C. 1002(16), the administrator of a plan is the person named in the plan document and, if none is named, the plan sponsor. In a single-employer plan the sponsor is the employer. An employer that signs the vendor contract, approves the renewal and pays the invoices may therefore be acting in more than one role at once: plan sponsor, fiduciary and party in interest.
The Department of Labor’s group health plan publication also says that hiring a service provider is itself a fiduciary function, and that the fiduciary must monitor the provider periodically. Our page on selecting and monitoring plan vendors covers that process.
One Set Of Facts Can Raise Both.
Imagine a fiduciary who steers a plan contract to a company owned by the fiduciary’s sibling. The company provides services to the plan, so subsection (a) is in view, and the sibling’s company is a party in interest under the relative and ownership paragraphs of the definition. If the fiduciary also receives something personally from that company, subsection (b)(3) is in view as well. This is an illustration of how the rules fit together, not a description of any real case.
The text of section 406 describes categories of conduct. It does not say that the plan must have been harmed. Loss to the plan comes into the remedies sections, which our consequences page covers.
Questions To Ask Before Approving A Contract Or Payment.
These questions are a process aid, not a legal test. Who is the other party, and does that party appear on the statutory party in interest list? Is the arrangement one of the listed categories, such as services or a transfer of plan assets? Does anyone who approves it receive something personally from the other side? Is there an exemption that fits, and is the supporting file written down? Were compensation disclosures received before the contract was signed or renewed?
Keep the answers with the renewal file. A record made at the time is easier to rely on than a recollection later.
Related Rules And Tools.
Selecting and Monitoring Health Plan Service Providers
Hiring and watching TPAs, PBMs, brokers and stop-loss carriers as a fiduciary job.
ERISA Fiduciary Duties for Employer Health Plans
A practical guide to the duties of the people who run an employer health plan.
Participant Contribution Timing for Group Health Plans
When payroll deductions for health coverage become plan money.
Laws And Sources
ERISA section 406, 29 U.S.C. 1106: Section 406(a) and (b), the lists of prohibited transactions.
ERISA section 3, 29 U.S.C. 1002: Section 3(14), (16) and (21), the definitions of party in interest, administrator and fiduciary.
Department of Labor, Understanding Your Fiduciary Responsibilities Under a Group Health Plan: Department of Labor guidance on service providers, self-dealing and monitoring in group health plans.
General information, not legal or tax advice.
Quick Answers.
Short replies on this page’s topic, each tied to a fuller guide.
What is the difference between section 406(a) and 406(b)?
Subsection (a) lists transactions with a party in interest that a fiduciary may not cause. Subsection (b) lists fiduciary self-dealing: using plan assets for oneself, acting for an adverse party, or taking personal consideration from a party dealing with the plan.
What does knows or should know mean in section 406?
The statute reaches transactions the fiduciary either knows or should know fall into a listed category. We read that as a reason to check each arrangement rather than assume, though how courts apply the phrase is a question for counsel.
Can paying a plan administrator or pharmacy benefit manager fall under section 406?
A service provider is a party in interest, and furnishing services between the plan and a party in interest is a listed category, so a service contract is within the list on its face. Section 408(b)(2) is the exemption that normally addresses it. This is our reading.
The Rest Of This Series.
Who Is a Party in Interest
The statutory list of people and businesses around a plan, with plain examples labeled as our reading.
Prohibited Transaction Exemptions
The reasonable arrangements exemption, the new group health text and the exemption authority.
Consequences of a Prohibited Transaction
Personal liability, Department of Labor penalties, the Code excise tax question and correction.
Fiduciary Liability Insurance vs. the Fidelity Bond
What each one covers and does not cover, checked against ERISA section 410 and Department of Labor material.
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