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Employee Benefits Security Administration

Advisory Opinion

February 4, 1999

John P. Counts, Esq.
David Potts-Dupre, Esq.
Counts & Kanne
1125 15th Street, NW, Suite 444
Washington, DC 20005

1999-04A
ERISA Sec. 3(7)

Dear Messrs. Counts and Potts-Dupre:

This is in response to your request for an advisory opinion concerning the definition of “participant” provided in section 3(7) of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you ask whether individuals who own business enterprises, either wholly or in part, and who provide personal services to those businesses may be “participants,” within the meaning of section 3(7) of ERISA, in a multiemployer employee benefit plan. You state that the business enterprises that are the subject of this request include businesses that are operated as corporations, sole proprietorships, and partnerships.

You submit your request on behalf of the National Electrical Benefit Fund (the NEBF), a multiemployer pension plan established jointly by the International Brotherhood of Electrical Workers (IBEW) and the National Electrical Contractors Association (NECA) pursuant to collective bargaining. You describe the NEBF as the largest construction industry fund in the United States, with approximately 375,000 participants, over 14,000 contributing employers, and plan assets of almost five billion dollars.

The documents that you have submitted indicate that an individual can become eligible to participate in the NEBF only as a result of an employer’s having executed a participation agreement with the NEBF, obligating the employer to make contributions on behalf of at least some of its employees. See Restated Employees Benefit Agreement and Trust for the National Electrical Benefit Fund (hereinafter Trust Agreement), Part I, Provision 4; sections 1.7, 1.8, 1.18, 6.3.3. An employer must agree at a minimum to make contributions on behalf of its bargaining unit employees. Id. section 6.3.1. Such an employer may elect, in addition, to contribute on behalf of its “non-bargaining unit employees.” An employer may contribute on behalf of all “non-bargaining unit employees” or only those non-bargaining unit employees who were formerly bargaining unit members (“alumni”). Id.

With respect to bargaining unit employees, a participating employer must contribute to the NEBF an amount equal to three percent of “all wages and other compensation paid to, or accrued by, the Covered Employees in the . . . bargaining unit for services performed for the Covered Employer.” Id. section 6.2.1. For non-bargaining unit employees, the employer must contribute to the NEBF an amount equal to the lesser of

“(a) 3% of all wages and other compensation which the Covered Employer would pay, or which the [non-bargaining unit] Covered Employees would accrue, if the Covered Employees were receiving the wage rate received by the highest number of employees in the appropriate . . . bargaining unit and working the normal straight time hours provided for in the appropriate labor agreement, or (b) 3% of all wages and other compensation paid to, or accrued by, the [non-bargaining unit] Covered Employees for services performed for the Covered Employer . . . .”

Id. Section 6.2.2.

The documents that you have supplied indicate that the NEBF provides a pension benefit, which may be paid as an early retirement pension or a normal retirement pension, and a disability benefit. A participant becomes vested in his or her pension benefit upon earning at least five vesting service credits. (1)  Pension benefits for vested participants are calculated by multiplying the participant’s benefit service credits(2) by fixed dollar amounts that are specified in the plan. As a result, the amount of a participant’s monthly pension benefit is not dependent upon the participant’s actual income prior to retirement or the actual amount of contributions that an employer made on his or her behalf, but rather upon seniority in the NEBF.

You represent that the trustees of the NEBF currently interpret its plan documents to permit “working owners(3) to be treated as employees eligible to participate in the NEBF and therefore to become participants in the NEBF.(4) The eligible “working owners” include any “owner that earns wages or self-employment income from a company,” including sole proprietors of unincorporated businesses. You indicate that the working owners who currently participate in the NEBF are journeyman electricians who had worked initially as bargaining unit members for other employers that contributed to the NEBF on their behalf. They subsequently acquired ownership interests in those employers or started their own electrical businesses, sometimes in partnership with other similarly situated individuals, sometimes by creating wholly-owned corporations, and sometimes operating as sole proprietors. They continue to work as electricians and in some cases employ other union members covered by the NEBF. Most of these working owners had earned vested pension benefits in the NEBF based on their previous service as bargaining unit employees, and they began accruing additional service credits when the NEBF changed its eligibility rules in 1994 to permit working owners to participate.

