Advisory Opinion 2004-10A

Dear Mr. Brickson:

This is in response to your request on behalf of The May Department Stores Company (May Company) for an advisory opinion under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA). Specifically, you ask whether May Company’s vacation pay program (Program) is a “payroll practice” within the meaning of Department of Labor (Department) regulation at 29 C.F.R. § 2510.3-1(b)(3) and, therefore, not an employee welfare benefit plan within the meaning of section 3(1) of Title I of ERISA.

You provided the following facts and representations in support of your request. The Program provides the employees of May Company and its divisions, subsidiaries, and affiliates, with vacation benefits. The Program operates on an annual basis. A “vacation year” begins on May 1 and goes through April 30. Employees must satisfy a waiting period to become eligible for benefits. The level of benefits under the Program is based on the employee’s rate of compensation and years of service. Employees receive 50% of their maximum vacation entitlement on May 1 of the vacation year and the remaining 50% of their maximum vacation entitlement on September 1 of the vacation year. Vacation benefits are “vested” in that employees who terminate employment for any reason other than retirement during the year will be paid any earned, but unused, vacation pay for that year. However, earned vacation pay that is not used during the 12-month period beginning on May 1 is not carried over from year to year. You advise that the Program covers approximately 117,000 employees.

You represent that May Company established a trust (Trust) between itself and the Bank of New York, as Trustee, as a tax exempt VEBA trust under section 501(c)(9) of the Internal Revenue Code (Code) to hold assets to fund vacation benefits under the Program.(1)  You advise that vacation benefits are always paid by May Company and reimbursed by the Trust through the use of an “advance and recapture” arrangement. Specifically, vacation benefits under the Program are paid directly to employees from the general assets of May Company through its existing payroll system, and May Company at the end of each month submits a statement to the Trustee requesting reimbursement. The Trust document provides that as soon as reasonably possible after receipt of the request, the trustee must pay the amount requested to the applicable May Company division, subsidiary, or affiliate participating in the Program as an Employer. The Trust document also provides that the trustee “shall make payments only to an Employer, and the Trustee shall not be directed to make payments to Eligible Employees from the Trust.”

You represent that the Trust is funded exclusively by employer contributions and earnings thereon. You indicate that the May Company historically has made a lump-sum contribution to the Trust at the beginning of each vacation year. The contribution and earnings are intended to be sufficient to reimburse the May Company for vacation benefits paid under the Program for the year as well as cover the Trust’s administrative expenses. With each monthly reimbursement, you advise that the amount held in the Trust is intended to steadily decline to zero by the end of the year. You indicate that May Company contributes on a discretionary basis and does not have a legal obligation to contribute to the Trust. Specifically, the trust document provides that “each Employer shall contribute to the Trust such amount or amounts as the Employer may determine from time to time.” You also indicate that under the terms of the Program, the May Company would be obligated to pay eligible employees vacation wages under the Program regardless of whether there are sufficient funds in the Trust to reimburse May Company.

Section 3(1) of Title I of ERISA defines the term "employee welfare benefit plan" to include: [A]ny plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 (other than pensions on retirement or death, and insurance to provide such pensions).
In regulation section 29 C.F.R. § 2510.3-1, the Department clarified the definition of “employee welfare benefit plan” by describing certain arrangements that would not constitute employee welfare benefit plans within the meaning of section 3(1). Section 2510.3-1(b)(3) describes certain exempt payroll practices, and specifically provides that an employer program of compensating employees for vacation benefits out of the employer's general assets is not a welfare plan covered under Title I of ERISA. In the preamble of the regulation, the Department stated that “[s]ection 2510.3-1(b) distinguishes welfare plans from employer payroll practices which, although related to benefits described in [section 3(1) of ERISA], are more closely associated with normal wages or salary.” If vacation benefits are paid from a source other than the general assets of the employer, the conditions of the safe-harbor regulation are not met.

In this case, we are unable to conclude that the Program meets the conditions for being a payroll practice under the regulation. Although the vacation pay is distributed directly from the general assets of May Company, in the Department’s view, the regulation’s safe harbor for general asset vacation pay payroll practices does not reach programs such as the May Company’s that include a VEBA Trust dedicated to the vacation pay benefits. However, vacation pay programs that fail to satisfy all of the conditions of the regulation are not necessarily covered by Title I of ERISA. Rather, such programs are subject to further evaluation under section 3(1) of ERISA to determine whether the program includes the requisite elements to constitute an ERISA employee benefit plan.

In that regard, the Supreme Court in Massachusetts v. Morash, 490 U.S. 107 (1989), stated that ordinary vacation benefits are not “analogous to other welfare benefits, in which either the employee's right to a benefit is contingent upon some future occurrence or the employee bears a risk different from his ordinary employment risk.” Id. at 116. The Court also noted that extensive state regulation of vesting, funding and participation rights of vacation benefits may afford more protection for vacation benefits than ERISA, and indicated a reluctance to cause their preemption in situations where not clearly indicated. Id. at 119. Although the Morash court observed that “the creation of a separate fund to pay employees vacation benefits would subject a single employer to the regulatory provisions of ERISA[,]” the discussion in Morash suggests that the mere presence of a trust or other separate account from which an employer reimburses itself for vacation pay should not automatically result in ERISA coverage in the absence of the trust providing genuine protections to the accrued benefits under the plan or otherwise presenting risks ERISA was intended to address.(2)

Accordingly, in the Department’s view as recently articulated in Advisory Opinion 2004-08, to determine whether the use of a trust or other separate account in a vacation pay program such as May Company’s should result in the program being treated as an “employee benefit plan” subject to Title I of ERISA, the program should be evaluated to determine whether the trust is a bona fide separate fund, whether the trust has the direct legal obligation to pay benefits under the plan, whether there is a contribution obligation enforceable against the employer, and whether contributions are actuarially determined, established through collective bargaining, or otherwise bear a relationship to the plan’s accruing liability.(3)

Although a bona fide separate fund exists in this case, May Company, and not the Trust, is liable for the payment of vacation wages. The principal function of the Trust is to reimburse the May Company for vacation benefits paid under the Program for the year. In fact, the Trust document provides that the trustee “shall make payments only to an Employer, and the Trustee shall not be directed to make payments to Eligible Employees from the Trust.” The employees’ right to vacation pay benefits under the Program is not dependent on the amount or frequency of employer contributions to the Trust or level of assets in the Trust. Under the terms of the Program, employees do not receive, nor would they have any rights to receive, vacation payments directly from the Trust, even if the employer were to become insolvent, nor will their entitlement to benefits be affected if the Trust were terminated. May Company contributes on a discretionary basis and there is no contribution obligation enforceable against the employer. There are no employee contributions to the Trust. The fact that the May Company voluntarily makes an annual contribution into a tax exempt trust calculated to cover its vacation pay liability under the Program for the year does not in and of itself, in the Department’s view, make the Program “analogous to other welfare benefits, in which either the employee's right to a benefit is contingent upon some future occurrence or the employee bears a risk different from his ordinary employment risk.” Morash, 490 U.S. at 116. Consequently, in light of the relevant factors mentioned above and based on the information you supplied, it is the view of the Department that the Program is not an employee welfare benefit plan within the meaning of section 3(1) of ERISA.

This letter constitutes an advisory opinion under ERISA Procedure 76-1, and is issued subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions.