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Denise M. Clark
Feder & Semo, P.C.
1350 Connecticut Avenue, NW, Suite 600
Washington, DC 20036
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2001-05A
ERISA Sec. 403,404,406
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Dear Ms. Clark:
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This is in response to your request for an advisory opinion on behalf of the
board of trustees of The Hotel Employees and Restaurant Employees
International Union Welfare Fund (the fund) regarding the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974 (ERISA). Specifically, you ask whether it is permissible under such
provisions for the board of trustees to choose to amend the fund to provide
for the payment of: (1) certain federal tax obligations that
arise as a result of the fund's provision of domestic partner coverage;
(2) an additional gross-up benefit to
participants who elect domestic partner coverage.
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Domestic partner coverage means the totality of domestic partner benefits
available under applicable fund provisions. In general, domestic partner
benefits are the medical, surgical, hospital care and similar healthcare
services provided to the eligible domestic partners of plan participants by
healthcare providers and the fund's payment to such providers for the
services rendered pursuant to a particular plan unit's schedule of benefits,
contracts with providers or indemnity provisions. You state that the
trustees designed the fund's domestic partner coverage to provide health and
welfare benefits to the eligible domestic partners of participants that are
the same as the fund benefits available to participants and their spouses
and dependent children within a particular plan unit, on a cost and
lifestyle neutral basis.
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As background, you state that the fund provides medical, surgical, hospital
care, and similar health benefits to approximately 100,000 participants
employed in the hotel and restaurant industries and their eligible
beneficiaries pursuant to approximately 700 collective bargaining agreements
with the Hotel Employees and Restaurant Employees International Union (HEREIU),
its locals, or affiliates and contributing employers.(1)
You refer to the fund as a multi-employer health and welfare plan comprised
of twenty-seven plan units that cover discrete geographic areas throughout
the country.(2) Each plan unit offers its own set of
individualized benefits provided pursuant to the terms of its respective
plan document. All available benefits are paid from one asset pool despite
the existence of the various plan units. Coverage is generally provided to
participants and their eligible beneficiaries on a non-contributory basis.
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You represent that the fund has made domestic partner
coverage available in three plan units, New York [plan unit 100], Las
Vegas [plan unit 150] and Atlantic City [plan unit 102/202], and that
approximately 109 participants have elected domestic partner coverage in
their respective plan units. As defined in the applicable plan documents,
an eligible domestic partner is any unmarried individual who lives with an
unmarried participant of the same-sex on a continuous basis prior to the
election of the coverage, and who has a close and committed personal
relationship with the electing participant that is evidenced by joint
economic interdependence.(3) Additionally, the
participant electing domestic partner coverage and his or her domestic
partner must: (1) be at least 18 years of age; (2) be unrelated by blood;
(3) have jointly executed an Affidavit
of Domestic Partnership provided by the plan; (4) not have been members of another
domestic partnership, as defined in the plan document, within six
months preceding the relationship for which domestic partnership
benefits are claimed
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Plan unit 100 also extends domestic partner coverage to opposite-sex couples
that otherwise satisfy the fund's definition of domestic partner. The fund's
provision of domestic partner coverage in these plan units was authorized by
the fund's benefit plan committee, in the process described below, pursuant
to individual plan unit amendments that apply only to the plan unit
identified in the respective plan amendment.
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In a supplementary letter, you have explained the process for determining
the types of benefits a plan unit will offer, such as domestic partner
coverage. Initially, the trustees solicit the input of participants through
their collective bargaining representatives and satisfaction surveys. Next
and prior to any plan unit offering a specific benefit, actuarial
underwriting calculations are performed to assure that the contributions
received from contributing employers in a specific plan unit are sufficient
to cover the cost of benefits provided in that particular plan unit. If the
desired benefits can be supported by the plan unit income, then the fund
staff designs the benefit and seeks approval from the benefit plan committee
for a plan unit amendment. The benefit plan committee is the committee of
trustees that has been delegated the authority to oversee and approve all
benefits offered by individual plan units as well as blanket amendments that
apply to the plan documents of all the fund's constituent plan units.
