Proposed Exemptions; Investors Savings Bank Pension Plan (the Plan) [Notices] [08/09/2002]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Exemptions; Investors Savings Bank Pension Plan (the Plan) [08/09/2002]

[PDF Version]

Volume 67, Number 154, Page 51877-51885

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10989, et al.]

Proposed Exemptions; Investors Savings Bank Pension Plan (the
Plan)

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.

ADDRESS: All written comments and requests for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration (PWBA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ____, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to PWBA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``moffittb@pwba.dol.gov'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.

Investors Savings Bank Pension Plan (the Plan) Located in Milburn,
New Jersey

[Application No. D-10989]

Proposed Exemption

The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code, and in accordance with the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the past sales by the Plan of certain
securities (the Securities) to Investors Savings Bank (the Employer), a
party in interest with respect to the Plan, provided that the following
conditions were satisfied: (1) Each sale was a one-time transaction for
cash; (2) the Plan paid no commissions nor other expenses relating to
the sales; (3) for each Security that was publicly traded, the Plan
received an amount equal to the highest, as of the date of the sale, of
(a) the Plan's cost, (b) the book value, or (c) the fair market value
of the Security, as determined by an independent, third-party market
source; and (4) for each Security that was not publicly traded, the
Plan received an amount equal to its cost for the Security, which was
in excess of the fair market value of the Security on the date of the
sale.

[[Page 51878]]

EFFECTIVE DATE: The proposed exemption, if granted, will be effective
as of January 4, 1999.

Summary of Facts and Representations

1. The Plan was a defined benefit plan sponsored by the Employer.
As of January 4, 1999, the Plan had approximately 280 participants and
340 beneficiaries. As of that date, the Plan had total assets of
approximately $21,500,000. The trustees of the Plan were Patrick J.
Grant, Stephen J. Szabatin, Doreen R. Byrnes, and Joseph H. Shepard
III, who had responsibility for investment of the Plan's assets. The
Plan was terminated in 1999 and its assets transferred to the multiple
employer plan administered by the Pentegra Group (Pentegra).
2. Among the assets of the Plan were the Securities. The trustees
had purchased the Securities on the open market in the belief that the
purchases were consistent with the Plan's investment objectives at the
time.\1\
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\1\ The Department expresses no opinion herein as to whether the
acquisition and holding of the Securities by the Plan violated any
of the provisions of Part 4 of Title I of the Act. However, the
Department notes that section 404(a) of the Act requires, among
other things, that a plan fiduciary act prudently and solely in the
interest of the plan and its participants and beneficiaries when
making investment decisions on behalf of the plan.
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In 1999, the Employer terminated the Plan in the belief that
Pentegra can provide more efficient administration at less cost than
would be available with a single employer plan. According to the
Employer, it purchased the Securities from the Plan in order to
facilitate the transfer of the Plan's assets to Pentegra, which wanted
the Plan's assets in cash. The Employer represents that the terms of
each sale were at least as favorable to the Plan as terms the Plan
could have obtained in an arm's length transaction with an unrelated
party.
3. The Securities purchased by the Employer from the Plan for cash
during the period between January 4, 1999 and February 10, 1999, are
listed in the chart below. The Plan's cost for the Securities, and the
Employer's purchase price for the Securities, appear in the columns
with the headings ``Cost'' and ``Purchase Price,'' respectively.

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Security Cost Purchase price Yield
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Federal Nat'l Mortgage Ass'n Bonds.............................. $3,125,135.04 $4,500,426.98 6.91
Federal Home Loan Mortgage Corp. Bonds.......................... 364,879.80 629,063.83 8.25
Gen'l Nat'l Mortgage Ass'n Certificates......................... 828,861.30 882,198.64 8.963
Money Store (2d Mortgages)...................................... 97,099.22 97,099.22 9.65
U.S. Government Obligations..................................... 300,000.00 400,000.00 12.21
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For the Securities that were publicly traded, the Employer paid an
amount equal to the closing price for each Security on the previous
day, as quoted by Paine Webber's Million Plus trading desk as fair
market value for a ``whole lot'' (generally more than one million
dollars remaining value). The fair market value was greater than the
Plan's cost for these Securities, as demonstrated by the chart above.
With respect to the Money Store Second Mortgages (the Second
Mortgages), there was no established market for these Securities (due
to the small dollar amount). Thus, the Employer paid an amount equal to
the Plan's cost for the Second Mortgages. The Employer represents that
KPMG, the Plan's independent auditor, had always carried the Second
Mortgages on the Plan's balance sheet at cost, due to their lack of
marketability. Further, the Employer represents that the Plan's cost
for the Second Mortgages, i.e, $97,099, was the best possible price for
the Plan, since the Second Mortgages had been repaid by approximately
80 percent and had an outstanding balance that was significantly less
than their face value.
The Plan paid no commissions nor other expenses relating to the
sales of the Securities, which represented a significant savings to the
Plan in transaction costs. In addition, the Employer represents that
the sales of the Securities were in the best interests of the Plan and
of its participants and beneficiaries because they facilitated the
transfer of Plan assets to the Pentegra multiple employer plan.
4. In summary, the applicant represents that the subject
transactions satisfied the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (1) Each sale of
the Securities by the Plan to the Employer was a one-time transaction
for cash; (2) the Plan paid no commissions nor other expenses relating
to the sales; (3) for each Security that was publicly traded, the Plan
received an amount equal to the highest, as of the date of the sale, of
(a) the Plan's cost, (b) the book value, or (c) the fair market value
of the Security, as determined by an independent, third-party market
source; and (4) for each Security that was not publicly traded, the
Plan received an amount equal to its cost for the Security, which was
in excess of the fair market value of the Security on the date of the
sale.

FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 693-8540. (This is not a toll-free number.)

Twin City Iron Workers Apprenticeship and Training Fund (the Trust
Fund) Located in St. Paul, Minnesota

[Application No. L-10929]

Proposed Exemption

[[Page 51879]]

the best interest of the Trust Fund and its participants and
beneficiaries;
(f) SVI monitored various aspects of the purchase of the Property
until closing, including the environmental reports concerning the
Property, and took whatever action was necessary to protect the
interests of the Trust Fund; and
(g) The purchase price paid by the Trust Fund for the Property
represented no more than 25 percent of the Trust Fund's total assets at
the time of the transaction.

Summary of Facts and Representations

1. The Trust Fund is an apprenticeship training plan, the assets of
which are subject to the fiduciary responsibility provisions of Part 4
of Title I of the Act. The Trust Fund is also established and
administered pursuant to the provisions of section 302 of the Labor
Management Relations Act of 1947. Currently, there are approximately
972 participants and beneficiaries covered by the Trust Fund. As of
December 31, 1999, the Trust Fund had total assets of $715,108.76. The
Building Corporation is a Minnesota non-profit corporation under the
control and supervision of the Twin City Iron Workers Local Union No.
512.
2. The Property is a parcel of unimproved real property located at
Lots 10 & 21, Block 5, Winter's Addition to St. Paul, Ramsey County,
Minnesota.
The Property is approximately 10,720 square feet. The dimensions of
the site are 40 feet by 268 feet. The Property is rectangularly shaped
and the topography of the property is generally level and at street
grade.
3. The Trust Fund decided to construct a training facility for use
by Trust Fund members on a site consisting of several contiguous
parcels of real estate owned by the Trust Fund. Certain adjoining lots,
however, were owned by the Building Corporation. Construction of a
training facility large enough to accommodate current needs of Trust
Fund membership required a facility that is larger than that which
could be constructed on the parcels of real estate currently owned by
the Trust Fund. Economic conditions in the geographic area in which the
Trust Fund operates indicated that the need for skilled workers would
continue to multiply, thus, making it necessary for the Trust Fund to
have a facility which would be able to accommodate current as well as
future needs. For example, it was necessary that the Trust Fund secure
a storage facility for purpose of housing supplies and equipment
necessary for the Trust Fund's programs. To facilitate construction and
ultimate management and use of the facility, the Trust Fund determined
that all parcels should be owned by a single entity. Ownership by a
single entity would encourage administrative efficiency in the
construction process, as well as in the ultimate use and operation of
the facility. Because the facility would be managed and operated by the
Trust Fund, it was desirable that the Trust Fund holds title to the
Property. Ownership of the parcels by the Trust Fund would give the
Trust Fund full control of the buildings and grounds and would enable
the Trust Fund to make improvements to the Property as needed.\2\
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\2\ The Department expresses no opinion herein concerning the
application of section 404 of the Act to the amount of expenditures
and/or the need for construction of a training facility. In this
regard, the Department notes that the fact that a transaction is the
subject of an exemption under section 408(a) of the Act does not
relieve a fiduciary or other party in interest from the general
fiduciary responsibility provisions of section 404 of the Act.
Section 404(a) (1)(A) and (B) of the Act requires, among other
things, that a fiduciary discharge his duties with respect to a plan
solely in the interest of the plan's participants and beneficiaries
and in a prudent fashion. Accordingly, it is the responsibility of
the Trust Fund's fiduciaries to determine the appropriateness of the
construction of the facility.
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4. The Property was appraised by Lisa I. Lang and R. David Lang,
Minnesota licensed Certified General Real Property Appraisers of Lang &
Associates (the Appraisers), a real estate appraisal firm located in
Minnetonka, Minnesota. The Appraisers determined that the fair market
value of the Property was approximately $48,000, as of January 10,
2000.
The Appraisers utilized a sales comparison methodology in valuing
the Property. The Appraisers compared the Property with recent sales of
three other industrial zoned properties, all within immediate and/or
competitive market areas of the Property. In order to equate these
three transactions with the Property, the Appraisers made adjustments
for various comparative factors including appreciation/depreciation
over time, location, zoning, frontage/access, off-site improvements,
current easements and restrictions, physical characteristics, and size.
After making the necessary adjustments, the Appraisers concluded that
the unencumbered fee simple interest in the Property would have a fair
market value of approximately $48,000. The Appraisers also concluded
that an industrial complex, such as the Trust Fund's proposed training
facility, would represent the highest and best use of the Property.
5. The Building Corporation, on May 22, 2000, sold the Property to
the Trust Fund for $48,000 in cash, subject to the review and approval
of an independent fiduciary (see Paragraph 6 below). The parties
obtained an updated appraisal of the Property from the Appraisers at
the time of the proposed transaction to ensure that the appraised
amount (i.e., $48,000) still reflected the fair market value of the
Property at that time. The parties have agreed that the $48,000 paid by
the Trust Fund represented the fair market value of the Property at the
time of the transaction. In addition, the applicant states that the
Trust Fund did not pay any commissions, transaction costs, or other
expenses associated with the sale of the Property by the Building
Corporation, other than the fees necessary for the services of the
Trust Fund's independent fiduciary, SVI. Thus, the Building Corporation
paid, among other things, the costs of the title search and title
insurance premiums, the cost of recording the deeds conveying title to
the Property to the Trust Fund, all sales and transfer taxes (including
the conveyance tax), the escrow fees, and the cost of the appraisal.
6. SVI was appointed by the Trust Fund Trustees to act as an
independent fiduciary for the Trust Fund for the transaction. SVI
represents that it is a company organized under the laws of Minnesota
and that it exercises fiduciary powers similar to those of national
banks. SVI stated that it is an experienced fiduciary in matters
concerning Taft-Hartley funds subject to the Act and is also
experienced with real estate transactions and investments. SVI
acknowledged its duties, responsibilities and liabilities in acting as
a fiduciary for the Trust Fund for purposes of the proposed
transaction. SVI represents that it is an independent fiduciary and not
an affiliate of, or related to, the entities involved in the subject
transaction. In this regard, SVI certifies that: (i) Less than one (1)
percent of its total deposits, or outstanding loans, are attributable
to the deposits of, or loans to, the Building Corporation and its
affiliates; and (ii) less than one (1) percent of its annual income
(measured on the basis of the prior year's income) comes from business
derived from The Building Corporation and its affiliates.
7. SVI has reviewed all of the terms and conditions of the proposed
purchase of the Property by the Trust Fund. SVI states that the
Appraisers have considered all of the factors necessary to accurately
determine the fair market value of the Property, including the
applicable zoning restrictions for industrial usage, and the offsite
improvements surrounding the Property. Based on this review and

