Final Rules: Collectively Bargained Plans Under ERISA Section 3(40)(A), Exempt from MEWA Rules

[Federal Register: April 9, 2003 (Volume 68, Number 68)]
[Rules and Regulations]
[Page 17471-17484]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09ap03-14]

[[Page 17471]]

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Part III
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2510 and 2570

Employee Retirement Income Security Act of 1974; Procedures for
Administrative Hearings Regarding Plans Established or Maintained Under
or Pursuant to Collective Bargaining Agreements Under Section 3(40)(A)
of ERISA; Final Rule

[[Page 17472]]

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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2510
RIN 1210-AA48

Employee Retirement Income Security Act of 1974; Plans
Established or Maintained Under or Pursuant to Collective Bargaining
Agreements Under Section 3(40)(A) of ERISA

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Final rule.

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SUMMARY: This document contains a regulation under the Employee
Retirement Income Security Act of 1974, as amended, (ERISA or the Act)
setting forth specific criteria that, if met and if certain other
factors set forth in the regulation are not present, constitute a
finding by the Secretary of Labor (the Secretary) that a plan is
established or maintained under or pursuant to one or more collective
bargaining agreements for purposes of section 3(40) of ERISA. Employee
welfare benefit plans, such as health care plans, that meet the
requirements of the regulation are excluded from the definition of
"multiple employer welfare arrangements" under section 3(40) of ERISA
and consequently are not subject to state regulation of multiple
employer welfare arrangements as provided for by the Act. Regulations
published elsewhere in this issue of the Federal Register set forth a
procedure for obtaining a determination by the Secretary as to whether
a particular employee welfare benefit plan is established or maintained
under or pursuant to one or more agreements that are collective
bargaining agreements for purposes of section 3(40) of ERISA. The
procedure is available only in situations where the jurisdiction or law
of a state has been asserted against an entity that contends it meets
the exception for plans established or maintained under or pursuant to
one or more collective bargaining agreements. This regulation is
intended to assist labor organizations, plan sponsors and state
insurance departments in determining whether a plan is a "multiple
employer welfare arrangement" within the meaning of section 3(40) of
ERISA.

EFFECTIVE DATE: June 9, 2003.

FOR FURTHER INFORMATION CONTACT: Elizabeth A. Goodman, Office of
Regulations and Interpretations, Employee Benefits Security
Administration, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Room N-5669, Washington, DC 20210, (202) 693-8510. This is not a toll-
free number.

SUPPLEMENTARY INFORMATION:

A. Background

The Statute

    Section 3(40) of ERISA defines the term multiple employer welfare
arrangement (MEWA), in pertinent part, as an employee welfare benefit
plan, or any other arrangement (other than an employee welfare benefit
plan), which is established or maintained for the purpose of offering
or providing any benefit described in paragraph (1) of section 3 of the
Act to the employees of two or more employers (including one or more
self-employed individuals), or to their beneficiaries, except that such
term does not include any such plan or other arrangement which is
established or maintained under or pursuant to one or more agreements
which the Secretary finds to be collective bargaining agreements.

    This definition was added to ERISA by the Multiple Employer Welfare
Arrangement Act of 1983, Sec. 302(b), Pub. L. 97-473, 96 Stat. 2611,
2612 (29 U.S.C. 1002(40)) (the MEWA amendments), which also amended
section 514(b) of ERISA to narrow the scope of federal preemption of
state laws applicable to MEWAs. The purpose of the MEWA amendments
generally was to permit states to regulate employee welfare benefit
plans that are MEWAs; the extent of the states' jurisdiction over such
entities under the MEWA amendments depends on whether or not the MEWA
is fully insured. Sec. 302(b), Pub.L. 97-473, 96 Stat. 2611, 2613 (29
U.S.C. 1144(b)(6)).

    The Multiple Employer Welfare Arrangement Act of 1983, which was
introduced to counter what the Congressional drafters termed abuse by
the "operators of bogus `insurance' trusts," see 128 Cong. Rec. E2407
(1982) (Statement of Congressman Erlenborn), significantly enhanced the
states' ability to regulate MEWAs. Nevertheless, problems in this area
persist. Among other things, the exception for collectively bargained
plans contained in section 3(40) has been exploited by some MEWA
operators who, through the use of sham unions and collective bargaining
agreements, market fraudulent insurance schemes under the guise of
collectively bargained welfare plans exempt from state insurance
regulation. Another problem in this area involves the use of
collectively bargained plans as vehicles for marketing health care
coverage to individuals and employers with no relationship to the
bargaining process or the underlying bargaining agreement. The
definition of a MEWA in section 3(40) was drafted to exclude certain
types of plans. As pertains to this rulemaking, section 3(40)(A)(i) of
ERISA provides that employee welfare benefit plans that are found by
the Secretary of Labor (the Secretary) to be established or maintained
under or pursuant to one or more collective bargaining agreements are
not MEWAs for purposes of ERISA. Such collectively bargained plans, as
a result, were not made subject to the regulatory jurisdiction of the
states pursuant to the MEWA amendments.

    The Department of Labor (the Department) notes that also appearing
in today's Federal Register are final regulations relating to filing
the Form M-1 and Civil Monetary Penalties for failure or refusal to
file the Form M-1. For information on the Form M-1 and related civil
monetary penalties, contact Deborah S. Hobbs or Amy J. Turner, Employee
Benefits Security Administration, U.S. Department of Labor, Room C-
5331, 200 Constitution Ave., NW., Washington, DC 20210 (telephone (202)
693-8335) (this is not a toll-free number).

The Proposed Regulations

    On October 27, 2000, the Department published a notice in the
Federal Register (65 FR 64482) containing a proposed regulation (the
criteria regulation) setting forth specific criteria that, if met in
the case of a specific plan, and provided that certain other factors
set forth in the proposed regulation are not present, would constitute
a finding by the Secretary pursuant to section 3(40)(A)(i) of ERISA
that a plan is established or maintained under or pursuant to one or
more collective bargaining agreements for purposes of section 3(40) of
ERISA. The Department also simultaneously published in the Federal
Register (65 FR 64498) proposed regulations (the procedural
regulations) that set forth an administrative procedure for obtaining,
under certain limited circumstances, an individualized determination by
the Secretary as to whether a particular employee welfare benefit plan
is established or maintained under or pursuant to one or more
agreements that are collective bargaining agreements for purposes of
section 3(40) of ERISA.

    The proposed regulations followed the recommendations of the ERISA
section 3(40) Negotiated Rulemaking Advisory Committee (the Committee).
The Committee was convened under the Negotiated Rulemaking Act (the
NRA)

[[Page 17473]]

and the Federal Advisory Committee Act (the FACA), 5 U.S.C. App. 2, to
assist the Department in developing proposed regulations to implement
section 3(40)(A)(i) of ERISA, 29 U.S.C. 1002(40)(A)(i).

    The criteria regulation set forth standards that, if satisfied,
would constitute a finding by the Secretary that a plan is established
or maintained under or pursuant to one or more collective bargaining
agreements for purposes of section 3(40).

    The proposed regulation established four general criteria for a
finding that a plan was established or maintained under or pursuant to
collective bargaining for purposes of section 3(40)(A)(i). First, the
entity in question had to be an employee welfare benefit plan within
the meaning of ERISA section 3(1). Second, the preponderance of those
participants covered by the plan (at least 80%) had to have a nexus to
the bargaining relationships under or pursuant to which the plan was
established or maintained (referred to as the "nexus" group or test).
Third, the agreements under or pursuant to which the plan is
established or maintained had to have certain characteristics that
indicate that they were, for purposes of section 3(40) of ERISA only,
collective bargaining agreements, including that the agreements were
the product of a "bona fide collective bargaining relationship."
Fourth, the proposed regulation listed eight specific "factors"
deemed to indicate the existence, for purposes of section 3(40) only,
of a bona fide collective bargaining relationship. If at least four of
those specified factors were present, the regulation indicated that a
bona fide collective bargaining relationship underlying the agreements
under or pursuant to which the plan is established or maintained could
be presumed to exist.

    The proposed criteria regulation included a ninth non-specific
"factor" in the list. The ninth factor indicated that the Secretary
would consider, in making a finding, whether "other objective or
subjective indicia of actual collective bargaining and representation"
were present. The inclusion of this "catch-all" factor recognized
that, in any particular case, other facts might need to be taken into
account to determine whether a bona fide collective bargaining
relationship existed, especially where the entity did not meet at least
four of the eight specific factors, or where, despite meeting four of
the eight factors, there were other facts indicating that a bona fide
collective bargaining relationship did not exist.

    The proposed criteria regulation also specified circumstances that,
if present, would lead to a conclusion that an employee welfare benefit
plan is not established or maintained under or pursuant to one or more
agreements that the Secretary finds to be collective bargaining
agreements. The regulation stated that, for any plan year in which the
specified circumstances were present, a plan that otherwise met the
criteria of the regulation should not be deemed to be excluded from the
MEWA definition by virtue of section 3(40)(A)(i).

    The proposed regulation provided that, under certain limited
circumstances, an entity would be permitted to petition the Secretary
for an individual finding. The ability to petition, however, would
arise under the proposed regulation only if a state's law or
jurisdiction had been asserted against the entity in an administrative
or judicial proceeding. The procedural regulations set forth specific
processes for petitioning for an individual finding.

Public Comments

    Subsequent to publication of the proposed regulations, the
Department received seven public comments. The Department reconvened
the Committee and held a public meeting on March 1, 2002, to obtain the
Committee's views on the public comments. Minutes of this meeting, as
well as other meetings, of the Committee are available for inspection
by the public in the Department's Public Disclosure Room, 200
Constitution Avenue, NW., N1513, Washington, DC 20210.

