Some dealings are off limits to a health plan, even when the price is fair.
ERISA section 406 bars certain transactions between a plan and the people around it. This series explains the rule, who it reaches, the exemptions, the consequences and the insurance questions it raises.
Five Guides On Prohibited Transactions.
General information, not legal or tax advice. Check the cited sources before you act.
What ERISA Section 406 Prohibits
The two lists in the statute: transactions with parties in interest, and fiduciary self-dealing.
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.
What Section 406 Does In One Page.
ERISA section 406, 29 U.S.C. 1106, has two parts that work differently. Subsection (a) says a fiduciary may not cause the plan to engage in a transaction that the fiduciary knows or should know is, directly or indirectly, a sale, exchange or lease of property, a loan or extension of credit, a furnishing of goods, services or facilities, or a transfer or use of plan assets for the benefit of a party in interest. In each case the other side is a party in interest.
Subsection (b) is aimed at the fiduciary personally. A fiduciary may not deal with plan assets in the fiduciary’s own interest, may not act in a transaction involving the plan for a party whose interests are adverse to the plan, and may not take personal consideration from a party dealing with the plan in connection with a transaction involving plan assets.
Two points follow for an employer. First, a fair price does not end the analysis, because the statute lists categories of transactions rather than asking whether the deal was a bargain. Second, subsection (a) opens with the words “Except as provided in section 408,” so exemptions do the real sorting. Both points are covered in the child pages.
Parties In Interest And Fiduciaries.
The statute defines a party in interest in 29 U.S.C. 1002(14). The list names fiduciaries, people who provide services to the plan, an employer whose employees are covered, owners of 50 percent or more of that employer, their relatives and certain employees, officers, directors and large shareholders. The Department of Labor’s group health plan publication puts it in plain terms: prohibited parties include the employer, the union, plan fiduciaries and service providers.
In our reading, that means a service provider such as a third-party administrator or pharmacy benefit manager is a party in interest because it provides services to the plan, and the employer is a party in interest because its employees are covered. Neither status is wrongdoing. The rule looks at the transaction between the plan and that party.
The employer can also be a fiduciary. If a plan document names no administrator, the statute makes the plan sponsor the administrator, so a small employer often sits on both sides of a vendor decision.
Hiring Help Is Allowed When It Is Reasonable.
ERISA section 408(b)(2), 29 U.S.C. 1108(b)(2), lets a plan contract or make reasonable arrangements with a party in interest for office space or for legal, accounting or other services necessary to establish or operate the plan, if no more than reasonable compensation is paid. The Department of Labor’s regulation at 29 CFR 2550.408b-2 turns that into a three-part test: the service is necessary, the arrangement is reasonable, and the compensation is reasonable.
The same regulation says section 408(b)(2) does not exempt the fiduciary self-dealing acts described in section 406(b). The statute now also contains text on service provider disclosure for group health plans. The detailed regulation we read, current on the eCFR as of October 23, 2026, sets out the disclosure rule for pension plans only, and the Department’s pharmacy benefit manager proposal is covered on our own page as a proposal, not a final rule.
What Follows A Violation.
Under ERISA section 409, 29 U.S.C. 1109, a fiduciary who breaches the fiduciary duties is personally liable to restore plan losses and any profits made through use of plan assets, and a court can order other relief, including removal. Under section 502(i), the Secretary of Labor may assess a civil penalty against a party in interest who engages in a section 406 transaction, up to 5 percent of the amount involved for each year, rising to 100 percent if the transaction is not corrected within 90 days after notice. Section 502(l) adds a 20 percent penalty on amounts recovered from fiduciary breaches, which the Secretary may reduce or waive in some circumstances.
Code section 4975 imposes a 15 percent excise tax, and a 100 percent tax if the transaction is not corrected, but the plan types it lists do not expressly include group health plans. We explain that reading, and its limits, on the consequences page. The Department of Labor’s Voluntary Fiduciary Correction Program offers a route to correct some transactions, with conditions.
Insurance Does Not Replace Good Process.
Section 410(a) makes a contract term void if it tries to relieve a fiduciary of responsibility or liability under the fiduciary rules. Section 410(b) does allow insurance: a plan may buy insurance covering fiduciary liability if the policy permits recourse by the insurer against the fiduciary for a breach, a fiduciary may buy coverage for the fiduciary’s own account, and an employer may buy coverage for the people who serve as fiduciaries.
