June 1, 2001
Denise M. Clark
Dear Ms. Clark:
This is in response to your request for an advisory opinion on behalf of the board of trustees of The Hotel Employees and Restaurant Employees International Union Welfare Fund (the "Fund") regarding the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). Specifically, you ask whether it is permissible under such provisions for the board of trustees to choose to amend the Fund to provide for the payment of (1) certain federal tax obligations that arise as a result of the Fund's provision of domestic partner coverage, and (2) an additional gross-up benefit to participants who elect domestic partner coverage.
Domestic partner coverage means the totality of domestic partner benefits available under applicable Fund provisions. In general, domestic partner benefits are the medical, surgical, hospital care and similar healthcare services provided to the eligible domestic partners of plan participants by healthcare providers and the Fund's payment to such providers for the services rendered pursuant to a particular plan unit's schedule of benefits, contracts with providers or indemnity provisions. You state that the trustees designed the Fund's domestic partner coverage to provide health and welfare benefits to the eligible domestic partners of participants that are the same as the Fund benefits available to participants and their spouses and dependent children within a particular plan unit, on a cost and lifestyle neutral basis.
As background, you state that the Fund provides medical, surgical, hospital care, and similar health benefits to approximately 100,000 participants employed in the hotel and restaurant industries and their eligible beneficiaries pursuant to approximately 700 collective bargaining agreements with the Hotel Employees and Restaurant Employees International Union ("HEREIU"), its locals, or affiliates and contributing employers1. You refer to the Fund as a multiemployer health and welfare plan comprised of twenty-seven plan units that cover discrete geographic areas throughout the country2. Each plan unit offers its own set of individualized benefits provided pursuant to the terms of its respective plan document. All available benefits are paid from one asset pool despite the existence of the various plan units. Coverage is generally provided to participants and their eligible beneficiaries on a non-contributory basis.
You represent that the Fund has made domestic partner coverage available in three plan units, New York [plan unit 100], Las Vegas [plan unit 150] and Atlantic City [plan unit 102/202], and that approximately 109 participants have elected domestic partner coverage in their respective plan units. As defined in the applicable plan documents, an eligible domestic partner is any unmarried individual who lives with an unmarried participant of the same-sex on a continuous basis prior to the election of the coverage, and who has a close and committed personal relationship with the electing participant that is evidenced by joint economic interdependence3. Additionally, the participant electing domestic partner coverage and his or her domestic partner must:
-be at least 18 years of age;
-be unrelated by blood;
-have jointly executed an Affidavit of Domestic Partnership provided by the plan; and
-not have been members of another domestic partnership, as defined in the plan document, within six months preceding the relationship for which domestic partnership benefits are claimed.
Plan unit 100 also extends domestic partner coverage to opposite-sex couples that otherwise satisfy the Fund's definition of domestic partner. The Fund's provision of domestic partner coverage in these plan units was authorized by the Fund's benefit plan committee, in the process described below, pursuant to individual plan unit amendments that apply only to the plan unit identified in the respective plan amendment.
In a supplementary letter, you have explained the process for determining the types of benefits a plan unit will offer, such as domestic partner coverage. Initially, the trustees solicit the input of participants through their collective bargaining representatives and satisfaction surveys. Next and prior to any plan unit offering a specific benefit, actuarial underwriting calculations are performed to assure that the contributions received from contributing employers in a specific plan unit are sufficient to cover the cost of benefits provided in that particular plan unit. If the desired benefits can be supported by the plan unit income, then the Fund staff designs the benefit and seeks approval from the benefit plan committee for a plan unit amendment. The benefit plan committee is the committee of trustees that has been delegated the authority to oversee and approve all benefits offered by individual plan units as well as blanket amendments that apply to the plan documents of all the Fund's constituent plan units.
You represent that providing domestic partner coverage has raised issues of tax liability under the Internal Revenue Code (the "Code") for both the Fund and its participants, and fiduciary liability and prohibited transaction issues under ERISA for the Fund and its trustees. The tax issues relate to guidance provided by the Internal Revenue Service (the "Service") to another taxpayer in Private Letter Ruling 98500114. As a result, the trustees filed this advisory opinion request with the Department and a private letter ruling request with the Service regarding the employment tax consequences to the Fund of providing domestic partner coverage5. Specifically the trustees asked the Service for a ruling as to whether the Fund, as the entity in control of providing domestic partner coverage, is the employer for purposes of federal employment taxes. The request also asked the Service for a ruling regarding the effect of domestic partner coverage and related tax liabilities on the Fund's exempt status under section 501(c)(9) of the Code.