[[Page 51880]]

analysis, SVI concluded that the transaction was in the best interests
of the Trust Fund and its participants and beneficiaries. In this
regard, SVI stated that the purchase of the Property was a prudent
transaction taking into consideration that the Trust Fund will be using
this site as a training facility. SVI stated that the agreed upon
purchase price of $48,000, based on the Appraisers determination of
value accurately reflected the fair market value of the Property at the
time of the purchase.
SVI stated further that it would monitor the Property and will take
whatever actions are necessary to protect the interests of the Trust
Fund's participants and beneficiaries with regard to the transaction.
To this end, SVI represented that the current appraisal of the Property
was updated at the time of the transaction and that the Trust Fund paid
no more than the fair market value of the Property. SVI also ensured
that the purchase price paid by the Trust Fund represents no more than
25 percent of the Trust Fund's total assets at the time of the
transaction.
SVI represents that the Trust Fund will be able to meet all of its
current expenses after the transaction and that the transaction has not
adversely affected the Trust Fund's liquidity needs. By letter dated
May 6, 2000, SVI states it reviewed the essential documents associated
with the transaction and determined that the transaction was in the
best interest of the Trust Fund and its participants and beneficiaries.
8. In summary, the applicant states that the transaction has
satisfied the statutory criteria of section 408(a) of the Act because:
(a) The purchase of the Property by the Trust Fund was a one-time
transaction for cash; (b) the Trust Fund did not pay more than the fair
market value of the Property as determined at the time of the
transaction; (c) the fair market value of the Property was established
by an independent, qualified real estate appraiser; (d) the Trust Fund
did not pay any commissions or other expenses with respect to the
transaction, other than the services of an independent fiduciary (as
described herein); (e) SVI, acting as the Trust Fund's independent
fiduciary, determined that the proposed transaction was in the best
interest of the Trust Fund and its participants and beneficiaries; and
(f) the purchase price paid by the Trust Fund for the Property
represented no more than 25 percent of the Trust Fund's total assets at
the time of the transaction.

EFFECTIVE DATE: This exemption, if granted, is effective as of May 22,
2000.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.

FOR FURTHER INFORMATION CONTACT: Mr. Khalif I. Ford of the Department,
telephone (202) 693-8540. (This is not a toll-free number.)

Child Health Corporation America (CHCA) Located in Shawnee Mission,
KS

[Application No. L-10939]

Proposed Exemption

The Department is considering granting an exemption under the
authority of section 408(a) of the Act and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990). If the exemption is granted, the restrictions
of sections 406(a) and 406(b) of the Act shall not apply to the (1)
purchase, by a welfare plan (the Plan), whose hospital sponsor (the
Hospital) is a member of CHCA, of third party insurance, through CHCA,
the broker of record and a party in interest with respect to such Plan;
and (2) the receipt of an insurance sales commission by CHCA from the
third party insurance company, in connection with the purchase of an
insurance policy with the assets of the Plan attributed to participant
(i.e., employee) contributions.
This proposed exemption is subject to the following conditions:
(a) The transactions are effected by CHCA in the ordinary course of
its business.
(b) Each Plan pays no more than adequate consideration for an
insurance policy that is brokered by CHCA.
(c) Prior to the execution of the transactions, CHCA provides each
Hospital, which serves as the independent fiduciary of a Plan it
sponsors, with the following written documentation:
(1) A statement setting forth the insurance sales commissions,
expressed as a percentage of the gross annual premium payments that
will be paid by the insurance company to CHCA with respect to the
purchase of the insurance policy;
(2) A description of the charges, fees, discounts, penalties or
adjustments which may be imposed under the insurance policy in
connection with the purchase, holding, exchange, termination or sale of
such policy; and
(3) A full description of CHCA's procedure for offsetting a Plan's
allocable portion of insurance sales commissions that are received by
CHCA and which are attributable to Plan assets against the amounts
otherwise payable by such Plan for future premium contributions (the
Premium Adjustment; the Premium Adjustment Procedure).
(d) Following the receipt of such information, the Hospital
independent fiduciary acknowledges receipt of such information to CHCA,
in writing, and approves the transactions on behalf of the respective
Plan.
(e) On an annual basis, CHCA discloses all direct expenses it has
incurred to independent Plan fiduciaries of its member Hospitals,
including any Premium Adjustments that have been made.
(f) The transactions are on terms that are at least as favorable to
a Plan as those available in arm's length transactions with an
unrelated party.
(g) The combined total of all fees, insurance sales commissions and
other consideration received by CHCA in connection with the purchase of
insurance policies issued by a third party insurer or the provision of
services to a Plan is not in excess of ``reasonable compensation''
within the contemplation of section 408(b)(2) and 408(c)(2) of the Act.
(h) There is no increased cost to a Plan nor any diminution in any
benefit received by a Plan participant or beneficiary as a result of
CHCA's receipt of insurance sales commissions.
(i) The Plan receives a Premium Adjustment based upon the excess of
insurance sales commissions over direct costs, if any, incurred by
CHCA, in accordance with the Premium Adjustment Procedure, the steps of
which are as follows:
(1) At the end of each calendar year, CHCA separates the total
premiums paid between each Hospital and its respective Plan.
(2) CHCA calculates the commissions that are paid based on the
premiums.
(3) CHCA calculates the amount available for the patronage dividend
by subtracting aggregate direct expenses incurred under its insurance
program from the total commissions.
(4) CHCA calculates a breakdown of the commissions on a percentage
basis.
(5) CHCA allocates the amounts available for the patronage dividend
based upon the percentages determined above in paragraph (i)(4).
(6) CHCA sends a check to the insurer with instructions to allocate
such amount on a per Hospital basis to be

[[Page 51881]]

applied against a Plan participant's insurance rate schedule.
(7) CHCA requests written confirmation from the insurer that the
Premium Adjustment has been made.
(j) CHCA establishes and maintains a system of internal and
external accounting controls for the Premium Adjustment Procedure.
(k) CHCA retains an independent auditor to audit, on an annual
basis, the Premium Adjustments made to the affected Plans.
(l) Within 90 days following the publication, in the Federal
Register, of the notice granting the final exemption, CHCA makes full
restitution to the participants of each affected Plan whose assets are
attributed to CHCA's past fee arrangement with an independent broker
(the Independent Broker) and its subsequent compensation arrangement
with the UNUM Life Insurance Company (UNUM).
(m) CHCA maintains for a period of six years, in a manner that is
accessible for audit and examination, the records necessary to enable
the persons described in paragraph (n) to determine whether the
conditions of this exemption have been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of CHCA, such
records are lost or destroyed prior to the end of such six year period;
and
(2) No party in interest, other than CHCA, shall be subject to the
civil penalty that may be assessed under section 502(i), or the taxes
imposed by section 4975(a) and (b) of the Code, if the records are not
maintained, or are not available for examination as required by
paragraph (m).
(n)(1) Except as provided in paragraph (n)(2) and notwithstanding
anything to the contrary in sections 504(a)(2) and (b) of the Act, the
records referred to in paragraph (m) are unconditionally available for
examination during normal business hours by--
(A) Any duly authorized employees or representatives of the
Department or the Internal Revenue Service;
(B) Any fiduciary of a Plan which has the authority to purchase an
insurance policy by or on behalf of a Plan or any duly authorized
employee or representative of such fiduciary; and
(C) Any participant or beneficiary of a Plan or any duly authorized
employee or representative of such participant or beneficiary.
(2) None of the persons described above in paragraph (n)(1)(B) or
(C) shall be authorized to examine the trade secrets of CHCA or
commercial or financial information which is privileged or
confidential.

