Advisory Opinions 2003-04A

Dear Mr. Gallagher:

This is in response to your request for an advisory opinion on behalf of The Prudential Insurance Company of America regarding the application of the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”) to a sponsoring employer’s (“Employer”) amendment of its employee welfare benefit plan (“Welfare Plan”) to eliminate life insurance benefits for certain retirees and the amendment of its defined benefit pension plan (“Pension Plan”) to add similar benefits for those retirees, and the implementation of those amendments. You specifically ask for an opinion that the foregoing amendments, along with their implementation, would not violate the anti-inurement, exclusive benefit and prohibited transaction provisions under ERISA,⁽¹⁾ solely because the Employer would no longer pay for the retiree life insurance benefits from its general assets and account for such benefit liabilities on its financial statements under Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards No. 106, Employer’s Accounting for Post-Retirement Benefits Other Than Pensions (“OPEBs”) (“FAS 106”).⁽²⁾

Your letter and supplemental materials contain the following facts and representations. The Pension Plan is an employee pension benefit plan within the meaning of section 3(2) of ERISA. The Welfare Plan is an employee welfare benefit plan within the meaning of section 3(1) of ERISA that provides, among other benefits, life insurance benefits to certain former employees of the Employer (retirees). In most instances, the life insurance benefits provided under the Welfare Plan are paid from the Employer’s general assets directly, or through an insurance policy purchased by the Employer from its general assets, as to which the Employer is the contractholder. However, in some circumstances, these benefits may be funded in some measure, such as by a life insurance policy owned by the Welfare Plan, or may require some participant contribution. Any such life insurance policy or policies owned by the Plan are term policies. You represent that with respect to the life insurance benefits, under the terms of the Welfare Plan, the Employer has no obligation to make contributions to the Plan at any prescribed contribution rate, but does so on a “pay-as-you-go” basis to meet benefit payments or support premium payments.

Both the Pension Plan and Welfare Plan are single employer plans. You represent that the Employer is authorized to amend or terminate the Welfare Plan at any time, and has not communicated to participating employees or retirees any limitations on its ability to amend or terminate the Welfare Plan, or that such employees or retirees have a “vested” right to life insurance benefits. The Employer must account for the benefits provided under the Pension Plan in accordance with FASB Statement of Financial Accounting Standards No. 87, Employer’s Accounting for Pensions (“FAS 87"),⁽³⁾ and the benefits provided under the Welfare Plan in accordance with FAS 106.

You represent that the Pension Plan currently is overfunded. The Welfare Plan is not funded beyond the amounts necessary to pay current life insurance premium payments. However, where the Welfare Plan owns a life insurance policy or policies, which you represent are term policies, there may be circumstances where there is a stabilization reserve or similar amounts held in connection with those policies. The Employer proposes to amend the Welfare Plan to eliminate the life insurance benefits of certain retirees. Concurrent with the amending of the Welfare Plan, the Employer proposes to amend the Pension Plan to provide life insurance benefits to those same retirees whose benefits have been eliminated under the Welfare Plan. You explain that if the Welfare Plan provides life insurance benefits only to retirees, the Plan itself will be terminated. You further represent that in the case of such termination, if the Plan owns a term life insurance policy or policies, any stabilization reserve or similar amounts held in connection with those policies, to the extent it includes plan assets or is attributable to employee contributions, would be distributed as required by the terms of the plan or policy to the extent consistent with the provisions of ERISA. If the Welfare Plan also provides life insurance benefits to active employees, the Welfare Plan would be amended to eliminate coverage with respect to those retirees, but would continue with respect to the active employees.

The life insurance benefits provided to the retirees under the Pension Plan would be similar, but not identical, to the benefits made available under the Welfare Plan, and would be provided through the purchase of a life insurance contract with single or periodic premium payments. There will be no transfer of assets between the Plans in connection with these amendments. You further represent that the amendment of the Pension Plan to provide these life insurance benefits will not affect the tax qualification of that Plan under section 401(a) of the Code, and that the amendment of the Welfare Plan to eliminate the life insurance benefits will not relieve the Employer of any existing liability or obligation to make contributions to the Welfare Plan. You state that if following the amendment the Pension Plan is not currently funded at the appropriate level considering these additional liabilities, the Employer would be required to make additional contributions. However, it is contemplated that any additional liabilities under the Pension Plan caused by the addition of life insurance benefits will not require the Employer to make additional contributions to meet the minimum funding requirements under section 302 of ERISA. However, additional Employer contributions may be required in the future to fund these benefits.

You explain that, following the proposed amendments, the Employer would no longer purchase or provide life insurance benefits to the retirees from its general assets, and would not be required to continue reporting liabilities relating to those benefits on its financial statements in accordance with FAS 106. While the addition of the new life insurance benefits under the Pension Plan may increase the liabilities required to be reported on the Employer’s financial statements for benefits payable under the Pension Plan in accordance with FAS 87, you indicate that these liabilities would be offset by amounts funding the overfunded Pension Plan. You represent that the proposed amendments therefore may result in a financial accounting benefit to the Employer.

Section 3(21) of ERISA defines the term “fiduciary” to include one who has or exercises discretionary authority or control in the administration or management of an employee benefit plan or its assets. Section 404(a)(1)(A) of ERISA requires that a fiduciary of a plan discharge his or her duties with respect to the plan solely in the interest of the participants and beneficiaries, and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan. Section 403(c)(1) of ERISA provides, in part and subject to certain exceptions, that the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.

Section 406(a)(1)(D) of ERISA provides that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he or she knows or should know that such transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 406(b)(1) provides that a fiduciary with respect to a plan shall not deal with the assets of the plan in his or her own interest or for his or her own account. Section 406(b)(2) provides that a fiduciary with respect to a plan shall not in his or her individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries.

The Department has long taken the position that there is a class of discretionary activities which relate to the formation, rather than the management, of plans, explaining that these so-called “settlor” functions include decisions relating to the establishment, design and termination of plans, and generally are not fiduciary activities governed by ERISA. However, while such decisions may be settlor functions, activities undertaken to implement the decisions generally are fiduciary in nature and must be carried out in accordance with the fiduciary responsibility provisions.⁽⁴⁾

In the view of the Department, a settlor’s decision to eliminate life insurance benefits for certain retirees under a welfare plan and to provide similar benefits to the same retirees under a pension plan would not be subject to ERISA’s fiduciary standards.⁽⁵⁾ Further, it is the view of the Department that implementation of such decisions by plan fiduciaries would not, in itself, violate the anti-inurement provision of ERISA section 403(c)(1), the general fiduciary standards of section 404, or the prohibited transaction standards of section 406 merely because doing so would confer a benefit on the Employer. Whether the steps taken by any given fiduciary in implementing a settlor’s decision satisfy ERISA’s fiduciary standards are inherently factual questions on which the Department generally will not rule.

As indicated in various pronouncements by the Department, expenses incurred by an employer in the performance of settlor functions are not reasonable plan expenses. See Advisory Opinions Nos. 2001-01A and 97-03A (Jan. 23, 1997). See also EBSA Field Assistance Bulletin 2002-2 (Nov. 14, 2002); DOL Information Letter to Kirk Maldonado from Elliot I. Daniel (March 2, 1987).

This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions.