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March 23, 2005
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2005-03A
ERISA Sec. 29 CFR 2510.3-101 & 408(b)(2)
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Frank C. Sabatino
Stevens & Lee
1818 Market Street – 29th Floor
Philadelphia, PA 19103
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Dear Mr. Sabatino:
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This is in response to your request for an advisory
opinion regarding the application of the prohibited transaction provisions
of section 406 of the Employee Retirement Income Security Act, as amended
(“ERISA”) and section 4975 of the Internal Revenue Code (“Code”)
to certain transactions proposed by the Teamsters Pension Trust Fund of
Philadelphia & Vicinity (“Pension Fund”) and the Teamsters Health
and Welfare Fund of Philadelphia & Vicinity (“Welfare Fund”)
(collectively, the “Funds”).(1)
Specifically, you ask whether the provision of administrative services to
the Funds and to other multiemployer plans by a newly formed corporation,
to be owned approximately 65% by the Pension Fund and approximately 35% by
the Welfare Fund, would result in prohibited transactions under ERISA and
the Code.
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You represent that each of the Funds is a multiemployer plan established
pursuant to section 302(c)(5) of the Labor Management Relations Act, 29
U.S.C. § 186(c)(5) (“LMRA”) and the relevant provisions of ERISA. The
Funds are maintained pursuant to collective bargaining agreements negotiated
by unions affiliated with the International Brotherhood of Teamsters (“IBT”).
All of the IBT-affiliated unions associated with the Funds are chartered by
the IBT and governed by the same constitution and bylaws.
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You state that fifteen IBT-affiliated unions have negotiated with
approximately 500 employers to mandate contributions to the Welfare Fund.
Thirteen IBT-affiliated unions have negotiated with approximately 450
employers to require contributions to the Pension Fund. The Welfare Fund
provides medical and related benefits to approximately 9,752 active
participants and 17,000 dependents, while the Pension Fund has approximately
11,500 active participants, 3,900 terminated vested participants, and 12,700
individuals receiving pensions. Each of the Funds has six trustees (“Trustees”),
who are appointed in equal numbers by labor and management in accordance
with LMRA section 302(c)(5). Three of the Trustees are appointed by
contributing employers and three are appointed by the IBT-affiliated unions.
The same six individuals serve as the Trustees with respect to both Funds.
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You note that, in addition to the IBT-affiliated
unions, both Funds accept contributions with respect to 32 participants
pursuant to a collective bargaining agreement negotiated by their employer
with the Independent Dock Workers Union No. 1 (“IDU No. 1”), a union
that is not affiliated with the IBT. You represent that the members of IDU
No. 1 were previously represented by Teamsters Local Union No. 676 (“Local
676”) and were participants of the Funds through this IBT-affiliated
union. However, the members of Local 676 subsequently withdrew from the
IBT and formed IDU No. 1. You state that, at the time IDU No. 1 was
formed, the members of IDU No. 1 expressed an interest in continuing their
participation in the Funds. The Trustees granted that request with respect
to both Funds and continue to accept contributions on behalf of IDU No. 1.
You represent that IDU No. 1 has no authority to appoint any trustees to
either of the Funds and no control over the terms or governance of the
Funds.
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You state that, currently, administrative services for the Funds are
provided primarily by the Funds’ administrative operation, located in a
building (the “Building”) owned by the Welfare Fund in Philadelphia. The
Welfare Fund has 29 employees, all of whom work at that location. The
Pension Fund, which has 15 employees, pays rent to the Welfare Fund for its
use of the Building.(2)
You represent that although the Funds have taken measures to keep
administrative expenses in check, the Trustees believe that a reorganization
of the Funds’ administrative operation could reduce these expenses
further. The Trustees have proposed that the Funds establish a new
corporation (the “Administrative Corporation”) to provide administrative
services to the Funds and to other multiemployer plans in the Philadelphia
metropolitan area, thereby enabling the Funds to share these expenses with
other plans and increasing the amount of assets available to pay benefits.