    The following discussion summarizes the issues raised by the public
comments, the Committee's discussion of those issues at the public
meeting, and the Department's decisions, which are reflected in the
final regulations.

1. Whether the Factors Set Forth in the Proposed Criteria Regulation as
Presumptive of Bona Fide Collective Bargaining Should Be Expanded or
Modified

    Two commenters suggested that the Department should expand the list
of factors indicative of a bona fide collective bargaining
relationship. One commenter argued that such an expansion is necessary
to make sure that small employers and employers in manufacturing,
warehousing, service and other non-construction related industries
could easily meet this criterion. The commenter further suggested that
government certification of a union, as a collective bargaining agent
should be a stand-alone safe harbor factor. The other commenter noted
that newly established unions, particularly those organizing in the
health care field, might have difficulty meeting four of the eight
factors. That commenter suggested that an additional factor--that the
welfare plan was being administered along sound actuarial principles--
be added to the list of factors. The commenter also suggested that the
examples set out as part of the non-specific ninth factor be listed
individually as separate factors that could be counted towards meeting
the "safe harbor."

    In discussing these comments, the Committee noted that these issues
were not new and had been considered by the Committee in its initial
deliberations. It was noted that the language of the proposed
regulation went as far as possible to be inclusive of various types of
collective bargaining relationships. The purpose of the ninth "catch-
all" factor is to take into account that the eight specific factors
may not encompass all bona fide collective bargaining relationships.
Concerns were also expressed about lowering the threshold for what
constitutes a bona fide collective bargaining relationship. Bona fide
collectively bargained arrangements are not likely to be challenged
under the regulation by the states. The consensus of the Committee was
that the eight factors should not be expanded or modified.

    After consideration of the comments and the Committee's discussion,
the Department has decided not to expand or modify the factors
presumptive of a bona fide collective bargaining relationship. The
final regulation therefore retains, in section 2510.3-40(b)(4)(i)-
(viii), the factors as originally proposed. In the view of the
Department, the regulation carefully distinguishes between the specific
factors that generally evidence a bona fide collective bargaining
relationship and the types of activities and fact patterns that are
common to sham MEWA operators. Expanding or modifying the factors to
include less well-established or less common situations, or making any
single factor a stand-alone safe-harbor, may make it easier for sham
MEWA operators to mimic the regulation's factors presumptive of a bona
fide collective bargaining relationship.

    The Department also declines to add to the factors, as suggested by
one commenter, the fact that the plan is maintained on sound actuarial
principles. Although maintaining a plan on sound actuarial principles
is important in other regards, that a plan is actuarially sound does
not necessarily

[[Page 17474]]

evidence the existence of a bona fide collective bargaining
relationship.

    The Department notes, however, that the final regulations are
structured to take into account the possibility that a bona fide
collective bargaining relationship might, in some case, fail to meet
the "safe harbor" factors. In addition to including the ninth catch-
all factor, the regulations permit entities that assert they are in
fact established or maintained under or pursuant to bona fide
collective bargaining, and against which state law or jurisdiction is
asserted, to petition for an individualized finding from the Department
as to their status.

2. Whether the Definition of Collective Bargaining Agreement Should Be
Modified

    The Department received one comment suggesting that the definition
of collective bargaining agreement in section 2510.3-(40)(b)(3) needed
to be modified to correct a technical defect. As proposed, the
regulation required that a plan be "incorporated or referenced in a
written agreement between two or more employers and one or more
employee organizations." The commenter argued that the requirement of
a minimum of two employers, rather than one, was unnecessarily narrow,
since there may be situations where a plan that originally was
established or maintained under or pursuant to a collective bargaining
agreement signed by two or more employers, is now maintained only by
one due to a dwindling number of participating employers, although the
plan still covers the employees of more than one employer.

    The Committee, in discussing this issue, considered whether, in
addition to the reasons articulated by the commenter, the language of
paragraph 2510.3-40(b)(3) should be changed to make clear that the
regulation applies to plans established or maintained under or pursuant
to collective bargaining by a single employer but covering the
employees of other employers who do not bind themselves to the
collective bargaining agreement. It was noted that such entities are
MEWAs. The Committee's discussion focused on the fact that it is
important for the regulation to make clear that such entities are
subject to evaluation under the regulation to see whether in fact they
meet the exception under section 3(40) for plans established or
maintained under or pursuant to collective bargaining.

    On the basis of the public comment and the Committee's discussion,
the Department has determined to amend 2510.3-40 to provide that the
conditions of (b)(3) will be met if the written agreement referencing
the plan is between one or more employers, rather than two or more
employers, and one or more employee organizations.

3. Whether the Nexus Group Categories Should Be Expanded or Modified

    As part of the process for determining whether a preponderance of
the participants covered by the plan have a nexus to the bargaining
relationships under or pursuant to which the plan is established or
maintained, the proposed criteria regulation defined a "nexus group"
of categories of participants who could be counted towards the 80%
coverage level set in the proposed regulation as demonstrating such a
preponderance. One commenter requested that the nexus group categories
be expanded to include employees of an employer trade association that
has negotiated any of the multiemployer agreements under or pursuant to
which a plan is established or maintained. The commenter noted that the
proposed regulation included, as part of the nexus group, employees of
employee organizations that sponsor or jointly sponsor a plan, or are
represented on the committee, joint board of trustees, or other similar
group of representatives of the parties who sponsor the plan. The
commenter noted that employees of employer associations might have a
similar connection to the collective bargaining process. The commenter
asserted that employer trade associations often are involved in
negotiating collective bargaining agreements on behalf of many
employers, and that such employers routinely become signatories to, or
otherwise adopt, agreements that have been negotiated by their employer
associations. The multiemployer plans that result from such bargaining
often cover the employees of the employer association as well as the
employees of the employers represented by the association.

    The Committee concluded that, as a matter of parity, employees of
an authorized representative of employers in collective bargaining
should be included in the nexus group, just as are employees of the
employee organization.

    Based on its consideration of the comment and the Committee's
discussion, the Department has determined to amend 2530.3-40(b)(2)(vi)
to include, as a separate category, the employees of an authorized
employer representative that actually engaged in the collective
bargaining that led to the agreement that references the plan as
described in 2510.3-40(b)(3)(i).

4. Whether the Regulation Should Be Expanded To Include Entities That
Are Not Collectively Bargained, i.e., Long-Established MEWAs, Union-
Only Sponsored Public Sector Benefit Plans

    The Department received two comments suggesting that the regulation
should be expanded to include certain types of entities that
technically are not established or maintained under or pursuant to
collective bargaining. The commenters were concerned that issuance of
regulations providing clear guidance addressing what the Secretary
finds to be collective bargaining for the purposes of the collective
bargaining exception in 3(40) of ERISA might result in more state
regulation of entities that are not established pursuant to collective
bargaining than there had been in the absence of regulations.

    The first commenter was a long-established MEWA that contended that
it should be excluded from the scope of the MEWA definition pursuant to
a "grandfather" provision in the regulation, allowing it to operate
free of state regulation even though it is not a plan established or
maintained under or pursuant to collective bargaining, because it had
been operating on a financially sound basis for many years. A similar
comment had been previously submitted to the Committee for
consideration prior to the issuance of its Report to the Secretary.
Another commenter requested that the preamble to the regulation discuss
the nature of legal defense funds for peace officers, which are
established by employee organizations for the employees of more than
one employer, but are not actually the subject of collective
bargaining.

    The Committee reiterated its belief, as noted in the preamble to
the proposed criteria regulation, that the regulation should serve only
to define what constitutes a plan that is established or maintained
under or pursuant to collective bargaining. The Department believes
that the issues raised by these commenters go beyond the scope of the
regulation and, therefore, has determined not to modify the final
regulation in response to these comments.
5. Whether and How the Procedural Regulation Should Be Modified in
Order To Obviate the Possibility That It May Hinder or Impede Timely
State Enforcement Actions

    One commenter expressed concern that the availability of
administrative proceedings for an individualized section 3(40) finding
in cases where the

[[Page 17475]]

jurisdiction or law of a state has been asserted may result in delays
in state enforcement that could substantially hinder a state's ability
to take timely enforcement actions against sham MEWA operators. The
commenter stated that time is often of the essence in such
circumstances and that a delay of even a few days in a state's taking
effective action against a MEWA may seriously increase the harm to the
participants in the MEWA by permitting the amount of unpaid medical
benefit claims to increase, allowing the plan to collect additional
illegal premiums, and impinging or eliminating the states' ability to
preserve assets by giving the plan operators and opportunity to
transfer and hide funds. The commenter specifically identified the need
to be able to obtain preliminary and permanent injunctive relief and
cease and desist orders where sham union plans are continuing to
collect premiums or failing to pay claims. The commenter asserted that,
unless the Department made clear that the availability of
administrative proceedings was not meant to provide a basis for a stay
or delay of state enforcement actions, the regulations should not be
implemented.

    Recognizing the need to ensure that the regulations assist, rather
than hinder, state enforcement efforts against sham MEWA operators and
that there are situations where time is of the essence for effective
enforcement by the states, the Committee recommended that the
regulatory language be clarified to emphasize that the section 3(40)
ALJ proceedings are not a basis in themselves for a stay-of-state
administrative or judicial proceedings against a putative MEWA.

    As proposed, paragraph 2510.3-40(g)(2) of the criteria regulation
provided that "nothing in this section or in part 2570, subpart H of
this chapter is intended to have any effect on applicable law relating
to stay or delay of a state administrative or court proceeding or
enforcement subpoena." In response to the commenter and the concerns
of the Committee, the Department has amended that paragraph to state
that "nothing in this section or in part 2570, subpart H of this
chapter is intended to provide the basis for a stay or delay of a state
administrative or court proceeding or enforcement of a subpoena."

