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2003-08A
ERISA Sec. 403(2) to 403(d)(2)
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Stephen R. Kern
McNees Wallace & Nurick LLC
PO Box 1166, 100 Pine Street
Harrisburg, PA 17108-1166
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Dear Mr. Kern:
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This is in response to your request for an advisory
opinion under Title I of the Employee Retirement Income Security Act of
1974 (ERISA) as to the disposition of surplus assets on the termination of
the Pennsylvania Automotive Association Insurance Trust (Trust or Plan).
Specifically, you ask whether, after all outstanding claims for benefits
have been satisfied and all surplus attributable to participant
contributions has been used for the provision of benefits, the remaining
surplus assets may be transferred to a charitable foundation that is not a
party in interest under section 3(14) of ERISA in accordance with the
terms of the trust document. You also ask whether it is permissible under
section 410 of ERISA for an entity related to the Plan sponsor to agree to
indemnify the Plan and its trustee fiduciaries for any claims that might
be asserted against them as a result of the termination of the Plan so
long as the indemnification will not relieve the fiduciaries of any
liability for breach of fiduciary duty.
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You represent that the Pennsylvania Automobile Association (Association) is
a trade association exempt from federal income tax pursuant to section
501(c)(6) of the Internal Revenue Code of 1986 (the Code), as amended. The
Trust is a multiple employer welfare benefit arrangement (MEWA) that was
originally established by the Association on October 1, 1947, and was most
recently amended and restated effective as of January 1, 1998. You represent
that the Association meets the definition of “employer” in section 3(5)
of ERISA, and therefore, the Trust is a plan within the meaning of section
3(1) of ERISA.(1)
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The Plan provides health, life, short-term disability, long-term disability,
vision and dental insurance to the employees of those members of the
Association who choose to participate in the Plan. You represent that at
present, approximately 1,000 employers participate in the Plan and that the
Plan provides welfare benefits to approximately 27,000 participants and
beneficiaries. All benefits under the Plan are provided through insurance
contracts with five insurance carriers with respect to which the Plan is the
policyholder.
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You further represent that on an annualized basis, approximately $60 million
of premium payments for the various insurance contracts are funded through
the Trust. A small portion of the funding is derived from employee
contributions. You represent that the Plan currently holds approximately $4
million in an operating fund (Operating Fund). You state that one of the
purposes of the Operating Fund is to protect participants and beneficiaries
by paying monthly insurance premiums if their employers fail to pay these
premiums when due, in which case benefits would otherwise cease for affected
individuals. The Plan’s trustee fiduciaries established a policy that the
Operating Fund is not to exceed an amount equal to one month’s total
premium payments for benefits under the Plan ($5 million). The source of the
Operating Fund’s assets are administrative fees paid by all participating
employers, “reinstatement” fees paid by delinquent employers, investment
income, and dividends paid prior to 1999 by Prudential Financial, Inc.,
formerly known as Prudential Insurance Company of America (Prudential), one
of the insurance carriers with which the Plan has contracted to provide
benefits under the Plan.
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You state that since 1998, the Association has been
considering terminating the Plan and Trust and establishing a new approach
to providing welfare benefits to the employees of its members. You
indicate that certain insurance carriers now prefer, for business reasons,
to contract directly with a corporate entity rather than with the Trust.
Moreover, the Association has reviewed its role in relation to the Trust
and determined that it does not, as settlor, wish to continue to use a
funding vehicle in the nature of the current Trust, due to the time and
expense associated with the operation of such an arrangement. The
Association intends to establish a new plan (the Association Plan) to
provide various welfare benefits to employees of the participating
Association members.
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On December 15, 2000, Prudential announced to its policyholders that it
would be undergoing a demutualization.(2)
In January of 2002, pursuant to Prudential’s demutualization, the Plan, as
a Prudential policyholder, received 217,222 shares of Prudential stock that
had a value of $27.50 per share on the date of issuance.
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In connection with its decision to terminate the Plan, the trustees
determined that the portion of the Trust surplus attributable to participant
contributions, which includes both a portion of the Operating Fund and the
Prudential demutualization proceeds, will be utilized to provide benefits to
the Plan’s participants and beneficiaries. In that regard, because
whether, and to what extent, employee contributions are required is
determined on an employer-by-employer and benefit-by-benefit basis by each
of the 1,000 participating employers, the trustees could not determine the
exact amount attributable to employee contributions, most of which have been
made in the last few years of the Plan’s 54-year operating history. The
Plan’s trustee fiduciaries engaged a CPA firm (“the CPA Firm”) to
devise and perform a data sampling analysis in order to determine the amount
of the Prudential proceeds and Operating Fund assets that are attributable
to participant contributions. The CPA Firm determined, based on its sampling
analysis, that the portion of the Prudential demutualization proceeds
attributable to participant contributions is less than 7.2% of the total
proceeds.
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You also represent that the Plan’s trustee
fiduciaries determined, in connection with its decision to terminate the
Plan, that 46% of the Operating Fund’s revenues during the 10-year
period ending December 31, 2000, were generated by revenue from
Prudential, which was the only revenue source attributable to participant
contributions. As noted above, the trustee fiduciaries determined that
less than 7.2% of the demutualization proceeds were generated by
participant contributions. Accordingly, the trustee fiduciaries have
determined that separate and apart from the demutualization proceeds, 3.3%
of the funds in the Operating Fund (7.2% of 46%) are attributable to
participant contributions.
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You represent further that prior to the Plan’s termination, all remaining
Plan liabilities will be satisfied. All remaining insurance contracts held
by the Trust will be terminated. The Association Plan will establish new
contracts with various insurance providers. As part of the termination of
the Plan, however, the Association Plan will assume any of the Plan’s
potential liability for unfiled, unanticipated claims, if any, so that
affected Plan participants and beneficiaries will be fully protected.
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After the portion of the Plan’s Operating Fund and the demutualization
proceeds are used to provide benefits for participants and beneficiaries and
all remaining Plan liabilities are satisfied, the trustees propose to
distribute the surplus plan assets remaining pursuant to Section 1 of
Article IX of the Trust, which provides, in pertinent part, that “the
Trustees may transfer all or a part of a surplus in the Fund to a foundation
qualified under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended, the purpose of which shall be to carry on educational and
charitable activities as defined for the purposes of Section 501(c)(3) for
the benefit of Employees and those generally affiliated with the automotive
industry in the Commonwealth of Pennsylvania.”(3)
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You represent that the Association established a
foundation (Foundation) on December 6, 2001, to carry on educational and
charitable activities on behalf of the former participants and beneficiaries
in the Plan, as well as those generally affiliated with the automobile
dealer industry in the Commonwealth of Pennsylvania. Such activities include
industry training and educational programs, among other things, none of
which, according to your representations, constitute employee welfare
benefit plans. You indicate that on April 15, 2002, the Internal Revenue
Service (IRS) determined that the Foundation qualified for tax-exempt status
under Code section 501(c)(3).(4)
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You also represent that a related entity of the Association will agree to
indemnify the Plan and its trustee fiduciaries for any claims that might be
asserted against them as a result of the termination of the Plan. This
indemnification will not, however, relieve the fiduciaries of any liability
for breach of fiduciary duty under Title I of ERISA.
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You have requested an advisory opinion with regard to
the following questions:
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Whether on termination of the Trust,
the trustee fiduciaries may use the portion of the Operating Fund
assets and demutualization proceeds attributable to participant
contributions to provide benefits to participants and beneficiaries no
later than the date for the distribution of the remaining surplus
assets on termination without contravening the provisions of section
403(c)(1) or 404(a)(1)(A) of ERISA.
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Whether, after the portion of the
Operating Fund assets and demutualization proceeds attributable to
participant contributions is used to provide benefits to participants
and beneficiaries no later than the date for the distribution of the
remaining surplus assets on termination and the other liabilities of
the Plan are satisfied, upon termination of the Plan, it is
permissible under section 403(d)(2) of ERISA, to transfer the
remaining surplus assets to the Foundation in accordance with the
terms of the Plan.
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Whether the transfer of the Plan’s
surplus assets to the Foundation is a prohibited transaction involving
the Plan’s trustee fiduciaries within the meaning of ERISA sections
406(b)(2).
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Whether the proposed indemnification
agreement in favor of the Plan and its trustee fiduciaries is an
exculpatory provision prohibited by section 410 of ERISA.
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The Department ordinarily will not issue advisory
opinions regarding sections 403(c)(1) and 404(a)(1) of ERISA. See ERISA
Advisory Opinion Procedure 76-1, sec. 5.02(n) and (o). We note, however,
that section 403(c)(1) of ERISA provides that except as provided in
section 403(d), the assets of a plan shall never inure to the benefit of
any employer and shall be held for the exclusive purposes of providing
benefits to participants in the plan and their beneficiaries and defraying
reasonable expenses of administering the plan. In addition, section
404(a)(1) of ERISA provides, in part, that subject to sections 403(c) and
(d), a fiduciary shall discharge his or her duties with respect to a plan
solely in the interest of the participants and beneficiaries and for the
exclusive purpose of providing benefits to the participants and
beneficiaries.
