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Stephen M. Saxon, Esq.
Jon W. Breyfogle, Esq.
Groom Law Group, Chartered
1701 Pennsylvania Avenue, NW
Washington, DC 20006-5893
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2000-12A
ERISA Sec. 401(c)
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Dear Messrs. Saxon and Breyfogle:
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This is in response to your request on behalf of Aetna Inc. (Aetna) for an
advisory opinion. Specifically, you seek guidance regarding the definition
of a “Transition Policy” contained in the Department of Labor (the
Department) regulation at 29 C.F.R. 2550.401c- 1(h)(6).
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You represent that a wholly-owned indirect subsidiary of Aetna, Aetna Life
Insurance Company (ALIC), has issued a number of traditional group annuity
contracts to policyholders. Some policyholders of ALIC group annuity
contracts (Policyholders) have asked ALIC to make changes to their group
annuity contracts (Group Annuity Contracts) as a result of corporate
reorganizations of the employee benefit plans’ sponsors (Policyholder
Corporate Reorganizations).
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Your request details the following situations with which ALIC has been
confronted because of Policyholder-initiated requests for Group Annuity
Contract changes resulting from Policyholder Corporate Reorganizations.
Because numerous Policyholder requests are based on similar facts, those
facts are set forth in the following examples.
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In the first example, ALIC has issued a Group Annuity Contract to the
Trustee of the Company A Retirement Plan (Plan A). You represent that the
original Group Annuity Contract was issued to the Trustee of Plan A on or
before December 31, 1998, and qualifies as a Transition Policy within the
meaning of the Department’s regulation at 29 C.F.R. 2550.401c- 1(h)(6). In
1999, Company A sold one of its divisions, which became a separate company
called Company B. A group of Company A employees who were covered by Plan A
have been transferred to Company B and are now covered by new Plan B (which
is substantially similar to Plan A). Company A and Company B agreed on the
value of assets to be transferred from Plan A to Plan B to cover the accrued
benefits of Plan B participants. Company A and Company B request that ALIC
segregate funds attributable to Plan B and allocate those funds to a
“clone” group annuity contract to be issued to the Trustee of Plan B.
Company A affirmatively consents to the issuance of the clone group annuity
contract. You represent that the clone group annuity contract will have the
same premiums, policy guarantees, and other terms and conditions as the
original Group Annuity Contract issued to the Trustee of Plan A. The clone
group annuity contract will cover the former employees of Company A, and it
may also cover other employees of Company B covered by Plan B. You further
represent that no market value adjustments or deferred sales charges will
apply when the Group Annuity Contract is cloned since these group annuity
contracts will be treated as ongoing group annuity contracts.
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In the second example, ALIC has issued a Group Annuity Contract to the
Trustee of the Company A Retirement Plan (Plan A). You represent that the
original Group Annuity Contract was issued to the Trustee of Plan A on or
before December 31, 1998, and qualifies as a Transition Policy within the
meaning of the Department’s regulation at 29 C.F.R. 2550.401c- 1(h)(6). In
1999, Company A and Company B merged to form Company C. Plan A was then
merged with Company B Retirement Plan to form Plan C. Company C has
requested that ALIC amend the Group Annuity Contract to change the name of
the policyholder to the Trustee of Plan C and to change the jurisdiction in
which the Group Annuity Contract is issued. Company C affirmatively consents
to the amendment of the Group Annuity Contract. This may be accomplished
through the issuance of a new “face” page to the Group Annuity Contract
or a rider to the Group Annuity Contract. You represent that the amended
Group Annuity Contract will have the same premiums, policy guarantees, and,
except as described below, other terms and conditions as the original Group
Annuity Contract issued to the Trustee of Plan A, but it will be owned by a
new plan and will cover persons who were employees of Company A and Company
B, as well as any new employees of Company C.
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You represent that if Company C elects to guarantee plan benefits for the
new group of plan participants under the Group Annuity Contract (e.g.,
through the purchase of annuities), the amount transferred to ALIC to
guarantee these additional benefits is determined in the same manner that
pre-existing guaranteed benefits were determined. You represent that ALIC
will not change any of its contractual commitments and guarantees when the
Group Annuity Contract is amended, including those contract provisions
relating to credited and guaranteed interest, annuity options, annuity
purchase rates, and expenses. You further represent that no market value
adjustments or deferred sales charges will apply when the Group Annuity
Contract is amended since the amended Group Annuity Contract will be treated
as an ongoing group annuity contract.
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You represent that there are a few states that require unique contract
provisions which are intended to offer additional consumer protections.
Where a Group Annuity Contract has been issued in such a state, ALIC will
not eliminate such protective contract rights if the amended Group Annuity
Contract is to be issued in a new state that does not impose a similar
requirement. You further represent that ALIC will add a new contractual
right to a Group Annuity Contract if necessary to comply with the laws of
the new state jurisdiction. Thus, Policyholders’ rights under an amended
Group Annuity Contract may be improved, but not diminished.
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You request an opinion that, under the circumstances described, the clone
group annuity contract and the amended Group Annuity Contract will qualify
as Transition Policies within the meaning of the Department’s regulation
at 29 C.F.R. 2550.401c-1(h)(6).