You represent that the employer’s payroll reports, submitted monthly to the NEBF, are used to determine an employer’s contributions, based on the working owner’s reported “wages,” and a working owner’s service credits, based on the working owner’s reported hours of service. You further represent that reporting employers determine a working owner’s “wages” by determining the greater of the working owner’s actual gross earnings subject to employment tax for that month or the amount the working owner would have earned if he had worked at normal straight-time hours for the month at the applicable journeyman’s rate. The working owner’s hours of service are reported as the actual hours the working owner worked for the business during the month.

Section 3(7) of Title I of ERISA provides that a “participant” is “any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.” Section 3(6) in turn defines an “employee” as “any individual employed by an employer.” Finally, section 3(5) defines “employer” as “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.”

Title I of ERISA contains multiple indications, albeit indirect, that Congress assumed that a “working owner” could be a “participant” in an employee benefit plan sponsored by the business in which that working owner held an ownership right, regardless of the legal form in which the business was operated. For example, section 401(a)(2) exempts certain partnership agreements from the fiduciary provisions of Part 4. This exemption would be meaningless if the partnership agreements themselves (which cover only partners, one of the categories of “working owners”) were not otherwise plans covered by Title I. Further, section 403(b)(3)(A) specifically exempts from the trust requirement of section 403(a) a plan “some or all of the participants of which are employees described in section 401(c)(1) of the Code [emphasis added].” This exemption takes as its basis the assumption that the employees described in Code section 401(c)(1), namely self-employed individuals (including “working owners”), are legitimate “participants” within the meaning of Title I. Also, section 408(b)(1) exempts from section 406's prohibition of specified transactions certain non-discriminatory loans made to plan participants, including highly compensated employees, but section 408(d)(1) eliminates that exemption for owner-employees as defined in section 401(c)(3) of the Code. Inasmuch as the owner-employers described in Code section 401(c)(3) are sole proprietors and more than ten-percent partners, it is clear that the provisions in section 408 of Title I assume that such “working owners” are “participants” in the plans from which those loans would be made.

These indications of Congressional intent are supported and reinforced by the treatment of “working owners” under the provisions of Title II and Title IV of ERISA.(5)  Section 401(c) of the Internal Revenue Code (the Code) provides that self-employed individuals are included as “employees” under Code section 401(a) to the extent that they have earned income “with respect to a trade or business in which personal services of the [individual] are a material income- producing factor.” Code section 401(c)(2)(A). Code section 401(c) further imposes specific additional requirements on tax-qualified pension plans that provide benefits to “owner- employees,” a term defined in Code section 401(c)(3) to include employees who own the entire interest in an unincorporated trade or business or more than 10 percent of a partnership. It is thus patently clear that Title II of ERISA permits “working owners” to receive the tax benefits that flow from participation as “participants” in pension plans that meet the qualification requirements of Code section 401(a).

Title IV of ERISA (the termination insurance provisions) also expressly includes “working owners” among the “participants” who receive its protections. See ERISA section 4001(b)(1) (“[a]n individual who owns the entire interest in an unincorporated trade or business is treated as his own employer, and a partnership is treated as the employer of each partner who is an employee within the meaning of [Code] section 401(c)(1) . . .”). Section 4021(b)(9) of ERISA excludes from coverage under Title IV only those pension plans that are “established and maintained exclusively for substantial owners,” i.e., sole proprietors and more than ten-percent owners of partnerships and corporations. See ERISA section 4022(b)(5)(A) (defining “substantial owner”). Title IV limits the amount of benefits that the PBGC guarantees to “substantial owners” who participate in single employer plans, but nonetheless provides a basic guarantee of such owners’ pension benefits. Such a guarantee would be meaningless if Title I did not permit such owners to be participants in ERISA-covered pension plans.

