Clarification of Application of ERISA to Insurance Company
General Accounts [11/25/1996]
Volume 61, Number 228, Page
59845-59848=======================================================================
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
29 CFR Part 2510
Clarification of Application of ERISA to Insurance Company
General Accounts
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Request for information.
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SUMMARY: This document requests information from the public concerning
issues which the Department has under consideration in developing
regulations to clarify the application of the Employee Retirement
Income Security Act of 1974 as amended (ERISA), to insurance company
general accounts. Pursuant to section 1460 of the Small Business Job
Protection Act of 1996 (Pub. L. 104-188), section 401 of ERISA has been
amended. Section 401 now provides that no later than June 30, 1997, the
Department must issue proposed regulations to: Provide guidance for the
purpose of determining, where an insurer issues one or more policies to
or for the benefit of an employee benefit plan (and such policies are
supported by assets of the insurer's general account), which assets
held by the insurer (other than plan assets held in its separate
accounts) constitute assets of the plan for purposes of part 4 of Title
I of ERISA and section 4975 of the Internal Revenue Code of 1986; and
provide
[[Page 59846]]
guidance with respect to the application of Title I to the general
account assets of insurers. The information provided to the Department
in response to this document will assist the Department in developing
the proposed regulations.
DATES: Comments must be received on or before January 24, 1997.
ADDRESSES: Comments (preferably, at least three copies) should be
addressed to: Pension and Welfare Benefits Administration, Office of
Exemption Determinations, Room N-5649, 200 Constitution Ave., N.W.,
Washington, D.C. 20210. Attention: ``General Account Contracts''.
FOR FURTHER INFORMATION CONTACT:
Lyssa E. Hall, Office of Exemption Determinations, Pension and Welfare
Benefits Administration, U.S. Department of Labor, 200 Constitution
Avenue, N.W., Washington, D.C. 20210, (202) 219-8971 (not a toll-free
number) or Timothy Hauser, Plan Benefits Security Division, Office of
the Solicitor, (202) 219-8637 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
A. Background
Life insurance companies issue a variety of group contracts for use
in connection with employee pension benefit plans, some of which
provide benefits the amount of which is guaranteed, some of which
provide benefits that may fluctuate with the investment performance of
the insurance company, and some of which offer elements of both. Under
section 401(b)(2) of ERISA, if an insurance company issues a
``guaranteed benefit policy'' to a plan, the assets of the plan are
deemed to include the policy, but do not solely by reason of the
issuance of the policy, include any of the assets of the insurance
company. Section 401(b)(2)(B) defines the term ``guaranteed benefit
policy'' to mean an insurance policy or contract to the extent that
such policy or contract provides for benefits the amount of which is
guaranteed by the insurer. In addition, in paragraph (b) of ERISA
Interpretive Bulletin 75-2, 29 CFR 2509.75-2 (1975), the Department
stated that if an insurance company issues a contract or policy of
insurance to a plan and places the consideration for such contract or
policy in its general asset account, the assets in such account shall
not be considered to be plan assets.\1\
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\1\ Paragraph (b) of 29 CFR 2509.75-2 was removed effective July
1, 1996. 61 FR 33847, 33849 (July 1, 1996).
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On December 13, 1993, the Supreme Court rendered its decision in
John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank,
114 S. Ct. 517 (1993) (Harris Trust) which interpreted the meaning of
``guaranteed benefit policy''. In its decision, the Court held that a
contract qualifies as a guaranteed benefit policy only to the extent it
allocates investment risk to the insurer:
[w]e hold that to determine whether a contract qualifies as a
guaranteed benefit policy, each component of the contract bears
examination. A component fits within the guaranteed benefit policy
exclusion only if it allocates investment risk to the insurer. Such
an allocation is present when the insurer provides a genuine
guarantee of an aggregate amount of benefits payable to retirement
plan participants and their beneficiaries.
Accordingly, under the Supreme Court's decision, an insurer's general
account includes plan assets to the extent it contains funds which are
attributable to any nonguaranteed components of contracts with employee
benefit plans. Because John Hancock's contract provided for a return
that varied with the insurer's investment performance, the Court
concluded that John Hancock held plan assets, and was, therefore, a
fiduciary with respect to the management and disposition of those
assets. Under the reasoning of the Court's decision, a broad range of
activities involving insurance company general accounts are subject to
ERISA's fiduciary standards.
