MEWA Termination / Dissolution

[401 Chaos]

Looking for advice regarding the termination / dissolution of a MEWA. In particular, we are trying to be sure we have reviewed any and all applicable sources of restrictions on the distribution of remaining trust assets once all MEWA claims have been satisfied and the applicable state department of insurance regulators have signed off on dissolution of the remaining trust assets.

In this case, the MEWA was a long-running MEWA established by a bona fide employer organization consisting of a professional trade association limited to employers in a single industry. The MEWA has always been operated as an ERISA welfare benefit plan and has always complied with all applicable state insurance laws and requirements for MEWAs and is working through the termination of coverage period currently. The funds have always been held in trust but the trust was not established as a tax-exempt VEBA under Code Section 501©(9). The MEWA anticipates a fair amount of trust funds remaining after all claims / liabilities have been paid. The remaining employers want to know whether they can get the remaining money and, if so, how it is to be divided or are there various restrictions on how those assets get used (e.g., having to be used for the benefit of participants / employees rather than reverting back to the employers).

Would welcome any thoughts on applicable rules or sources of restrictions. Assume the trust agreement and plan documents would be the two most direct sources of restrictions on use of remaining assets. Would also assume the State's MEWA regulations may factor in here if they specifically address the dissolution of MEWAs (unclear there are any express rules on this though). Also assume that ERISA's general fiduciary obligations to act solely in the best interests of plan participants, etc. may factor in here even though the decision to terminate the MEWA was a settlor decision of the Plan Sponsor. (Is there any reason to think that the Trustee's general fiduciary duty with respect to remaining assets and general restrictions on the use of those for participant benefit somehow goes away and the assets revert back following termination of the plan.)

Thanks for any thoughts from those that have been through the process before.

[401 Chaos]

Let me try and rephrase my question to simplify a bit:

Have an ERISA MEWA that is terminating. MEWA expects to have approximately $1.0 million left over after all claims are paid. A trust account was established pursuant to a less than artfully drafted trust agreement that does not set clear rules for the distribution of remaining proceeds. Trust was not qualified as a VEBA. Plan document itself only touches on distribution of assets following termination suggesting that remaining assets will be used to provide continuing or additional benefits to participants. Employers in the MEWA are already at each other's throats as to how to divide the pie and making plans to spend the remaining funds under assumption it will simply revert back in the nature of unrestricted funds to the employers. Insurance broker has suggested that is probably ok as long as all claims have been paid.

Is it really possible to simply divide up and distribute the remaining MEWA trust assets among the remaining employers without any restrictions when VEBA regulations do not apply?

I would assume those funds need to somehow use the remaining funds for the exclusive benefit of the participants. Seems these are trust assets of an ERISA plan and there would be a fiduciary duty at very least to use the amounts for the exclusive benefit of the participants and to try and reduce expenses or defer costs for participants, etc.

Any thoughts appreciated.

[Chaz]

I hate to punt on your question but have you looked at the DOL advisory opinions on the topic from a few years ago? I think the DOL has permitted transfer of a terminating MEWA's plan assets to a VEBA or a tax exempt entity but I don't believe that it has permitted reversion to the employers.

[401 Chaos]

Thanks, Chaz. Yes, we've generally reviewed some of the DOL Advisory Opinions and other releases and you are correct that there are a few of those that speak to the transfer of remaining MEWA assets to a 501©(3) charitable foundation or a related VEBA for the successor employer group, etc. Certainly none of them seem to mention anything about a reversion of the funds to the employers which is part of what has us concerned. Hard to glean all the facts from some of the DOL letters but it does appear in at least some of those cases the trust involved was a VEBA which clearly prohibited the reversion of assets to the employers. Given the VEBA status and the difficulty of trying to divy up the assets among various participants, etc., I can see where folks might just decide to transfer those amounts over to a 501©(3), particularly if they could give it to a ©(3) related to or affiliated with the sponsoring association, etc. In our case, however, there is no VEBA and the trust terms do not seem to expressly require the use of remaining assets solely for the same or similar purpose the trust was originally set up. Apparently there are some brokers (and I think here possibly even some folks at the state Dept. of Insurance that regulates the MEWA) that seem to have suggested that the assets could be sent back to the employers. I'm not sure any of them have much experience with those sorts of things however. There is also a PLR from the IRS from May or so of this year similar to some prior guidance where they permit a terminating VEBA to use the remaining assets to basically provide for premium holidays or other similar welfare benefit coverage for prior participants so even though the money doesn't revert back to the general funds of the employers they may still get some indirect benefit by lowering costs of future benefit coverage for awhile.

[Chaz]

I share with what I suspect is your discomfort in permitting the amounts to revert back to the employer.

In my experience, some folks at state insurance departments are not very familiar with MEWAs (even the ones that purport to regulate them) so I would take their view with a grain of salt.

The last PLR that you refer sounds promising.

[401 Chaos]

Thanks, Chaz. I too am suspicious about just how much the regulators might now about distribution of remaining assets in an ERISA MEWA. I think they are appropriately focused on making sure the trust has sufficient assets to cover all the liabilities / claims but once that happens they are sort of out of the picture so not sure it's their job to regulate that really. I just wish they didn't plant the seed for some use of the funds that may not be appropriate. The other aspect that I think I need to research (as I admittedly know very little about the area) is whether there may be some guidance as to distribution of remaining assets under Code §§ 419 or 419A that would apply to permit reversion / distribution of excess funds directly to the employers. (Of course, just finding some authority for that is only half the fun though as I think each employer or former employer has its own unique thought on how the amounts should be distributed.)