The Trustees expect that the Administrative Corporation will be able to
offer administrative services to other multiemployer plans at rates
significantly lower than those offered by other third-party administrators
on the open market. You represent that, if at any time the Trustees
determine that the establishment or operation of the Administrative
Corporation ceases to be of benefit to the Funds, the Trustees would have a
fiduciary obligation to reform the arrangements, including, if the
circumstances so warrant, re-establishing the Funds’ administrative
operations.
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Under the proposed arrangement, the Funds would
collectively own 100 percent of the outstanding stock of the
Administrative Corporation, with each Fund owing an interest proportionate
to that Fund’s initial investment. The initial investments in the
Administrative Corporation would include data processing and office
equipment currently owned by each of the Funds, with the fair market value
of each Fund’s initial investment determined by Ernst & Young, LLP,
the Funds’ independent auditor and financial advisor.
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The Administrative Corporation would be a “for-profit” corporation
established pursuant to Pennsylvania law. The Board of Directors of the
Administrative Corporation (“Directors”) would consist of two
individuals, each of whom is a Trustee of both the Pension Fund and the
Welfare Fund. The other four Trustees of the Funds would be specifically
charged under the Funds’ plan documents with assessing the performance of
the Administrative Corporation. You state that the Trustees’ respective
responsibilities to oversee the management and to monitor the performance of
the Administrative Corporation would be clearly and separately apportioned
among the Funds’ six Trustees. You represent that the Trustees who are
Directors of the Administrative Corporation would ensure that the net
revenue earned by the Administrative Corporation is actually used to keep
the administrative fees charged to the Funds as low as practicable and would
not have any role in evaluating the Administrative Corporation’s
performance as a service provider to the Funds, and that the other four
Trustees would be exclusively responsible for the monitoring function. The
Funds’ auditor would provide the four monitoring Trustees with a special
report designed to assist them in their monitoring capacity.
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You state that the fees to be paid by the Funds to the Administrative
Corporation for administrative services would be determined in the following
manner. Using the previous year’s administrative expenses and the average
number of participants as a base, a per member, per month cost would be
determined. This per member, per month fee would be paid by the respective
Fund and would be reviewed on a quarterly basis. Thus, the fees charged by
the Administrative Corporation to the Funds would be roughly cost neutral at
the outset of the conversion. You expect that the Administrative Corporation
will find a ready market for its third-party administrative services among
the relatively large number of Taft-Hartley plans in the Philadelphia area
that have comparatively small participant bases. You represent that all of
the net revenue earned by the Administrative Corporation from administrative
services provided to other plans would be used to reduce the fees charged to
the Funds by the Administrative Corporation.
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We have determined that your request raises the
following issues:
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(1) Are the Funds a “related group of plans” for purposes of paragraph
(h)(3) of the plan assets regulation at 29 CFR 2510.3-101?
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The Department of Labor’s plan assets regulation, at § 2510.3-101(h)(3),
provides that when a plan or a related group of plans owns all of the
outstanding equity interests (other than director’s qualifying shares) in
an entity, its assets include those equity interests and all of the
underlying assets of the entity. As explained in the preamble to the final
regulation, this provision reflects the conclusion of the Department that,
when a plan is the sole owner of an entity, there is no meaningful
difference between the assets of the entity and the assets of the plan.(3)
Paragraph (h)(4) of the plan assets regulation provides, in relevant
part, that for purposes of paragraph (h)(3), a “related group” of
employee benefit plans consists of every group of two or more employee
benefit plans – each of which is either maintained by, or maintained
pursuant to a collective bargaining agreement negotiated by, the same
employee organization or affiliated employee organizations. In this regard,
an “affiliate” of an employee organization is defined to mean any person
controlling, controlled by, or under common control with such organization,
and includes any organization chartered by the same parent body, or governed
by the same constitution and bylaws, or having the relation of parent and
subordinate.