Because of the retroactive effect of the Supreme Court decision,
numerous transaction engaged in by insurance company general accounts
may have violated ERISA's prohibited transaction and general fiduciary
responsibility provisions. The insurance industry believed that, absent
legislative or administrative action, it would be subject to
significant additional litigation and potential liability with respect
to the operation of its general accounts.
If the underlying assets of a general account include plan assets,
persons who have engaged in transactions with such general account may
be viewed as parties in interest under section 3(14) of ERISA and
disqualified persons under section 4975 of the Code, including
fiduciaries with respect to plans which have interests as
contractholders in the general account. For example, insurance
companies are a source of loans for smaller and mid-sized companies.
Many of these companies have party in interest relationships with plans
that have purchased general account contracts. Application of the
prohibited transaction rules to the general account of an insurance
company as a result of the Harris Trust decision could call such loans
into question under ERISA. Lastly, the underlying assets of an entity
in which a general account acquired an equity interest may include plan
assets as a result of the Harris Trust decision.
On March 25, 1994, the American Council of Life Insurance (ACLI)
submitted an application for a class exemption from certain of the
restrictions of sections 406 and 407 of ERISA and from certain excise
taxes imposed by section 4975 (a) and (b) of the Code. The ACLI
requested broad exemptive relief for transactions which included the
following: all internal operations of general accounts, all investment
transactions involving general account assets, including transactions
with parties in interest with respect to plans that have purchased
general account contracts, and the purchase by the general account of
securities issued by, and real property leased to, employers of
employees covered by plans that have purchased general account
contracts.
On August 22, 1994, the Department published a notice of proposed
Class Exemption for Certain Transactions Involving Insurance Company
General Accounts. (59 FR 43134). Although the ACLI requested exemptive
relief for activities in connection with the internal operation of
general accounts, the Department determined that it did not have
sufficient information regarding the operation of such accounts to make
the findings required by section 408(a) of ERISA. Accordingly, the
proposed class exemption did not provide relief for transactions
involving the internal operation of an insurance company general
account. The final exemption (Prohibited Transaction Exemption [PTE]
95-60, 60 FR 35925) was published in the Federal Register on July 12,
1995.
B. Public Law 104-188
In response to the Supreme Court decision in Harris Trust, Congress
amended section 401 of ERISA by adding a new subsection 401(c) which
clarifies the application of ERISA to insurance company general
accounts. Pub. L. 104-188, Sec. 1460. This statutory provision requires
that the Department, not later than June 30, 1997, issue proposed
regulations providing guidance for the purpose of determining, in cases
where an insurer issues one or more policies (supported by the assets
of the insurer's general account) to or for the benefit of an employee
benefit plan, which assets held by the insurer (other than plan assets
held in its separate accounts) constitute plan assets for purposes of
part 4 of Title I and section 4975 of the
[[Page 59847]]
Code and to provide guidance with respect to the application of Title I
to an insurer's general account assets. The proposed regulations must
be subject to public notice and comment until September 30, 1997, and
final regulations shall be issued not later than December 31, 1997.
The regulations will only apply to those general account policies
which are issued by an insurer on or before December 31, 1998. In the
case of such policies, the regulations will take effect at the end of
the 18 month period following the date the regulations become final.
Pub. L. 104-188, however, authorizes the Secretary to issue additional
regulations designed to prevent avoidance of the regulations described
above. These additional regulations, if issued, may have an earlier
effective date.
The Department must ensure that the regulations issued under Pub.
L. 104-188 are administratively feasible, and protect the interests and
rights of the plan and of its participants and beneficiaries. In
addition, the regulations must require, in connection with any policy
(other than a guaranteed benefit policy) issued by an insurer to or for
the benefit of an employee benefit plan, that: (1) an independent plan
fiduciary authorize the purchase of the policy (unless the purchase is
exempt under ERISA section 408(b)(5)); (2) the insurer provide
information on an annual basis to policyholders (as prescribed in such
regulations) disclosing the methods by which any income and expenses of
the insurer's general account are allocated to be policy and the actual
return to the plan under the policy and such other financial
information as the Department determines is appropriate; (3) the
insurer disclose to the plan fiduciary the extent to which alternative
arrangements supported by the assets of the insurer's separate accounts
are available, whether there is a right under the policy to transfer
funds to a separate account and the terms governing any such right, and
the extent to which support by assets of the insurer's general account
and support by assets of the insurer's separate accounts might pose
differing risks to the plan; and (4) the insurer must manage general
account assets prudently, taking into account all obligations supported
by such general account.
