Multiemployer Plans and
Prohibited Transactions
Jim Cole
Groom Law Group, Chartered
(202) 861-0175
jcole@groom.com
NECA Labor Relations Conference
October 13, 2009
© 2009
Employee Retirement Income
Security Act (ERISA)
• Mandatory Plan or Trust Provisions
• Reporting and Disclosure Requirements
• Fiduciary Duty Requirements
– Affirmative Duties – “Thou shalt”
– Negative Prohibitions – “Thou shalt not”
– Liability and Penalties
Mandatory Plan or Trust
Provisions
• ERISA requires plan or trust documents to
set forth:
–
–
–
–
Funding policy
Allocation of responsibilities
Procedure for plan amendments
Basis for contributions
Fiduciary Duty Requirements
• Who is a fiduciary?
• What are the affirmative duties of a fiduciary
(the “Thou Shalts”)?
• What is a fiduciary prohibited from doing (the
“Thou Shalt Nots”)?
• What are the exceptions to the “Thou Shalt
Nots”?
• What are the consequences of a breach of
fiduciary duty?
Chart II: Fiduciary Analysis
I
Person/Entity
Renders Investment Advice For a Fee
Person/Entity Exercises Discretion
(e.g., brokers, investment managers)
Does person/entity give advice about the value of
securities or other property, or make
recommendations about whether to invest in,
purchase, or sell securities or other property?
Does person/entity have
discretionary authority or control
over administration of the plan?
(Distinguish the
performance of purely ministerial or
administrative functions such as
processing claims or calculating
benefits within a set framework
of rules or procedures)
Yes
Yes
Does the person/entity
(or affiliate) have
discretionary
Yes
authority or control
with respect to
purchasing and selling
securities or property
for plan?
No
Yes
Does person/entity exercise
authority or control
over management
or disposition of the
plan’s assets?
No
No
Fiduciary
(e.g., plan administrators)
(e.g., investment managers,
trustees)
II
Analyze based on the function being performed
No
Does the person/entity
(or affiliate)
render advice on a
regular basis
pursuant to mutual
No
agreement
that advice will serve
as a primary basis for
investment decisions?
Yes
Not a
Fiduciary
Yes
No
Yes
Is advice provided for a fee or
other compensation?
(may include brokerage
commissions, mutual fund
sales commissions,
and insurance
sales commissions)
Who Is a Fiduciary?
Section 3(21)(A) of ERISA states that “a person is a
fiduciary with respect to a plan to the extent (i) he
exercises any discretionary authority or
discretionary control respecting management of
such plan or exercises any authority or control
respecting management or disposition of its assets,
(ii) he renders investment advice for a fee or other
compensation, direct or indirect, with respect to any
moneys or other property of such plan, or has any
authority or responsibility to do so, or (iii) he has
any discretionary responsibility in the
administration of such plan.”
“Thou Shalts”
Section 404 of ERISA:
• Exclusive Benefit Rule
• Prudence Rule
• Diversification Rule
• In Accordance with Plan Documents Rule
PLAN
Participants
“Thou Shalt Nots”
• Section 406(a) per se prohibited transactions
PLAN
Party in
Interest
• Section 406(b) conflict of interest transactions
PLAN
Fiduciary
Hey, if it’s prohibited, it’s prohibited -- Who cares?
406(a) Per Se Prohibited
Transactions
•
•
•
•
•
Sale, exchange, or lease of property
Lending of money or extension of credit
Furnishing of goods, services or facilities
Transfer of plan assets to a party in interest
Use by or for the benefit of a party in interest
of any plan assets
• Acquisition by plan of any employer
securities or employer real property
General Parties In Interest
•
•
•
•
•
Fiduciary, counsel or employee
Service providers
Covered employers
Unions which represent covered employees
Owners, officers, shareholders, partners, joint
venturers, relatives or employees of the
above
Multiemployer Plan Parties In Interest
•
•
•
•
•
Trustees
Committee Members
Executive Director
Employees
Attorneys
•
•
•
•
•
Other Service Providers
Contributing Employers
Employer Associations
Local Union
Employees and Family
Members of the above
406(b) Conflict of Interest
Transactions
• Self Dealing
– Example – Cannot use assets to buy a boat
• Acting on Behalf of Adverse Party
– Example – A management trustee cannot negotiate the
sale of office equipment on behalf of the Plan and the
NECA Chapter that appointed him
• Kickbacks
– Example – A trustee cannot receive season football
tickets from the plan’s counsel
Chart I: Overview of Prohibited Transaction Analysis
I
II
Does the
transaction involve
the assets of a Plan?
Yes
III
Is the
transaction directly
between the Plan
and a Party-inInterest (PII)?
No
No
IV
Is the
transaction
part of an agreement,
arrangement, or understanding
involving the Plan’s
assets to benefit
a PII?
No
V
Does the
Fiduciary causing
No
the transaction
have an “interest” in the
transaction?
Yes
Yes
Yes
Does a
fiduciary advisor
recommending the
transaction have
an interest in the
transaction?