The ERISA fidelity bond is a different thing. The Department of Labor describes it as protection against loss from fraud or dishonesty by people who handle plan funds, and says fiduciary liability insurance does not satisfy the bonding requirement. We make no statements about particular insurance products or prices, and your policy wording controls what it covers.
What We Could Not Confirm.
We checked the statutory text on Cornell’s copy of the U.S. Code, the eCFR, the Federal Register and Department of Labor publications. We did not review the full list of Department of Labor class exemptions, so we make no statement about whether any applies to broker compensation or other arrangements. We did not find a Department publication stating whether a Voluntary Fiduciary Correction Program correction ends every penalty for every transaction type. We did not review Michigan law and make no Michigan claims. Statutes and rules change, so confirm current text before you rely on any of it.
We are licensed insurance brokers, not a law firm. We can help you gather the service agreements, compensation disclosures and renewal documents that a fiduciary review needs. Legal questions belong with your ERISA counsel.
Related Rules And Tools.
ERISA Fiduciary Duties for Employer Health Plans
A practical guide to the duties of the people who run an employer health plan.
Selecting and Monitoring Health Plan Service Providers
Hiring and watching TPAs, PBMs, brokers and stop-loss carriers as a fiduciary job.
ERISA Part 7 Group Health Plan Requirements Checklist
Six federal health plan rules and how to check each one against your plan.
Laws And Sources
ERISA section 406, 29 U.S.C. 1106: Section 406, the statutory list of prohibited transactions and the fiduciary self-dealing rules.
ERISA section 3, 29 U.S.C. 1002: Section 3(14), the definition of party in interest, and section 3(16), the definition of administrator.
ERISA section 408, 29 U.S.C. 1108: Section 408, exemptions including the reasonable arrangements exemption.
29 CFR 2550.408b-2: The Department of Labor regulation on the services exemption, current on the eCFR as of October 23, 2026.
ERISA section 409, 29 U.S.C. 1109: Section 409, personal liability for breach.
ERISA section 502, 29 U.S.C. 1132: Section 502, including the civil penalties in subsections (i) and (l).
Internal Revenue Code section 4975, 26 U.S.C. 4975: The Code excise tax on prohibited transactions.
ERISA section 410, 29 U.S.C. 1110: Section 410, exculpatory provisions and insurance.
Department of Labor, Understanding Your Fiduciary Responsibilities Under a Group Health Plan: Department of Labor guidance on prohibited transactions, service providers and bonding for 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 a prohibited transaction under ERISA?
It is a transaction the ERISA section 406 list bars a fiduciary from causing, such as a sale, loan, furnishing of services or use of plan assets involving a party in interest, or fiduciary self-dealing, unless an exemption applies. See 29 U.S.C. 1106.
Does section 406 apply to group health plans?
The Department of Labor’s publication on fiduciary responsibilities under a group health plan discusses prohibited transactions, so the rule is part of the group health plan picture. Whether a particular plan is covered, for example a church or governmental plan, is a legal question for counsel.
Is paying a service provider a prohibited transaction?
Not when an exemption fits. Section 408(b)(2) covers services necessary to operate the plan under a reasonable arrangement for no more than reasonable compensation, but it does not exempt fiduciary self-dealing under section 406(b).
Who can be personally liable for a prohibited transaction?
A fiduciary who breaches the duties can be personally liable under section 409, and the Secretary of Labor can assess a penalty against a party in interest under section 502(i). Facts and plan type matter, so ask counsel about a specific case.
Does fiduciary liability insurance replace the ERISA fidelity bond?
No. The Department of Labor says fiduciary liability insurance does not satisfy the fidelity bonding requirement, and the two cover different risks.
Correction And Coverage Pages.
Voluntary Fiduciary Correction Program for Employer Health Plans
How the Department of Labor correction program works for employers.
ERISA Fidelity Bond for Employer Health Plans
The bond requirement as it applies to employer health plans.
ERISA Fidelity Bond Requirement: Employer Guide
An employer guide to who must be bonded and for how much.
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