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Mr. Thomas W. Meagher
Actuarial Sciences Associates, Inc.
270 Davidson Avenue
Somerset, New Jersey 08873
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1999-08A
ERISA Sec. 401(b)
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Dear Mr. Meagher:
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This is in response to your request for an advisory opinion concerning the
application of Title I of the Employee Retirement Income Security Act of
1974 (“ERISA”) to a special purpose trust (“the Trust”) established
on behalf of Michigan Consolidated Gas Company (the “Company”), a
wholly-owned subsidiary of MCN Energy Group, Inc. (“MCN”). Specifically,
you ask whether assets contributed to the Trust would constitute assets of
an employee welfare benefit plan for purposes of Title I of ERISA.
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You represent that the Trust is intended to operate as a grantor trust
within the meaning of section 671 of the Internal Revenue Code of 1986
(“the Code”). The Trust was established as a vehicle through which the
Company may accumulate assets that it may eventually either (i) contribute
to one or more voluntary employees’ beneficiary associations maintained by
or on behalf of the Company to fund postretirement health and life insurance
benefits provided to its employees and former employees (“the VEBAs”),
or (ii) apply to such other business purposes as are consistent with the
applicable rate orders of the Michigan Public Service Commission (“the
Commission”).
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The Company is a natural gas distribution and interstate transmission
company and is the principal operating subsidiary of MCN, a diversified gas
holding company. You state that rates charged to customers and other
significant aspects of the Company’s business are regulated by the
Commission. In 1991, the Commission commenced a case related to ratemaking
associated with implementing the Financial Accounting Standards Board’s
(“FASB”) Statement of Financial Accounting Standards No. 106,
Employer’s Accounting for Postretirement Benefits Other Than Pensions (“FAS
106").(1) During 1991 and 1992, the
Company operated under an incentive plan that provided for annual rate
increases or decreases to recover the effects of inflation on operation and
maintenance expenses. In an opinion and order dated December 8, 1992
(“Order”), the Commission concluded that the Company could also recover
an amount equal to its reasonable and prudent FAS 106 expenses through rates
charged to its customers, provided that the Company contributed the amounts
so collected to an external funding arrangement, so as to minimize any risk
that the Company would use those recovered funds for purposes inconsistent
with the Commission’s rate orders.
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You represent that, following issuance of the Order, the Company will
continue to fund the VEBAs that it currently maintains according to its
current funding policies. In order to comply with the Commission’s
requirement of an external funding arrangement in connection with imposing a
rate increase to cover FAS 106 expenses, the Company intends to contribute
to the Trust any amounts recovered from ratepayers in excess of the maximum
deductible contributions(2) permitted to
be made to the VEBAs, or otherwise in excess of the amount the Company deems
advisable to contribute to the VEBAs. The Trust assets will not be treated
by the Company, or by any other participating employer,(3)
as a “restricted and segregated fund” for purposes of FAS 106. The Trust
agreement provides that Trust assets may be used for any business or
regulatory purpose that the Company determines not to be inconsistent with
the orders or decisions of the Commission. Further, the Trust agreement
states specifically that nothing shall entitle any participant or
beneficiary of any employee benefit plan to any payments from, or create any
interest on their part in, the assets of the Trust Fund and that the Trust
is not intended to fund any employee benefit plan or program, but rather is
intended to be a depository arrangement with the Trustee for the setting
aside of cash and other assets for meeting all or part of the Company’s
and any Participating Employer’s obligations, including any obligations
that the Company might have with respect to any rate orders issued by the
Commission.
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The Company, according to your representations, may decide in the future to
make contributions to the VEBAs from the Trust or from the revenues of the
Company, at its discretion. Under the Trust Agreement, neither the VEBAs nor
their participants or beneficiaries will have any preferential claim
against, or any beneficial interest in, the assets of the Trust. To the
extent that assets held in the VEBAs are insufficient to pay benefits
provided by the welfare benefit plans that they fund, the Company retains
sole responsibility for the claims of VEBA participants and beneficiaries,
and the benefits provided under the VEBAs will not be limited or governed in
any way by the amount of contributions to the Trust. You state that the
Company will inform its employees that the Company has discretion to revoke
the Trust, that the assets of the Trust are available to be used for general
corporate purposes as permitted under the Commission’s rate orders, and
that employees should not look to the assets of the Trust as a source of
funding for benefits provided under any employee benefit plan sponsored by
the Company or any Participating Employers. The Trust agreement contains no
references to benefit plans, plan participants, or their dependents, other
than the statement that nothing shall entitle any participant or beneficiary
of any employee benefit plan to any payments from, or create any interest on
their part in, the assets of the Trust Fund and that the Trust is not
intended to fund any employee benefit plan or program. The Trust agreement
also provides that the Trust may be terminated by the Company without
consent of any person upon 180 days written prior notice to the Commission.
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Title I of ERISA does not expressly define what property will be regarded as
“assets of an employee benefit plan.” The Department of Labor (“the
Department”) has issued regulations describing what constitutes plan
assets with respect to a plan’s investment in other entities and with
respect to participant contributions. See 29 C.F.R. 2510.3-101 and 29 C.F.R.
2510.3-102, respectively. The Department has indicated that the assets of an
employee benefit plan generally are to be identified in other situations on
the basis of ordinary notions of property rights. See, e.g., Advisory
Opinion 94-31A (September 9, 1994). The provisions of Title I further do not
impose funding standards on employee welfare benefit plans. Accordingly, the
Department has acknowledged that an employer sponsor of a welfare plan may
maintain such a plan without identifiable plan assets by paying plan
benefits exclusively from the general assets of the employer. This could be
the case even if an employer sets aside some of its general assets in a
separate employer account for the purpose of ensuring that assets are
available to provide benefits under the plan. However, if an employer takes
steps that cause the plan to gain a beneficial interest in particular
assets, under ordinary notions of property rights, such assets would become
plan assets. See Advisory Opinion 94-31A.
