Advisory Opinion 1978-17A

Re: Exemption Application No. L-149

Dear Mr. McGrath:

This is in response to the letter of Mr. Michael Klein dated October 29, 1975, on behalf of the Newspaper and Mail Deliverers' Union of New York and Vicinity (the Union) requesting a determination that certain welfare and pension payments to retired members of the Union are exempt from coverage under Title I of the Employee Retirement Income Security Act of 1974 (the Act). In the alternative, the letter requested an administrative exemption under section 408(a) of the Act from the prohibited transaction provisions contained in section 406 of the Act. You informed the Department of Labor (the Department) in a letter dated January 10, 1978, that you have been appointed General Counsel for the Union.

The October 29, 1975 letter states that the Union' s Constitution and By-laws contain provisions allocating specified portions of the dues paid by Union members to four separate accounts designated Custody Account, Administration Account, Welfare and Pension Account and Defense Fund Account. The Union Constitution further provides that "all monies belonging to this Union other than the Custody Fund, shall be deposited in the name and to the credit of this Union, in such depositories as the President may designate." Funds from the Welfare and Pension Account are paid monthly, in an amount not exceeding $50, to each retired member of the Union who qualifies for these benefits. Approximately 50 retired members are also eligible for a mortuary benefit of $600. The letter represents that as a result of the institution in 1957 of collectively bargained union-industry pension and welfare plans and an amendment to the Union Constitution, most Union members will receive pension and welfare benefits solely from the joint union-industry plans. The Welfare and Pension Account is used to pay retirement benefits to members who retired prior to 1968. The letter states that 536 retired members currently receive payments from the Welfare and Pension Account.

In the past, funds were transferred from the Welfare and Pension Account to the Administration and Defense accounts. These transfers, which are described as "loans," were not evidenced in writing, contained no due dates and did not provide for payment of interest. The letter represents that the transfers were made because the Administration and Defense accounts were seriously depleted. It further represents that the monies remaining in the Welfare and Pension Account after the loans were made plus the amounts which are allocated to the Welfare and Pension Account each month from the dues payments of the 3000 active Union members are more than adequate to meet the Union's obligation to pay pension and welfare benefits to those members not covered solely by the joint union-industry plans.

The October 29, 1975 letter requests a determination that, because payments from the Welfare and Pension Account are made to members and not to employees, the Welfare and Pension Account is not covered by Title I of the Act. The letter states that section 3(3) of the Act, which defines the term "employee benefit plan," refers only to "employees" and does not cover members of a union who do not have an employer-employee relationship with the union.

Section 4(a) of the Act provides in relevant part, that Title I applies to "any employee benefit plan if it is established or maintained...by any employer engaged in commerce or in any industry or activity affecting commerce... or by any employee organization or organizations representing employees engaged in commerce or in any industry or activity affecting commerce...or by both." The term "employee organization" is defined in section 3(4), in relevant part, as "any labor union...in which employees participate and which exists for the purpose, in whole or in part, of dealing with employers concerning...matters incidental to employment relationships." Sections 3(1) and 3(2), which define the terms "employee welfare plan" and "employee pension benefit plan", include within those definitions plans, funds, or programs established or maintained by an employer or by an employee organization, or by both, to the extent that the plan fund or program is established or maintained to provide any of the benefits described in sections 3(1) and 3(2). Pension and death benefits are among the benefits described in sections 3(1) and 3(2). Section 3(3) defines the term "employee benefit plan" or "plan" to mean an employee welfare benefit plan or an employee pension benefit plan or a plan which is both a welfare benefit plan and a pension benefit plan. Section 3(7) provides that the term "participant" means "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.

Based on the above, a program or plan established by a union to pay pension and mortuary benefits to members of the union is an employee benefit plan within the meaning of Title I of the Act. Participants in a plan established or maintained by the union need not have an employer-employee relationship with the union.

Accordingly, the arrangement by which pension and mortuary benefits are paid to retired members of the Union from the Welfare and Pension Account is a plan (hereafter referred to as the Plan) covered under Title I of the Act.

Section 406 of the Act contains rules against self-dealing and conflicts of interest by fiduciaries and prohibits certain transactions between a plan and a party in interest. The Union is a party in interest, as that term is defined in section 3(14)(D) of the Act, with respect to the Plan. A loan of money between the Plan and the Union would violate the prohibited transaction provisions of section 406 of the Act. Accordingly, to the extent that the funds in the Welfare and Pension Account are Plan assets, their transfer to other accounts of the Union constituted a prohibited transaction.

This part of our response constitutes an Advisory Opinion under ERISA Procedure 76-1. Accordingly, this letter is subject to the provisions of the procedure including Section 10 thereof relating to the effect of advisory opinions.

The October 29, 1975 letter states that if the Plan is covered by Title I, the Plan requests an administrative exemption from the prohibitions of section 406 of the Act for loans by the Plan to the Union. The exemption application has been assigned the following number: L-149. Please use this number to identify the application in any further communication regarding the request for exemption.

The Department has reviewed the application for exemption from the prohibitions of section 406 of the Act, and on the basis of the facts submitted and representations made the Department has tentatively decided not to propose the requested exemption.

Among the factors considered in our tentative decision are: (1) the failure to demonstrate that the specific terms of the loans are as favorable to the Plan as those which could be obtained from an unrelated party, (2) the failure to demonstrate that the loans are in the interests of the Plan and its participants and beneficiaries, (3) the absence of independent safeguards for the protection of Plan participants and beneficiaries, (4) the inherent conflict of interest involved in transactions of this type, and (5) the administrative difficulty of monitoring abuses which may occur in such transactions.

ERISA Proc. 75-1, a copy of which is enclosed, provides that an applicant is entitled to a conference in Washington, D.C., in the event that the Department contemplates not proposing the requested exemption. If you desire a conference, please notify the Department in writing at the address set forth below , or contact Ms. Mary S. Champagne, Department of Labor, phone (202) 523-8299, within 30 days from the date of this letter.

At the conference, you should be prepared to discuss any matter which you believe will support a decision to publish the requested exemption in the Federal Register for comment. Any information or arguments that you want considered with regard to the exemption application should be submitted in writing no later than five days before the scheduled time and date of the conference to the Department at the following address: Department of Labor, Pension and Welfare Benefit Programs, Office of Regulatory Standards and Exceptions, Room C-4526, 200 Constitution Avenue, N.W., Washington, D.C. 20216. If you decide to submit additional information in support of the exemption request, please include information with respect to items 4 through 17 of section 4.06 of ERISA Proc. 75 -1.

In the event that you do not request a conference or submit additional information in support of the application for exemption within 30 days from the date of this letter, you will be notified that a final decision has been made not to propose the requested exemption.