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Both Funds are maintained pursuant to a collective
bargaining agreement negotiated by unions affiliated with the IBT. All of
the IBT-affiliated unions associated with the Funds are chartered by the
IBT and governed by the same constitution and bylaws of the IBT. The same
six individuals are the Trustees of both the Welfare Fund and the Pension
Fund. While you acknowledge that the Funds accept contributions on behalf
of a small number of individuals who are members of IDU No. 1, which is
not IBT-affiliated, you specifically represent that IDU No. 1 does not
have authority to appoint any trustees to either of the Funds and does not
have any control over the terms or governance of the Funds. As a result,
the Funds are maintained by, or pursuant to, a collective bargaining
agreement negotiated by the same employee organization, the IBT. The fact
that IDU No. 1 is not IBT-affiliated, but contributes to the Funds, does
not alter this conclusion where IDU No. 1 does not participate in the
collective bargaining process and has no authority or control with respect
to the maintenance of the Funds.
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Based upon the representations set forth above, it is
the Department’s view that the Funds constitute a “related group of
plans” for purposes of § 2510.3-101(h)(3) of the plan asset regulation.
Accordingly, because the Funds would make the only capital contributions
to the Administrative Corporation and would own 100% of the equity
interests in the Administrative Corporation, the Funds’ assets would
include their equity interests in the Administrative Corporation and all
of the underlying assets of the Administrative Corporation.
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(2) Would transactions between the Administrative
Corporation and the Funds constitute prohibited transactions under section
406 of ERISA?
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Section 3(14) of ERISA defines the term “party in
interest” with respect to a plan to include, among other things, a
person providing services to such plan; an employer any of whose employees
are covered by the plan; or a corporation, 50 percent or more owned
directly or indirectly or held by a service provider or employer.”(4)
Section 406(a)(1)(A) of ERISA states that a fiduciary with respect
to an employee benefit plan shall not cause the plan to engage in a
transaction if he or she knows or should know that such transaction
constitutes a direct or indirect sale, exchange or leasing of any property
between a plan and a party in interest. Section 406(a)(1)(C) and
406(a)(1)(D) state that a fiduciary with respect to an employee benefit
plan shall not cause the plan to engage in a transaction if he or she
knows or should know that such transaction constitutes a direct or
indirect furnishing of services between the plan and a party in interest
with respect to the plan, or a transfer to, or use by or for the benefit
of, a party in interest, of any assets of the plan.
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Section 406(b)(1) of ERISA prohibits a fiduciary from
dealing with plan assets in his or her own interest or for his or her own
account and section 406(b)(2) specifically prohibits a fiduciary in his or
her individual or in any other capacity from acting in any transaction
involving the plan on behalf of a party (or representing a party) whose
interests are adverse to the interests of the plan or the interests of its
participants or beneficiaries.
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To the extent that the Funds are a “related group of
plans” for purposes of the plan assets regulation at §
2510.3-101(h)(3), and the Funds own 100 percent of the Administrative
Corporation, it is our view that the Administrative Corporation should be
viewed as an asset of the Funds and therefore would not be a party in
interest with respect to the Funds. Accordingly, consistent with the
analysis set forth above, it is the opinion of the Department that, under
the circumstances described, transactions between the Administrative
Corporation and the Funds would not be prohibited under section 406
because, under the terms of the plan asset regulation, they would be
treated as “intra-plan” transactions with respect to each of the
Funds.(5)
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(3) Would the provision of services by the
Administrative Corporation to other plans result in violations of the
prohibited transaction provisions of section 406 of ERISA?
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Once the Administrative Corporation begins providing
services to a plan, the Administrative Corporation and the Funds which own
the Administrative Corporation become parties in interest with respect to
that plan under ERISA section 3(14)(B) and (G), respectively. Absent a
statutory or administrative exemption, fiduciaries of a plan would violate
ERISA section 406(a)(1)(C) by obtaining services from a party in interest
and ERISA section 406(a)(1)(D) by using plan assets to pay for those
services.
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Subject to the limitations of section 408(d) of ERISA,
section 408(b)(2) exempts from the prohibitions of section 406(a)
contracting or making reasonable arrangements for services (or a
combination of services) with a party in interest if: (1) the service is
necessary for the establishment or operation of the plan; (2) the service
is furnished under a contract or arrangement which is reasonable; and (3)
no more than reasonable compensation is paid for the service. Regulations
issued by the Department clarify the terms “necessary service” (29 CFR
§ 2550.408b-2(b)), “reasonable contract or arrangement” (§
2550.408b-2(c)) and “reasonable compensation” (§§ 2550.408b-2(d) and
2550.408c-2) as used in section 408(b)(2) of ERISA.