Summary of Facts and Representations

1. CHCA, a taxable cooperative organization located at 803 West
64th Street, Shawnee Mission, Kansas, is owned by 38 different not-for-
profit hospitals. The Hospitals are located in various cities around
the United States and they specialize in the medical treatment of
children. Each member Hospital owns 2.63 percent of CHCA and no member
Hospital is in a position to influence or control the actions of CHCA
or the entire Hospital group.\3\ (A table showing the Hospitals
participating under CHCA's insurance program, the Plans they sponsor
and the respective participant totals is presented in the Appendix.)
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\3\ CHCA is subject to the provisions of Subchapter T of the
Code, specifically to Code sections 1381-1388 and section 521 which
provides special exemptions for cooperative organizations from
taxes.
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2. As a cooperative organization, CHCA acts as a purchasing agent
and makes products and services, including insurance, available to its
member Hospitals at discounted rates. Each Hospital is, however, free
to purchase any product or service elsewhere, if it desires. At the end
of each year, if CHCA receives a ``profit,'' as confirmed by an
independent auditor, it typically pays a patronage dividend to each
Hospital.\4\ Under such circumstances, CHCA's eleven member Board of
Directors, consisting of CHCA's Chief Executive Officer and the Chief
Executive Officers of ten member Hospitals, will determine whether such
dividend will be paid, the amount, the components (i.e., cash, retained
surplus in CHCA, or equity interests in other entities that are
associated with CHCA), and the percentage distribution of the dividend
amount among the various components.\5\
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\4\ The profitability or net income of CHCA is defined as
revenues less expenses. CHCA represents that its financial records
are presented in conformity with Generally-Accepted Accounting
Principles.
\5\ The Board of Directors also approves the third party
insurer, the contract with such insurer and authorizes other
business functions. Members of the Board of Directors are not
compensated for their services.
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3. Among the goods and services provided by CHCA are insurance
policies, including property and casualty insurance, workers
compensation, disability insurance and group life insurance. Many of
CHCA's member Hospitals maintain disability plans provided through
group disability insurance obtained through CHCA. These Hospitals also
maintain group life insurance plans provided through life insurance
obtained through CHCA.
The insurance is obtained on a group basis. To allow the Hospitals
the benefit of a group rate, CHCA is the master policy holder. Each
Hospital is a participating employer in the policy. Thus, CHCA will
make a recommendation to the Hospitals on who the ultimate insurance
carrier will be and it will establish a relationship the Hospitals may
access. The individual Hospitals will then have the sole discretion on
whether or not to participate in CHCA's insurance program. CHCA will
also exercise discretionary authority regarding the type of insurance
to be purchased and made available to its membership.
CHCA notes that the amount of insurance premiums paid by individual
member Hospital may be different from that paid by other member
Hospitals. In this regard, CHCA explains that some Hospitals may choose
to pay all or most of the insurance costs for its employees while
others may pass all or a significant portion of the insurance costs on
to their employees. Still other Hospitals may choose not to provide any
disability and/or life insurance coverage at all.
4. Prior to May 1, 2000, member Hospitals participating in CHCA's
insurance program placed insurance through an independent insurance
broker with UNUM, a third party insurer.\6\ UNUM set the premiums for
the insurance and negotiated the commissions to be paid to the
Independent Broker. Under this arrangement with the Independent Broker,
CHCA acted primarily as a liaison between the Hospitals, the
Independent Broker and UNUM. In this regard, between 1998 and May 2000,
CHCA received fees from the Independent Broker totaling $1,137,000 for
the administrative and marketing services it performed while the
Independent Broker received a 7 percent commission.
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\6\ UNUM's current financial strength ratings, as denoted by
Moody's Standard and Poor's, A.M. Best, and Fitch/Duff & Phelps are
ad follows: ``A2'' or ``Good Financial Security'' (Moody's); ``AA''
or ``Very Strong'' (Standard & Poor's); ``A'' or ``Excellent'' (A.M.
Best); and ``AA/'' or ``Very Strong'' (Fitch/Duff & Phelps).
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5. CHCA has obtained a brokerage license to sell insurance and
after May 2000, it became the broker of record. Rather than having the
commissions paid by UNUM to the Independent Broker, CHCA has been
retaining the commissions within the cooperative group in order to
increase the cooperative's net profits as well as the amount of the
patronage dividend. As a

[[Page 51882]]

consequence, the commissions previously paid to the Independent Broker
are currently being paid to CHCA. The amount of the commissions payable
to CHCA by UNUM represents 10 percent of the total premiums for
disability insurance and 5 percent of the total premiums for life
insurance. CHCA states that the commissions are negotiated on an arm's
length basis with UNUM and are market-based. CHCA also does not expect
that a Plan's costs will be increased by the present arrangement.
6. To provide a direct benefit to Plan participants with respect to
the distribution of patronage dividends, CHCA proposes to amend its
policy of allocating net income to each of the member Hospitals. Under
the contemplated arrangement, CHCA intends to take a portion of the net
income attributable to the commissions paid by Plan participants and
then transfer such commissions to each Plan in accordance with the
Premium Adjustment Procedure described herein. In general, CHCA will
make a payment to UNUM, or a successor third party insurance carrier,
on behalf of Plan participants to ensure that the participants will
benefit from its action. The amount of the Premium Adjustment will
represent a pro rata portion of the commissions paid by the Plan
participants to the commissions paid on the aggregate premium
contribution.
More specifically, during its normal year-end patronage dividend
calculation, CHCA will make a special allocation for the commission
dollars it has received from its current long-term disability and life
insurance program (and possibly commission dollars derived from other
health and welfare plans in the future). The calculation will then
determine the net patronage dividend dollar that pertains to the
commissions derived from Plan participant contributions to the overall
commission dollars earned by CHCA. The dollar amount will then be paid
directly to UNUM and applied as a direct reduction in the rate paid by
the Plan participant for future insurance premium contributions.
In effect, CHCA will implement its Premium Adjustment Procedure as
follows:
At the end of each calendar year, CHCA will separate the
total premiums paid between each Hospital and its respective Plan.
CHCA will calculate the commissions that are paid based
upon the premiums.
CHCA will calculate the amount available for the patronage
dividend by subtracting the aggregate direct expenses incurred under
its insurance program \7\ from the total commissions.
---------------------------------------------------------------------------

\7\ CHCA represents that the ``direct expenses'' associated with
its insurance program are those expenses which are unique to CHCA
that would not be incurred if the program were not in place.
Regulation section 29 CFR 2550.408c-2(b)(3) provides that an expense
is not a direct expense to the extent it would have been sustained
had the service not been provided or if it represents an allocable
portion of overhead costs. Although CHCA represents that it intends
to comply with the foregoing regulation, the Department is
expressing no opinion herein on whether the expenses identified by
CHCA in the operation of its insurance program are ``direct
expenses'' as contemplated by the regulation.
---------------------------------------------------------------------------

