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Mr. Robert Gallagher
Groom Law Group
1701 Pennsylvania Ave., N.W.
Washington, D.C. 20006-5893
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2003-04A
ERISA Sec. 403, 404, and 406
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Dear Mr. Gallagher:
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This is in response to your request for an advisory
opinion on behalf of The Prudential Insurance Company of America regarding
the application of the fiduciary responsibility provisions of the Employee
Retirement Income Security Act of 1974 (“ERISA”) to a sponsoring
employer’s (“Employer”) amendment of its employee welfare benefit
plan (“Welfare Plan”) to eliminate life insurance benefits for certain
retirees and the amendment of its defined benefit pension plan (“Pension
Plan”) to add similar benefits for those retirees, and the
implementation of those amendments. You specifically ask for an opinion
that the foregoing amendments, along with their implementation, would not
violate the anti-inurement, exclusive benefit and prohibited transaction
provisions under ERISA,(1) solely
because the Employer would no longer pay for the retiree life insurance
benefits from its general assets and account for such benefit liabilities
on its financial statements under Financial Accounting Standards Board’s
(FASB) Statement of Financial Accounting Standards No. 106, Employer’s
Accounting for Post-Retirement Benefits Other Than Pensions (“OPEBs”)
(“FAS 106”).(2)
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Your letter and supplemental materials contain the following facts and
representations. The Pension Plan is an employee pension benefit plan within
the meaning of section 3(2) of ERISA. The Welfare Plan is an employee
welfare benefit plan within the meaning of section 3(1) of ERISA that
provides, among other benefits, life insurance benefits to certain former
employees of the Employer (retirees). In most instances, the life insurance
benefits provided under the Welfare Plan are paid from the Employer’s
general assets directly, or through an insurance policy purchased by the
Employer from its general assets, as to which the Employer is the
contractholder. However, in some circumstances, these benefits may be funded
in some measure, such as by a life insurance policy owned by the Welfare
Plan, or may require some participant contribution. Any such life insurance
policy or policies owned by the Plan are term policies. You represent that
with respect to the life insurance benefits, under the terms of the Welfare
Plan, the Employer has no obligation to make contributions to the Plan at
any prescribed contribution rate, but does so on a “pay-as-you-go” basis
to meet benefit payments or support premium payments.
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Both the Pension Plan and Welfare Plan are single employer plans. You
represent that the Employer is authorized to amend or terminate the Welfare
Plan at any time, and has not communicated to participating employees or
retirees any limitations on its ability to amend or terminate the Welfare
Plan, or that such employees or retirees have a “vested” right to life
insurance benefits. The Employer must account for the benefits provided
under the Pension Plan in accordance with FASB Statement of Financial
Accounting Standards No. 87, Employer’s Accounting for Pensions (“FAS
87"),(3) and the benefits provided
under the Welfare Plan in accordance with FAS 106.
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You represent that the Pension Plan currently is
overfunded. The Welfare Plan is not funded beyond the amounts necessary to
pay current life insurance premium payments. However, where the Welfare
Plan owns a life insurance policy or policies, which you represent are
term policies, there may be circumstances where there is a stabilization
reserve or similar amounts held in connection with those policies. The
Employer proposes to amend the Welfare Plan to eliminate the life
insurance benefits of certain retirees. Concurrent with the amending of
the Welfare Plan, the Employer proposes to amend the Pension Plan to
provide life insurance benefits to those same retirees whose benefits have
been eliminated under the Welfare Plan. You explain that if the Welfare
Plan provides life insurance benefits only to retirees, the Plan itself
will be terminated. You further represent that in the case of such
termination, if the Plan owns a term life insurance policy or policies,
any stabilization reserve or similar amounts held in connection with those
policies, to the extent it includes plan assets or is attributable to
employee contributions, would be distributed as required by the terms of
the plan or policy to the extent consistent with the provisions of ERISA.
If the Welfare Plan also provides life insurance benefits to active
employees, the Welfare Plan would be amended to eliminate coverage with
respect to those retirees, but would continue with respect to the active
employees.
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The life insurance benefits provided to the retirees under the Pension Plan
would be similar, but not identical, to the benefits made available under
the Welfare Plan, and would be provided through the purchase of a life
insurance contract with single or periodic premium payments. There will be
no transfer of assets between the Plans in connection with these amendments.
You further represent that the amendment of the Pension Plan to provide
these life insurance benefits will not affect the tax qualification of that
Plan under section 401(a) of the Code, and that the amendment of the Welfare
Plan to eliminate the life insurance benefits will not relieve the Employer
of any existing liability or obligation to make contributions to the Welfare
Plan. You state that if following the amendment the Pension Plan is not
currently funded at the appropriate level considering these additional
liabilities, the Employer would be required to make additional
contributions. However, it is contemplated that any additional liabilities
under the Pension Plan caused by the addition of life insurance benefits
will not require the Employer to make additional contributions to meet the
minimum funding requirements under section 302 of ERISA. However, additional
Employer contributions may be required in the future to fund these benefits.