As a preliminary action before requesting guidance from the Department and the Service, the trustees adopted a blanket amendment to comply with the Fund's tax responsibilities for all plan units with domestic partner coverage. The blanket amendment is designed to preserve the Fund's domestic partner coverage, protect the privacy of electing participants and permit additional plan units to offer domestic partner coverage in the future. The amendment provides that the Fund will pay both the FUTA taxes and the employer and employee portion of the FICA taxes on the amount includible as wages in the gross income of the participant by reason of the domestic partner coverage (the "taxable domestic partner amount"). Additionally, the Fund will pay a gross-up amount on the employee portion of the FICA tax (the "gross-up"), calculated in accordance with the methodology detailed in Revenue Procedure 81-48, 1981-2 C.B. 623. The gross-up is intended to make the participant whole by avoiding the pyramiding of wages and resulting taxes that would otherwise result from the Fund's payment of the employee portion of the FICA tax. You represent that the tax compliance method contained in the blanket amendment is the result of a deliberative decisionmaking process by the trustees that evaluated compliance alternatives to determine a method that would be both administratively and fiscally reasonable for the Fund.
The Service issued Private Letter Ruling 200108010 (November 17, 2000) in response to the trustees' request for rulings on the Fund's employment tax responsibilities based on the facts represented. Among the rulings, the Service held that:
1) the excess of the fair market value of the coverage provided by the Fund to a nondependent, nonspousal domestic partner of the participant within the meaning of section 152 of the Code, over the amount paid by the employee-participant (the "participant") for such coverage, is includible in the income of the participant under section 61 of the Code and is wages for FICA, FUTA and income tax withholding purposes. The amount of participant FICA attributable to the coverage that is paid by the Fund on the participant's behalf is also includible in the participant's income and is wages for employment tax purposes. Therefore, the grossed-up amount determined under Revenue Procedure 81-48 is the amount includible in the gross income of the participant by reason of the health coverage for a domestic partner and is the amount of the participant's wages for FICA, FUTA and income tax withholding purposes;
2) the Fund is the employer under section 3401(d) of the Code for purposes of the employment taxes because it has legal control of the payment of the wages (that is, the value of the coverage provided to a participant's nondependent, nonspousal domestic partner). Consequently, the Fund must withhold income tax and the participant portion of the FICA tax. The Fund must also pay the employer portion of the FICA tax and FUTA tax; and
3) the Fund's operations with respect to health coverage provided to nondependent, nonspousal domestic partners will be no more than de minimis within the meaning of Treasury Regulation section 1.501(c)(9)-3(a). The provision of domestic partner coverage therefore will not adversely affect the Fund's exempt status under section 501(c)(9) of the Code.
In the advisory opinion request to the Department, you first ask for an opinion that the Fund's payment of the FUTA taxes and the employer and employee portions of the FICA taxes on the taxable domestic partner amount would not violate ERISA sections 403(c)(1), 404(a)(1) or the prohibited transaction provisions of ERISA section 406(a)(1)(C) and 406(a)(1)(D). Secondly, you ask whether it is permissible under the prohibited transaction provisions of ERISA section 406(b)(2) for employer-appointed trustees to participate in the process of deciding to have the Fund pay the employer's FICA and FUTA tax obligations on the taxable domestic partner amount. Thirdly, you ask whether the Fund's blanket amendment on domestic partner coverage has the effect of establishing the Fund's payments of participants' FICA taxes on the taxable domestic partner amount as benefits specified in the plan. Fourthly, you ask whether the Fund's payment of the gross-up as an additional domestic partner benefit would violate ERISA sections 403(c)(1), 404(a)(1) and 406(a)(1)(D).
ERISA section 403(c)(1) generally provides that, subject to certain exceptions, the assets of a plan shall not inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. ERISA section 404(a)(1)(A) requires plan fiduciaries to discharge their 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 beneficiaries and defraying reasonable expenses of administering the plan. In addition, ERISA section 404(a)(1)(B) requires plan fiduciaries to discharge their duties with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use, and, pursuant to ERISA section 404(a)(1)(D), in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of Titles I and IV of ERISA.
ERISA section 406(a)(1)(C) and (D) prohibit a fiduciary from causing a plan to engage in a transaction, if he or she knows or should know that the transaction constitutes a direct or indirect furnishing of goods, services or facilities between a plan and a party in interest, or transfer to, or use by or for the benefit of, a party in interest of any assets of the plan. ERISA section 406(b)(1) prohibits a fiduciary from dealing with the assets of the plan in his own interest or for his own account. ERISA section 406(b)(2) specifically prohibits fiduciaries in their individual or in any other capacity from acting in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries.
With respect to that portion of your first question dealing with the Fund's payment of the FUTA taxes and the employer portion of the FICA taxes, it is the view of the Department that if the Fund is legally responsible for payment of the FUTA taxes and the employer portion of the FICA taxes on the taxable domestic partner amount, the payment of these obligations would not violate ERISA sections 403(c)(1), 404(a)(1), 406(a)(1)(C) and 406(a)(1)(D). If a participant's common law employer is not responsible for the payment of these obligations, then the Fund's payment of them would not be an inurement of plan assets to the common law employer's benefit. Similarly, the Fund's payment of these obligations would not be an improper expenditure of plan assets under ERISA section 404(a)(1). Nor would it give rise to a prohibited transaction under ERISA section 406(a)(1). This view is consistent with the principles articulated in Advisory Opinion 82-32A (July 20, 1982)6.