In our view, the statutory provisions of ERISA, taken as a whole, reveal a clear Congressional design to include “working owners” within the definition of “participant” for purposes of Title I of ERISA. Congress could not have intended that a pension plan operated so as to satisfy the complex tax qualification rules applicable to benefits provided to “owner- employees” under the provisions of Title II of ERISA, and with respect to which an employer faithfully makes the premium payments required to protect the benefits payable under the plan to such individuals under Title IV of ERISA, would somehow transgress against the limitations of the definitions contained in Title I of ERISA. Such a result would cause an intolerable conflict between the separate titles of ERISA, leading to the sort of “absurd results” that the Supreme Court warned against in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992).(6)

Therefore, it is the view of the Department that there is nothing in the definitions of Title I of ERISA that would preclude a pension plan, including the NEBF, from extending plan coverage to “working owners,” as described in your submission, where such coverage is otherwise consistent with the documents and instruments governing the plan and does not violate any other provisions of Title I.(7)

ERISA’s fiduciary standards, however, require compliance with any other applicable federal law. Pursuant to ERISA section 514(d), nothing in Title I of ERISA shall be construed to alter, amend, modify, invalidate, impair, or supersede any federal law or any rule or regulation issued pursuant to such federal law. Such federal laws include any requirements applicable to multiemployer benefit plans under the Labor Management Relations Act (LMRA). Several federal courts interpreting the LMRA have upheld decisions by plan trustees to exclude owner- employees on the ground that their inclusion would violate the LMRA. See, e.g., Todd v. Benal Concrete Const. Co., Inc., 710 F.2d 581 (9th Cir. 1983); Aitken v. GCU-Employer Retirement Fund, 604 F.2d 1261 (9th Cir. 1979). The Department is not authorized to issue opinions regarding the LMRA. Accordingly, the fiduciary of a plan subject to the LMRA that includes “working owners” should seek legal advice regarding the propriety of the participation of “working owners” in such plan under the LMRA.

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

Sincerely,
Susan G. Lahne
Acting Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations


Footnotes

  1. One vesting service credit is earned for each year after 1965 in which a participant is credited with 1000 hours of covered service for covered employment (employment during a period for which an employer is obligated to make contributions for that employee).

  2. One benefit service credit is similarly earned for each year after 1965 in which a participant is credited with 1000 hours of covered employment.

  3. By the term “working owner,” you apparently mean any individual who has an equity ownership right of any nature in a business enterprise and who is actively engaged in providing services to that business, as distinguished from a “passive” owner, who may own shares in a corporation, for example, but is not otherwise involved in the activities in which the business engages for profit.

  4. This current practice has been followed only since January, 1994. In the course of its history (since its creation in the early 1960's), the NEBF’s practices have varied regarding participation by individuals who have equity ownership rights in business enterprises that operate in the industry covered by the IBEW.

  5. Although we rely on certain provisions of Title II and Title IV in reaching the conclusions expressed in this opinion, nothing in this opinion should be construed as interpreting the provisions of those Titles that lie within the interpretive jurisdiction of the Department of the Treasury and the Pension Benefit Guaranty Corporation.

  6. In Darden, the United States Supreme Court held that the definition of “employee” provided in section 3(6) of Title I did not include an individual who was an independent contractor to the employer that established and maintained the plan. In reaching this conclusion, the Court first sought to determine whether ERISA contained any provision “either giving specific guidance on the term’s meaning or suggesting that construing it to incorporate traditional agency law principles would thwart the congressional design or lead to absurd results.” Id. at 323. Finding no guidance in the statute itself, the Court concluded that, “[w]here Congress uses terms that have accumulated settled meaning under . . . the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms.” 503 U.S. at 322. We follow here the Court’s analysis in Darden, although with a different result, inasmuch as we find ample guidance in ERISA as to Congress’ specific intent to treat “working owners” as “participants.”

  7. In its regulation at 29 C.F.R. 2510.3-3, the Department clarified that the term “employee benefit plan” as defined in section 3(3) of Title I does not include a plan the only participants of which are “[a]n individual and his or her spouse . . . with respect to a trade of business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse” or “[a] partner in a partnership and his or her spouse.” The regulation further specifies, however, that a plan that covers as participants “one or more common law employees, in addition to the self-employed individuals” will be included in the definition of “employee benefit plan” under section 3(3). The conclusion of this opinion, that such “self-employed individuals” are themselves “participants” in the covered plan, is fully consistent with that regulation.