Miscellaneous Changes

    In its consideration of a final regulation, the Committee
questioned whether consideration should be given to the effect of plan
mergers on counting years of service for purposes of the determining
the "nexus" group. In this regard, the Committee noted that the nexus
group in section 2510.3-40(b)(2) includes retirees who either
participated in the welfare benefit plan for at least five of the last
10 years preceding their retirement or are receiving benefits as
participants under a multiemployer pension benefit plan that is
maintained under the same agreement referred to in paragraph (b)(2)(i),
and have at least five years of service or the equivalent under that
pension plan. The Committee suggested that participation in the pre-
merger multiemployer plans should also be considered in determining
whether employees meet the requirements of these categories of the
nexus group. The Committee also raised the issue of whether employment
in the bargaining unit under the pre-merger plan should be considered
for determining whether an individual is a bargaining unit alumnus
under 2510.3-40(b)(2)(vii) where the merger was based on a merger of
unions. The Committee noted that Example 2 of the proposed regulation
addresses how a merger affects the evaluation of the factors in
(b)(4)(iii) and (iv) and suggested that another example could be added
to the final regulation to address the effect of merging unions and
multiemployer plans on the nexus group analysis. After considering the
issues raised by the Committee, the Department has determined that it
is appropriate to clarify the examples at 2510.3-40(e) to make clear
that, in the case of a merger of multiemployer plans, participation in
a predecessor plan or employment with a predecessor union may be
considered for purposes of determining the nexus group individuals in
section 2510.3-40(b)(2)(ii) and (vii). In this regard, a new paragraph
(3) was added to Example 2 to clarify that the merger of two unions and
the related pension and health and welfare plans will not affect the
determinations of who is a "retiree" or a "bargaining unit alumni"
for purposes of determining the nexus group under the regulation.

    In reviewing the 75% test in paragraph (b)(4)(vi) of 2510.3-40, the
Department decided that the regulation should be modified to make clear
that in determining the amount of premiums or contributions to which
the 75% test applies does not include any amount that a participant or
beneficiary might be required to pay as a co-pay or deductible under
the provided coverage. Accordingly, the Department has modified
paragraph 2510.3-40(b)(4)(iv) to make clear that, in addition to dental
or vision care and coverage for excepted benefits under 29 CFR
2590.732(b), amounts payable by participants and beneficiaries as co-
payments or deductibles are disregarded for purposes of the 75% test.
In so clarifying this provision, however, the Department notes that if
an entity were to establish a co-payment or deductible schedule
designed solely to satisfy the criteria of paragraph 2510.3-
40(b)(4)(vi), without actually requiring substantial employer
contributions, evidence of such a design may be considered in
evaluating whether for purposes of 2510.3-40(c)(3) there is fraud,
forgery, or willful misrepresentation as to the factors relied on to
demonstrate that the plan satisfies the criteria set forth in paragraph
(b) of this section. The Department further notes that the collective
bargaining history appropriately may be examined in a 3(40) proceeding,
including a review of those factors in section 2510.3-40(b)(4).

    Independent of the Committee's review of the regulations, the
Department considered whether the proposed 80% minimum coverage
requirement for the "nexus" test is too low. In the August 1, 1995,
proposed regulation, the Department proposed that no less than 85% of
the individuals covered by a plan must be within the "nexus" group. A
number of commenters on that regulation expressed concern that the
percentage was too high. In developing a new proposal, the Committee
recommended, and the Department proposed, an 80% test. In this regard,
the preamble to the proposal indicated that "[t]he Committee
recommended a 20% margin for coverage of non-nexus people, even though
it understood that the percentage of participants in collectively
bargained plans who are not within one of the nexus categories is
rarely likely to be that high." 65 FR 64485 (Oct. 27, 2000). While
comments were specifically invited on the 80% test, no comments were
received on that provision. Moreover, the Department received no
comments suggesting that changing the 80% test to an 85% test would
present a problem for affected plans. The Department further notes that
H.R. 2563 of the 107th Congress, the "Bipartisan Patients Protection
Act," as passed by the U.S. House of Representatives, among other
things, amends ERISA section 3(40)(A)(i) to clarify the standards
applicable to determining whether a plan is established or maintained
pursuant to collective bargaining agreements. See section 423 of H.R.
2563. Although similar in many respects to the regulatory standards
proposed by the Department, H.R. 2563

[[Page 17476]]

limits the percentage of non-nexus group individuals to 15 percent.

    On the basis of the comments, as well as the discussions of the
Committee, the Department does not believe that, in the absence of any
data to the contrary, requiring 85% of the covered individuals to be
within the "nexus" group, rather than 80%, will have any significant
effect on the status of otherwise bona fide collectively bargained
plans. Increasing the "nexus" group percentage to 85% should enhance
the regulation's deterrent effect on sham MEWA operators who attempt to
masquerade as collectively bargained plans in order to avoid state
insurance regulation and oversight. In an environment where problems
with sham MEWA operators are growing, the Department believes that any
action it can take to reduce the likelihood of health insurance fraud
against workers and their families is action that should be taken.
Accordingly, the Department determined it appropriate to modify
paragraph (b)(2) of 2510.3-40 to require that at least 85% of the
participants in the plan be within the "nexus" group (described in
subparagraphs (i) through (x) of 2510.3-40(b)(2)).

B. Economic Analysis Under Executive Order 12866

    Under Executive Order 12866, the Department must determine whether
a regulatory action is "significant" and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f), the order defines a
"significant regulatory action" as an action that is likely to result
in a rule: (1) Having an annual effect on the economy of $100 million
or more, or adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local, or tribal governments or communities (also
referred to as "economically significant"); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.

    Pursuant to the terms of the Executive Order, it has been
determined that this action is "significant" within the meaning of
3(f)(4), and therefore subject to review by the Office of Management
and Budget (OMB). Consistent with the Executive Order, the Department
has undertaken an assessment of the costs and benefits of this
regulatory action. This analysis is detailed below.

Summary

    Although neither the benefits nor costs have been fully quantified,
the Department believes that the benefits of this final regulation more
than justify its costs. The final regulation yields positive benefits
by reducing uncertainty over which welfare benefit plans are excepted
from the definition of a multiple employer welfare arrangement under
section 3(40) and are therefore not subject to state regulation. The
Department sought comments from the public concerning its analysis of
benefits and costs of the proposed regulation. Having received no
comments, the Department has relied on its initial analysis in
concluding that the benefits of the final regulation justify its costs.

    The regulation's elements for distinguishing collectively bargained
plans from MEWAs are verifiable through documentation that plans or
their agents generally maintain as part of usual business practices.
The regulation also incorporates elements of flexibility, allowing
entities to demonstrate the existence of a bona fide collective
bargaining agreement, one of the regulatory factors, by satisfying any
four of eight specified factors. Finally, the regulation is both
sufficiently broad to include all plans established or maintained under
or pursuant to one or more collective bargaining agreements, yet is
discriminating enough to ensure that state law will apply to entities
not meeting the criteria. Only a very small number of entities are
likely to be treated differently as a result of promulgation of this
criteria regulation. In the case of the few entities that will be
determined to be not collectively bargained plans, the additional cost
attributable to state regulation is outweighed by the benefit that such
state regulation will provide by way of additional protections for
participants and beneficiaries.

Background

    It is the view of the Department that the uncertainty created by
the lack of clear criteria for distinguishing collectively bargained
plans from MEWAs has encouraged unscrupulous operators of sham MEWAs in
attempts to escape or delay state regulatory efforts by asserting that
states lack jurisdiction to regulate such entities because they are
excluded from the definition of MEWA by reason of the exception for
collectively bargained plans. In order to establish their authority to
regulate, states have had to take additional steps, such as initiating
administrative or legal proceedings contesting the defendant's status
as a collectively bargained plan, and have been the subject of actions
initiated by sham MEWA operators, such as suits for federal declaratory
judgment or removal actions.

    Confusion about whether a plan was established or maintained under
or pursuant to an agreement which the Secretary finds to be a
collective bargaining agreement has made it difficult for the states to
enforce appropriate laws. The criteria regulation will reduce or
eliminate this uncertainty. It will provide greater clarity for
entities and states and reduce the time and expense attributable to
court actions or requests to the Department for guidance.

Benefits of the Regulation--Reducing Uncertainty

    Plans and arrangements will benefit from greater assurance
concerning their actual legal status. States, through an enhanced
ability to regulate based on the greater certainty offered by the
regulation, will be better able to protect employers, participants, and
beneficiaries from unscrupulous MEWA operators. Further, the majority
of plans established or maintained under or pursuant to collective
bargaining agreements currently operate in a manner that is consistent
with the regulation. Most entities will therefore not perceive any need
to undertake a systematic reassessment of their status under the
regulation. It is possible, however, that some will choose to undertake
such an assessment by "comparison testing" the plan's operations
against the "safe harbor" criteria established in the final
regulation. The Department has estimated below the number of entities
likely to undertake a status assessment and the costs likely to be
associated with those activities.