Similarly with respect to your second question, it is the view of the Department that if the Fund is legally responsible for paying the FUTA taxes and the employer portion of the FICA taxes, participation by the employer-appointed trustees in the compliance decisionmaking process would not give rise to a prohibited transaction under ERISA section 406(b)(2).
With respect to the portion of your first question dealing with Fund's payment of the employee portion of the FICA tax, it is the Department's view that the Fund's decision to pay the employee portion of the FICA tax for participants electing domestic partner coverage as an additional domestic partner benefit would not violate ERISA sections 403(c)(1), 404(a)(1) and 406(a)(1)(D) provided such payments are clearly specified as plan benefits in the plan document7. Such payments are an additional distribution from plan assets and must be provided as plan benefits to avoid violating ERISA; they cannot be justified as reasonable administrative expenses of the plan.
With respect to your third question asking for confirmation that the Fund's blanket amendment has the effect of establishing the Fund's payment of the participants' FICA taxes triggered by their domestic partner coverage as benefits specified in plan, the Department generally will not issue opinions regarding the interpretation of plan documents and therefore declines to opine on this question.
With respect to your fourth question dealing with the Fund's payment of the gross-up, it is the Department's view that the Fund's decision to pay the gross-up as an additional domestic partner benefit would not violate ERISA sections 403(c)(1), 404(a)(1) and 406(a)(1)(D) provided such payments are clearly specified as plan benefits in the plan document. Such payments are an additional distribution from plan assets and must be provided as plan benefits to avoid violating ERISA; they cannot be justified as reasonable administrative expenses of the plan.
The views expressed in this letter relate only to the provisions of ERISA addressed above and not to any other law. In particular, this letter does not rule on the interpretation or application of any Code sections. Further, this letter makes no comments regarding section 302 (c) of the Labor Management Relations Act of 1947 because the Department of Justice rather than the Department of Labor has jurisdiction regarding that provision.
This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, it is subject to the provisions of the procedure, including section 10 thereof relating to the effect of advisory opinions.
Chief, Division of Fiduciary
Office of Regulations
1 The Fund was created pursuant to an Agreement and Declaration of Trust in 1974 and is a voluntary employee beneficiary association under section 501(c)(9) of the Internal Revenue Code.
2 Section 1.06 of the trust agreement creating the Fund defines "Welfare Fund" to mean "the trust fund established for the purposes of providing benefits..." Section 1.07 defines "Welfare Plan" to mean "the benefit programs established and maintained by the trustees for the payment of medical, hospital care...benefits from the Welfare Fund" and states that "the Welfare Plan is an employee welfare benefit plan... and shall be administered in accordance with... the applicable Plan Documents which contain the rules and regulations relating to eligibility for and the amount and nature of the benefits that are adopted by the trustees." Section 1.08 defines "Plan Unit" to refer to the "benefit programs adopted by the Trustees for specific regions of the country. Each Plan Unit shall be considered a part of the Welfare Fund and Welfare Plan administered hereunder."
3A nonspousal domestic partner cannot qualify as a spouse for any purpose under federal law. The Defense of Marriage Act §3, 1 U.S.C. §7 (1996), provides: "In determining the meaning of any Act of Congress, or of any ruling, regulation or interpretation of the various administrative bureaus or agencies of the United States, the word marriage' means only a legal union between one-man and one-woman as husband and wife, and the word spouse' refers only to a person of the opposite sex who is a husband or wife."
4 In PLR 9850011 (September 10,1998), the Service ruled that the amount equal to the excess of the fair market value of the group medical coverage provided by a particular multiemployer fund to a domestic partner over the amount paid by the participant (employee) for such coverage was includible in the gross income of participants electing domestic partner coverage in all situations where a covered domestic partner failed to qualify as a spouse or dependent. Additionally, the Service ruled that the amount includible in the gross income of the employee by reason of the domestic partner coverage constituted wages under section 3401(a) of the Code and was subject to income tax withholding under section 3402 of the Code. The Service also ruled that such amounts constituted wages within the meaning of section 3121(a) of the Code and section 3306(b) of the Code for FICA and FUTA purposes, respectively. Moreover, the Service ruled that the fund was required to withhold the amount required to be withheld under section 3402 of the Code for income tax purposes and the amount of FICA and FUTA taxes imposed by sections 3111 and 3301 of the Code.
5 The term "employment tax" is used in PLR 9850011 and the private letter ruling request to refer collectively to: (1) the Federal Insurance Contributions Act (FICA) which imposes a tax on employers and employees based on a percentage of wages paid or received with respect to employment under sections 3101 and 3111 of the Code; (2) the Federal Unemployment Contributions Act (FUTA) which imposes an excise tax on employers based on a percentage of total wages paid with respect to employment under section 3301 of the Code; and, (3) the income tax reporting and withholding at source obligations on wages imposed under section 3402 of the Code.
6 In Advisory Opinion 82-32A, the Department expressed the view that multiemployer plans could comply with certain federal tax law requirements imposed on such plans by directly reporting sick pay to the Service and paying the employer portion of FICA tax without necessarily contravening ERISA sections 403(c)(1), 404(a)(1) and 406(a)(1)(D).
7 See also Advisory Opinion 82-32A
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