This Is Not a Drill — It’s a Process
This isn’t a drill. It’s a process — and those who fail to pay attention may eventually find themselves standing in the fire.
On March 9, a federal court ruled on the motion to dismiss in Stern v. JPMorgan Chase, a case challenging how JPMorgan managed the prescription drug component of its employee health plan. The court granted the motion in part and denied it in part, allowing the prohibited transaction claims to proceed.
Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries must act solely in the interest of plan participants and beneficiaries. Because conflicts of interest can arise when plan assets are used in transactions with related parties, ERISA strictly regulates certain arrangements and treats them as prohibited transactions unless specific exemptions apply.
These rules are designed to prevent situations such as self-dealing, where a fiduciary uses plan assets for personal gain, or conflicted service arrangements in which a vendor receives compensation from the plan that is either not properly disclosed or is unreasonable. The law also focuses heavily on transactions involving “parties in interest,” a broad category that includes employers sponsoring the plan, plan fiduciaries, service providers, and entities affiliated with those parties. ERISA generally prohibits transactions between the plan and these parties because of the heightened risk of conflicts, including improper payments, undisclosed compensation arrangements, or other financial benefits that may not align with the best interests of plan participants.
There is, however, an important exemption that allows many routine service relationships to exist – the “reasonable compensation for necessary services” exemption under ERISA §408(b)(2). This exemption permits plans to hire service providers and pay them for legitimate services, but only if certain conditions are satisfied. The services must be necessary for the operation of the plan, the compensation must be reasonable, and the compensation arrangements must be properly disclosed to the plan’s fiduciaries so they can evaluate them. If those disclosures are not provided, or if fiduciaries lack sufficient visibility to assess whether the compensation is reasonable, the exemption may fail, meaning the arrangement could be treated as a prohibited transaction under ERISA.
The court allowed the prohibited transaction claims to move forward based on allegations that JPMorgan caused the plan to enter into and pay under a PBM agreement with Caremark. The court emphasized that selecting or retaining a plan service provider is itself a fiduciary function, and because Caremark was a service provider to the plan, it qualified as a party-in-interest under ERISA.
Applying the Supreme Court’s decision in Cunningham v. Cornell University, the court explained that plaintiffs need only plausibly allege the elements of a prohibited transaction under ERISA §406(a). Specifically, that a fiduciary caused the plan to engage in a transaction with a party-in-interest involving the furnishing of services or use of plan assets. The court found that standard was met in this case.
So why does this matter for employers?
Because the regulatory landscape is shifting at the same time litigation is accelerating. The Consolidated Appropriations Act of 2026, signed into law on February 3, amends ERISA §408(b)(2) and reframes who qualifies as a covered service provider. Disclosure obligations now hinge on the services performed in connection with the plan — not how an entity describes itself (broker, consultant, advisor, etc.).
Function, not title, is the real game changer.
For employers, this reduces ambiguity and expands the scope of compensation transparency across service relationships. Once compensation disclosures are received, fiduciaries must determine whether those fees are reasonable. Without proper disclosures and a documented process to evaluate them, employers may inadvertently expose themselves to prohibited transaction claims or fiduciary breach allegations.
In the JPMorgan case, the only plausible exemption available is the “reasonable compensation for necessary services” exemption under ERISA §408(b)(2). That means the litigation will likely hinge on whether plan fiduciaries had sufficient visibility into PBM compensation to determine whether the fees were reasonable – i.e. a compensation disclosure.
Surviving dismissal under Cunningham is increasingly procedural rather than predictive. However, one issue that could prove critical on the merits is whether the plan requested and received proper fee disclosures from Caremark as required under ERISA §408(b)(2)(B).
For employers, this case is important to watch.
More importantly, it is a reminder to ensure that you have obtained the necessary compensation disclosures and have a documented process to evaluate their reasonableness. It may also be the moment to revisit requests with vendors who have been slow to provide them.
At the end of the day, you are the fiduciary.
And this isn’t a drill.