Costs of the Regulation

    Entities Potentially Affected. To estimate the number of entities
potentially affected by the final rule, the Department examined
available data on multiemployer welfare plans established or maintained
under or pursuant to collective bargaining agreements, and the number
of entities self-reporting as MEWAs. Under ERISA, multiemployer
collectively bargained plans are required to file an annual financial
report, the Form 5500. MEWAs are required to file the Form M-1
annually. The 1998 Form 5500 filings by

[[Page 17477]]

multiemployer collectively bargained plans numbered about 2,000 (with
about 6 million participants). The MEWAs that filed Form M-1 for the
year 2000, pursuant to section 101 of ERISA and related interim final
rules (65 FR 7152, February 11, 2000) numbered about 600 (with about 2
million participants).\1\ The total number of MEWAs and collectively
bargained plans, which represents the total universe of arrangements
that might have questions about their legal status and "comparison
test" under this regulation, is estimated at about 2,600 (8 million
participants).
---------------------------------------------------------------------------

    \1\ This represents a smaller number of plans and fewer
participants than the numbers projected at the time of the proposal.
Because the Form M-1 requirement had not been fully implemented at
the time of the proposal, actual information on its use was not
available, and the Department relied on survey data regarded as the
most comparable at the time.
---------------------------------------------------------------------------

    The Department was unable to identify any direct measure of the
number of entities whose status is uncertain or whose status would
remain uncertain under the regulation. Therefore, in order to assess
the economic impact of reduced uncertainty under the regulation, the
Department examined proxies for the number of entities that might be
subject to such uncertainty. After estimating the total number of MEWAs
and collectively bargained plans at 2,600, the Department then tallied
the number of inquiries to the Department concerning MEWAs and the
number of MEWA-related lawsuits to which the Department has been party,
taking this to represent a reasonable indicator of the number of
entities that have been subject to uncertainty in the past.

    Department data indicate that in recent years, the Department has
received an average of about nine MEWA-related requests for information
each year from state and federal agencies and the private sector. The
Department also considered the number of MEWA-related lawsuits that
were filed by the Department in recent years. An average of about 45
actions have been brought each year. For purposes of this analysis, it
has been assumed that each case involved a different MEWA. Accordingly,
the Department has estimated for purposes of this economic analysis
that approximately 54 entities (45 + 9) annually may have reason to be
uncertain about their legal status with respect to section 3(40) of
ERISA, or about two percent of the estimated total number of 2,600
MEWAs and collectively bargained plans.

    The Department views this approximate number of 54 entities per
year as a conservatively high estimate of the number of entities whose
status could be made more certain by issuance of this regulation. On
one hand, because some number of entities may confront uncertainty
without becoming either the subject of an inquiry addressed to the
Department or a lawsuit to which the Department is party, this estimate
may represent only a subset of the entities that face uncertainty over
their status. On the other hand, this estimate may overstate the number
of entities that face uncertainty because it is known that not all
requests to the Department or court actions actually raised issues
related directly to the collective bargaining exception under section
3(40).

    Assessment of Status. The Department estimates the cost to the 54
entities of conducting an assessment of their status under the
regulation to be small. Such cost would be largely generated by
reviewing records kept by third parties or by the entity in the
ordinary course of business. The Department assumes that such a review
requires 16 hours of an attorney's or comparable professional's time,
plus 5 hours of clerical staff time. At $72 per hour and $21 per hour
respectively, the total cost would be $1,173 per entity, or about
$63,342 on aggregate per year for 54 entities. This cost would be
incurred only once for a given entity unless its circumstances changed
substantially relative to the standard. The Department believes that
the cost is more than justified by savings to entities that, by
conducting this assessment, avoid the need to engage in litigation or
seek guidance from the Department in order to determine their status.
These net savings represent a net benefit of this regulation.

    Following a self-assessment of status, some fraction of these 54
entities might nonetheless find themselves in a situation leading them
to seek an administrative determination from the Secretary under the
procedural regulations, incurring attendant costs, perhaps because a
state's jurisdiction or laws are asserted against the entity. The
administrative process under the procedural regulations is, in the
Department's view, an efficient and less costly process for resolving
such disputes than would be available in the absence of the procedural
regulations. The Department has elected to attribute the net benefit
from these savings not to this regulation, but to the accompanying
procedural regulations.

    Reclassifying Incorrectly Classified Entities. Some number of
entities, generally a subset of the 54 estimated annually to face
uncertainty over status, will be reclassified as a result of comparison
testing against the regulation's criteria. Entities that formerly
considered themselves to be excluded from the MEWAs definition as
collectively bargained plans may be required under the criteria
regulation to classify themselves as MEWAs. These MEWAs will likely
incur costs to comply with newly applicable state requirements. Such
requirements vary from state to state, making it difficult to estimate
the cost of compliance, but it is likely that costs might include those
attributable to audits, funding and reserves, reporting, premium taxes
and assessments, provision of state-mandated benefits, underwriting and
rating rules, market conduct standards, and managed care patient
protection rules, among other costs. These costs may be higher for
those MEWAs that conduct business in more than one state.

    Relevant literature suggests these costs can amount to ten percent
of premium.\2\ The cost may be substantially more if a state regulates
premium rates and the entity otherwise would have benefited from
insuring a population whose health costs are far lower than average.
However, these added costs are transfers and not true economic costs
because they serve as cross-subsidies that reduce costs for populations
that are costlier than average.
---------------------------------------------------------------------------

    \2\ Data from the Health Insurance Association of America
(Source Book of Health Insurance Data, 1999-2000) suggests that
insurance companies' loss ratios for group health insurance policies
historically ranged from about 85 percent to 90 percent. The inverse
of the loss ratio, or about 10 percent to 15 percent, generally
would include all of these costs except those associated with
benefit mandates and some managed care protections, as well as
insurance company profits, income taxes, and normal administrative
overhead. Loss ratios tend to be higher (and these costs lower) for
larger group policies, and MEWAs are likely to be large. The cost of
benefit mandates and managed care protection will very across states
depending on their extent and across MEWAs depending largely on the
degree to which they otherwise are included voluntarily in the
insurance products they provide. One study estimated that mandates
raise premiums by between 4 percent and 13 percent (Gail A. Jensen
and Michael A. Morrisey, Mandated Benefit Laws and Employer-
Sponsored Health Insurance (Washington, DC: HIAA 1999)).
---------------------------------------------------------------------------

    As noted above, the universe of 2,600 entities that includes those
potentially subject to uncertainty covers 8 million participants, or
about 3,100 participants per entity on average. Industry surveys put
the cost of health coverage at about $4,500 per employee and retiree
per year. Applying these figures to 54 entities that might face
uncertainty over status--an upper bound on the number likely to be
reclassified--produces an

[[Page 17478]]

upper-bound estimated cost of about $75 million.\3\
---------------------------------------------------------------------------

    \3\ Recent data from actual Form M-1 filings results in a higher
estimated number of participants per entity than was indicated in
the proposal; therefore, the estimated cost for the final regulation
exceeds the $58 million cost estimate for the proposal.
---------------------------------------------------------------------------

    The Department has concluded that actual costs will be far lower
than this and will be outweighed by the benefit of the associated
protections that will flow from clarifying the state's authority to
regulate. As noted above, it is likely that the true number of entities
that are reclassified as MEWAs will be a fraction of the estimated 54
that annually might face uncertainty over status. Among those that are
reclassified, certain entities likely would already have elected
voluntarily to comply with some of the state regulatory requirements
and therefore would not incur any cost from the application of state
law. For those that would not have complied with relevant state law,
operation of the regulation may impose additional costs, such as
meeting solvency requirements or providing mandated benefits. The
additional costs are offset and justified by increased security for
plans and improved coverage for participants. Thus, the added cost from
state regulation would be offset by the benefits derived from the
protections that state regulations provide. GAO, in 1992, identified
$124 million in unpaid claims owed by sham MEWAs. Department
enforcement actions involving MEWAs in recent years have identified
monetary violations of approximately $121.6 million. With state
licensing and solvency requirements in place, at least some incidences
of the $124 million in unpaid claims cited in the GAO study or the
$121.6 million in violations would most likely not have occurred.

    It is also possible that some entities considered to be MEWAs
because they are not collectively bargained will be reclassified under
the criteria regulation as collectively bargained plans. However, this
number seems likely to be very small because entities that can
legitimately be treated as collectively bargained have an economic
incentive to do so. Any entities that are so classified benefit from
the savings of having no obligation to comply with state regulatory
requirements. There is no meaningful loss of benefits from the absence
of state protections in such cases because the combination of a
legitimate collective bargaining agreement and the application of ERISA
provides adequate protections.

C. Paperwork Reduction Act

    This Notice of Final Rulemaking is not subject to the requirements
of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) because
it does not contain a "collection of information" as defined in 44
U.S.C. 3502(3).

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are
likely to have a significant economic impact on a substantial number of
small entities. Unless an agency certifies that a rule will not have a
significant economic impact on a substantial number of small entities,
section 604 of the RFA requires that the agency present a regulatory
flexibility analysis at the time of the publication of the notice of
final rulemaking describing the impact of the rule on small entities.
Small entities include small businesses, organizations and governmental
jurisdictions.

    For purposes of analysis under the RFA, the Employee Benefits
Security Administration (EBSA) continues to consider a small entity to
be an employee benefit plan with fewer than 100 participants. The basis
of this definition is found in section 104(a)(2) of ERISA, which
permits the Secretary of Labor to prescribe simplified annual reports
for pension plans that cover fewer than 100 participants. Under section
104(a)(3), the Secretary may also provide for exemptions or simplified
annual reporting and disclosure for welfare benefit plans. Pursuant to
the authority of section 104(a)(3), the Department has previously
issued at 29 CFR 2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46,
and 2520.104b-10, certain simplified reporting provisions and limited
exemptions from reporting and disclosure requirements for small plans,
including unfunded or insured welfare benefit plans covering fewer than
100 participants and that satisfy certain other requirements.

    Further, while some large employers may have small plans,
generally, most small plans are maintained by small employers. Thus,
EBSA believes that assessing the impact of this rule on small plans is
an appropriate substitute for evaluating the effect on small entities.
The definition of small entity considered appropriate for this purpose
differs, however, from a definition of small business that is based on
size standards promulgated by the Small Business Administration (SBA)
(13 CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 631 et
seq.). At the time of the proposed rule, EBSA requested comments on the
appropriateness of the size standard used in evaluating the impact of
this rule on small entities; no comments were received that would cause
the Department to reevaluate its size standard.

