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March 1, 2006
The Honorable Mike Kreidler
Insurance Commissioner
Washington Office of Insurance Commissioner
P.O. Box 40255
Olympia, WA 98504-0255
Dear Commissioner Kreidler:
This is in response to the request we received from your Office
regarding the definition of “multiple employer welfare arrangement” (MEWA)
in section 3(40) of the Employee Retirement Income Security Act of 1974 (ERISA).
Specifically, you ask whether a professional employer organization (PEO)
and its client companies would be a “control group” within the meaning
of ERISA section 3(40)(B)(i) by reason of the PEO entering into agreements
with its client companies under which the PEO is given an option to
purchase an 80% interest in each client company.
You indicate that this issue has arisen in connection with a PEO’s
challenge to an order issued by the Washington Insurance Commissioner
directing the PEO to cease and desist marketing an unlicensed insurance
program to employers in Washington State. The PEO claims the health
benefit arrangement it markets to client employers is not subject to state
insurance regulation because the existence of the option agreements to
purchase its client employers’ businesses makes its health benefit
program a single-employer “employee welfare benefit plan”
within the meaning of section 3(1) of ERISA that is not subject to state
insurance regulation as a MEWA under section 514(b)(6) of ERISA.
You state that discovery obtained from the PEO to date has not revealed
any business purpose for the option agreements other than to enable the
PEO to claim that its health benefit program is exempt from State
insurance regulation as a MEWA. The option agreements are entered into in
connection with an agreement that the PEO would provide employee benefits
to the employees of the client employer or benefit related services to the
client employer. The option agreements also terminate upon the termination
of the benefit or service agreement. Neither the PEO nor any client
employer has produced any evidence that the PEO and the client employers
consider themselves under common control for any tax or regulatory purpose
other than for the purpose of avoiding MEWA status under ERISA and state
insurance law. You indicated that, although the PEO has been in business
since 2002, there is no evidence that any option agreement has been
exercised and the PEO has not offered any evidence indicating that there
is any reasonable likelihood that the PEO will, or has the financial
capability to, exercise the options to purchase the companies that it
claims are members of its controlled group. You further state that any
exercise of the option agreements would appear to violate Washington law
because the PEO’s arrangement includes chiropractors, dentists and oral
surgeons. You represent that a PEO could not acquire a dental,
chiropractic, or surgical practice under Washington law because Washington
law prohibits corporations, other than professional service corporations,
from engaging in the practice of medicine. Moreover, only licensed
professionals and certain qualified trusts, may own shares of professional
service corporations.
The question you pose regarding the status of the PEO health benefit
program as a MEWA involves interpretation of whether the Department would
treat the PEO and its client employers as a “single employer” by
reason of being a “group of trades or businesses under common control”
for purposes of section 3(40) of ERISA.
Section 3(40)(A) of ERISA provides, in pertinent part, that the term
“multiple employer welfare arrangement,” also referred to as MEWA, “means
an employee welfare benefit plan, or any other arrangement (other than an
employee welfare benefit plan), which is established or maintained for the
purpose of offering or providing any [welfare] benefit described in
[section 3(1) of ERISA] to the employees of two or more employers
(including one or more self-employed individuals), or to their
beneficiaries . . . .” If a plan is maintained by a single employer for
the exclusive purpose of providing benefits to that employer’s
employees, former employees, or their beneficiaries, the plan would be a
single employer plan and not a MEWA within the meaning of ERISA section
3(40). In this connection, ERISA section 3(40)(B)(i) provides that, for
purposes of section 3(40), “two or more trades or businesses, whether or
not incorporated, shall be deemed a single employer if such trades or
businesses are within the same control group.” In determining whether
trades or businesses are within the “same control group,” section
3(40)(B)(ii) provides that the term “control group” means a “group
of trades or businesses under common control.” Pursuant to section
3(40)(B)(iii), whether a trade or business is under “common control”
with another trade or business is to be determined under regulations
issued by the Secretary of Labor “applying principles similar to the
principles applied” in determining whether there is “common control”
under section 4001(b) of Title IV of ERISA, except that common control
shall not be based on an interest of less than 25 percent.
The Secretary has not issued regulations under ERISA section 3(40)(B).