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You represent that providing domestic partner coverage has raised issues of
tax liability under the Internal Revenue Code (the code) for both the fund
and its participants, and fiduciary liability and prohibited transaction
issues under ERISA for the fund and its trustees. The tax issues relate to
guidance provided by the Internal Revenue Service (the service) to another
taxpayer in Private Letter Ruling 9850011.(4) As a result,
the trustees filed this advisory opinion request with the department and a
private letter ruling request with the service regarding the employment tax
consequences to the fund of providing domestic partner coverage.(5)
Specifically the trustees asked the service for a ruling as to whether the fund,
as the entity in control of providing domestic partner coverage, is the
employer for purposes of federal employment taxes. The request also asked
the service for a ruling regarding the effect of domestic partner coverage
and related tax liabilities on the fund's exempt status under section
501(c)(9) of the code.
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As a preliminary action before requesting guidance from the department and
the service, the trustees adopted a blanket amendment to comply with the fund's
tax responsibilities for all plan units with domestic partner coverage. The
blanket amendment is designed to preserve the fund's domestic partner
coverage, protect the privacy of electing participants and permit additional
plan units to offer domestic partner coverage in the future. The amendment
provides that the fund will pay both the FUTA taxes and the employer and
employee portion of the FICA taxes on the amount includible as wages in the
gross income of the participant by reason of the domestic partner coverage
(the taxable domestic partner amount). Additionally, the fund will pay a
gross-up amount on the employee portion of the FICA tax (the gross-up),
calculated in accordance with the methodology detailed in Revenue Procedure
81-48, 1981-2 C.B. 623. The gross-up is intended to make the participant
whole by avoiding the pyramiding of wages and resulting taxes that would
otherwise result from the fund's payment of the employee portion of the FICA
tax. You represent that the tax compliance method contained in the blanket
amendment is the result of a deliberative decision making process by the
trustees that evaluated compliance alternatives to determine a method that
would be both administratively and fiscally reasonable for the fund.
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The service issued Private Letter Ruling 200108010
(November 17, 2000) in response to the trustees' request for rulings on
the fund's employment tax responsibilities based on the facts represented.
Among the rulings, the service held that: (1) the excess of the fair market value
of the coverage provided by the fund to a nondependent, non-spousal
domestic partner of the participant within the meaning of section 152
of the code, over the amount paid by the employee-participant (the
participant) for such coverage, is includible in the income of the
participant under section 61 of the code and is wages for FICA, FUTA
and income tax withholding purposes. The amount of participant FICA
attributable to the coverage that is paid by the fund on the
participant's behalf is also includible in the participant's income
and is wages for employment tax purposes. Therefore, the grossed-up
amount determined under Revenue Procedure 81-48 is the amount
includible in the gross income of the participant by reason of the
health coverage for a domestic partner and is the amount of the
participant's wages for FICA, FUTA and income tax withholding purposes;
(2) the fund is the employer under
section 3401(d) of the code for purposes of the employment taxes
because it has legal control of the payment of the wages (that is, the
value of the coverage provided to a participant's nondependent, non-spousal
domestic partner). Consequently, the fund must withhold income tax and
the participant portion of the FICA tax. The fund must also pay the
employer portion of the FICA tax and FUTA tax; (3) the fund's operations with respect
to health coverage provided to nondependent, non-spousal domestic
partners will be no more than de minimis within the meaning of
Treasury Regulation section 1.501(c)(9)-3(a). The provision of
domestic partner coverage therefore will not adversely affect the fund's
exempt status under section 501(c)(9) of the code.
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In the advisory opinion request to the department, you first ask for an
opinion that the fund's payment of the FUTA taxes and the employer and
employee portions of the FICA taxes on the taxable domestic partner amount
would not violate ERISA sections 403(c)(1), 404(a)(1) or the prohibited
transaction provisions of ERISA section 406(a)(1)(C) and 406(a)(1)(D).
