prior service increases for "good" contractors

[Guest Keith N]

I had a client recently ask me if they could allow their "good" contractors to share in past service increases. It smells bad to me, but I can't put my finger on why.

For example:

Ted is a union member and participant for 15 years. Ted leaves the union and takes a job as a "general electrician" at the local hospital. A non-union position. Ted's benefit is frozen, based his YOS and the multiplier in effect when he left.

Damion is a union member and participant for 15 years. Damion leaves to become a contractor. Damion hires non-union guys and is therefore a "bad" contractor. Damion's benefit is also frozen, based his YOS and the multiplier in effect when he left.

Bill is a union member and participant for 15 years. Bill leaves to become a contractor. Bill hires union guys and is therefore a "good" contractor. Bill's benefit is also frozen, based his YOS and the multiplier in effect, but if the pension multiplier increases at some point in the future, Bill would get the increase on his 15 YOS.

Also note that Bill is also permitted to participate in the union plan as an active participate if he wants. He can make contributions for himself, as well as his other employees, but this would not be required.

My thoughts ranged from general labor issues to the fact that the contractors would be HCE (>5% owners) who would not be covered by the bargaining agreement who are the sole beneficiaries of the amendment. Doesn't this discriminate against other NHCE terminated vested participants? 1.401(a)(4)-5

I looking for a reasons other than "it doesn't smell right".

[KJohnson]

Collectively bargained plan pass all of 401(a)(4) automatically under 1.401(a)(4)-1©(5).

This reg then sends you to 1.410(B)-2(B)(7) with regard to a collectively bargained plan. Then under the 410 regs you go to

1.410(B)(6)(d) to see who is collectively bargained. This rule contains provisons on bargaining unit "alumni" being treated as collectively bargained and it sounds like Bill, being the good guy that he is, falls under the defintiion (you would have to read this in more detail to make sure-- and also make sure that you fall within any consistency or other rules).

If this is the case then it does not appear that you could have a

1.401(a)(4)-5 violation given the automatic "pass" for collectively bargained plans.

If this all pans out to be true, I would think that you would want your amendment to specifically reference the alumni regs and that only alumni would be entitled to this credit.

[KJohnson]

B/T/W I AM NOT SURE ANY RESEARCH WOULD SHOW ANYTHING ON THIS DIRECTLY, BUT I KNOW MUTLIEMPLOYER PLANS ARE ALWAYS IN LITIGATION ABOUT CHANGES TO THEIR SUSPENSION OF BENEFITS RULES WITH REGARD TO PEOPLE WORKING UNION AND NON-UNION. YOU MAY WANT TO DO A SEARCH AND SEE IF ANYTHING HAS EVER COME UP ON THIS. (ALTHOUGH THE 411(d)(6) ASPECTS SEEM TO COME UP ON THIS MORE FREQUENTLY THAN ANY SORT OF 401(a)(4) DISCRIMINATION ISSUe).

[mal]

Check out Deak v. Masters & Mates Pension Fund...I am

not sure on the spelling...but I think it came out of CA.

In that case multiemployer plan fiduciaries were found to

have violated ERISA by discriminating against retirees who returned to work for non-union contractors. The applicable suspension period was much longer for those retirees who went to work non-union versus those who stayed with contributing employers. The court found no rational basis that the plan

should treat these people differently.

[KJohnson]

MAL--I haven't gone back and read it but I wonder if Deak holds up after the Supreme Court's decisions in Spink and Jacobsen with regard to settlor/fidcuairy funcitons. In the last few weeks the DOL has come out with some guidance on when trustees of a multiemployer plan act in a settlor function and when they act in a fiduciary function in amending a plan.

Also to the extent that the attack was on sole and exclusive benefit under 302 of Taft-Hartley--this argument would seem to be dead because of the Supreme Court's decision in Demisay.

Again, haven't gone back to read Deak lately.

[Guest Keith N]

Thank you both. You provided great direction. Stop me if you don’t agree with the following:

Collectively bargained plans have an automatic pass by way of 1.401(a)(4)-1©(5), which kicks you eventually to 1.410(B)(6)(d). Since all active participants in the plan are collectively bargained, I pass and I am exempt from 401(a)(4). That works for my actives.

Now, I want to grant a benefit increase to certain inactive participants. I'm not sure that 1.410(B)-6(d)(2) helps me because it seems to be looking more at employees who were bargaining employees during a portion of the year, or a portion of the agreement, who earned additional benefits inside the plan for hours worked outside the agreement. I don't think that is my issue.

I may be able to stop at –1©(5), but if I say that the amendment must also comply with 1.410(a)(4)-1©(6) - former employees, the definition of excludable employees in 1.410(B)-6(h)(3), states that if the former employee was a previously an excludable employee, than I can continue to treat him as excludable. Since at the time he was active, he was excludable, I don't think I have a problem here either.

This now brings me to mal's comment about Deak v Masters & Mates. I'm no lawyer, but after reading the findings it seemed to me like the court ruled that the trustees failed to act in the best interest of the plan when they amended the plan to make the length of time retirement benefits were suspended when a retiree becomes re-employed dependent on whether reemployment was with a contributing or noncontributing employer. The court felt that the amendment was intended to strengthen the union and not necessarily the Plan.

