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This is in response to your request, on behalf of
several insurance companies (insurers), for an advisory opinion under the
Employee Retirement Income Security Act of 1974, as amended (ERISA). In
particular, you ask how the significant participation test in the
Department’s plan assets regulation (29 CFR § 2510.3-101(f)) should be
applied to an investment in an entity by a wholly owned subsidiary of an
insurer’s general account which holds plan assets for purposes of
determining whether that entity holds plan assets.
You explain that some of the insurance and annuity
contracts issued to customers by an insurer provide benefits backed by
reserves held in the insurer’s general account. The insurer invests
general account assets in all manner of investments, and in some instances
may invest those assets through wholly owned direct and indirect
subsidiaries(1) that are established
for business reasons unrelated to ERISA, such as limiting the recourse of
a subsidiary’s creditors to the investment assets of the subsidiary
alone rather than to all the insurer’s general account assets. You
represent that under these circumstances, the assets held by the insurer’s
wholly owned subsidiary support the liabilities of the insurer’s general
account. You further represent that neither the insurer’s equity
interest in the subsidiary nor the assets of the subsidiary are allocated
to a “separate account.”
You also explain that the insurer’s interest in the
subsidiary, and ultimately the subsidiary’s assets, would be available
to satisfy the insurer’s creditors in the event of insolvency because
the insurer’s interest in the subsidiary would be included in the
insurer’s estate.(2)
You make representations to the effect that, for purposes of
applying any limitations under state insurance law relating to investments
made by the insurer, the subsidiary’s investments are treated as
investments made by the insurer.(3)
You also represent that for federal and state tax purposes, a subsidiary
wholly owned by the insurer’s general account is completely disregarded
and its transactions and assets will be consolidated with the insurer’s
for tax reporting purposes, and that for purposes of GAAP accounting, the
assets of the subsidiary will be consolidated with, and treated as if they
are, assets of the insurer.
The plan assets regulation defines when a plan’s
investment in another entity causes that entity’s underlying assets to
be “plan assets.” The plan assets regulation imposes a “look-through
rule” based on the premise that, with certain exceptions, when a plan
indirectly retains investment management services by investing in a pooled
investment vehicle, the assets of the vehicle should be viewed as plan
assets and managed according to the fiduciary responsibility provisions of
ERISA.
The plan assets regulation provides at 29 CFR §
2510.3-101(a)(2) that, in the case of a plan’s investment in an equity
interest of an entity, the plan’s assets include both the equity
interest and an undivided interest in each of the underlying assets of the
entity unless equity participation in the entity by benefit plan investors
is not “significant,” the entity is an operating company, or the
equity interest held by the plan is a publicly-offered security or a
security issued by an investment company registered under the Investment
Company Act of 1940. Under the “significant participation” test in 29
CFR § 2510.3-101(f)(1), equity participation in an entity by benefit plan
investors is “significant” on any date if, immediately after the most
recent acquisition of any equity interest in the entity, 25 percent or
more of the value of any class of equity interests in the entity is held
by benefit plan investors (as defined in 29 CFR § 2510.3-101(f)(2)). For
purposes of this determination, the value of any equity interests held by
a person (other than a benefit plan investor) who has discretionary
authority or control with respect to the assets of the entity or any
person who provides investment advice for a fee (direct or indirect) with
respect to such assets, or any affiliate of such a person, must be
disregarded. 29 CFR § 2510.3-101(f)(1). 29 CFR § 2510.3-101(f)(2)(iii)
provides that a “benefit plan investor” includes any entity whose
underlying assets include plan assets by reason of a plan’s investment
in the entity.
The plan assets regulation does not expressly address
the application of the significant participation test to investments by an
insurance company general account. Under section 401(b) of ERISA, if an
insurance company issues a “guaranteed benefit policy” to a plan, the
assets of the plan are deemed to include the policy, but do not, solely by
reason of the issuance of the policy, include any assets of the insurer.
However, in its decision in John Hancock Mutual Life Insurance Co. v.
Harris Trust & Savings Bank, 510 U.S. 86 (1993) (Harris Trust),
the Supreme Court interpreted the meaning of “guaranteed benefit policy,”
as defined in ERISA section 401(b)(2)(B), and held that a contract
qualifies as a guaranteed benefit policy only to the extent that it
allocates investment risk to the insurer. Under the reasoning of this
decision, an insurer’s general account would be treated as holding plan
assets to the extent it contains funds which are attributable to any
non-guaranteed components of contracts with employee benefit plans. Prior
to Harris Trust, the Department had taken the position in ERISA
Interpretive Bulletin 75-2, 29 CFR § 2509.75-2, that if an insurance
company issued a contract or policy of insurance to a plan and placed the
consideration for such contract or policy in its general account, the
assets of such account would not be considered plan assets.(4)
Following the Harris Trust decision, concerns
were raised regarding its impact on the insurance companies themselves,
and also on the entities in which insurance companies invest general
account assets. Specifically, it was noted that, prior to Harris Trust,
entities in which insurance companies invested general account assets
might have operated under the assumption that general account assets were
not plan assets, and that general accounts therefore would not be benefit
plan investors under 29 CFR § 2510.3-101(f)(2)(iii). After the Harris
Trust decision, however, entities could no longer follow this
assumption. Treating insurance company general accounts as benefit plan
investors could result in an increased number of entities that hold plan
assets under the significant participation test, especially given that
insurance company general account investments have comprised a significant
source of capital investment.(5)
Responding to these concerns, the Department
interpreted the plan assets regulation with respect to general account
investments and expressed its view that, for purposes of determining
whether equity participation in an entity by benefit plan investors is
significant within the meaning of the significant participation test
contained in 29 CFR § 2510.3-101(f), only the proportion of an
insurance company general account’s equity investment in the entity that
represents plan assets should be taken into account. The proportion of
that investment that represents plan assets would equal the proportion of
the insurance company general account as a whole that constitutes plan
assets.(6) For
example, if an insurance company general account, 10 percent of whose
assets constitute plan assets, held 50 percent of the value of equity
interests in an entity, then in applying the significant participation
test to that entity, 5 percent (i.e., 10 percent of 50 percent) of the
value of equity would be considered held by a benefit plan investor by
reason of the general account’s investment.(7)
Your question essentially focuses on whether this
interpretation would be applicable to the investment in an entity by the
insurance company general account’s wholly owned subsidiary.
You represent in this context, among other things, that
the assets of such a subsidiary that is wholly owned by an insurer through
its general account support the liabilities of the insurer’s general
account and are available to meet the claims of the insurer’s general
creditors in the event of the insurer’s insolvency, and that neither the
insurer’s equity interest in the subsidiary nor the assets of the
subsidiary are allocated to a separate account. You further represent that
the assets of the subsidiary are treated as the assets of the insurer for
purposes of state insurance law investment restrictions and GAAP
accounting rules, and that the subsidiary is completely disregarded for
federal and state taxation purposes. It is our view that, for purposes of
applying the significant participation test to an entity in which such a
subsidiary invests, the subsidiary is disregarded and the equity interest
held by the subsidiary is treated as held by the insurance company’s
general account provided such subsidiary is wholly owned at all times
during the period of such entity’s existence.
This letter constitutes an advisory opinion under ERISA
Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is
issued subject to the provisions of that procedure, including section 10
thereof, relating to the effect of advisory opinions.
Sincerely,
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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