Advisory Opinion 1999-08A

Dear Mr. Meagher:

This is in response to your request for an advisory opinion concerning the application of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") to a special purpose trust ("the Trust") established on behalf of Michigan Consolidated Gas Company ("the Company"), a wholly-owned subsidiary of MCN Energy Group, Inc. ("MCN"). Specifically, you ask whether assets contributed to the Trust would constitute assets of an employee welfare benefit plan for purposes of Title I of ERISA.

You represent that the Trust is intended to operate as a grantor trust within the meaning of section 671 of the Internal Revenue Code of 1986 ("the Code"). The Trust was established as a vehicle through which the Company may accumulate assets that it may eventually either (i) contribute to one or more voluntary employees beneficiary associations maintained by or on behalf of the Company to fund postretirement health and life insurance benefits provided to its employees and former employees (the VEBAs), or (ii) apply to such other business purposes as are consistent with the applicable rate orders of the Michigan Public Service Commission (the Commission).

The Company is a natural gas distribution and interstate transmission company and is the principal operating subsidiary of MCN, a diversified gas holding company. You state that rates charged to customers and other significant aspects of the Company's business are regulated by the Commission. In 1991, the Commission commenced a case related to ratemaking associated with implementing the Financial Accounting Standards Board's ("FASB') Statement of Financial Accounting Standards No. 106, Employer's Accounting for Postretirement Benefits Other Than Pensions ("FAS 106").⁽¹⁾ During 1991 and 1992, the Company operated under an incentive plan that provided for annual rate increases or decreases to recover the effects of inflation on operation and maintenance expenses. In an opinion and order dated December 8, 1992 ("Order"), the Commission concluded that the Company could also recover an amount equal to its reasonable and prudent FAS 106 expenses through rates charged to its customers, provided that the Company contributed the amounts so collected to an external funding arrangement, so as to minimize any risk that the Company would use those recovered funds for purposes inconsistent with the Commission's rate orders.

You represent that, following issuance of the Order, the Company will continue to fund the VEBAs that it currently maintains according to its current funding policies. In order to comply with the Commission's requirement of an external funding arrangement in connection with imposing a rate increase to cover FAS 106 expenses, the Company intends to contribute to the Trust any amounts recovered from ratepayers in excess of the maximum deductible contributions⁽²⁾ permitted to be made to the VEBAs, or otherwise in excess of the amount the Company deems advisable to contribute to the VEBAs. The Trust assets will not be treated by the Company, or by any other participating employer,⁽³⁾ as a "restricted and segregated fund" for purposes of FAS 106. The Trust agreement provides that Trust assets may be used for any business or regulatory purpose that the Company determines not to be inconsistent with the orders or decisions of the Commission. Further, the Trust agreement states specifically that nothing shall entitle any participant or beneficiary of any employee benefit plan to any payments from, or create any interest on their part in, the assets of the Trust Fund and that the Trust is not intended to fund any employee benefit plan or program, but rather is intended to be a depository arrangement with the Trustee for the setting aside of cash and other assets for meeting all or part of the Company's and any Participating Employer's obligations, including any obligations that the Company might have with respect to any rate orders issued by the Commission.

The Company, according to your representations, may decide in the future to make contributions to the VEBAs from the Trust or from the revenues of the Company, at its discretion. Under the Trust Agreement, neither the VEBAs nor their participants or beneficiaries will have any preferential claim against, or any beneficial interest in, the assets of the Trust. To the extent that assets held in the VEBAs are insufficient to pay benefits provided by the welfare benefit plans that they fund, the Company retains sole responsibility for the claims of VEBA participants and beneficiaries, and the benefits provided under the VEBAs will not be limited or governed in any way by the amount of contributions to the Trust. You state that the Company will inform its employees that the Company has discretion to revoke the Trust, that the assets of the Trust are available to be used for general corporate purposes as permitted under the Commission's rate orders, and that employees should not look to the assets of the Trust as a source of funding for benefits provided under any employee benefit plan sponsored by the Company or any Participating Employers. The Trust agreement contains no references to benefit plans, plan participants, or their dependents, other than the statement that nothing shall entitle any participant or beneficiary of any employee benefit plan to any payments from, or create any interest on their part in, the assets of the Trust Fund and that the Trust is not intended to fund any employee benefit plan or program. The Trust agreement also provides that the Trust may be terminated by the Company without consent of any person upon 180 days written prior notice to the Commission.