So it seems to me that there may be nothing in non-discrimination rules of ERISA that precludes the amendment (since there is no one to discriminate against), but if the Trustees make such an amendment, they are possibly breaching their fiduciary duty to act "for the exclusive purpose of providing benefits to participants and their beneficiaries", unless they can prove that the amendment would provide some financial benefit to the Plan.

Agree? Disagree? Thanks again.

[KJohnson]

Again, I am not sure that Deak is good law if it is premised on the assumption that trustees of a multiemployer plan, in amending a plan, are acting as fiduciaries.

You might want to look at Walling v. Brady 125 F.3d 114 (3d Cir. 1997) out ouf your own Circuit where the Court held that the trustees of a multiemployer plan are not acting as fiduciaries when they amend the plan.

Also do a search on benefits link. In the last month the DOL published a letter that set out DOL's analysis of the settlor/fiduciary roles of multiemployer trustees when they act to amend a plan.

[Guest Keith N]

OK, as I said, I'm not a lawyer so I'm a little confused by the significance of a Settlor vs. a Fiduciary functions, but I thank you for the input.

The summary of Walling v. Brady 125 F.3d 114 (3d Cir. 1997)states that: "the ERISA fiduciary obligations simply do not apply to a plan amendment. See Lockheed, 517 U.S. at ----, 116 S.Ct. at 1789. The Trustees, acting collectively as settlor, were free to make any amendment that did not run afoul of relevant ERISA regulations. No such regulation was implicated here. See, e.g., 29 U.S.C.A. § 1054(g)(amendment generally may not decrease accrued plan benefits) and § 1085b (if adoption of an amendment results in underfunding of a defined benefit plan, the sponsor must post security for the amount of the deficiency). Walling and his class had no accrued or vested benefits that were affected by the Trustees' actions. The Pension Fund plan explicitly states:

12.04 No Vesting in Assets. No person other than the Trustees of the Pension Fund shall have any right, title, or interest in any of the income or property of any funds received or held by or for the account of the Pension Fund, and no person shall have any vested right to benefits provided by the Pension Plan....

App. at 180. "

This seems to imply that hey may be "ok". Is that your opinion?

[KJohnson]

Keith a cautious yes...

The settlor/fiduciary distinction means that if you are acting as a settlor you cannot be sued for fiduciary breach (because you are not a fiduciary).

Thus, if the Trustees are acting as settlors in amending the Plan, they cannot be sued for fidicuary breach for adopting the amendment. DOL has taken a long time to acknowledge the settlor/fiduciary distinction for multiemployer plan trustees when they amend a plan. It gave a luke waarm endorsement to this proposition in certain specified circumstances in Field Assitance Bulletin 2002-2 which can be found here:

http://www.dol.gov/pwba/regs/fab_2002-2.html

The bulletin also includes DOL's "take" on Walling.

Once a Plan is amended the Trustees then have a fiduciary duty to abide by the terms of the Plan under ERISA Section 404(a)(1)(D). However that duty is caveated by the condition that they can only follow the amendment if it is "consistent with the terms" of ERISA title I (including prudence).

Then the quesiton is, are you back at square one?

I don't know the answer, but frankly, I think there is a distinction in this respect to pure "plan design" issues-- which this falls under --and amendments that would infringe on traditional "fiduciary functions" such as an amendment to the Plan directing the trustee to invest 100% of assets in a speculative commodities future. You may want to look at the discussion on the Board that is currently ongoing with regard to "forcing a participant to sell investments."

[Guest Keith N]

This seems to put them in a "catch 22". The Bulletin states that where the relevant plan documents are silent, then the activities of the board of trustees which are settlor in nature generally will be viewed as carried out by the board of trustees in a settlor capacity, and such activities would not be fiduciary activities subject to Title I of ERISA.

This is presumably a good thing, since they can't get sued for breaching their fiduciary duty while preforming a settlor function, but then it goes on to say that "It is also the view of this Office that, consistent with the plan expense guidance discussed above, it would not be appropriate for a multiemployer plan to pay for expenses attendant to activities that a multiemployer plan trustee carries out in a settlor capacity. "

Therefore, if they do it in a settlor function they can't get sued for breach of fiduciary duty, but they can't pay the expenses related to it from the fund. If they do it as a fiduciary, they can pay the expenses from the fund, but then they can get sued for breach of fiduciary duty!

[KJohnson]

By "expenses" they are not referring to the benefit itself, what they are referring to are the attorneys fees for drafting the amendment and the actuarial fees for determining whether the plan can afford it.

As you can imagine, this is especially tricky for service providers. Let's say that the trustees of a multiemployer plan ask you to do a benfits study and price out various benefit increases. If any amendment to adopt the benefits increase is the trustees acting as settlor, then your fees cannot come out of the Plan without it being a fiducairy breach and PT.

If you can finesse the meeting where you have to tell the Trustees that either the union or the employers (or both) have to pay your fees (rather than the plan), then you are wasting your skills as an actuary and should be in the State Department.

[Guest Keith N]

OK Thanks, I think we're on the same page.