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Section 403(d)(2) provides that the assets of an
employee welfare benefit plan that terminates shall be distributed in
accordance with the terms of the plan,(5)
except as otherwise provided in regulations of the Secretary of Labor.
Although no regulations have been issued under section 403(d)(2),
Conference Report No. 93-1280, 93rd Congress, 2d Session, at page 303,
states in part that it is intended that the terms of the welfare plan will
govern distribution or transfer of assets upon termination of the plan,
except to the extent that implementation of the terms of the plan or
agreement would unduly impair the accrued benefits of the plan
participants. See Advisory Opinion 93-14A (May 5, 1993). We note further
in this regard that section 404(a)(1)(D) of ERISA requires that plan
fiduciaries discharge their duties in accordance with the documents and
instruments governing the plan insofar as such documents and instruments
are consistent with Titles I and IV of ERISA.
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We believe that the trustees’ proposal to treat, in
connection with the termination of the Plan and the winding down of the
Trust and its liabilities, the surplus attributable to participant
contributions as a plan liability requiring the provision of benefits to
the Plan’s participants and beneficiaries, is appropriate under the
circumstances and is consistent with the provisions of sections 403 and
404 of Title I of ERISA.(6)
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With regard to your second question, there is nothing
in section 403(d)(2) of ERISA, in the absence of regulations by the
Secretary, that would preclude, after the proper termination of the Trust
in accordance with the Trust terms and the provisions of part 4 of Title I
of ERISA, including the satisfaction of all Trust liabilities, the
transfer of surplus assets to an unrelated charitable foundation.
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As for your third question, section 406(b)(2) provides
that a fiduciary with respect to a plan shall not in his or her individual
or in any other capacity act in any transaction involving the plan on
behalf of a party (or represent a party) whose interests are adverse to
the interests of the plan or the interests of its participants or
beneficiaries. If the Plan has properly been terminated and all claims
have been either paid or properly forfeited, the proposed subsequent
transfer of surplus funds by the trustees of that Plan would not violate
section 406(b)(2). Assuming the contemplated transfer is in accordance
with the terms of the plan, then it is specifically allowed under section
403(d).
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With regard to your last question, section 410(a) of
ERISA provides generally that any provision in an agreement or instrument
that purports to relieve a fiduciary from responsibility or liability for
any responsibility, obligation or duty under part 4 of Title I of ERISA
shall be void as against public policy. ERISA Interpretive Bulletin 75-4,
29 CFR 2509.75-4, provides in pertinent part that the Department
interprets section 410 of ERISA to permit indemnification agreements that
do not relieve a fiduciary of responsibility or liability under part 4 of
Title I of ERISA. It further provides that indemnification provisions that
leave the fiduciary fully responsible and liable, but merely permit
another party to satisfy any liability incurred by the fiduciary in the
same manner as insurance purchased under section 410(b)(3), are therefore
not void under section 410(a). So long as the terms of the indemnification
agreement do not relieve the trustee fiduciaries of liability under part 4
of Title I of ERISA, the entity related to the Association may agree to
indemnify the Trust and the trustees. See Advisory Opinions 93-15A (May
18, 1993), 93-16A (May 18, 1993), and 93-18A (May 28, 1993).
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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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For the purposes of this letter, we
rely on your representation that the Association is a cognizable, bona
fide group or association of employers within the meaning of section
3(5) of ERISA. We note, however, that if the Association in fact
consists of unrelated employers that have executed participation
agreements or similar documents merely as a means to fund benefits, in
the absence of any genuine organizational relationship between the
employers, no employer association would be recognized, and the Trust
would not be a plan within the meaning of section 3(1) of ERISA. See
Advisory Opinion 2001-04A (Mar. 22, 2001).
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A “demutualization” is the
process used by an insurance company to convert from a mutual
insurance company to a stock insurance company. When an insurance
company demutualizes, it distributes its equity value to eligible
policyholders in the form of stock, cash, or policy credits.
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This provision of the Trust
Agreement has been in effect for several years and was included as
part of the amendment and restatement of the Trust effective as of
January 1, 1998.
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You represent that you have
requested a private letter ruling from the IRS as to whether the
distribution of the Plan’s surplus to the Foundation will be a
prohibited “reversion” within the meaning of section 4976 of the
Code. The opinions expressed in this letter are limited to issues
under Title I of ERISA.
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Whether the distribution complies
with provisions of law other than those in Title I of ERISA, including
the provisions of the Internal Revenue Code, is not within the
jurisdiction of the Department of Labor.
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See Advisory Opinion 2001-02A,
footnote 2.
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