Advisory Opinion 2006-02A

Dear Mr. McLeod:

This is in response to your request for an advisory opinion under the Employee Income Security Act of 1974, as amended (ERISA). In particular, you request guidance as to the acceptable use of assets remaining in a trust that served as the funding vehicle for a multiple employer welfare arrangement (MEWA) that has been terminated.

You represent that the National Office Machine Dealers Association (NOMDA) established the NOMDA Group Insurance Trust (the NOMDA Trust or Trust) in 1976 to provide group health insurance benefits to employees of dealer members of NOMDA.⁽¹⁾ The NOMDA Trust was self-insured until 1990, when, as a result of the issuance of Advisory Opinion 90-18A (July 2, 1990), the trustees of the Trust realized that, even if the NOMDA Trust was a group health plan subject to ERISA, it also constituted a MEWA as defined in section 3(40) of ERISA, and thus was subject to State insurance regulation. The trustees began a search for an insurance company to provide insurance for the coverage provided by the Trust. On January 15, 1992, the NOMDA Trust entered into an agreement with American Medical Security, a division of United Wisconsin Life, in which United Wisconsin Life agreed to provide coverage for the participants in the Trust. You represent that since April 30, 1992, the NOMDA Trust has not maintained any health benefits program.

You represent that all outstanding claims of the NOMDA Trust have been paid in full. No former participant or beneficiary in the NOMDA Trust has any claim, expectancy or right to future benefit of any kind from the NOMDA Trust. However, assets in the Trust at the time were insufficient to pay all claims due. Accordingly, NOMDA advanced funds to the Trust to enable it to pay claims. The advances were characterized as loans. An audit of the NOMDA Trust by the Department determined that those loans were prohibited transactions under section 406 of ERISA. NOMDA proposed corrective actions that were accepted by the Department.

The agreement between the NOMDA Trust and American Medical Security provided for fees to be paid to the Trust for providing marketing services for American Medical Security to members of NOMDA. The agreement also provided that a portion of future underwriting profits of American Medical Security would be paid to the Trust. The funds now in the NOMDA Trust are the result of the payments made by American Medical Security after 1992 pursuant to the agreement. The agreement has since been terminated and no further payments will be made.

The NOMDA Trust document provides that the Trust may be terminated upon a vote of its trustees and approval of the NOMDA Board of Regents. Upon termination, the trustees shall, after paying or making provision for the payment of all the liabilities of the Trust, dispose of all the assets of the Trust exclusively for the purposes of the Trust in such manner or to such organization or organizations organized and operated for the same purposes as the Trust, as the trustees shall determine.

The stated purpose of the Trust is to provide life, health, accident, dental and disability benefits to persons who are eligible members of NOMDA, their employees, and the employees of NOMDA.

You represent that due to changes in the office machine industry, as well as the shift from typewriters to computers, NOMDA membership has changed significantly in recent years. Many small dealers, who were the bulk of the employers participating in the NOMDA Trust, have been eliminated. As a result of these changes, NOMDA merged with the Local Area Network Dealers Association on June 25, 1993, and changed its name to the Business Technology Association (BTA) on July 1, 1994.

BTA has decided to establish a voluntary employee benefit association (VEBA) under section 501(c)(9) of the Internal Revenue Code of 1986 (the Code), and desires to transfer the assets of the NOMDA Trust to the VEBA. The VEBA will use the funds to purchase health and life insurance for the employees of BTA. You are requesting an advisory opinion that the transfer of the assets of the NOMDA Trust to the BTA VEBA for the benefit of its employees does not constitute an improper inurement of plan assets to an employer as described in ERISA section 403 or a transaction prohibited under ERISA section 406.

Section 406(a) of ERISA provides, in part, 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 the transaction constitutes a direct or indirect (1) lending of money or other extension of credit between the plan and a party in interest, or (2) a transfer to, or use by or for the benefit of, a party in interest of any assets of the plan. With respect to the prohibitions contained in ERISA section 406(a), nothing in your submission suggests that the VEBA would be a party in interest to the NOMDA Trust. Thus, the transfer of assets from the NOMDA Trust to the VEBA would not appear to be a transaction between an employee benefit plan and a party in interest with respect thereto. Accordingly, it is the Department's view, based upon your representations, that the transaction is not prohibited by section 406(a).

Section 406(b)(1) of ERISA provides that a fiduciary with respect to a plan shall not deal with plan assets in his own interest or for his own account. Section 406(b)(2) of ERISA prohibits a fiduciary with respect to a plan from acting in any transaction involving the plan on behalf of a party, or represent a party, whose interests are adverse to the interest of the plan or of its participants and beneficiaries.

Section 403(c)(1) of ERISA provides that, except as provided in section 403(d), 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 403(d)(2) of ERISA provides that the assets of an employee welfare benefit plan that terminates shall be distributed in accordance with the terms of the plan, except as otherwise provided in regulations of the Secretary of Labor. Although no regulations have been issued under section 403(d)(2), Conference Report No. 93-1280, 93rd Congress, 2d Session, at 303, states in part that it is intended that the terms of the welfare plan will govern distribution or transfer of assets upon termination of the plan, except to the extent that implementation of the terms of the plan or agreement would unduly impair the accrued benefits of the plan participants. See Advisory Opinion 93-14A (May 5, 1993). We note further in this regard that section 404(a)(1)(D) of ERISA requires that plan fiduciaries discharge their duties in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with Titles I and IV of ERISA.

The trustees' transfer of the NOMDA Trust assets to the VEBA for the purpose of providing benefits to the employees of BTA does not appear to involve a use of the Trust assets for the benefit of the trustees in violation of ERISA section 406(b)(1). Furthermore, if the NOMDA Trust has been properly terminated and all claims have either been paid or properly forfeited so that there are no longer any participants or beneficiaries of the NOMDA Trust, the proposed subsequent transfer of excess funds by the trustees of the Trust would not violate section 406(b)(2). Assuming the contemplated transfer is in accordance with the terms of the plan, then it is specifically allowed under section 403(d)(2).⁽²⁾

ERISA's general standards of fiduciary conduct also would apply to the proposed transfer. Section 404 requires a fiduciary, among other things, to discharge his duties respecting a plan solely in the interest of the plan's participants and beneficiaries, in a prudent fashion, and in accordance with the terms of the plan to the extent that they are consistent with Titles I and IV of ERISA.

This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 relating to the effect of advisory opinions.