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John P. Counts, Esq.
David Potts-Dupre, Esq.
Counts & Kanne
1125 15th Street, NW, Suite 444
Washington, DC 20005
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1999-04A
ERISA Sec. 3(7)
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Dear Messrs. Counts and Potts-Dupre:
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This is in response to your request for an advisory opinion concerning the
definition of “participant” provided in section 3(7) of Title I of the
Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you
ask whether individuals who own business enterprises, either wholly or in
part, and who provide personal services to those businesses may be
“participants,” within the meaning of section 3(7) of ERISA, in a
multiemployer employee benefit plan. You state that the business enterprises
that are the subject of this request include businesses that are operated as
corporations, sole proprietorships, and partnerships.
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You submit your request on behalf of the National Electrical Benefit Fund
(the NEBF), a multiemployer pension plan established jointly by the
International Brotherhood of Electrical Workers (IBEW) and the National
Electrical Contractors Association (NECA) pursuant to collective bargaining.
You describe the NEBF as the largest construction industry fund in the
United States, with approximately 375,000 participants, over 14,000
contributing employers, and plan assets of almost five billion dollars.
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The documents that you have submitted indicate that an individual can become
eligible to participate in the NEBF only as a result of an employer’s
having executed a participation agreement with the NEBF, obligating the
employer to make contributions on behalf of at least some of its employees.
See Restated Employees Benefit Agreement and Trust for the National
Electrical Benefit Fund (hereinafter Trust Agreement), Part I, Provision 4;
sections 1.7, 1.8, 1.18, 6.3.3. An employer must agree at a minimum to make
contributions on behalf of its bargaining unit employees. Id. section 6.3.1.
Such an employer may elect, in addition, to contribute on behalf of its
“non-bargaining unit employees.” An employer may contribute on behalf of
all “non-bargaining unit employees” or only those non-bargaining unit
employees who were formerly bargaining unit members (“alumni”). Id.
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With respect to bargaining unit employees, a participating employer must
contribute to the NEBF an amount equal to three percent of “all wages and
other compensation paid to, or accrued by, the Covered Employees in the . .
. bargaining unit for services performed for the Covered Employer.” Id.
section 6.2.1. For non-bargaining unit employees, the employer must
contribute to the NEBF an amount equal to the lesser of
“(a) 3% of all wages and other compensation which the Covered Employer
would pay, or which the [non-bargaining unit] Covered Employees would
accrue, if the Covered Employees were receiving the wage rate received by
the highest number of employees in the appropriate . . . bargaining unit and
working the normal straight time hours provided for in the appropriate labor
agreement, or (b) 3% of all wages and other compensation paid to, or accrued
by, the [non-bargaining unit] Covered Employees for services performed for
the Covered Employer . . . .”
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Id. Section 6.2.2.
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The documents that you have supplied indicate that the NEBF provides a
pension benefit, which may be paid as an early retirement pension or a
normal retirement pension, and a disability benefit. A participant becomes
vested in his or her pension benefit upon earning at least five vesting
service credits. (1) Pension
benefits for vested participants are calculated by multiplying the
participant’s benefit service credits(2)
by fixed dollar amounts that are specified in the plan. As a result, the
amount of a participant’s monthly pension benefit is not dependent upon
the participant’s actual income prior to retirement or the actual amount
of contributions that an employer made on his or her behalf, but rather upon
seniority in the NEBF.
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You represent that the trustees of the NEBF currently interpret its plan
documents to permit “working owners(3)
to be treated as employees eligible to participate in the NEBF and therefore
to become participants in the NEBF.(4)
The eligible “working owners” include any “owner that earns wages or
self-employment income from a company,” including sole proprietors of
unincorporated businesses. You indicate that the working owners who
currently participate in the NEBF are journeyman electricians who had worked
initially as bargaining unit members for other employers that contributed to
the NEBF on their behalf. They subsequently acquired ownership interests in
those employers or started their own electrical businesses, sometimes in
partnership with other similarly situated individuals, sometimes by creating
wholly-owned corporations, and sometimes operating as sole proprietors. They
continue to work as electricians and in some cases employ other union
members covered by the NEBF. Most of these working owners had earned vested
pension benefits in the NEBF based on their previous service as bargaining
unit employees, and they began accruing additional service credits when the
NEBF changed its eligibility rules in 1994 to permit working owners to
participate.
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You represent that the employer’s payroll reports, submitted monthly to
the NEBF, are used to determine an employer’s contributions, based on the
working owner’s reported “wages,” and a working owner’s service
credits, based on the working owner’s reported hours of service. You
further represent that reporting employers determine a working owner’s
“wages” by determining the greater of the working owner’s actual gross
earnings subject to employment tax for that month or the amount the working
owner would have earned if he had worked at normal straight-time hours for
the month at the applicable journeyman’s rate. The working owner’s hours
of service are reported as the actual hours the working owner worked for the
business during the month.
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Section 3(7) of Title I of ERISA provides that a “participant” is “any
employee or former employee of an employer, or any member or former member
of an employee organization, who is or may become eligible to receive a
benefit of any type from an employee benefit plan which covers employees of
such employer or members of such organization, or whose beneficiaries may be
eligible to receive any such benefit.” Section 3(6) in turn defines an
“employee” as “any individual employed by an employer.” Finally,
section 3(5) defines “employer” as “any person acting directly as an
employer, or indirectly in the interest of an employer, in relation to an
employee benefit plan; and includes a group or association of employers
acting for an employer in such capacity.”
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Title I of ERISA contains multiple indications, albeit indirect, that
Congress assumed that a “working owner” could be a “participant” in
an employee benefit plan sponsored by the business in which that working
owner held an ownership right, regardless of the legal form in which the
business was operated. For example, section 401(a)(2) exempts certain
partnership agreements from the fiduciary provisions of Part 4. This
exemption would be meaningless if the partnership agreements themselves
(which cover only partners, one of the categories of “working owners”)
were not otherwise plans covered by Title I. Further, section 403(b)(3)(A)
specifically exempts from the trust requirement of section 403(a) a plan
“some or all of the participants of which are employees described in
section 401(c)(1) of the Code [emphasis added].” This exemption takes as
its basis the assumption that the employees described in Code section
401(c)(1), namely self-employed individuals (including “working
owners”), are legitimate “participants” within the meaning of Title I.
Also, section 408(b)(1) exempts from section 406's prohibition of specified
transactions certain non-discriminatory loans made to plan participants,
including highly compensated employees, but section 408(d)(1) eliminates
that exemption for owner-employees as defined in section 401(c)(3) of the
Code. Inasmuch as the owner-employers described in Code section 401(c)(3)
are sole proprietors and more than ten-percent partners, it is clear that
the provisions in section 408 of Title I assume that such “working
owners” are “participants” in the plans from which those loans would
be made.
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These indications of Congressional intent are supported and reinforced by
the treatment of “working owners” under the provisions of Title II and
Title IV of ERISA.(5) Section
401(c) of the Internal Revenue Code (the Code) provides that self-employed
individuals are included as “employees” under Code section 401(a) to the
extent that they have earned income “with respect to a trade or business
in which personal services of the [individual] are a material income-
producing factor.” Code section 401(c)(2)(A). Code section 401(c) further
imposes specific additional requirements on tax-qualified pension plans that
provide benefits to “owner- employees,” a term defined in Code section
401(c)(3) to include employees who own the entire interest in an
unincorporated trade or business or more than 10 percent of a partnership.
It is thus patently clear that Title II of ERISA permits “working
owners” to receive the tax benefits that flow from participation as
“participants” in pension plans that meet the qualification requirements
of Code section 401(a).
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Title IV of ERISA (the termination insurance provisions) also expressly
includes “working owners” among the “participants” who receive its
protections. See ERISA section 4001(b)(1) (“[a]n individual who owns the
entire interest in an unincorporated trade or business is treated as his own
employer, and a partnership is treated as the employer of each partner who
is an employee within the meaning of [Code] section 401(c)(1) . . .”).
Section 4021(b)(9) of ERISA excludes from coverage under Title IV only those
pension plans that are “established and maintained exclusively for
substantial owners,” i.e., sole proprietors and more than ten-percent
owners of partnerships and corporations. See ERISA section 4022(b)(5)(A)
(defining “substantial owner”). Title IV limits the amount of benefits
that the PBGC guarantees to “substantial owners” who participate in
single employer plans, but nonetheless provides a basic guarantee of such
owners’ pension benefits. Such a guarantee would be meaningless if Title I
did not permit such owners to be participants in ERISA-covered pension
plans.
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In our view, the statutory provisions of ERISA, taken
as a whole, reveal a clear Congressional design to include “working
owners” within the definition of “participant” for purposes of Title
I of ERISA. Congress could not have intended that a pension plan operated
so as to satisfy the complex tax qualification rules applicable to
benefits provided to “owner- employees” under the provisions of Title
II of ERISA, and with respect to which an employer faithfully makes the
premium payments required to protect the benefits payable under the plan
to such individuals under Title IV of ERISA, would somehow transgress
against the limitations of the definitions contained in Title I of ERISA.
Such a result would cause an intolerable conflict between the separate
titles of ERISA, leading to the sort of “absurd results” that the
Supreme Court warned against in Nationwide Mutual Insurance Co. v. Darden,
503 U.S. 318 (1992).(6)
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Therefore, it is the view of the Department that there
is nothing in the definitions of Title I of ERISA that would preclude a
pension plan, including the NEBF, from extending plan coverage to
“working owners,” as described in your submission, where such coverage
is otherwise consistent with the documents and instruments governing the
plan and does not violate any other provisions of Title I.(7)
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ERISA’s fiduciary standards, however, require
compliance with any other applicable federal law. Pursuant to ERISA
section 514(d), nothing in Title I of ERISA shall be construed to alter,
amend, modify, invalidate, impair, or supersede any federal law or any
rule or regulation issued pursuant to such federal law. Such federal laws
include any requirements applicable to multiemployer benefit plans under
the Labor Management Relations Act (LMRA). Several federal courts
interpreting the LMRA have upheld decisions by plan trustees to exclude
owner- employees on the ground that their inclusion would violate the LMRA.
See, e.g., Todd v. Benal Concrete Const. Co., Inc., 710 F.2d 581 (9th Cir.
1983); Aitken v. GCU-Employer Retirement Fund, 604 F.2d 1261 (9th Cir.
1979). The Department is not authorized to issue opinions regarding the
LMRA. Accordingly, the fiduciary of a plan subject to the LMRA that
includes “working owners” should seek legal advice regarding the
propriety of the participation of “working owners” in such plan under
the LMRA.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1. Accordingly, it is issued subject to the provisions of
that procedure, including section 10 thereof relating to the effect of
advisory opinions.
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Sincerely,
Susan G. Lahne
Acting Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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One vesting service credit is earned
for each year after 1965 in which a participant is credited with 1000
hours of covered service for covered employment (employment during a
period for which an employer is obligated to make contributions for
that employee).
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One benefit service credit is
similarly earned for each year after 1965 in which a participant is
credited with 1000 hours of covered employment.
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By the term “working owner,” you
apparently mean any individual who has an equity ownership right of
any nature in a business enterprise and who is actively engaged in
providing services to that business, as distinguished from a
“passive” owner, who may own shares in a corporation, for example,
but is not otherwise involved in the activities in which the business
engages for profit.
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This current practice has been
followed only since January, 1994. In the course of its history (since
its creation in the early 1960's), the NEBF’s practices have varied
regarding participation by individuals who have equity ownership
rights in business enterprises that operate in the industry covered by
the IBEW.
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Although we rely on certain
provisions of Title II and Title IV in reaching the conclusions
expressed in this opinion, nothing in this opinion should be construed
as interpreting the provisions of those Titles that lie within the
interpretive jurisdiction of the Department of the Treasury and the
Pension Benefit Guaranty Corporation.
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In Darden, the United States Supreme
Court held that the definition of “employee” provided in section
3(6) of Title I did not include an individual who was an independent
contractor to the employer that established and maintained the plan.
In reaching this conclusion, the Court first sought to determine
whether ERISA contained any provision “either giving specific
guidance on the term’s meaning or suggesting that construing it to
incorporate traditional agency law principles would thwart the
congressional design or lead to absurd results.” Id. at 323. Finding
no guidance in the statute itself, the Court concluded that,
“[w]here Congress uses terms that have accumulated settled meaning
under . . . the common law, a court must infer, unless the statute
otherwise dictates, that Congress means to incorporate the established
meaning of these terms.” 503 U.S. at 322. We follow here the
Court’s analysis in Darden, although with a different result,
inasmuch as we find ample guidance in ERISA as to Congress’ specific
intent to treat “working owners” as “participants.”
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In its regulation at 29 C.F.R.
2510.3-3, the Department clarified that the term “employee benefit
plan” as defined in section 3(3) of Title I does not include a plan
the only participants of which are “[a]n individual and his or her
spouse . . . with respect to a trade of business, whether incorporated
or unincorporated, which is wholly owned by the individual or by the
individual and his or her spouse” or “[a] partner in a partnership
and his or her spouse.” The regulation further specifies, however,
that a plan that covers as participants “one or more common law
employees, in addition to the self-employed individuals” will be
included in the definition of “employee benefit plan” under
section 3(3). The conclusion of this opinion, that such
“self-employed individuals” are themselves “participants” in
the covered plan, is fully consistent with that regulation.
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