Title I of ERISA does not expressly define what property will be regarded as "assets of an employee benefit plan."  The Department of Labor ("the Department") has issued regulations describing what constitutes plan assets with respect to a plan's investment in other entities and with respect to participant contributions. See 29 C.F.R. 2510.3-101 and 29 C.F.R. 2510.3-102, respectively. The Department has indicated that the assets of an employee benefit plan generally are to be identified in other situations on the basis of ordinary notions of property rights. See, e.g., Advisory Opinion 94-31A (September 9, 1994). The provisions of Title I further do not impose funding standards on employee welfare benefit plans. Accordingly, the Department has acknowledged that an employer sponsor of a welfare plan may maintain such a plan without identifiable plan assets by paying plan benefits exclusively from the general assets of the employer. This could be the case even if an employer sets aside some of its general assets in a separate employer account for the purpose of ensuring that assets are available to provide benefits under the plan. However, if an employer takes steps that cause the plan to gain a beneficial interest in particular assets, under ordinary notions of property rights, such assets would become plan assets. See Advisory Opinion 94-31A.

In the Department's view, a plan obtains a beneficial interest in particular property if, under common law principles, the property is held in trust for the benefit of the plan or its participants and beneficiaries, or if the plan otherwise has an interest in such property on the basis of ordinary notions of property rights.⁽⁴⁾ Further, whether a plan has acquired a beneficial interest in definable assets depends, largely, on whether the plan sponsor has expressed the intent to grant such a beneficial interest or has acted or made representations sufficient to lead participants and beneficiaries of the plan reasonably to believe that such funds separately secure the promised benefits or are otherwise plan assets. The identification of plan assets therefore requires consideration of any contract or other legal instrument involving the plan, as well as the actions and representations of the parties involved. For example, it is the Department's view that a welfare plan generally will have a beneficial interest in particular assets if the employer establishes a trust on behalf of the plan, sets up a separate account with a bank or with a third party in the name of the plan, or specifically indicates in the plan documents or instruments that separately maintained funds belong to the plan. In Advisory Opinion 94-31A, the Department found that the use of assets in a trust to offset benefit obligations for purposes of financial reporting under FAS 106 was tantamount to a representation that such assets would secure the benefits promised under the plan and that, accordingly, the plan would have a beneficial interest in the assets in the trust and such assets would constitute plan assets. See also Advisory Opinions 92-24A (Nov. 6, 1992) and 84-10A (Feb. 22, 1984).

On the other hand, the Department has also explained that the mere segregation of employer funds to facilitate administration of a plan, in the absence of any other actions or representations that would manifest an intent to contribute assets to a welfare plan, would not in itself demonstrate an intent to create a beneficial interest in those assets on behalf of a plan. See Advisory Opinions 92-24A and 94-31A. For example, in Advisory Opinion 92-02A (Jan. 17, 1992), the Department determined that, under the circumstances involved in that case, a stop loss insurance policy purchased by a single employer plan sponsor to meet the employer's liabilities under a medical benefit plan did not constitute plan assets. That determination was based, among other things, on the fact that there was no representation to any participant or beneficiary that the policy would be used to provide benefits or that it in any way represented security for the payment of benefits. The employer, and not the plan, retained all rights of ownership under the policy. The employer was named as the beneficiary of the policy; neither the plan nor any participant or beneficiary had any preferred claim against the policy or any beneficial ownership interest in the policy; the plan benefits were not limited or governed in any way by the amount of the insurance proceeds; and employee contributions were not expended toward the purchase of the policy.

In this case, you state that the Company will make no representations to any participant or beneficiary that the Trust will be used to pay benefits. Rather, all representations made by the Company concerning the Trust affirm that the Trust assets may be used by the Company for appropriate business purposes and are not set aside to provide employee benefits. The Trust agreement explicitly states that the Trust does not fund, and that it is not the purpose of the Trust to fund, any employee benefit plan of the Company. The purpose of the Trust, as explained in the Trust document, is to be no more than a depository arrangement for the setting aside of cash and other assets for meeting all or part of the Company's obligations, including any obligations with respect to complying with any rate orders issued by the Michigan Public Utility Commission. You state further that the Trust assets will be carried on the Company's balance sheet as assets of the Company and will not be used to offset the Company's FAS 106 liability.⁽⁵⁾ In addition, you state that the Company will retain all rights of ownership of the Trust assets, which will be available for general business purposes; that the benefits of the plan will not be limited or governed in any way by contributions to the Trust; and that no contributions from any participant will be made to the Trust.

Under the circumstances described herein, it is the view of the Department that the plan would have no beneficial interest in the Trust and that the assets of the Trust would not constitute plan assets for purposes of Title I of ERISA. This letter constitutes an advisory opinion under ERISA Advisory Opinion Procedure 76-1, and accordingly, is subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions.