Benefits Monthly Minute
The October Monthly Minute offers a grab-bag of guidance including a new 11th Circuit ruling reversing decades of precedent on ERISA exhaustion requirements, bad news for Compass Group’s tobacco surcharge program, and new proposed rules for Trump Accounts.
11th Circuit Drops Mandatory Exhaustion for ERISA Statutory and Fiduciary Claims
In a recent ruling, Bolton v. Inland Fresh Seafood Corp., the 11th Circuit overruled its own forty year old precedent to the extent it held that ERISA itself required employees to exhaust a plan’s internal claims and appeals process before bringing statutory ERISA claims — including claims that plan fiduciaries breached their duties. In this class action case grounded in ESOP valuation allegations, the court held that ERISA’s text contains no such exhaustion requirement for statutory claims and that the old rule rested on policy preferences rather than statutory language. The court emphasized that ERISA is designed to give participants ready access to federal courts, and that requiring fiduciaries accused of wrongdoing to review complaints against themselves raises conflict-of-interest concerns. It also observed that the old rule put the 11th Circuit at odds with seven other circuits that already reject mandatory exhaustion for statutory claims.
KMK Comment: The 11th Circuit’s new ruling does not disturb the well-settled rule that participants challenging a denial of benefits under the terms of a plan must still generally exhaust internal claims and appeals procedures prior to bringing suit. However, for plans that are subject to 11th Circuit law (Alabama, Florida, Georgia), expect fiduciary-breach and other statutory ERISA claims to reach court faster. In light of this 11th Circuit ruling, employers should discuss with counsel whether their plans can reliably impose a broad-based mandatory internal exhaustion process.
Court Finds Compass Group Liable on Tobacco Surcharge Claims
In this summary judgment order, a Missouri federal court ruled against Compass Group on the design of its tobacco surcharge wellness program. Compass charged tobacco users an extra $12 to $24 per week, allowing them to stop the surcharge prospectively after completing a free smoking cessation course. However, the court held that failing to retroactively reimburse surcharges paid earlier in the plan year improperly denied employees the “full reward.” It further found the plan materials deficient because its tobacco attestation form failed to disclose the availability of a reasonable alternative standard and its enrollment guides omitted the required statement that a participant’s personal physician’s recommendations would be accommodated. Notably, the court held that a recent Department of Labor FAQ indicating non-enforcement of the retroactive-reward position did not protect Compass because such guidance does not bind private plaintiffs.
The amounts at issue in the Compass Group class action are significant — surcharges collected over 10 years totaled nearly $48 million (although no damages have been awarded yet). Notably, the court found a breach of fiduciary duty in holding that the surcharges were “plan assets” that Compass improperly commingled with its own general funds, and rejected Compass’ argument that its self-funded plan is exempt from trust requirements.
KMK Comment: As plans enter open enrollment, now is a good time to double-check tobacco surcharge and other health-contingent wellness programs. For example, evaluate notice compliance, reward/surcharge amounts, and retroactive refunds. And, exercise caution in leaning on the DOL’s recent non-enforcement posture as to retroactive reimbursements — it will not necessarily curb a class action lawsuit.
IRS Proposes Rules for Trump Accounts
The recently released notice of proposed rulemaking implements new IRC section 128, and sets forth guidelines for how employers can contribute to “Trump accounts.” As previously reported in the December 2025 Monthly Minute, a Trump account is a type of traditional IRA opened for the benefit of a child under 18, subject to special rules during a “growth period.” Under IRC section 128, an employer may contribute to the Trump account of an employee or an employee’s dependent, and the contribution is excluded from the employee’s income up to $2,500 per employee per year (indexed for inflation after 2027). As noted in the proposed rule, the cap is applied per employee rather than per child and it aggregates across multiple employers. Contributions may be funded through pre-tax salary reduction under a section 125 cafeteria plan only when directed to a dependent’s account. Although excluded from income tax, the new rules explain that contributions remain wages for FICA and FUTA purposes.
As reflected in the proposed rules, a program must be set out in a separate written plan, provide reasonable notice to eligible employees, furnish a written statement of amounts paid (satisfied via Form W-2), and satisfy nondiscrimination testing modeled on the section 129 dependent care assistance program rules. The proposed rules also offer a safe harbor so that employer matches of the pilot program’s $1,000 seed contribution (for children born 2025–2028) can be disregarded so as not to cause certain nondiscrimination testing failures. Although these rules remain proposed, employers may rely on them for plan years beginning before final regulations are published.
KMK Comment: Employers that are weighing a Trump account contribution program can begin designing it now, since the proposed rules may be relied upon currently. The program must be in a separate written plan, the W-2 reporting should be integrated with payroll, and nondiscrimination testing should be run to confirm the benefit is not skewed toward highly compensated employees. Be sure to work closely with benefits counsel before rollout and the KMK Benefits team will keep you informed when final regulations are issued.
The KMK Law Employee Benefits & Executive Compensation Group is available to assist with these and other issues.
Lisa Wintersheimer Michel
513.579.6462
lmichel@kmklaw.com
John F. Meisenhelder
513.579.6914
jmeisenhelder@kmklaw.com
Antoinette L. Schindel
513.579.6473
aschindel@kmklaw.com
Kelly E. MacDonald
513.579.6409
kmacdonald@kmklaw.com
Rachel M. Pappenfus
513.579.6492
rpappenfus@kmklaw.com
KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.