No
No PT
Yes
No PT
Analyze for indirect 406(a) transactions:
• Would the transaction be a transaction between a
plan and a PII but for the insertion of an intermediate
party? (e.g., a sale of property between a PII
and a third party, followed by a sale of the same
property to the plan);
• Is a transaction involving the plan either a
logical consequence of or a prerequisite for a
second transaction involving a PII?
•Is the plan entering into a transaction with a non PII
with the understanding that it will then engage in a
transaction with a PII?
Analyze for direct 406(a) transactions.
Does the transaction involve:
• A sale, exchange or lease of property;
• A loan or extension of credit (including a
guarantee);
• The furnishing of goods, services or facilities;
• A transfer of plan assets to a PII;
• A use of plan assets by a PII; or
• A use of plan assets for the benefit of a PII
No PT /
Exempt PT
No (continue
analysis in
IV-V, above,
if necessary)
No
Analyze for 406(b) transactions:
• Is the Plan fiduciary self-dealing (acting
in his own interest or for his own account)?
• Is the Plan Fiduciary acting on both sides
of the transaction?
• Is the Plan Fiduciary receiving
consideration from a third party?
Yes
No
Yes
Yes
Is there an
exemption available to cover the
transaction?
Yes
No
Are the
conditions of the exemption
satisfied?
No
Yes
No PT/ Exempt PT
(continue analysis in III,
IV and V, above, if
necessary)
Yes
Does the
exemption provide relief for
all relevant violations (e.g.,
406(a) and 406(b)?
No
Possible PT
Exemptions
• Statutory Exemptions
• Class Exemptions
• Individual Exemptions
PLAN
Party in
Interest
Statutory Exemption for Services
and Office Space
Section 408(b)(2) of ERISA permits a plan to“contract or
make reasonable arrangements with a party in interest
for office space, or legal, accounting, or other services
necessary for the establishment or operation of the plan,
if no more than reasonable compensation is paid therefor.”
– Necessary
– Reasonable contract or arrangement – Terminable
on short notice w/o penalty
– Reasonable compensation
Services and Office Space
Exemption Not Applicable to 406(b)
• The exemption does not apply to conflict of
interest situations.
• To avoid conflict of interest situations
– Pay no more than direct expenses.
– Fiduciary with conflict can recuse himself or herself from
decision
Fiduciary Pay
PLAN
Fiduciary
A. The fiduciary should not be involved in the decision
as to the amount or level of compensation paid.
Fiduciary Pay
PLAN
Fiduciary
B. If a fiduciary receives full-time pay from the union, a
covered employer, or NECA, the fiduciary can only be
reimbursed his direct expenses actually and properly
incurred.
1. Full-time pay – Fiduciary who is compensated on an hourly
basis and who loses wages when performing fiduciary duties
is not considered to be receiving full-time pay.
2. Expense advances – Plan may advance expenses to a
fiduciary if the amount of the advance is reasonable and if the
fiduciary accounts for all expenses properly and actually
incurred.
Summary of Exemptions
Union
Employer
NECA Chapter
Party in Interest Provides
Services to Plan
§ 408(b)(2)* §408(b)(2)*
§ 408(b)(2)*
Party in Interest Leases
Office Space to Plan
§ 408(b)(2)* § 408(b)(2)*
§ 408(b)(2)*
Party in Interest Leases
Real Estate to Plan
PTCE 78-6# PTCE 78-6#
NO
Party in Interest Sells
Real Estate to Plan
NO
NO
NO
Party in Interest Sells/
Leases Goods to Plan
NO
PTCE 78-6#
NO
#Applies only to Apprenticeship Plans and no relief from 406(b)(2)
*No 406(b)(2) relief
Summary of Exemptions
Union
Plan Provides Services
to Party in Interest
Employer
NECA Chapter
PTCE 76-1/77-10 PTCE 76-1/77-10 PTCE 76-1/77-10
Plan Leases Office Space
PTCE 76-1/77-10 PTCE 76-1/77-10 PTCE 76-1/77-10
to Party in Interest
Plan Leases Real Estate
to Party in Interest
NO
NO
NO
Plan Sells Real Estate
to Party in Interest
NO
NO
NO
Plan Sells/Leases Goods
to Party in Interest
PTCE 76-1/77-10 PTCE 76-1/77-10 PTCE 76-1/77-10
Individual Exemptions
The DOL is authorized to grant individual
exemptions upon application if such exemption is:
• Administratively feasible
• In the interests of the plan and its participants and
beneficiaries, and
• Protective of the rights of participants and
beneficiaries
Consequences of a Fiduciary
Breach
Section 409(a) of ERISA.
• Liable for losses to plan
• Pay any profits earned
• Equitable or remedial relief, including
removal
Consequences of a Fiduciary
Breach
Additional consequences:
• Civil penalty under Section 502(l) equal to
20% of amount recovered
• Liability for breach by a co-fiduciary
– Participate in or conceal breach
– Failure to comply with own responsibilities led to breach
by another
– Failure to correct
• Penalty on party in interest equal to 15% of
amount involved or 100% of amount involved
if not corrected
Questions & Answers
Jim Cole
Groom Law Group, Chartered
(202) 861-0175
jvc@groom.com
www.groom.com