CHCA will calculate a breakdown of the commissions on a
percentage basis.
CHCA will allocate the amounts available for the patronage
dividend based upon the percentages determined in the previous step.
CHCA will send a check to UNUM (or a successor third party
insurer) with instructions to allocate such amount on a per Hospital
basis that will be applied against a Plan participant's insurance rate
schedule.
CHCA will request written confirmation from UNUM (or the
successor third party insurer) that the Premium Adjustment has been
made.
(For a further explanation of CHCA's Premium Adjustment Procedure,
refer to the example in the Appendix.)
7. CHCA states that the payment of insurance commissions that are
attributable to plan assets, the payment of patronage dividends and the
Premium Adjustment Procedure may violate certain provisions of sections
406(a) and 406(b) of the Act. In this regard, since a member Hospital
will receive a patronage dividend which is derived, in part, from plan
assets attributable to insurance commissions paid to CHCA, CHCA is of
the view that the purchase of insurance for a Hospital-sponsored,
disability or life insurance Plan may be construed as fiduciary self-
dealing both on the part of CHCA and a member Hospital in violation of
section 406(b)(1) of the Act. In addition, CHCA observes that its
actions may further result in the involvement of a member Hospital and
thereby be construed as the Hospital's receiving consideration from a
party (i.e., CHCA) which has been dealing with a participating Plan in
connection with a transaction involving the assets of such Plan, in
violation of section 406(b)(3) of the Act.
Accordingly, CHCA requests an administrative exemption from the
Department to permit (a) the purchase of third party insurance by a
Plan through CHCA, as the broker of record; and (b) the receipt of
insurance sales commissions by CHCA from UNUM in connection with such
purchase. Further, CHCA represents that within 90 days of publication,
in the Federal Register, of the notice granting the final exemption, it
will make full restitution to the participants of each affected Plan
whose assets are attributed to CHCA's past fee arrangement with the
Independent Broker and its current insurance brokerage arrangement with
UNUM.
CHCA anticipates that the foregoing purchase and insurance
brokerage transactions will recur on an annual basis. Although the
basic parameters of the transactions will not change from year to year,
the amount of the annual premium, the amount of the brokerage
commissions and the amount of the patronage dividend are expected to
differ.
8. The proposed exemption is subject to a number of safeguards. In
pertinent part,
The transactions will be effected by CHCA in the ordinary
course of its business.
No Plan will pay more than adequate consideration for an
insurance policy that is brokered by CHCA.
Prior to the execution of the transactions covered by the
exemption, CHCA will provide each Hospital, which serves as the
independent fiduciary of a Plan it sponsors, with written disclosures
describing the insurance sales commissions and fees, discounts,
penalties or adjustments which may be imposed under the recommended
insurance policy in connection with the purchase, holding, exchange,
termination or sale of the insurance policy, as well as the Premium
Adjustment Procedure.
Following the receipt of such information, the Hospital
fiduciary will acknowledge receipt of such information to CHCA in
writing and approve the transactions on behalf of the Plan.
On an annual basis, CHCA will disclose, in writing, the
direct expenses it has incurred to independent Plan fiduciaries of its
member Hospitals, including any Premium Adjustments that have been
made.
The transactions will be on terms that are at least as
favorable to a Plan as those available in arm's length transactions
with an unrelated party.
The combined total of all fees, commissions and other
consideration received by CHCA in connection with the purchase of
insurance policies issued by a third party insurer or the provision of
services to a Plan has not been and will not be in excess of
``reasonable compensation'' within the

[[Page 51883]]

contemplation of section 408(b)(2) and 408(c)(2) of the Act.
9. CHCA will establish a system of internal and external accounting
controls with respect to the Premium Adjustment Procedure. In this
regard, internal audit employees of CHCA will review appropriate
records. In addition, CHCA will retain the services of Baird, Kurtz &
Dobson, CPA, P.C., an independent accounting firm, to audit, on an
annual basis, the Premium Adjustment Procedure. The audits will provide
independent verification of the proper crediting of the insurance sales
commissions attributed to the assets of the participating Plans.
Specifically, the independent auditors will be instructed to (a) review
and test compliance with the operational controls established by CHCA
for purposes of implementing the Premium Adjustment Procedure; (b)
verify, on a test basis, the Premium Adjustments that are made; and (c)
recompute, on a test basis, the amounts adjusted at the discretion of
the auditors. In the event any shortfalls are uncovered during the
course of an audit as a result of errors it has made, CHCA will provide
a cash payment to the Plan equal to the amount of the error plus market
rate interest for the period of time of the error until the correction
is made. Any excess Premium Adjustments will be corrected by
corresponding future adjustments in the amount of the excess and will
not require that the Plan pay any interest.
10. In summary, it is represented that the transactions will
satisfy the statutory criteria for an exemption under section 408(a) of
the Act because:
(a) The transactions will be effected by CHCA in the ordinary
course of its business.
(b) A Plan will pay no more than adequate consideration for an
insurance policy that is brokered by CHCA.
(c) Prior to the execution of the transactions, CHCA will provide
each Hospital, serving as the independent fiduciary of the Plan it
sponsors, with written disclosures describing the insurance sales
commissions and fees, discounts, penalties or adjustments which may be
imposed under the insurance policy, including a written description its
Premium Adjustment Procedure. Such disclosures will also be approved by
the independent Plan fiduciary.
(d) On an annual basis, CHCA will provide independent Plan
fiduciaries of its member Hospitals with written disclosures of the
direct expenses CHCA has incurred, including any Premium Adjustments
that have been made.
(e) The transactions will be on terms that are at least as
favorable to a Plan as those available in arm's length transactions
with an unrelated party.
(f) The combined total of all fees, commissions and other
consideration received by CHCA in connection with the purchase of
insurance policies issued by UNUM (or another third party insurer) or
the provision of services to a Plan will not be in excess of
``reasonable compensation'' within the contemplation of section
408(b)(2) and 408(c)(2) of the Act.
(g) There will be no increased cost to a Plan nor any diminution in
any benefit received by a Plan participant or beneficiary since Plan
participants and beneficiaries will receive the same insurance benefits
regardless of whether the insurance sales commissions stay within the
cooperative group and are used for the payment of patronage dividends
to the member Hospitals.
(h) The Plan will receive a Premium Adjustment based upon the
excess of insurance commissions over direct costs, if any, incurred by
CHCA, in accordance with CHCA's Premium Adjustment Procedure.
(i) CHCA will maintain a system of internal accounting controls
with respect to the Premium Adjustment Procedure, and will retain an
independent auditor outside of the control of CHCA to audit, on an
annual basis, the Premium Adjustments that are made on behalf of the
affected Plans.
(k) Within 90 days following the publication, in the Federal
Register, of the notice granting the final exemption, CHCA will make
full restitution to the participants of each affected Plan whose assets
are attributed to CHCA's past and continuing compensation arrangements
with the Independent Broker and UNUM.
(l) CHCA will maintain, for a period of six years and in a manner
that is accessible for audit and examination, written records of the
transactions covered by this exemption to enable certain authorized
persons to determine whether the conditions of the exemption have been
met.