    On this basis, however, EBSA has determined that this rule will not
have a significant economic impact on a substantial number of small
entities. In support of this determination, and in an effort to provide
a sound basis for this conclusion, EBSA has prepared the following
final regulatory flexibility analysis.

    (1) Reasons for Action. EBSA is proposing this regulation because
it believes that regulatory guidance concerning the definition of a
"plan or arrangement which is established or maintained under or
pursuant to one or more agreements which the Secretary finds to be
collective bargaining agreements" (ERISA 3(40)(A)(1)) is necessary to
ensure that state insurance regulators have ascertainable guidelines to
help regulate MEWAs operating in their jurisdictions. The guidance will
also allow sponsors of employee welfare benefit plans to determine
independently whether their entities are excepted under section 3(40)
of ERISA. A more detailed discussion of the agency's reasoning for
issuing the regulation is found above.

    (2) Objective. The objective of the regulation is to provide
criteria for the application of an exception to the definition
"multiple employer welfare arrangement" (MEWA) found in section 3(40)
of ERISA for a "plan or other arrangement which is established or
maintained--(i) under or pursuant to one or more agreements which the
Secretary finds to be collective bargaining agreements." An extensive
list of authority may be found in the Statutory Authority section,
below.

    (3) Estimate of Small Entities Affected. Form 5500 filings and Form
M-1 filings indicate that there are about 2,600 entities that could be
classified as collectively bargained plans or MEWAs and that could be
affected by the new criteria for defining collectively bargained plans.
It is expected, however, that a very small number of these entities
will have fewer than 100 participants. By their nature, the affected
entities must involve at least two employers, which decreases the
likelihood of their covering fewer than 100 participants. Also, the
underlying goals behind the formation of these

[[Page 17479]]

entities, such as gaining purchasing and negotiating power through
economies of scale, improving administrative efficiencies, and gaining
access to additional benefit design features, are not readily
accomplished if the group of covered lives remains small.

    Available data indicate that about 200 or eight percent of the
2,600 entities have fewer than 100 participants. Based on the health
coverage reported in the Employee Benefits Supplement to the 1993
Current Population Survey and a 1993 Small Business Administration
survey of retirement and other benefit coverages in small firms, the
Department estimates that there are more than 2.5 million private group
health plans with fewer than 100 participants. Thus, the number of
small plans and MEWAs potentially affected is very small in light of
this large number of small plans. Even if every one of the 2,600
entities at issue had fewer than 100 participants, the number of
entities affected would represent approximately one-tenth of one
percent of all small group health plans. Accordingly, the Department
has determined that this regulation will not have a significant
economic impact on a substantial number of small entities.

    Although relatively few small plans and other entities are expected
to be affected by this proposal, it is known that the employers
typically involved in these entities are often small (that is, they
have fewer than 500 employees, which is generally consistent with the
definition of small entity found in regulations issued by the Small
Business Administration (13 CFR 121.201)). At the time of the proposed
regulation, the Department sought comments and data with respect to the
number of small employers potentially impacted by the establishment of
a standard for determining whether a welfare benefit plan is
established or maintained under or pursuant to one or more collective
bargaining agreements. No comments or data were received in response to
this request; the Department therefore continues to believe that,
because these plans and arrangements involve at least two employers,
and assuming that each is small, it can be estimated that at least
5,200 small employers may be affected.

    It is possible that a small employer participating in what it
thinks is a legitimate MEWA may find that it has unknowingly
participated in a sham MEWA and will need to change its method of
providing welfare benefits to its employees. By enabling states to
regulate fraudulent and financially unsound MEWAs, therefore, the
regulation may limit the sources of welfare benefits available to some
small businesses, requiring them to seek alternative coverage for their
employees. The greater benefit for employers, however, is an increased
certainty that the MEWAs that remain in business will meet state
regulatory standards and will be more certain to provide promised
health, life, disability or other welfare benefits to employees.
Consequently, employers will receive a net benefit from the reduced
incidence of fraud and insolvency among the pool of MEWAs in the
marketplace.

    (4) Reporting and Recordkeeping. In most cases, the records used to
determine if a welfare benefit plan is established or maintained under
or pursuant to a collective bargaining agreement are routinely prepared
and held by a collectively bargained multiemployer plan in the ordinary
course of business. For any entities that are newly determined to be
MEWAs under the regulation, there will be an economic impact related to
the start-up costs of compliance with state regulations. These costs
arise from state requirements, however, and not the requirements of
this regulation. Start-up costs under state regulations may include
expenses of registration, licensing, financial reporting, auditing, and
any other requirement of state insurance law. Reporting and filing this
information with the state would require the professional skills of an
attorney, accountant, or other health benefit plan professional;
however, post start-up, the majority of the recordkeeping and reporting
could be handled by clerical staff.

    (5) Duplication. No federal rules have been identified that
duplicate, overlap, or conflict with the final rule.

    (6) Alternatives. The regulation adopts generally the views of the
consensus report of the Committee that was established to provide an
alternative to the Department's earlier Notice of Proposed Rulemaking
on Plans Established or Maintained Under or Pursuant to Collective
Bargaining Agreements, published in the Federal Register (60 FR 39209,
Aug. 1, 1995). At that time, recognizing that guidance was needed to
clarify the collective bargaining exception to the MEWA regulation, the
Department had proposed certain criteria describing the collective
bargaining agreement. Commenters on the first proposed regulation
expressed concerns related to plan compliance and the issue of state
regulation.

    Based on the comments received, the Department subsequently turned
to negotiated rulemaking, establishing the Committee to assist the
Department in developing acceptable criteria. The Committee included
representatives from labor unions, multiemployer plans, state
governments, employer/management associations, Railway Labor Act plans,
third-party administrators, independent agents and brokers of health
care products, insurance carriers and the federal government. Because
this rule takes into account the Committee's consensus views, and
because the Committee represented a full cross-section of the parties
affected by the rule, including state, federal, association, and
private sector health care organizations, the Department believes that,
as an alternative to the 1995 NPRM, this regulation accomplishes the
stated objectives of the Secretary and will have a beneficial effect on
small employer participation in MEWAs.

    The Department has concluded that the implementation of the
regulation will be less costly than alternative methods of determining
compliance with section 3(40), such as through case-by-case analysis by
EBSA of each employee welfare benefit plan or litigation. In addition,
if the Department elected not to define specific guidelines for the
application of section 3(40), thereby enabling sham MEWAs to continue
to evade state regulation, costs for small businesses would rise in
terms of loss of coverage and unpaid claims. No other significant
alternatives that would minimize economic impact on small entities were
identified.

    Further, the Department has concluded that it would be
inappropriate to create a specific exemption under the regulation for
small MEWAs because small MEWAs are just as likely as large MEWAs to be
underfunded or otherwise have inadequate reserves to meet the benefit
claims submitted for payment.

E. Small Business Regulatory Enforcement Fairness Act

    The rule being issued here is subject to the Congressional Review
Act provisions of the Small Business Regulatory Enforcement Fairness
Act of 1996 (5 U.S.C. 801 et seq.) and has been transmitted to Congress
and the Comptroller General for review. The rule is not a "major
rule" as that term is defined in 5 U.S.C. 804, because it is not
likely to result in (1) An annual effect on the economy of $100 million
or more; (2) a major increase in costs or prices for consumers,
individual industries, or federal, state, or local government agencies,
or geographic regions; or (3) significant adverse effects on
competition, employment, investment, productivity, innovation, or

[[Page 17480]]

on the ability of United States-based enterprises to compete with
foreign-based enterprises in domestic or export markets.

F. Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1501 et seq.), as well as Executive Order 12875, this rule does not
include any Federal mandate that may result in expenditures by State,
local, or tribal governments, or the private sector, which may impose
an annual burden of $100 million.

G. Executive Order 13132

    When an agency promulgates a regulation that has federalism
implications, Executive Order 13132 (64 FR 43255, August 10, 1999),
requires the Agency to provide a federalism summary impact statement.
Pursuant to section 6(c) of the Order, such a statement must include a
description of the extent of the agency's consultation with State and
local officials, a summary of the nature of their concerns and the
agency's position supporting the need to issue the regulation, and a
statement of the extent to which the concerns of the State have been
met.

    This regulation has federalism implications because it sets forth
standards and procedures for determining whether certain entities may
be regulated under certain state laws or whether such state laws are
preempted with respect to such entities. The state laws at issue are
those that regulate the business of insurance.

    From the inception of the Committee through final deliberations on
comments received on the proposed regulation, a representative from the
National Association of Insurance Commissioners (NAIC), representing
the interests of state governments in the regulation of insurance,
participated in the rulemaking. NAIC raised the following concerns at
Committee meetings: (1) That the rule should allow MEWAs to be easily
distinguishable from collectively bargained plans so that MEWAs
properly may be subjected to state jurisdiction and regulation; (2)
that the rule should prevent the unlicensed sale of health insurance;
and (3) that losses to individuals in the form of unreimbursed and
denied medical claims should be eliminated.

    The Department's position is that there is a substantial need for
this regulation. Unscrupulous individuals have been able to exploit the
lack of clear guidance regarding the criteria for determining whether
an entity is established or maintained pursuant to collective
bargaining agreements to create entities that falsely promise benefits
they are unable to provide. These operators, free of state solvency and
reserve requirements, have marketed unlicensed health insurance to
small employers, often offering health insurance at significantly lower
rates than state-licensed insurance companies. Ultimately, these
operations have often gone bankrupt, leaving individuals with
significant unpaid health claims and without health insurance. The lack
of clear guidance has hampered states in their efforts to regulate
these entities, and appropriate state regulation would reduce or
eliminate the risk of losses to employers, employees and their
families.

