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sloble@crowleyfleck.com

Funding MEWA

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MEWA will be established as a single self-funded ERISA plan (an association of bona fide group of employers is the sponsor).

Association needs to pre-fund to get it going. State insurance laws require certain reserves, etc. Association would like to loan the funds directly to the MEWA trust.

My feeling is that we need to follow the requirements of PTE 80-26 as amended and do this as an interest-free loan to the plan.

But, I was thinking, the plan does not exist yet so could the contribution merely be viewed as a setllor function.

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Ashley:

I gather that the association is in only one state, correct?

What type of trust are you using; is it a VEBA?

Are the employers satisfied with the reserves and surplus required by the state laws?

Were the amounts required according to the laws as written for MEWAs, or, were the requirements the same as for commercial insurers?

In other words, were the reserve and surplus requirements decided after reviewing the MEWA's liabilities, or did the Department of Insurance use the "boiler plate" requirements?

I gather the MEWA is partially self insured, correct?

Don Levit

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Don Levit:

I gather that the association is in only one state, correct? YES

What type of trust are you using; is it a VEBA? PROBABLY - STILL DECIDING

Are the employers satisfied with the reserves and surplus required by the state laws? YES SO FAR

Were the amounts required according to the laws as written for MEWAs, or, were the requirements the same as for commercial insurers? THE STATE LAW IS SPECIFIC TO SELF FUNDED MEWAS

In other words, were the reserve and surplus requirements decided after reviewing the MEWA's liabilities, or did the Department of Insurance use the "boiler plate" requirements? BOILER PLATE/STATUTE

I gather the MEWA is partially self insured, correct? IT IS FULLY SELF INSURED BUT IT WILL HAVE STOP LOSS

I hope this helps you consider my original question. THANKS

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Ashley:

Typically, settlor functions are those activities that take place before the trust creation, as well as those activities after the trust is created that relate to business or administrative decisions.

Settlor decisions have little or no relation to fiduciary responsibilities.

Could you explain to us what PTE 80-26 is?

Since the state applied boiler plate rules for reserves and surplus, you can be assured the general requirements do not fit what would be needed for your plan.

These are not my words. Rather, this is the opinion of the NAIC, as well as the Lewin Group, a well respected actuarial firm.

With stop-loss insurance, I assume the reserve and surplus requirements were lowered, as opposed to a self insured plan without stop-loss insurance.

Do the MEWA reserve laws account for that?

What state are you in?

By the way, if the reserve and surplus requirements are excessive, the VEBA will have Unrelated Business Income Tax to pay. If that occurs, the reserve and surplus laws may be preempted to lower or eliminate the UBIT.

If that is the case, a VEBA may be an excellent choice.

Don Levit

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Don: Thank you for your comments: The state is Montana and the relevant law is at

http://data.opi.mt.gov/bills/mca_toc/33_35.htm

80-26 is a prohibited transaction exemption that permits a party-in-interest (here, the association sponsor) to make an interest free loan to a Plan (here, the MEWA) without violating the prohibition on loans between a plan and a party in interest. I think my scenario falls into this exemption, but I was curious whether I might avoid having to apply it if the pre-funding is only a settlor function. You are right that settlor decisions have nothing to do with fiduciary decisions. That is why my question is whether pre-funding a MEWA is a settlor decision. Then it would not have fiduciary implications.

I appreciate your comments but I am not an insurance person but rather an ERISA lawyer so I dont follow some of your points (my questions are in ALLCAPS for clarity, I am not SHOUTING...):

Since the state applied boiler plate rules for reserves and surplus, you can be assured the general requirements do not fit what would be needed for your plan.

These are not my words. Rather, this is the opinion of the NAIC, as well as the Lewin Group, a well respected actuarial firm. WHAT IS THE POINT OF MAKING THE RESERVES "FIT WHAT WOULD BE NEEDED FOR THE PLA"-- ARE YOU SUGGESTING THAT THE LOAN AMOUNT (WHICH IS OBTAINED TO MEET RESERVE REQUIREMENTS) MIGHT BE TOO HIGH BASED ON PLAN OPERATIONAL NEEDS OR TOO LOW? WHAT IF WE OBTAINED A FINANCIAL ASSESSMENT TAILORED TO THE PLAN, WOULD THAT ELIMINATE YOUR CONCERNS?

With stop-loss insurance, I assume the reserve and surplus requirements were lowered, as opposed to a self insured plan without stop-loss insurance. I THINK SO

By the way, if the reserve and surplus requirements are excessive, the VEBA will have Unrelated Business Income Tax to pay. If that occurs, the reserve and surplus laws may be preempted to lower or eliminate the UBIT. If that is the case, a VEBA may be an excellent choice. I AM CONFUSED> DO YOU MEAN THAT ERISA WOULD PREEMPT THE RESERVE AND SURPLUS LAWS BECAUSE THE UBIT IS INCONSISTENT WITH ERISA? DO YOU HAVE AUTHORITY FOR THAT? AGAIN, IF WE OBTAINED A FINANCIAL ASSESSMENT TAILORED TO THE PLAN, WOULD THAT ELIMINATE YOUR CONCERNS?

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Ashley:

Thanks for providing the link. I will take a look at it.

If the reserves and surplus are "excessive," then there may be some fiduciary violations to the participants, because premiums may be higher than necessary in order to pay back the (excessive) loan, and benefits would be less due to the excess.

A VEBA has much more stringent responsibilities as a fiduciary to the participants, than a commercial insurer would have to its policyholders.

Excessive UBIT could be viewed as a fidiciary violation, as well as my prior explanation regarding higher premiums and lower benefits.

While most states do not have maximum surplus laws for commercial insurers, this would not apply, in my opinion, to self-funded VEBAs.

Of course, many regulators that I have spoken with are concerned, primarily, with enforcing state laws, and have little interest in how they may conflict with federal laws.

Because the VEBA is funded under a 501©(9), for example, it is supposed to offer benefits that are not provided in the commercial market, in order to "earn" its tax exempt status. This can provide the necessary breathing room to provide more innovative plans.

Obtaining a financial assessment seems like a great idea. You will have to have an actuary's opinion anyway, in order to satisfy (at least most) Department of Insurances.

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