Notice to Interested Persons

Notice of the proposed exemption will be provided to participants
and beneficiaries in each Plan sponsored by a member Hospital within 30
days after publication of the notice of proposed exemption in the
Federal Register. The notice will include a copy of the proposed
exemption, as published in the Federal Register, and a supplemental
statement, as required pursuant to 29 CFR 2570.43(b)(2), which shall
inform interested persons of their right to comment on and/or to
request a hearing with respect to the proposed exemption. Each member
Hospital will give notice (a) to active participants in their
respective Plans, by posting copies of the proposed exemption and
supplemental statement on bulletin boards normally used for employee
notices; and (b) to retirees, by forwarding copies of the proposed
exemption and supplemental statement, by first-class mail. Comments
regarding the proposed exemption will be due within 60 days of the
publication of the notice of pendency in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 693-8556. (This is not a toll-free number.)

Appendix

A. Table Showing CHCA Hospitals, Plans and Participants Enrolled in
CHCA's Insurance Program

------------------------------------------------------------------------
Total
Hospital Name of plan participants
------------------------------------------------------------------------
Children's Hospital Medical Children's Hospital 6,315
Center of Akron. Medical Center of
Akron/Flexible
Benefits Program.
Children's Healthcare of Children's Healthcare 11,831
Atlanta. of Atlanta Welfare
Benefit Plan.
The Children's Hospital of The Children's Hospital 7,704
Alabama. of Alabama Group Life
Insurance Plan.
Children's Hospital (Boston)... Group Life, Optional 10,145
Life, Dependent Life &
Weekly Indemnity Plan.
Children's Hospital 3,866
Long Term Disability
Plan.
The Children's Memorial Children's Memorial 5,584
Hospital (Chicago). Hospital Life & LTD
Plan.
Children's Hospital Medical Children's Hospital 3,556
Center (Cincinnati). Medical Center Long
Term Disability Plan.
Children's Hospital (Columbus). Group Life Plan for 7,231
Employees of
Children's Hospital.
Group Long Term 1,834
Disability Plan for
Employees of
Children's Hospital.

[[Page 51884]]

Driscoll Children's Hospital R. Driscoll & J. 6,658
(Corpus Christi). Driscoll & R.
Driscoll, Jr.
Foundation Plan.
Children's Medical Center of Children's Group Life & 6,642
Dallas. Health Insurance Plan.
The Children's Medical Center Children's Medical 3,717
(Dayton). Center Life & Add.
Plan.
The Children's Hospital The Children's Hospital 1,473
(Denver). Long Term Disability
Plan.
The Children's Hospital 6,919
Life Insurance Plan.
Cook Children's Medical Center Cook Children's Health 7,968
(Ft. worth). Care System Group LTD
Plan.
Texas Children's Hospital Texas Children's 11,953
(Houston). Hospital Match Plan.
Children's Hospital Los Angeles Children's Hospital Los
Angeles Long Term
Disability and Group
Life Insurance Plans.
St. Jude Children's Research St. Jude Children's 1,739
Hospital (Memphis). Research Hospital--
Employees' Group Long
Term Disability
Insurance Plan.
Miami Children's Hospital...... Miami Children's 7,106
Hospital Optional Life
Plan.
Children's Hospital of Children's Health 3,795
Wisconsin (Milwaukee). System of Wisconsin,
Inc. Benefits Plan.
Children's Hospital (New Children's Hospital 981
Orleans). Long Term Disability
Insurance Plan.
Children's Healthcare Services Children's Hospital 2,354
(Omaha). Employee Life
Insurance Plan.
Children's Hospital 687
Group Long Term
Disability Plan.
Children's Hospital 2,036
Employee Life Plan.
Children's Healthcare 124
Services Short Term
Disability Plan.
Phoenix Children's Hospital.... Phoenix Children's 1,489
Hospital Benefits Plan.
All Children's Hospital (St. All Children's Health
Petersburg). System Life,
Accidental Death and
Dismemberment Plan.
Children's Hospital and Health All Children's Health
Center (San Diego). System Long Term
Disability Plan.
Children's National Medical Children's Life & LTD 7,244
Center (DC). Plan.
------------------------------------------------------------------------

B. Example Showing CHCA's Rebate Procedure Where the Plan Sponsors and
the Participants Pay Their Proportionate Share of the Insurance
Premiums

Step 1--Separate total premiums paid by each employer
Hospital and its respective Plan participants.