The regulation under section 4001(b) of Title IV of ERISA, which also
treats trades or businesses under common control as a single employer,
adopts the definition of common control set forth in the regulations under
section 414(c) of the Internal Revenue Code of 1986 (Code). See 29 C.F.R.
§ 4001.3. It is our understanding that under Code section 414 (c), common
control generally means (i) in the case of a parent-subsidiary group, the
entities are connected through at least an 80% ownership interest, or (ii)
in the case of a brother-sister group: (a) five or fewer people own at
least an 80% interest in each entity and, (b) the same five or fewer
people together own a greater than 50% interest in each entity taking into
account the ownership of each person only to the extent such ownership is
identical with respect to each organization. See 26 CFR §1.414(c)-2. The
regulations under section 414(c) take into account certain constructive
ownership interests. Of particular relevance to your inquiry, “if a
person has an option to acquire any outstanding interest in an
organization, such interest shall be considered as owned by such person.”
26 C.F.R. § 1.414(c)-4(b).
In the absence of regulations under section 3(40)(B)(iii), the
Department would generally follow ERISA section 4001(b), and therefore the
Code section 414(c) rules, in interpreting ERISA’s MEWA preemption
provisions. The Department, however, believes it is important in
interpreting section 3(40)(B)(i) to keep in mind the different policies
underlying the section 4001(b) single employer concept and the single
employer provision in section 3(40) of ERISA.(1) The effect of single
employer treatment under ERISA section 4001(b) and Code section 414(c) is
to ignore separate formal business structures of an employer and of
businesses under common control with the employer in order to expand with
respect to a particular plan the range of businesses subject to certain
PBGC liabilities and the range of businesses to which the tax
qualification rules would apply. See H. Conf. Rep. 1280, 93d Cong., 2d
Sess. 266, 376 (1974); H. Rep. 807, 93d Cong., 2d Sess. 50 (1974). In
contrast, Congress’s objective in enacting the MEWA preemption
provisions was to remove impediments to the States’ ability to regulate
multiple employer welfare arrangements and assure the financial soundness
and timely payment of benefits under such arrangements. See 128 Cong. Rec.
E2407 (1982) (statement of Congressman Ehrlenborn on the purpose of Pub.
L. 97-473 which added ERISA section 3(40) and ERISA section 514(b)
reducing the scope of ERISA preemption of State law applicable to ERISA-covered
plans that are MEWAs). It would be inconsistent with the goals and
purposes underlying ERISA section 3(40)(B) to read the common control
language of the statute in a vacuum so as to treat separate businesses as
a single employer based on an artifice entered into for the purpose of
using ERISA preemption as a shield against state insurance regulation of a
health benefit program being marketed to those separate employers and
their employees.
The Department, therefore, is of the view that the PEO must be able to
demonstrate that there is a “substantial business purpose” for the
option agreements other than avoiding State insurance regulation of a
health benefit program it offers to its client employers before the
Department will give any weight to the option agreements in determining
whether the PEO and its client employers should be treated as a single
employer for purposes of section 3(40) of ERISA.(2) Furthermore, this letter
should not be read as expressing the view that the particular PEO health
benefit program involved in your proceeding is itself an “employee
welfare benefit plan” within the meaning of section 3(1) of ERISA, or
that the option agreements involved in your proceeding are valid, or that
the option agreement arrangement is sufficient to constitute common
control under ERISA section 4001(b), as administered by the PBGC, or Code
section 414(c), as administered by the Internal Revenue Service which has
interpretive authority over that section and the regulations issued
thereunder.
We hope that this information is of assistance to you.
Sincerely,
John J. Canary
Chief, Division of Coverage, Reporting and Disclosure
Office of Regulations and Interpretations
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The statutory text in section 3(40) of ERISA calling for application of
similar principles contrasts with section 4001(b) under which the PBGC‘s
common control regulations are to be “consistent and coextensive with”
the Treasury regulations under sections 414(c) of the Code. That
difference reflects, in the Department’s view, an expectation that
single employer determinations under section 3(40) of ERISA should account
for the different policies underlying ERISA’s MEWA preemption
provisions.
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A “substantial business purpose” test applies in the context of
ERISA section 3(37) to address arrangements constructed to obtain the
benefits of being regulated as a multiemployer plan under ERISA. See 29
C.F.R. § 2510.3-37.
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