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In the Department’s view, a plan obtains a beneficial interest in
particular property if, under common law principles, the property is held in
trust for the benefit of the plan or its participants and beneficiaries, or
if the plan otherwise has an interest in such property on the basis of
ordinary notions of property rights.(4)
Further, whether a plan has acquired a beneficial interest in definable
assets depends, largely, on whether the plan sponsor has expressed the
intent to grant such a beneficial interest or has acted or made
representations sufficient to lead participants and beneficiaries of the
plan reasonably to believe that such funds separately secure the promised
benefits or are otherwise plan assets. The identification of plan assets
therefore requires consideration of any contract or other legal instrument
involving the plan, as well as the actions and representations of the
parties involved. For example, it is the Department’s view that a welfare
plan generally will have a beneficial interest in particular assets if the
employer establishes a trust on behalf of the plan, sets up a separate
account with a bank or with a third party in the name of the plan, or
specifically indicates in the plan documents or instruments that separately
maintained funds belong to the plan. In Advisory Opinion 94-31A, the
Department found that the use of assets in a trust to offset benefit
obligations for purposes of financial reporting under FAS 106 was tantamount
to a representation that such assets would secure the benefits promised
under the plan and that, accordingly, the plan would have a beneficial
interest in the assets in the trust and such assets would constitute plan
assets. See also Advisory Opinions 92-24A (Nov. 6, 1992) and 84-10A (Feb.
22, 1984).
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On the other hand, the Department has also explained that the mere
segregation of employer funds to facilitate administration of a plan, in the
absence of any other actions or representations that would manifest an
intent to contribute assets to a welfare plan, would not in itself
demonstrate an intent to create a beneficial interest in those assets on
behalf of a plan. See Advisory Opinions 92-24A and 94-31A. For example, in
Advisory Opinion 92-02A (Jan. 17, 1992), the Department determined that,
under the circumstances involved in that case, a stop loss insurance policy
purchased by a single employer plan sponsor to meet the employer’s
liabilities under a medical benefit plan did not constitute plan assets.
That determination was based, among other things, on the fact that there was
no representation to any participant or beneficiary that the policy would be
used to provide benefits or that it in any way represented security for the
payment of benefits. The employer, and not the plan, retained all rights of
ownership under the policy. The employer was named as the beneficiary of the
policy; neither the plan nor any participant or beneficiary had any
preferred claim against the policy or any beneficial ownership interest in
the policy; the plan benefits were not limited or governed in any way by the
amount of the insurance proceeds; and employee contributions were not
expended toward the purchase of the policy.
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In this case, you state that the Company will make no representations to any
participant or beneficiary that the Trust will be used to pay benefits.
Rather, all representations made by the Company concerning the Trust affirm
that the Trust assets may be used by the Company for appropriate business
purposes and are not set aside to provide employee benefits. The Trust
agreement explicitly states that the Trust does not fund, and that it is not
the purpose of the Trust to fund, any employee benefit plan of the Company.
The purpose of the Trust, as explained in the Trust document, is to be no
more than a depository arrangement for the setting aside of cash and other
assets for meeting all or part of the Company’s obligations, including any
obligations with respect to complying with any rate orders issued by the
Michigan Public Utility Commission. You state further that the Trust assets
will be carried on the Company’s balance sheet as assets of the Company
and will not be used to offset the Company’s FAS 106 liability.(5)
In addition, you state that the Company will retain all rights of ownership
of the Trust assets, which will be available for general business purposes;
that the benefits of the plan will not be limited or governed in any way by
contributions to the Trust; and that no contributions from any participant
will be made to the Trust.
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Under the circumstances described herein, it is the view of the Department
that the plan would have no beneficial interest in the Trust and that the
assets of the Trust would not constitute plan assets for purposes of Title I
of ERISA. This letter constitutes an advisory opinion under ERISA Advisory
Opinion Procedure 76-1, and accordingly, is 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
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FAS 106 requires employers to
account for postretirement benefits on an accrual basis, rather than
on a cash or pay-as-you-go basis.
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Sections 419 and 419A of the
Internal Revenue Code limit the amount of deductible contributions
that may be made to the VEBAs.
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The Trust document provides that MCN
and any corporation which is at least 50% owned or controlled directly
or indirectly by MCN may be a Participating Employer in the Trust.
While the Company is currently the only participant in the Trust, you
represent that it is contemplated that Citizens Gas Fuel Company,
another wholly-owned subsidiary of MCN, may be a Participating
Employer in the future.
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This is consistent with
Congressional intent under ERISA to foster the development of a body
of common law that encompasses traditional law principles, applied in
light of the special nature and purpose of employee benefit plans. See
120 Cong. Rec. 29,942 (1974) (remarks of Senator Javits), reprinted in
Legislative History of the Employee Retirement Income Security Act of
1974, Vol. III, p. 4771; H.R. Rep. 93-533, pp. 11-13 (1973), reprinted
in Legislative History of the Employee Retirement Income Security Act
of 1974, Vol. II, pp. 2358-2360.
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You represent further that the
Company, as the sponsor of the Trust arrangement, will take such steps
as may be necessary to preclude any other companies from participating
in the Trust unless such companies are willing to represent to the
Company that any Trust assets attributable to that company shall not
be treated as plan assets under ERISA and shall not be used to offset
such company’s liabilities under FAS 106.
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