Secondly, you ask whether it is permissible under the prohibited transaction
provisions of ERISA section 406(b)(2) for employer-appointed trustees to
participate in the process of deciding to have the fund pay the employer's
FICA and FUTA tax obligations on the taxable domestic partner amount.
Thirdly, you ask whether the fund's blanket amendment on domestic partner
coverage has the effect of establishing the fund's payments of participants'
FICA taxes on the taxable domestic partner amount as benefits specified in
the plan. Fourthly, you ask whether the fund's payment of the gross-up as an
additional domestic partner benefit would violate ERISA sections 403(c)(1),
404(a)(1) and 406(a)(1)(D).
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ERISA section 403(c)(1) generally provides that, subject to certain
exceptions, the assets of a plan shall not inure to the benefit of any
employer and shall be held for the exclusive purposes of providing benefits
to participants and beneficiaries and defraying reasonable expenses of
administering the plan. ERISA section 404(a)(1)(A) requires plan fiduciaries
to discharge their 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 beneficiaries and defraying
reasonable expenses of administering the plan. In addition, ERISA section
404(a)(1)(B) requires plan fiduciaries to discharge their duties 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, and, pursuant to ERISA section 404(a)(1)(D), in
accordance with the documents and instruments governing the plan insofar as
such documents and instruments are consistent with the provisions of Titles
I and IV of ERISA.
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ERISA section 406(a)(1)(C) and (D) prohibit a fiduciary from causing a plan
to engage in a transaction, if he or she knows or should know that the
transaction constitutes a direct or indirect furnishing of goods, services
or facilities between a plan and a party in interest, or transfer to, or use
by or for the benefit of, a party in interest of any assets of the plan.
ERISA section 406(b)(1) prohibits a fiduciary from dealing with the assets
of the plan in his own interest or for his own account. ERISA section
406(b)(2) specifically prohibits fiduciaries in their 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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With respect to that portion of your first question
dealing with the fund's payment of the FUTA taxes and the employer portion
of the FICA taxes, it is the view of the department that if the fund is
legally responsible for payment of the FUTA taxes and the employer portion
of the FICA taxes on the taxable domestic partner amount, the payment of
these obligations would not violate ERISA sections 403(c)(1), 404(a)(1),
406(a)(1)(C) and 406(a)(1)(D). If a participant's common law employer is
not responsible for the payment of these obligations, then the fund's
payment of them would not be an inurement of plan assets to the common law
employer's benefit. Similarly, the fund's payment of these obligations
would not be an improper expenditure of plan assets under ERISA section
404(a)(1). Nor would it give rise to a prohibited transaction under ERISA
section 406(a)(1). This view is consistent with the principles articulated
in Advisory Opinion 82-32A (July 20, 1982).(6)
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Similarly with respect to your second question, it is
the view of the department that if the fund is legally responsible for
paying the FUTA taxes and the employer portion of the FICA taxes,
participation by the employer-appointed trustees in the compliance
decision making process would not give rise to a prohibited transaction
under ERISA section 406(b)(2).
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With respect to the portion of your first question
dealing with fund's payment of the employee portion of the FICA tax, it is
the department's view that the fund's decision to pay the employee portion
of the FICA tax for participants electing domestic partner coverage as an
additional domestic partner benefit would not violate ERISA sections
403(c)(1), 404(a)(1) and 406(a)(1)(D) provided such payments are clearly
specified as plan benefits in the plan document.(7) Such
payments are an additional distribution from plan assets and must be
provided as plan benefits to avoid violating ERISA; they cannot be
justified as reasonable administrative expenses of the plan.
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With respect to your third question asking for
confirmation that the fund's blanket amendment has the effect of
establishing the fund's payment of the participants' FICA taxes triggered
by their domestic partner coverage as benefits specified in plan, the department
generally will not issue opinions regarding the interpretation of plan
documents and therefore declines to opine on this question.