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Section 401(c)(1)(A) of ERISA, as added by section 1460 of the Small
Business Job Protection Act of 1996, provides that the Secretary of Labor
must issue regulations to provide guidance for the purpose of determining,
where an insurer issues one or more policies to or for the benefit of an
employee benefit plan (and such policies are supported by assets of the
insurer’s general account), which assets held by the insurer (other than
plan assets held in its separate accounts) constitute assets of the plan for
purposes of Part 4 of Title I of ERISA and section 4975 of the Internal
Revenue Code of 1986 and to provide guidance with respect to the application
of Title I to the general account assets of insurers. Section 401(c)(1)(D)
of ERISA provides, in part, that the regulations will only apply to those
general account policies which are issued by an insurer to or for the
benefit of an employee benefit plan on or before December 31, 1998. Section
401(c)(7) of ERISA provides that, for purposes of section 401(c) of ERISA,
the term “policy” includes a contract.
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Section 401(c)(2) of ERISA provides that the Secretary of Labor must ensure
that the regulations issued under section 401(c)(1) of ERISA are
administratively feasible and protect the interests and rights of the plan
and of its participants and beneficiaries.
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Pursuant to section 401(c) of ERISA, on January 5, 2000, the Department
issued final regulation 29 C.F.R. 2550.401c-1, clarifying the application of
ERISA to insurance company general accounts. This regulation at 29 C.F.R.
2550.401c-1(a)(2) describes the general rule that, when a plan has acquired
a Transition Policy (as defined in 29 C.F.R. 2550.401c-1(h)(6)), the
plan’s assets include the Transition Policy, but do not include any of the
underlying assets of the insurer’s general account if the insurer
satisfies the requirements of paragraphs (c) through (f) of 29 C.F.R.
2550.401c-1.
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This regulation at 29 C.F.R. 2550.401c-1(h)(6) defines a “Transition
Policy” as a policy or contract of insurance (other than a guaranteed
benefit policy) that is issued by an insurer to, or on behalf of, an
employee benefit plan on or before December 31, 1998, and which is supported
by the assets of the insurer’s general account. As explained in 29 C.F.R.
2550.401c- 1(h)(6)(ii)(A), a policy will not fail to be a Transition Policy
merely because the policy is amended or modified to comply with the
requirements of section 401(c) of ERISA and 29 C.F.R. 2550.401c-1. Further,
as explained in 29 C.F.R. 2550.401c-1(h)(6)(ii)(B), a policy will not fail
to be a Transition Policy merely because the policy is amended or modified
pursuant to a merger, acquisition, demutualization, conversion, or
reorganization authorized by applicable State law, provided that the
premiums, policy guarantees, and the other terms and conditions of the
policy remain the same, except that a membership interest in a mutual
insurance company may be eliminated from the policy in exchange for separate
consideration (e.g., shares of stock or policy credits).
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You have assumed, and the Department agrees, that 29 C.F.R.
2550.401c-1(h)(6)(ii)(B) is limited to insurer mergers, acquisitions,
demutualizations, and reorganizations. You represent that the Group Annuity
Contracts will be amended or cloned pursuant to Policyholder Corporate
Reorganizations, not insurer reorganizations.
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The Department’s regulation at 29 C.F.R. 2550.401c-1
provides conditions under which plan investments in Transition Policies do
not result in insurers holding plan assets, thus providing a safe harbor
for insurers from ERISA’s fiduciary responsibility provisions. As
required by section 401(c)(2) of ERISA, 29 C.F.R. 2550.401c-1 protects the
interests and rights of the plan and of its participants and beneficiaries
by providing that, in order to come within this safe harbor, insurers must
satisfy the requirements of paragraphs (c) through (f) of 29 C.F.R.
2550.401c-1. These requirements include disclosures to plan fiduciaries,
termination procedures allowing plans to terminate a policy upon 90 days
notice to the insurer, and the duty to manage the general account assets
prudently (irrespective of whether the assets are plan assets). The
insurer must also provide notification of “insurer-initiated
amendments” at least 60 days prior to their taking effect. The
Department’s regulation at 29 C.F.R. 2550.401c-1(h)(8) defines
“insurer- initiated amendment” and specifically provides that, for
purposes of this definition, any amendment or change which is made with
the affirmative consent of the policyholder is not an insurer-initiated
amendment.
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The Department’s regulation at 29 C.F.R. 2550.401c-1
does not address the effect of policyholder-initiated amendments on a
Transition Policy. However, the Department recognizes that certain
amendments made to accommodate changes in the corporate structure of the
plan’s sponsor are not material for purposes of the definition of a
Transition Policy.
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It is the Department’s view that the clone group
annuity contract and the amended Group Annuity Contract as described in
your submission, each of which has been requested by the Policyholder as a
result of the Policyholder Corporate Reorganizations described herein,
would not fail to meet the definition of a “Transition Policy”
contained in 29 C.F.R. 2550.401c- 1(h)(6)(i). The Department notes that
ALIC must satisfy the requirements of paragraphs (c) through (f) of 29
C.F.R. 2550.401c-1 with respect to the clone group annuity contract and
the amended Group Annuity Contract in order for the safe harbor at 29
C.F.R. 2550.401c-1 to apply.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1. Accordingly, it is subject to the provisions of that
procedure, including section 10 thereof relating to the effect of advisory
opinions.
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Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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