----------------------------------------------------------------------------------------------------------------
Hospital-paid premiums Participant-paid premiums
Hospital ------------------------------------------------------------
Life LTD Life LTD
----------------------------------------------------------------------------------------------------------------
A.................................................. $130,000 $0 $110,000 $0
B.................................................. 350,000 280,000 60,000 0
C.................................................. 250,000 450,000 490,000 0
D.................................................. 250,000 300,000 250,000 0
E.................................................. 400,000 800,000 0 0
------------------------------------------------------------
1,380,000 1,830,000 910,000 0
----------------------------------------------------------------------------------------------------------------

Step 2--Calculate the commissions paid to CHCA based on
the premiums shown in Step 1. The commission rates are 5% for Life
and 10% for LTD insurance.

----------------------------------------------------------------------------------------------------------------
Commissions based on Commissions based on
hospital-paid premiums participant-paid
Hospital -------------------------- premiums
-------------------------
Life LTD Life LTD
----------------------------------------------------------------------------------------------------------------
A........................................................... $6,500 $0 $5,500 $0
B........................................................... 17,500 28,000 3,000 0
C........................................................... 12,500 45,000 24,500 0
D........................................................... 12,500 30,000 12,500 0
E........................................................... 20,000 80,000 0 0
---------------------------------------------------
69,000 183,000 45,500 0
----------------------------------------------------------------------------------------------------------------

Step 3--Calculate the net contribution of the CHCA's
Insurance Program.
Total Commissions ($69,000 + $183,000 + $45,500) = $297,500
Direct Expenses Unique to CHCA's Insurance Program = $75,000
($297,500--$75,000) = $222,500. This is the amount available for the
Patronage Dividend. (For purposes of this example, assume that the
Patronage Dividend will be in cash and that the adjustment will be
in cash.)
Step 4--Calculate the breakdown of the commissions paid
by each Hospital and Plan Participants on a percentage basis.

----------------------------------------------------------------------------------------------------------------
Commission percentages Commission percentages
based on hospital-paid based on participant-
Hospital premiums % paid paid premiums %
---------------------------------------------------
Life LTD Life LTD
----------------------------------------------------------------------------------------------------------------
A........................................................... 2.18 0.00 1.85 0.00
B........................................................... 5.88 9.41 1.01 0.00
C........................................................... 4.20 15.13 8.24 0.00
D........................................................... 4.20 10.08 4.20 0.00
E........................................................... 6.72 26.89 0.00 0.00

[[Page 51885]]

23.18 61.51 15.30 0.00
----------------------------------------------------------------------------------------------------------------

Step 5--Allocate the amount available for the Patronage
Dividend based upon the Step 4 percentages.

----------------------------------------------------------------------------------------------------------------
Allocation of patronage dividends to hospital-paid premiums Allocation of patronage
------------------------------------------------------------------------------------ dividends to participant-
paid premiums
Hospital Life LTD ----------------------------
Life LTD
----------------------------------------------------------------------------------------------------------------
A.................................................. $4,851 $0 $4,116 $0
B.................................................. 13,083 20,937 2,247 0
C.................................................. 9,345 33,664 18,334 0
D.................................................. 9,345 22,428 9,345 0
E.................................................. 14,952 59,830 0 0
------------------------------------------------------------
51,576 136,042 34,042 0
----------------------------------------------------------------------------------------------------------------

(To compute the Patronage Dividend amount that is attributable to
Participant-Paid Premiums for Life Insurance, under Hospital A, the
$5,500 commission attributable to Participant-Paid Premiums for Life
Insurance is divided by the $297,500 Total Commission payable to
CHCA. The quotient, 1.85%, is then multiplied by the $222,500 amount
available for the Patronage Dividend to arrive at the product,
$4,116. The amounts for Hospitals B-E are also similarly
calculated.)
Step 6--CHCA will send a check to the insurance carrier
for $34,042 with instructions to allocate the amount on a per
Hospital basis that will be applied against the employee
Participants' premium rate schedule. CHCA will also request written
confirmation from the insurer that the Premium Adjustment has been
made.

General Information

The attention of interested persons is directed to the
following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the
Code does not relieve a fiduciary or other party in interest or
disqualified person from certain other provisions of the Act and/or
the Code, including any prohibited transaction provisions to which
the exemption does not apply and the general fiduciary
responsibility provisions of section 404 of the Act, which, among
other things, require a fiduciary to discharge his duties respecting
the plan solely in the interest of the participants and
beneficiaries of the plan and in a prudent fashion in accordance
with section 404(a)(1)(b) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of
the Act and/or section 4975(c)(2) of the Code, the Department must
find that the exemption is administratively feasible, in the
interests of the plan and of its participants and beneficiaries, and
protective of the rights of participants and beneficiaries of the
plan;
(3) The proposed exemptions, if granted, will be supplemental
to, and not in derogation of, any other provisions of the Act and/or
the Code, including statutory or administrative exemptions and
transitional rules. Furthermore, the fact that a transaction is
subject to an administrative or statutory exemption is not
dispositive of whether the transaction is in fact a prohibited
transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations
contained in each application are true and complete, and that each
application accurately describes all material terms of the
transaction which is the subject of the exemption.

Signed at Washington, DC, this 6th day of August, 2002.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.

[FR Doc. 02-20205 Filed 8-8-02; 8:45 am]
BILLING CODE 4510-29-P