The February Monthly Minute discusses a class action suit alleging a breach of fiduciary duties in connection with ERISA benefit plan prescription drug pricing and the latest IRS guidance on defined contribution plan emergency fund accounts under SECURE 2.0.

Drug Pricing Class Action a Headache for Plan Fiduciaries

Earlier this month, a proposed class action was filed in New Jersey that seeks to hold plan fiduciaries accountable for inflated drug pricing. In Lewandowski v. Johnson and Johnson, plaintiffs allege that the mismanagement of their plan’s prescription drug benefits amounts to a breach of fiduciary duties and costs ERISA plans and employees millions of dollars. The lawsuit focuses on the inflated cost of generics and cites the following jarring example: “[S]omeone with a 90-pill prescription for the generic drug teriflunomide (the generic form of Aubagio, used to treat multiple sclerosis) could fill that prescription, without even using their insurance, at Wegmans for $40.55, ShopRite for $41.05, Walmart for $76.41, Rite Aid for $77.41, or from Cost Plus Drugs online pharmacy for $28.40. Defendants, however, agreed to make their ERISA plans and their beneficiaries pay $10,239.69—not a typo—for each 90-pill teriflunomide prescription… No prudent fiduciary would agree to make its plan and beneficiaries pay a price that is two-hundred-and-fifty times higher than the price available to any individual who just walks into a pharmacy and pays out-of-pocket.” Plaintiffs cite defendants’ alleged failure to obtain better rates with other providers, failure to steer beneficiaries towards less costly coverage, and also cite defendants’ failure to monitor plan expenses as examples of fiduciary breaches.

KMK Comment: Containing drug costs has long been a struggle for ERISA plans that contract with large pharmacy benefit managers (PBMs) to ensure participants have access to a broad network and reliably sourced medications. This case may signal increased scrutiny of fiduciaries in securing prescription drug benefits for ERISA plans. For this reason, it is important for fiduciaries to take an active and critical role when selecting and monitoring PBMs, despite the fact that the intricate web of prescription drug pricing along with a PBM’s relationship to pharmacy distributors make PBM selection and monitoring an uphill battle.

IRS Attempts to Shed Light on Rainy Day Funds

Section 127 of the SECURE 2.0 Act allows employers to help non-highly compensated workers set up emergency savings funds – referred to as plan-linked emergency savings accounts (PLESAs). PLESAs are short-term savings accounts established and maintained in connection with a defined contribution plan and are treated as a type of designated Roth account. Employers can offer PLESAs in plan years beginning after December 31, 2023, and subject to certain restrictions, matching contributions are made with respect to PLESA contributions at the same rate as contributions to the linked defined contribution plan. In general, the maximum balance in a PLESA (attributable to employee contributions) is $2,500, although employers can opt to set a lower limit. Recently released FAQs offer more information about PLESAs.

To assist with PLESA implementation, IRS Notice 2024-22 provides initial guidance on PLESA anti-abuse rules. The Notice explains that a reasonable anti-abuse procedure is one that balances the interests of participants in using the PLESA for its intended purpose with the interests of plan sponsors in preventing manipulation of the plan’s matching contribution rules. To this end, the Notice makes clear that procedures that are unreasonable for a plan sponsor to implement include, but are not limited to:

• Forfeiture of matching contributions: A plan may not provide that matching contributions already made on account of participant contributions to the PLESA will be forfeited by reason of a participant’s withdrawal from a PLESA;
• Suspension of participant contributions to PLESA: A plan may not suspend a participant’s ability to contribute to the participant’s PLESA on account of a withdrawal from the PLESA; and
• Suspension of matching contributions on participant contributions to the underlying defined contribution plan: A plan may not suspend matching contributions made on account of participant elective deferrals to the underlying defined contribution plan.

KMK Comment: Unfortunately, Notice 2024-22 may create more questions than answers. While the Notice offers come specific tactics that plan sponsors may not use, it offers little in the way of strategies to prevent abuse. It remains to be seen whether statutory provisions that limit manipulation of plan rules to cause matching contributions to exceed the intended amounts or frequency will be sufficient to curb participant abuse of PLESAs. Given the administrative burdens and questions surrounding anti-abuse measures, it is unclear whether PLESAs will become a popular component of defined contribution plans and employers may want to wait for more IRS guidance before offering this option.