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With respect to the prohibitions in section 406(b) of
ERISA, the Department’s regulation at 29 CFR 2550.408b-2(a) states that
section 408(b)(2) does not contain an exemption for an act described in
section 406(b), even if such act occurs in connection with a provision of
services which section 408(b)(2) exempts from the prohibitions of section
406(a). As explained in § 2550.408b-2(e)(1), if a fiduciary uses the
authority, control or responsibility which makes such person a fiduciary
to cause the plan to enter into a transaction involving the provision of
services which may affect the exercise of such fiduciary’s best judgment
as a fiduciary, a transaction described in section 406(b) would occur, and
that transaction would be deemed to be a separate transaction not exempted
by section 408(b)(2). However, § 2550.408b-2(e)(2) provides that if a
fiduciary does not use any of the control, authority or responsibility
which makes such person a fiduciary to cause a plan to pay a fee for a
service furnished by a person in which such fiduciary has an interest
which may affect the exercise of such fiduciary’s best judgment as a
fiduciary, no violation of section 406(b)(1) will occur. In general,
whether a violation of section 406(b) occurs in the course of a fiduciary’s
selection of the Administrative Corporation to provide services to a plan
is an inherently factual matter.(6)
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More generally, the Department cautions that ERISA’s
general standards of fiduciary conduct apply to all fiduciary decisions
made in connection with the proposed transactions. Section 404(a)(1) of
ERISA requires, among other things, that a fiduciary discharge his or her
duties with respect to a plan solely in the interest of the participants
and beneficiaries, and with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of like character and with like aims. Accordingly, the
appropriate plan fiduciaries must act “prudently” and “solely in the
interests” of the plan participants and beneficiaries in making
decisions relating to the establishment, operation and continuation of the
Administrative Corporation.
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This letter constitutes an advisory opinion under ERISA section 76-1.
Accordingly, this letter is issued subject to the provisions of the
procedure, including section 10 relating to the effect of advisory opinions.
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Sincerely,
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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Under Reorganization Plan No. 4 of
1978, 43 FR 47713 (5 U.S.C. App. 1 [1996]), the authority of the
Secretary of the Treasury to issue rulings under section 4975 of the
Code has been transferred, with certain exceptions not here relevant,
to the Secretary of Labor. The Secretary of the Treasury is bound by
interpretations of the Secretary of Labor pursuant to such authority.
Therefore, references in this letter to specific sections of ERISA
should be read to refer also to the corresponding sections of the
Code.
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You have represented that the Funds
have the same trustees, and that, currently, employees of each of the
Funds are covered by both Funds. Under section 3(14)(C) of ERISA, the
term “party in interest” includes an employer any of whose
employees are covered by the plan. Accordingly, the Welfare Fund, as
an employer of employees covered by the Pension Fund, is a party in
interest with respect to the Pension Fund, and vice versa. In the
absence of an exemption, the leasing or sharing of office space,
and/or the provision of administrative services between plans that are
parties in interest with respect to one another results in a violation
of section 406(a) of ERISA. In addition, transactions between plans
with the same trustees result in violations of section 406(b)(2) of
ERISA. The Department notes that exemptive relief may be available for
these transactions under Part C of PTE 76-1 (41 Fed. Reg. 12740,
(March 26, 1976)) and under PTE 77-10 (42 Fed. Reg. 33918 (July 1,
1977)), provided all conditions of those exemptions are satisfied. The
Department is not opining on whether the conditions of those
exemptions have been satisfied.
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See 51 Fed. Reg. 41262, 41276 (Nov.
13, 1986).
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See ERISA section 3(14)(B), (C) and
(G), respectively.
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We are assuming for purposes of this
opinion that the Funds will continue to be a “related group of plans”
for purposes of § 2510.3-101(h)(3) and will continue to own 100
percent of the Administrative Corporation. If for any reason the Funds
cease to be a “related group of plans” or cease to collectively
own 100 percent of the Administrative Corporation, the analysis set
forth in this advisory opinion would no longer apply.
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See Advisory Opinion 97-23A,
September 26, 1997.
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