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You explain that, following the proposed amendments,
the Employer would no longer purchase or provide life insurance benefits
to the retirees from its general assets, and would not be required to
continue reporting liabilities relating to those benefits on its financial
statements in accordance with FAS 106. While the addition of the new life
insurance benefits under the Pension Plan may increase the liabilities
required to be reported on the Employer’s financial statements for
benefits payable under the Pension Plan in accordance with FAS 87, you
indicate that these liabilities would be offset by amounts funding the
overfunded Pension Plan. You represent that the proposed amendments
therefore may result in a financial accounting benefit to the Employer.
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Section 3(21) of ERISA defines the term “fiduciary” to include one who
has or exercises discretionary authority or control in the administration or
management of an employee benefit plan or its assets. Section 404(a)(1)(A)
of ERISA requires that a fiduciary of a plan discharge his or her duties
with respect to the plan solely in the interest of the participants and
beneficiaries, and for the exclusive purpose of providing benefits to
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 403(c)(1) of ERISA provides, in part and
subject to certain exceptions, that 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.
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Section 406(a)(1)(D) of ERISA provides that a fiduciary with respect to a
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
transfer to, or use by or for the benefit of, a party in interest, of any
assets of the plan. Section 406(b)(1) provides that a fiduciary with respect
to a plan shall not deal with the assets of the plan in his or her own
interest or for his or her own account. 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.
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The Department has long taken the position that there
is a class of discretionary activities which relate to the formation,
rather than the management, of plans, explaining that these so-called “settlor”
functions include decisions relating to the establishment, design and
termination of plans, and generally are not fiduciary activities governed
by ERISA. However, while such decisions may be settlor functions,
activities undertaken to implement the decisions generally are fiduciary
in nature and must be carried out in accordance with the fiduciary
responsibility provisions.(4)
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In the view of the Department, a settlor’s decision to eliminate life
insurance benefits for certain retirees under a welfare plan and to provide
similar benefits to the same retirees under a pension plan would not be
subject to ERISA’s fiduciary standards.(5)
Further, it is the view of the Department that implementation of such
decisions by plan fiduciaries would not, in itself, violate the anti-inurement
provision of ERISA section 403(c)(1), the general fiduciary standards of
section 404, or the prohibited transaction standards of section 406 merely
because doing so would confer a benefit on the Employer. Whether the steps
taken by any given fiduciary in implementing a settlor’s decision satisfy
ERISA’s fiduciary standards are inherently factual questions on which the
Department generally will not rule.
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As indicated in various pronouncements by the Department, expenses incurred
by an employer in the performance of settlor functions are not reasonable
plan expenses. See Advisory Opinions Nos. 2001-01A and 97-03A (Jan. 23,
1997). See also EBSA Field Assistance Bulletin 2002-2 (Nov. 14, 2002); DOL
Information Letter to Kirk Maldonado from Elliot I. Daniel (March 2, 1987).
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This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41
Fed. Reg. 36281 (1976). Accordingly, this letter 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,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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You also request an opinion
regarding the application of the prohibited transaction provisions
under section 4975 of the Internal Revenue Code (the “Code”). In
accordance with Presidential Reorganization Plan No. 4 of 1978, 43
Fed. Reg. 47713 (Oct. 17, 1978), the Department has generally been
authorized to interpret the provisions of section 4975 of the Code. In
this regard, the guidance provided herein with respect to section 406
of ERISA would extend to the corresponding provisions under section
4975 of the Code.
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You have explained that FAS 106
generally requires an employer to accrue the anticipated cost of OPEBs
during the period of an employee’s service, rather than accounting
for such benefits on a “pay-as-you-go” basis, and report such
costs on its financial statements as an accrued liability.
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You have explained that FAS 87
generally requires an employer to recognize compensation costs of an
employee’s pension benefits approximately over the service life of
that employee, based on the benefit formula specified in the pension
plan.
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See Advisory Opinion 2001-01A (Jan.
18, 2001).
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See Advisory Opinion 2001-01A. Also,
the Supreme Court has recognized that plan sponsors receive a number
of incidental benefits by virtue of offering an employee benefit plan,
such as attracting and retaining employees, providing increased
compensation without increasing wages, and reducing the likelihood of
lawsuits by encouraging employees who would otherwise be laid off to
depart voluntarily. It is the view of the Department that the mere
receipt of such benefits by plan sponsors does not convert a settlor
activity into a fiduciary activity or convert an otherwise permissible
plan expense into a settlor expense. See Hughes Aircraft Company v.
Jacobson, 525 U.S. 432 (1999); Lockheed Corp. v. Spink, 517 U.S. 882
(1996).
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