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With respect to your fourth question dealing with the fund's
payment of the gross-up, it is the department's view that the fund's
decision to pay the gross-up as an additional domestic partner benefit
would not violate ERISA sections 403(c)(1), 404(a)(1) and 406(a)(1)(D)
provided such payments are clearly specified as plan benefits in the plan
document. Such payments are an additional distribution from plan assets
and must be provided as plan benefits to avoid violating ERISA; they
cannot be justified as reasonable administrative expenses of the plan.
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The views expressed in this letter relate only to the
provisions of ERISA addressed above and not to any other law. In
particular, this letter does not rule on the interpretation or application
of any code sections. Further, this letter makes no comments regarding
section 302 (c) of the Labor Management Relations Act of 1947 because the
Department of Justice rather than the Department of Labor has jurisdiction
regarding that provision.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1. Accordingly, it is subject to the provisions of the
procedure, including section 10 thereof relating to the effect of advisory
opinions.
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Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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The fund was created pursuant to an
Agreement and Declaration of Trust in 1974 and is a voluntary employee
beneficiary association under section 501(c)(9) of the Internal
Revenue Code.
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Section 1.06 of the trust agreement
creating the fund defines Welfare Fund to mean the trust fund
established for the purposes of providing benefits... Section 1.07
defines Welfare Plan to mean the benefit programs established and
maintained by the trustees for the payment of medical, hospital
care...benefits from the Welfare Fund and states that the Welfare Plan
is an employee welfare benefit plan... and shall be administered in
accordance with... the applicable Plan Documents which contain the
rules and regulations relating to eligibility for and the amount and
nature of the benefits that are adopted by the trustees. Section 1.08
defines plan unit to refer to the benefit programs adopted by the
Trustees for specific regions of the country. Each plan unit shall be
considered a part of the Welfare Fund and Welfare Plan administered
hereunder.
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A non-spousal domestic partner
cannot qualify as a spouse for any purpose under federal law. The
Defense of Marriage Act � 1 U.S.C. �(1996), provides: In
determining the meaning of any Act of Congress, or of any ruling,
regulation or interpretation of the various administrative bureaus or
agencies of the United States, the word 憁arriage' means only a
legal union between one-man and one-woman as husband and wife, and the
word 憇pouse' refers only to a person of the opposite sex who is a
husband or wife.
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In PLR 9850011 (September 10,1998),
the service ruled that the amount equal to the excess of the fair
market value of the group medical coverage provided by a particular
multi-employer fund to a domestic partner over the amount paid by the
participant (employee) for such coverage was includible in the gross
income of participants electing domestic partner coverage in all
situations where a covered domestic partner failed to qualify as a
spouse or dependent. Additionally, the service ruled that the amount
includible in the gross income of the employee by reason of the
domestic partner coverage constituted wages under section 3401(a) of
the code and was subject to income tax withholding under section 3402
of the code. The service also ruled that such amounts constituted
wages within the meaning of section 3121(a) of the code and section
3306(b) of the code for FICA and FUTA purposes, respectively.
Moreover, the service ruled that the fund was required to withhold the
amount required to be withheld under section 3402 of the code for
income tax purposes and the amount of FICA and FUTA taxes imposed by
sections 3111 and 3301 of the code.
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The term employment tax is used in
PLR 9850011 and the private letter ruling request to refer
collectively to:
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The Federal Insurance
Contributions Act (FICA) which imposes a tax on employers and
employees based on a percentage of wages paid or received with
respect to employment under sections 3101 and 3111 of the code
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The Federal Unemployment
Contributions Act (FUTA) which imposes an excise tax on employers
based on a percentage of total wages paid with respect to
employment under section 3301 of the code
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The income tax reporting and
withholding at source obligations on wages imposed under section
3402 of the code
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In Advisory Opinion 82-32A, the department
expressed the view that multi-employer plans could comply with certain
federal tax law requirements imposed on such plans by directly
reporting sick pay to the service and paying the employer portion of
FICA tax without necessarily contravening ERISA sections 403(c)(1),
404(a)(1) and 406(a)(1)(D).
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See also Advisory Opinion 82-32A
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