    This regulation provides objective criteria for distinguishing
collectively bargained plans from arrangements subject to state
insurance law. The regulation will facilitate state enforcement efforts
against arrangements attempting to misuse the collectively bargained
exception in section 3(40) of ERISA. In that regard, the regulation
will reduce the incidence of sale of unlicensed insurance under the
guise of collectively bargained plans and will limit the losses to
individuals in the form of unreimbursed medical and other welfare
benefit insurance claims.

    The Department notes further, as discussed more fully above, that
one commenter expressed concern that the availability of administrative
proceedings for an individualized section 3(40) finding in cases where
the jurisdiction or law of a state has been asserted may result in
delays in state enforcement that could substantially hinder a state's
ability to take timely enforcement actions against sham MEWA operators.
Recognizing the need to ensure that the regulations assist, rather than
hinder, state enforcement efforts against sham MEWA operators, and
taking into account the input of the Committee, including the NAIC
representative, the Department has amended the regulation to make clear
that it is not intended to provide the basis for a stay or delay of any
state actions, including administrative or court proceedings and
enforcement subpoenas, where immediate state enforcement action is
warranted.

List of Subjects in 29 CFR Part 2510

    Collective bargaining, Employee benefit plans, Pensions.

0
For the reasons set forth in the preamble, 29 CFR part 2510 is amended
as follows:

PART 2510--[AMENDED] DEFINITION OF TERMS USED IN SUBCHAPTERS C, D,
E, F, AND G OF THIS CHAPTER

0
1. The authority citation for part 2510 is revised to read as follows:

    Authority: 29 U.S.C. 1002(2), 1002(21), 1002(37), 1002(40),
1031, and 1135; Secretary of Labor's Order 1-2003, 68 FR 5374; Sec.
2510.3-101 also issued under sec. 102 of Reorganization Plan No. 4
of 1978, 43 FR 47713, 3 CFR, 1978 Comp., p. 332 and E.O. 12108, 44
FR 1065, 3 CFR, 1978 Comp., p. 275, and 29 U.S.C. 1135 note. Sec.
2510.3-102 also issued under sec. 102 of Reorganization Plan No. 4
of 1978, 43 FR 47713, 3 CFR, 1978 Comp., p. 332 and E.O. 12108, 44
FR 1065, 3 CFR, 1978 Comp., p. 275.

0
2. Add new section 2510.3-40 to read as follows:

Sec.  2510.3-40  Plans Established or Maintained Under or Pursuant to
Collective Bargaining Agreements Under Section 3(40)(A) of ERISA.

    (a) Scope and purpose. Section 3(40)(A) of the Employee Retirement
Income Security Act of 1974 (ERISA) provides that the term "multiple
employer welfare arrangement" (MEWA) does not include an employee
welfare benefit plan that is established or maintained under or
pursuant to one or more agreements that the Secretary of Labor (the
Secretary) finds to be collective bargaining agreements. This section
sets forth criteria that represent a finding by the Secretary whether
an arrangement is an employee welfare benefit plan established or
maintained under or pursuant to one or more collective bargaining
agreements. A plan is established or maintained under or pursuant to
collective bargaining if it meets the criteria in this section.
However, even if an entity meets the criteria in this section, it will
not be an employee welfare benefit plan established or maintained under
or pursuant to a collective bargaining agreement if it comes within the
exclusions in the section. Nothing in or pursuant to this section shall
constitute a finding for any purpose other than the exception for plans
established or maintained under or pursuant to one or more collective
bargaining agreements under section 3(40) of ERISA. In a particular
case where there is an attempt to assert state jurisdiction or the
application of state law with respect to a plan or other arrangement
that allegedly is covered under Title I of ERISA, the Secretary has set
forth a procedure for obtaining individualized findings at 29 CFR part
2570, subpart H.

    (b) General criteria. The Secretary finds, for purposes of section
3(40) of ERISA, that an employee welfare benefit

[[Page 17481]]

plan is "established or maintained under or pursuant to one or more
agreements which the Secretary finds to be collective bargaining
agreements" for any plan year in which the plan meets the criteria set
forth in paragraphs (b)(1), (2), (3), and (4) of this section, and is
not excluded under paragraph (c) of this section.

    (1) The entity is an employee welfare benefit plan within the
meaning of section 3(1) of ERISA.

    (2) At least 85% of the participants in the plan are:

    (i) Individuals employed under one or more agreements meeting the
criteria of paragraph (b)(3) of this section, under which contributions
are made to the plan, or pursuant to which coverage under the plan is
provided;

    (ii) Retirees who either participated in the plan at least five of
the last 10 years preceding their retirement, or

    (A) Are receiving benefits as participants under a multiemployer
pension benefit plan that is maintained under the same agreements
referred to in paragraph (b)(3) of this section, and

    (B) Have at least five years of service or the equivalent under
that multiemployer pension benefit plan;

    (iii) Participants on extended coverage under the plan pursuant to
the requirements of a statute or court or administrative agency
decision, including but not limited to the continuation coverage
requirements of the Consolidated Omnibus Budget Reconciliation Act of
1985, sections 601-609, 29 U.S.C. 1169, the Family and Medical Leave
Act, 29 U.S.C. 2601 et seq., the Uniformed Services Employment and
Reemployment Rights Act of 1994, 38 U.S.C. 4301 et seq., or the
National Labor Relations Act, 29 U.S.C. 158(a)(5);

    (iv) Participants who were active participants and whose coverage
is otherwise extended under the terms of the plan, including but not
limited to extension by reason of self-payment, hour bank, long or
short-term disability, furlough, or temporary unemployment, provided
that the charge to the individual for such extended coverage is no more
than the applicable premium under section 604 of the Act;

    (v) Participants whose coverage under the plan is maintained
pursuant to a reciprocal agreement with one or more other employee
welfare benefit plans that are established or maintained under or
pursuant to one or more collective bargaining agreements and that are
multiemployer plans;

    (vi) Individuals employed by:

    (A) An employee organization that sponsors, jointly sponsors, or is
represented on the association, committee, joint board of trustees, or
other similar group of representatives of the parties who sponsor the
plan;

    (B) The plan or associated trust fund;

    (C) Other employee benefit plans or trust funds to which
contributions are made pursuant to the same agreement described in
paragraph (b)(3) of this section; or

    (D) An employer association that is the authorized employer
representative that actually engaged in the collective bargaining that
led to the agreement that references the plan as described in paragraph
(b)(3) of this section;

    (vii) Individuals who were employed under an agreement described in
paragraph (b)(3) of this section, provided that they are employed by
one or more employers that are parties to an agreement described in
paragraph (b)(3) and are covered under the plan on terms that are
generally no more favorable than those that apply to similarly situated
individuals described in paragraph (b)(2)(i) of this section;

    (viii) Individuals (other than individuals described in paragraph
(b)(2)(i) of this section) who are employed by employers that are bound
by the terms of an agreement described in paragraph (b)(3) of this
section and that employ personnel covered by such agreement, and who
are covered under the plan on terms that are generally no more
favorable than those that apply to such covered personnel. For this
purpose, such individuals in excess of 10% of the total population of
participants in the plan are disregarded;

    (ix) Individuals who are, or were for a period of at least three
years, employed under one or more agreements between or among one or
more "carriers" (including "carriers by air") and one or more
"representatives" of employees for collective bargaining purposes and
as defined by the Railway Labor Act, 45 U.S.C. 151 et seq., providing
for such individuals' current or subsequent participation in the plan,
or providing for contributions to be made to the plan by such carriers;
or

    (x) Individuals who are licensed marine pilots operating in United
States ports as a state-regulated enterprise and are covered under an
employee welfare benefit plan that meets the definition of a qualified
merchant marine plan, as defined in section 415(b)(2)(F) of the
Internal Revenue Code (26 U.S.C.).

    (3) The plan is incorporated or referenced in a written agreement
between one or more employers and one or more employee organizations,
which agreement, itself or together with other agreements among the
same parties:

    (i) Is the product of a bona fide collective bargaining
relationship between the employers and the employee organization(s);

    (ii) Identifies employers and employee organization(s) that are
parties to and bound by the agreement;

    (iii) Identifies the personnel, job classifications, and/or work
jurisdiction covered by the agreement;

    (iv) Provides for terms and conditions of employment in addition to
coverage under, or contributions to, the plan; and

    (v) Is not unilaterally terminable or automatically terminated
solely for non-payment of benefits under, or contributions to, the
plan.

    (4) For purposes of paragraph (b)(3)(i) of this section, the
following factors, among others, are to be considered in determining
the existence of a bona fide collective bargaining relationship. In any
proceeding initiated under 29 CFR part 2570 subpart H, the existence of
a bona fide collective bargaining relationship under paragraph
(b)(3)(i) shall be presumed where at least four of the factors set out
in paragraphs (b)(4)(i) through (viii) of this section are established.
In such a proceeding, the Secretary may also consider whether other
objective or subjective indicia of actual collective bargaining and
representation are present as set out in paragraph (b)(4)(ix) of this
section.

    (i) The agreement referred to in paragraph (b)(3) of this section
provides for contributions to a labor-management trust fund structured
according to section 302(c)(5), (6), (7), (8), or (9) of the Taft-
Hartley Act, 29 U.S.C. 186(c)(5), (6), (7), (8) or (9), or to a plan
lawfully negotiated under the Railway Labor Act;

    (ii) The agreement referred to in paragraph (b)(3) of this section
requires contributions by substantially all of the participating
employers to a multiemployer pension plan that is structured in
accordance with section 401 of the Internal Revenue Code (26 U.S.C.)
and is either structured in accordance with section 302(c)(5) of the
Taft-Hartley Act, 29 U.S.C. 186(c)(5), or is lawfully negotiated under
the Railway Labor Act, and substantially all of the active participants
covered by the employee welfare benefit plan are also eligible to
become participants in that pension plan;

    (iii) The predominant employee organization that is a party to the
agreement referred to in paragraph (b)(3) of this section has
maintained a series of agreements incorporating or referencing the plan
since before January 1, 1983;

    (iv) The predominant employee organization that is a party to the
agreement referred to in paragraph (b)(3) of this section has been a
national or international union, or a federation of

[[Page 17482]]

national and international unions, or has been affiliated with such a
union or federation, since before January 1, 1983;

    (v) A court, government agency, or other third-party adjudicatory
tribunal has determined, in a contested or adversary proceeding, or in
a government-supervised election, that the predominant employee
organization that is a party to the agreement described in paragraph
(b)(3) of this section is the lawfully recognized or designated
collective bargaining representative with respect to one or more
bargaining units of personnel covered by such agreement;

    (vi) Employers who are parties to the agreement described in
paragraph (b)(3) of this section pay at least 75% of the premiums or
contributions required for the coverage of active participants under
the plan or, in the case of a retiree-only plan, the employers pay at
least 75% of the premiums or contributions required for the coverage of
the retirees. For this purpose, coverage under the plan for dental or
vision care, coverage for excepted benefits under 29 CFR 2590.732(b),
and amounts paid by participants and beneficiaries as co-payments or
deductibles in accordance with the terms of the plan are disregarded;

    (vii) The predominant employee organization that is a party to the
agreement described in paragraph (b)(3) of this section provides,
sponsors, or jointly sponsors a hiring hall(s) and/or a state-certified
apprenticeship program(s) that provides services that are available to
substantially all active participants covered by the plan;

    (viii) The agreement described in paragraph (b)(3) of this section
has been determined to be a bona fide collective bargaining agreement
for purposes of establishing the prevailing practices with respect to
wages and supplements in a locality, pursuant to a prevailing wage
statute of any state or the District of Columbia.

    (ix) There are other objective or subjective indicia of actual
collective bargaining and representation, such as that arm's-length
negotiations occurred between the parties to the agreement described in
paragraph (b)(3) of this section; that the predominant employee
organization that is party to such agreement actively represents
employees covered by such agreement with respect to grievances,
disputes, or other matters involving employment terms and conditions
other than coverage under, or contributions to, the employee welfare
benefit plan; that there is a geographic, occupational, trade,
organizing, or other rationale for the employers and bargaining units
covered by such agreement; that there is a connection between such
agreement and the participation, if any, of self-employed individuals
in the employee welfare benefit plan established or maintained under or
pursuant to such agreement.

    (c) Exclusions. An employee welfare benefit plan shall not be
deemed to be "established or maintained under or pursuant to one or
more agreements which the Secretary finds to be collective bargaining
agreements" for any plan year in which:

    (1) The plan is self-funded or partially self-funded and is
marketed to employers or sole proprietors

    (i) By one or more insurance producers as defined in paragraph (d)
of this section;

    (ii) By an individual who is disqualified from, or ineligible for,
or has failed to obtain, a license to serve as an insurance producer to
the extent that the individual engages in an activity for which such
license is required; or

    (iii) By individuals (other than individuals described in
paragraphs (c)(1)(i) and (ii) of this section) who are paid on a
commission-type basis to market the plan.

    (iv) For the purposes of this paragraph (c)(1):

    (A) "Marketing" does not include administering the plan,
consulting with plan sponsors, counseling on benefit design or
coverage, or explaining the terms of coverage available under the plan
to employees or union members;

    (B) "Marketing" does include the marketing of union membership
that carries with it plan participation by virtue of such membership,
except for membership in unions representing insurance producers
themselves;

    (2) The agreement under which the plan is established or maintained
is a scheme, plan, stratagem, or artifice of evasion, a principal
intent of which is to evade compliance with state law and regulations
applicable to insurance; or

    (3) There is fraud, forgery, or willful misrepresentation as to the
factors relied on to demonstrate that the plan satisfies the criteria
set forth in paragraph (b) of this section.

    (d) Definitions. (1) Active participant means a participant who is
not retired and who is not on extended coverage under paragraphs
(b)(2)(iii) or (b)(2)(iv) of this section.

    (2) Agreement means the contract embodying the terms and conditions
mutually agreed upon between or among the parties to such agreement.
Where the singular is used in this section, the plural is automatically
included.

    (3) Individual employed means any natural person who furnishes
services to another person or entity in the capacity of an employee
under common law, without regard to any specialized definitions or
interpretations of the terms "employee," "employer," or
"employed" under federal or state statutes other than ERISA.

    (4) Insurance producer means an agent, broker, consultant, or
producer who is an individual, entity, or sole proprietor that is
licensed under the laws of the state to sell, solicit, or negotiate
insurance.

    (5) Predominant employee organization means, where more than one
employee organization is a party to an agreement, either the
organization representing the plurality of individuals employed under
such agreement, or organizations that in combination represent the
majority of such individuals.

    (e) Examples. The operation of the provisions of this section may
be illustrated by the following examples.

    Example 1. Plan A has 500 participants, in the following 4
categories of participants under paragraph (b)(2) of this section:

----------------------------------------------------------------------------------------------------------------

                   Categories of participants                      Total number     Nexus group      Non-nexus
----------------------------------------------------------------------------------------------------------------
1. Individuals working under CBAs...............................       335 (67%)       335 (67%)               0
2. Retirees.....................................................        50 (10%)        50 (10%)               0
3. "Special Class"--Non-CBA, non-CBA-alumni.....................       100 (20%)        50 (10%)        50 (10%)
4. Non-nexus participants.......................................         15 (3%)               0         15 (3%)

                                                                 -----------------

       Total....................................................       500 (100%)       435 (87%)        65 (13%)
----------------------------------------------------------------------------------------------------------------

    In determining whether at least 85% of Plan A's participant
population is made up of individuals with the required nexus to the
collective bargaining agreement as required by paragraph (b)(2) of
this section, the Plan may count as part of the nexus group only

[[Page 17483]]

50 (10% of the total plan population) of the 100 individuals
described in paragraph (b)(2)(viii) of this section. That is because
the number of individuals meeting the category of individuals in
paragraph (b)(2)(viii) exceeds 10% of the total participant
population by 50 individuals. The paragraph specifies that of those
individuals who would otherwise be deemed to be nexus individuals
because they are the type of individuals described in paragraph
(b)(2)(viii), the number in excess of 10% of the total plan
population may not be counted in the nexus group. Here, 50 of the
100 individuals employed by signatory employers, but not covered by
the collective bargaining agreement, are counted as nexus
individuals and 50 are not counted as nexus individuals.
Nonetheless, the Plan satisfies the 85% criterion under paragraph
(b)(2) because a total of 435 (335 individuals covered by the
collective bargaining agreement, plus 50 retirees, plus 50
individuals employed by signatory employers), or 87%, of the 500
participants in Plan A are individuals who may be counted as nexus
participants under paragraph (b)(2). Beneficiaries (e.g., spouses,
dependent children, etc.) are not counted to determine whether the
85% test has been met.

    Example 2. (i) International Union MG and its Local Unions have
represented people working primarily in a particular industry for
over 60 years. Since 1950, most of their collective bargaining
agreements have called for those workers to be covered by the
National MG Health and Welfare Plan. During that time, the number of
union-represented workers in the industry, and the number of active
participants in the National MG Health and Welfare Plan, first grew
and then declined. New Locals were formed and later were shut down.
Despite these fluctuations, the National MG Health and Welfare Plan
meets the factors described in paragraphs (b)(4)(iii) and (iv) of
this section, as the plan has been in existence pursuant to
collective bargaining agreements to which the International Union
and its affiliates have been parties since before January 1, 1983.

    (ii) Assume the same facts, except that on January 1, 1999,
International Union MG merged with International Union RE to form
International Union MRGE. MRGE and its Locals now represent the
active participants in the National MG Health and Welfare Plan and
in the National RE Health and Welfare Plan, which, for 45 years, had
been maintained under collective bargaining agreements negotiated by
International Union RE and its Locals. Since International Union
MRGE is the continuation of, and successor to, the MG and RE unions,
the two plans continue to meet the factors in paragraphs (b)(4)(iii)
and (iv) of this section. This also would be true if the two plans
were merged.

    (iii) Assume the same facts as in paragraphs (i) and (ii) of
this Example. In addition to maintaining the health and welfare
plans described in those paragraphs, International Union MG also
maintained the National MG Pension Plan and International Union RE
maintained the National RE Pension Plan. When the unions merged and
the health and welfare plans were merged, National MG Pension Plan
and National RE Pension Plan were merged to form National MRGE
Pension Plan. When the unions merged, the employees and retirees
covered under the pre-merger plans continued to be covered under the
post-merger plans pursuant to the collective bargaining agreements
and also were given credit in the post-merger plans for their years
of service and coverage in the pre-merger plans. Retirees who
originally were covered under the pre-merger plans and continue to
be covered under the post-merger plans based on their past service
and coverage would be considered to be "retirees" for purposes of
2550.3-40(b)(2)(ii). Likewise, bargaining unit alumni who were
covered under the pre-merger plans and continued to be covered under
the post-merger plans based on their past service and coverage and
their continued employment with employers that are parties to an
agreement described in paragraph (b)(3) of this section would be
considered to be bargaining unit alumni for purposes of 2550.3-
40(b)(2)(vii).

    Example 3. Assume the same facts as in paragraph (ii) of Example
2 with respect to International Union MG. However, in 1997, one of
its Locals and the employers with which it negotiates agree to set
up a new multiemployer health and welfare plan that only covers the
individuals represented by that Local Union. That plan would not
meet the factor in paragraph (b)(4)(iii) of this section, as it has
not been incorporated or referenced in collective bargaining
agreements since before January 1, 1983.

    Example 4. (i) Pursuant to a collective bargaining agreement
between various employers and Local 2000, the employers contribute
$2 per hour to the Fund for every hour that a covered employee works
under the agreement. The covered employees are automatically
entitled to health and disability coverage from the Fund for every
calendar quarter the employees have 300 hours of additional covered
service in the preceding quarter. The employees do not need to make
any additional contributions for their own coverage, but must pay
$250 per month if they want health coverage for their dependent
spouse and children. Because the employer payments cover 100% of the
required contributions for the employees' own coverage, the Local
2000 Employers Health and Welfare Fund meets the "75% employer
payment" factor under paragraph (b)(4)(vi) of this section.

    (ii) Assume, however, that the negotiated employer contribution
rate was $1 per hour, and the employees could only obtain health
coverage for themselves if they also elected to contribute $1 per
hour, paid on a pre-tax basis through salary reduction. The Fund
would not meet the 75% employer payment factor, even though the
employees' contributions are treated as employer contributions for
tax purposes. Under ERISA, and therefore under this section,
elective salary reduction contributions are treated as employee
contributions. The outcome would be the same if a uniform employee
contribution rate applied to all employees, whether they had
individual or family coverage, so that the $1 per hour employee
contribution qualified an employee for his or her own coverage and,
if he or she had dependents, dependent coverage as well.

    Example 5. Arthur is a licensed insurance broker, one of whose
clients is Multiemployer Fund M, a partially self-funded plan.
Arthur takes bids from insurance companies on behalf of Fund M for
the insured portion of its coverage, helps the trustees to evaluate
the bids, and places the Fund's health insurance coverage with the
carrier that is selected. Arthur also assists the trustees of Fund M
in preparing material to explain the plan and its benefits to the
participants, as well as in monitoring the insurance company's
performance under the contract. At the Trustees' request, Arthur
meets with a group of employers with which the union is negotiating
for their employees' coverage under Fund M, and he explains the cost
structure and benefits that Fund M provides. Arthur is not engaged
in marketing within the meaning of paragraph (c)(1) of this section,
so the fact that he provides these administrative services and sells
insurance to the Fund itself does not affect the plan's status as a
plan established or maintained under or pursuant to a collective
bargaining agreement. This is the case whether or how he is
compensated.

    Example 6. Assume the same facts as Example 5, except that
Arthur has a group of clients who are unrelated to the employers
bound by the collective bargaining agreement, whose employees would
not be "nexus group" members, and whose insurance carrier has
withdrawn from the market in their locality. He persuades the client
group to retain him to find them other coverage. The client group
has no relationship with the labor union that represents the
participants in Fund M. However, Arthur offers them coverage under
Fund M and persuades the Fund's Trustees to allow the client group
to join Fund M in order to broaden Fund M's contribution base.
Arthur's activities in obtaining coverage for the unrelated group
under Fund M constitutes marketing through an insurance producer;
Fund M is a MEWA under paragraph (c)(1) of this section.

    Example 7. Union A represents thousands of construction workers
in a three-state geographic region. For many years, Union A has
maintained a standard written collective bargaining agreement with
several hundred large and small building contractors, covering
wages, hours, and other terms and conditions of employment for all
work performed in Union A's geographic territory. The terms of those
agreements are negotiated every three years between Union A and a
multiemployer Association, which signs on behalf of those employers
who have delegated their bargaining authority to the Association.
Hundreds of other employers--including both local and traveling
contractors--have chosen to become bound to the terms of Union A's
standard area agreement for various periods of time and in various
ways, such as by signing short-form binders or "me too"
agreements, executing a single job or project labor agreement, or
entering into a subcontracting arrangement with a signatory
employer. All of these employ individuals represented by Union A and
contribute to Plan A, a self-insured multiemployer health and
welfare plan established and maintained under Union A's

[[Page 17484]]

standard area agreement. During the past year, the trustees of Plan
A have brought lawsuits against several signatory employers seeking
contributions allegedly owed, but not paid to the trust. In
defending that litigation, a number of employers have sworn that
they never intended to operate as union contractors, that their
employees want nothing to do with Union A, that Union A procured
their assent to the collective bargaining agreement solely by
threats and fraudulent misrepresentations, and that Union A has
failed to file certain reports required by the Labor Management
Reporting and Disclosure Act. In at least one instance, a petition
for a decertification election has been filed with the National
Labor Relations Board. In this example, Plan A meets the criteria
for a regulatory finding under this section that it is a
multiemployer plan established and maintained under or pursuant to
one or more collective bargaining agreements, assuming that its
participant population satisfies the 85% test of paragraph (b)(2) of
this section and that none of the disqualifying factors in paragraph
(c) of this section is present. Plan A's status for the purpose of
this section is not affected by the fact that some of the employers
who deal with Union A have challenged Union A's conduct, or have
disputed under labor statutes and legal doctrines other than ERISA
section 3(40) the validity and enforceability of their putative
contract with Union A, regardless of the outcome of those disputes.

    Example 8. Assume the same facts as Example 7. Plan A's benefits
consultant recently entered into an arrangement with the Medical
Consortium, a newly formed organization of health care providers,
which allows the Plan to offer a broader range of health services to
Plan A's participants while achieving cost savings to the Plan and
to participants. Union A, Plan A, and Plan A's consultant each have
added a page to their Web sites publicizing the new arrangement with
the Medical Consortium. Concurrently, Medical Consortium's Web site
prominently publicizes its recent affiliation with Plan A and the
innovative services it makes available to the Plan's participants.
Union A has mailed out informational packets to its members
describing the benefit enhancements and encouraging election of
family coverage. Union A has also begun distributing similar
material to workers on hundreds of non-union construction job sites
within its geographic territory. In this example, Plan A remains a
plan established and maintained under or pursuant to one or more
collective bargaining agreements under section 3(40) of ERISA.
Neither Plan A's relationship with a new organization of health care
providers, nor the use of various media to publicize Plan A's
attractive benefits throughout the area served by Union A, alters
Plan A's status for purpose of this section.

    Example 9. Assume the same facts as in Example 7. Union A
undertakes an area-wide organizing campaign among the employees of
all the health care providers who belong to the Medical Consortium.
When soliciting individual employees to sign up as union members,
Union A distributes Plan A's information materials and promises to
bargain for the same coverage. At the same time, when appealing to
the employers in the Medical Consortium for voluntary recognition,
Union A promises to publicize the Consortium's status as a group of
unionized health care service providers. Union A eventually succeeds
in obtaining recognition based on its majority status among the
employees working for Medical Consortium employers. The Consortium,
acting on behalf of its employer members, negotiates a collective
bargaining agreement with Union A that provides terms and conditions
of employment, including coverage under Plan A. In this example,
Plan A still meets the criteria for a regulatory finding that it is
collectively bargained under section 3(40) of ERISA. Union A's
recruitment and representation of a new occupational category of
workers unrelated to the construction trade, its promotion of
attractive health benefits to achieve organizing success, and the
Plan's resultant growth, do not take Plan A outside the regulatory
finding.

    Example 10. Assume the same facts as in Example 7. The Medical
Consortium, a newly formed organization, approaches Plan A with a
proposal to make money for Plan A and Union A by enrolling a large
group of employers, their employees, and self-employed individuals
affiliated with the Medical Consortium. The Medical Consortium
obtains employers' signatures on a generic document bearing Union
A's name, labeled "collective bargaining agreement," which
provides for health coverage under Plan A and compliance with wage
and hour statutes, as well as other employment laws. Employees of
signatory employers sign enrollment documents for Plan A and are
issued membership cards in Union A; their membership dues are
regularly checked off along with their monthly payments for health
coverage. Self-employed individuals similarly receive union
membership cards and make monthly payments, which are divided
between Plan A and the Union. Aside from health coverage matters,
these new participants have little or no contact with Union A. The
new participants enrolled through the Consortium amount to 18% of
the population of Plan A during the current Plan Year. In this
example, Plan A now fails to meet the criteria in paragraphs (b)(2)
and (b)(3) of this section, because more than 15% of its
participants are individuals who are not employed under agreements
that are the product of a bona fide collective bargaining
relationship and who do not fall within any of the other nexus
categories set forth in paragraph (b)(2) of this section. Moreover,
even if the number of additional participants enrolled through the
Medical Consortium, together with any other participants who did not
fall within any of the nexus categories, did not exceed 15% of the
total participant population under the plan, the circumstances in
this example would trigger the disqualification of paragraph (c)(2)
of this section, because Plan A now is being maintained under a
substantial number of agreements that are a "scheme, plan,
stratagem or artifice of evasion" intended primarily to evade
compliance with state laws and regulations pertaining to insurance.
In either case, the consequence of adding the participants through
the Medical Consortium is that Plan A is now a MEWA for purposes of
section 3(40) of ERISA and is not exempt from state regulation by
virtue of ERISA.

    (f) Cross-reference. See 29 CFR part 2570, subpart H for procedural
rules relating to proceedings seeking an Administrative Law Judge
finding by the Secretary under section 3(40) of ERISA.

    (g) Effect of proceeding seeking Administrative Law Judge Section
3(40) Finding.

    (1) An Administrative Law Judge finding issued pursuant to the
procedures in 29 CFR part 2570, subpart H will constitute a finding
whether the entity in that proceeding is an employee welfare benefit
plan established or maintained under or pursuant to an agreement that
the Secretary finds to be a collective bargaining agreement for
purposes of section 3(40) of ERISA.

    (2) Nothing in this section or in 29 CFR part 2570, subpart H is
intended to provide the basis for a stay or delay of a state
administrative or court proceeding or enforcement of a subpoena.

Signed this 31st day of March 2003.

Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration.
[FR Doc. 03-8113 Filed 4-7-03; 8:45 am]

BILLING CODE 4510-29-P

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