Compliance with the regulations issued by the Department will be
deemed compliance by such insurer with sections 404, 406 and 407 of
ERISA. In addition, under this statutory provision, no person will be
liable under part 4 of Title I or Code section 4975 for conduct which
occurred before the date which is 18 months following the issuance of
the final regulation on the basis of a claim that the assets of an
insurer (other than plan assets held in a separate account) constitute
plan assets. The limitation on liability is subject to three
exceptions: (1) the Department may circumscribe this limitation on
liability in regulations intended to prevent avoidance of the
regulations which it is required to issue under the statutory
amendment; (2) the Department may bring actions pursuant to paragraph
(2) or (5) of section 502(a) for breaches of fiduciary responsibilities
which also constitute violations of Federal or State criminal law; and
(3) civil actions commenced before November 7, 1995 are exempt from the
amendment's coverage.
Issues Under Consideration
The Department is publishing this notice to provide interested
persons with an opportunity to submit information and comments which
will be considered by the Department in developing the regulations
mandated by Pub. L. 104-188.\2\
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\2\ Section 1460 of Pub. L. 104-188 does not distinguish between
welfare plans and pension plans that purchase general account
contracts from insurers. Accordingly, the Department urges
interested persons to submit information and comments which are
relevant to welfare plans that have purchased general account
contracts.
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In order to assist interested parties in responding, this notice
contains a list of specific questions designed to elicit information
that the Department believes would be especially helpful in developing
a notice of proposed rulemaking. The questions developed by the
Department may not address all issues relevant to the development of
the regulation. Therefore, the Department further invites interested
parties to submit comments on other matters that they believe are
pertinent to the Department's consideration of the regulation.
Annual Disclosures
(1) What information relating to the financial soundness of an
insurer do plan fiduciaries currently rely upon in selecting an
insurer?
(2) Should additional information be required to be disclosed to
plan fiduciaries prior to selecting an insurer? What would be the cost
of supplying this information? To what extent would these costs be
passed on to the contractholders?
(3) What annual information would plan fiduciaries find helpful in
evaluating the appropriateness of an existing general account contract?
(4) Is there any information which should be disclosed more
frequently than annually? Should this information be provided or
available upon request?
(5) Do insurers currently disclose to potential contractholders the
availability of alternative insurance arrangements supported by
separate accounts, the right to transfer funds under a general account
contract to a separate account, and the terms governing any such right?
(6) In general, what are the comparative risks and benefits of
general account contracts vis-a-vis separate account contracts?
(7) To what extent, and in what format, should insurers be required
to disclose information concerning the following:
(a) The expenses allocated to the contract and the basis for the
allocation;
(b) The investment income allocated to the contract and the basis
for the allocation;
(c) The mortality or morbidity experience attributed to the
contract and the basis for the attribution;
(d) The allocation of any other aspect of the insurance company's
financial performance which has an impact on the contract's return, and
the basis for the allocation;
(e) The timing of the allocation of expenses, investment income,
mortality or morbidity experience, and of any other factors affecting
the contract's return;
(f) Any charges or provisions attributable to the contract for
risks or profits, and the basis for the charges or provisions;
(g) Comparative data concerning the return, expenses, investment
income, profit and risk charges attributable to other contracts, and an
explanation of any disparities;
(h) The particular investment income allocation methodology or
methodologies employed by the insurer, and any departures from the
general methodologies in the actual allocation of investment income to
the contract;
(i) Financial or familial relationships or transactions between (1)
the insurer, its officers, or directors, and (2) the plan, the plan
sponsor, or plan fiduciaries;
(j) Financial transactions between the insurer and any person or
entity in which the insurer, its officers, or directors have a
financial interest or familial relationship.
Do different formats have different cost implications? Which items
are costly to produce, or involve confidential or proprietary
information? What professional skills are required to prepare the
required information?
[[Page 59848]]
(8) Should the insurer be required to retain documentation
supporting the required disclosures, and to make the supporting
documentation available to the Secretary of Labor, plan sponsors, plan
fiduciaries, or plan participants and beneficiaries? To what extent are
these documents retained as part of current business practice? What are
the estimated costs of retaining and producing these documents to the
appropriate parties?
(9) How should the insurer calculate the actual return to the plan
for purposes of any disclosure requirement? In particular,
(a) Should the insurer be required to take into account any market
value adjustments, termination expense adjustments, withdrawal charges,
or surrender charges in stating the contract's return?
(b) Should the regulations permit different approaches for
calculating the rate of return for contracts requiring the issuance of
annuities as opposed to those in which benefit payments are made
without the issuance of an annuity?
(c) Should the regulations require that dividends that are
anticipated or declared buy not yet paid, be included in determining
the contract's return?
(d) To what extent should the regulations permit the return to be
reported on a gross basis (i.e., before expenses or charges)?
(10) Under what circumstances would regulations requiring
disclosure of the contractholder's return apply to general account
contracts before the end of the 18 month period following the issuance
of the final regulations?
Market Value Adjustments Upon Termination of General Account Contracts
(1) In what ways is discretion exercised by insurers under general
account contracts in imposing market value adjustments or in
determining the amount of such adjustments?
(2) What standards should the Department adopt to assure that
market value adjustments reflect market conditions at the time of
contract termination?
(3) Should the Department require general account contracts to set
forth in ``plain English'' the method for calculating market value
adjustments that can be objectively verified by the contractholder
pursuant to standards set forth in the contract? In this regard, should
the Department require that the method used for calculating market
value adjustments only use parameters that can be independently
verified by the contractholder?
(4) Should the Department limit or forbid the imposition of
termination expense adjustments, withdrawal charges, or surrender
charges pursuant to general account contracts?
(5) Under what circumstances should regulations regarding market
value adjustments and other termination charges be applicable to
general account contracts prior to the end of the 18 month period
following the issuance of the final regulations?
State Regulatory Requirements
(1) To what extent do State regulatory requirements parallel or
conflict with some or all of the requirements imposed by section 1460
of Pub. L. 104-188?
(2) Should the Department of Labor regulation take into account any
State regulatory requirements that serve as a protection to
contractholders? If so, please describe the nature of such requirements
and the state's enforcement mechanism to assure compliance with such
requirements.
Impact on Small Entities
(1) In responding to the questions above, please address the
anticipated annual impact of any regulatory proposals on small
insurers, (insurers with annual receipts of less than $5 million, see
Small Business Administration Size Standards, 61 FR 3280, Jan. 31,
1996) and small plans, (plans with fewer than 100 participants).
(2) Statistically, what are the sizes of the plans using insurance
company general accounts? What is the volume of assets held in these
accounts, and what percent is held by small plans? Is there an estimate
of how many small plans may be affected by the regulations?
(3) How many small insurance companies offer products that may be
subject to the regulations? Is there an anticipated effect on those
small companies' competitiveness due to such a regulation?
(4) What would be the most economical and efficient method of
compliance with the requirements imposed by the amendment for small
insurance companies?
(5) In responding to the questions above, please state whether the
insurance companies' costs of complying with any regulatory proposals
are likely to be passed on to the contractholders. If so, what are the
projected costs? Are large insurance companies more likely to absorb
the costs, leaving their contractholders in better positions? If costs
are passed on, will small plans be able to absorb the increase?
(6) How can the disclosed materials be provided in formats useful
to small plans? How can these materials be structured in ``plain
English,'' or must they require the assistance of professional service
providers to be valuable?
Miscellaneous
(1) The regulations will apply only to ``policies which are issued
by an insurer on or before December 31, 1998.'' To what extent should
the regulations treat pre-existing policies which are amended after
December 31, 1998 as policies issued on or before December 31, 1998?
(2) To what extent should the Department regulate transactions
between the insurer and its subsidiaries; between the insurer and
entities in which the insurer's officers or directors have a financial
interest?
(3) To what extent can insurers exercise discretion to the
detriment of plan contractholders in the allocation of income,
expenses, dividends, and other financial costs and benefits? How should
a limitation on that discretion be formulated? For example, should the
Department require that income, expenses and surplus be allocated in a
manner directly proportionate to the plan's actual contribution to each
of these categories?
(4) What constraints, if any, should be placed on insurers' ability
to unilaterally amend contract terms which affect the value of the
plan's policy (e.g., terms concerning minimum interest rate guarantees,
expense charges, and annuity purchase rates)?
(5) Do insurance companies and persons engaging in transactions
with such companies believe that guidance is necessary regarding which
general account contracts constitute ``guaranteed benefit policies''
within the meaning of section 401(b)(2) of ERISA in light of the Harris
Trust decision? In this regard, what types of policies raise
significant issues post Harris?
All submitted responses and comments will be made a part of the
record of the proceeding referred to herein and will be available for
public inspection.
Signed at Washington, DC this 20th day of November, 1996.
Olena Berg,
Assistant Secretary, Pension and Welfare Benefits Administration, U.S.
Department of Labor.
[FR Doc. 96-30030 Filed 11-22-96; 8:45 am]
BILLING CODE 4510-29-M
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