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Dear Mr. McLeod:
This is in response to your request for an advisory opinion under the
Employee Income Security Act of 1974, as amended (ERISA). In particular,
you request guidance as to the acceptable use of assets remaining in a
trust that served as the funding vehicle for a multiple employer welfare
arrangement (MEWA) that has been terminated.
You represent that the National Office Machine Dealers Association (NOMDA)
established the NOMDA Group Insurance Trust (the NOMDA Trust or Trust) in
1976 to provide group health insurance benefits to employees of dealer
members of NOMDA.(1) The NOMDA Trust was self-insured until 1990, when, as a
result of the issuance of Advisory Opinion 90-18A (July 2, 1990), the
trustees of the Trust realized that, even if the NOMDA Trust was a group
health plan subject to ERISA, it also constituted a MEWA as defined in
section 3(40) of ERISA, and thus was subject to State insurance
regulation. The trustees began a search for an insurance company to
provide insurance for the coverage provided by the Trust. On January 15,
1992, the NOMDA Trust entered into an agreement with American Medical
Security, a division of United Wisconsin Life, in which United Wisconsin
Life agreed to provide coverage for the participants in the Trust. You
represent that since April 30, 1992, the NOMDA Trust has not maintained
any health benefits program.
You represent that all outstanding claims of the NOMDA Trust have been
paid in full. No former participant or beneficiary in the NOMDA Trust has
any claim, expectancy or right to future benefit of any kind from the
NOMDA Trust. However, assets in the Trust at the time were insufficient to
pay all claims due. Accordingly, NOMDA advanced funds to the Trust to
enable it to pay claims. The advances were characterized as loans. An
audit of the NOMDA Trust by the Department determined that those loans
were prohibited transactions under section 406 of ERISA. NOMDA proposed
corrective actions that were accepted by the Department.
The agreement between the NOMDA Trust and American Medical Security
provided for fees to be paid to the Trust for providing marketing services
for American Medical Security to members of NOMDA. The agreement also
provided that a portion of future underwriting profits of American Medical
Security would be paid to the Trust. The funds now in the NOMDA Trust are
the result of the payments made by American Medical Security after 1992
pursuant to the agreement. The agreement has since been terminated and no
further payments will be made.
The NOMDA Trust document provides that the Trust may be terminated upon
a vote of its trustees and approval of the NOMDA Board of Regents. Upon
termination, the trustees shall, after paying or making provision for the
payment of all the liabilities of the Trust, dispose of all the assets of
the Trust exclusively for the purposes of the Trust in such manner or to
such organization or organizations organized and operated for the same
purposes as the Trust, as the trustees shall determine.
The stated purpose of the Trust is to provide life, health, accident,
dental and disability benefits to persons who are eligible members of
NOMDA, their employees, and the employees of NOMDA.
You represent that due to changes in the office machine industry, as
well as the shift from typewriters to computers, NOMDA membership has
changed significantly in recent years. Many small dealers, who were the
bulk of the employers participating in the NOMDA Trust, have been
eliminated. As a result of these changes, NOMDA merged with the Local Area
Network Dealers Association on June 25, 1993, and changed its name to the
Business Technology Association (BTA) on July 1, 1994.
BTA has decided to establish a voluntary employee benefit association (VEBA)
under section 501(c)(9) of the Internal Revenue Code of 1986 (the Code),
and desires to transfer the assets of the NOMDA Trust to the VEBA. The
VEBA will use the funds to purchase health and life insurance for the
employees of BTA. You are requesting an advisory opinion that the transfer
of the assets of the NOMDA Trust to the BTA VEBA for the benefit of its
employees does not constitute an improper inurement of plan assets to an
employer as described in ERISA section 403 or a transaction prohibited
under ERISA section 406.
Section 406(a) of ERISA provides, in part, 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 the transaction constitutes a direct
or indirect (1) lending of money or other extension of credit between the
plan and a party in interest, or (2) a transfer to, or use by or for the
benefit of, a party in interest of any assets of the plan. With respect to
the prohibitions contained in ERISA section 406(a), nothing in your
submission suggests that the VEBA would be a party in interest to the
NOMDA Trust. Thus, the transfer of assets from the NOMDA Trust to the VEBA
would not appear to be a transaction between an employee benefit plan and
a party in interest with respect thereto. Accordingly, it is the
Department’s view, based upon your representations, that the transaction
is not prohibited by section 406(a).
Section 406(b)(1) of ERISA provides that a fiduciary with respect to a
plan shall not deal with plan assets in his own interest or for his own
account. Section 406(b)(2) of ERISA prohibits a fiduciary with respect to
a plan from acting in any transaction involving the plan on behalf of a
party, or represent a party, whose interests are adverse to the interest
of the plan or of its participants and beneficiaries.
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. Section 403(d)(2) of ERISA
provides that the assets of an employee welfare benefit plan that
terminates shall be distributed in accordance with the terms of the plan,
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 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.
The trustees’ transfer of the NOMDA Trust assets to the VEBA for the
purpose of providing benefits to the employees of BTA does not appear to
involve a use of the Trust assets for the benefit of the trustees in
violation of ERISA section 406(b)(1). Furthermore, if the NOMDA Trust has
been properly terminated and all claims have either been paid or properly
forfeited so that there are no longer any participants or beneficiaries of
the NOMDA Trust, the proposed subsequent transfer of excess funds by the
trustees of the Trust 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)(2).(2)
ERISA's general standards of fiduciary conduct also would apply to the
proposed transfer. Section 404 requires a fiduciary, among other things,
to discharge his duties respecting a plan solely in the interest of the
plan's participants and beneficiaries, in a prudent fashion, and in
accordance with the terms of the plan to the extent that they are
consistent with Titles I and IV of ERISA.
This letter constitutes an advisory opinion under ERISA Procedure 76-1
(41 Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued
subject to the provisions of the procedure, including section 10 relating
to the effect of advisory opinions.
Sincerely,
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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We note that your request refers
solely to employer contributions, and accordingly, we assume for
purposes of this opinion that no assets of the NOMDA Trust were
derived from participant contributions or withholdings.
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You have represented that the NOMDA
Trust was created to provide health and life insurance benefits to
employees of employer members of NOMDA, as well as employees of NOMDA.
The Trust provides that upon termination, any remaining assets are to
be disposed of in a manner or to an organization organized and
operated for the same purposes as the Trust, as determined by the
trustees. The proposed VEBA is designed to provide health and life
insurance benefits to employees of BTA, the successor to NOMDA. You
represent that the Trustees believe that the transfer of the NOMDA
Trust’s assets to the VEBA satisfy the requirements of the Trust.
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