Advisory Opinion

July 2, 2004

Mr. Barry V. Frederick
Wiggins Childs Quinn & Pantazis
301 19th Street North
Birmingham, AL 35203


Dear Mr. Frederick:

This is in response to your request on behalf of Denny's, Inc. for an advisory opinion regarding the applicability of Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA). Specifically, you asked whether the Denny's, Inc. Vacation Pay Plan (Plan) is an "employee welfare benefit plan" within the meaning of section 3(1) of ERISA.

You provided the following facts and representations in support of your request. The Plan was established to provide paid vacation benefits to eligible employees of Denny's, Inc. and certain affiliates (Denny's). Eligible full and part-time employees earn vacation hours under the Plan based on average hours worked, length of service, and level of employment. The maximum accrual is 6.67 hours per month for hourly employees and 13.3 hours per month for salaried employees. Hourly employees may carry up to 80 vacation hours over from year-to-year and salaried employees can carry up to 1 year of vacation time. Participants must submit a request to the Plan prior to taking vacation in order to receive vacation pay from the Plan. Upon termination, whether voluntary or involuntary, salaried employees with six or more months of continuous service and hourly employees with 1 year of continuous service are paid their accumulated but unused vacation pay balance. You indicated that few employees carry vacation pay balances because of Denny's rate of employee turnover.

Denny's established the Denny's Inc. Employee Benefit Trust (Trust) to fund the Plan. The Trust is intended to be a tax-exempt voluntary employees beneficiary association (VEBA) under section 501(c)(9) of the Internal Revenue Code. The Trust document provides that, "[t]he Trust shall be held and maintained for the exclusive benefit of the [e]mployees," and that, "[n]o part of the net earnings of the Trust shall inure (other than as Benefit payments) to the benefit of the [e]mployer or any individual." Denny's retains the right to amend or terminate the Plan at any time, but no amendment or termination can permit reversion of any part of the Trust to Denny's. The Trust document states that, "[t]he net income and profits of the Trust Fund shall be accumulated, added to the principal of the Trust Fund, and invested and reinvested therewith as a single fund by the Trustee." You represent, however, that the Trust assets are held in a non-interest bearing account because the Plan determined that the expenses associated with investing the assets would exceed the investment return.

Pursuant to section 2.5 of the Trust document, the trustee is entitled to receive contributions from Denny's in "such sums as from time to time are established by the Administrator." Section 2.5 further provides that, "[t]o the extent applicable or necessary, the Administrator shall base its determination of these sums on actuarial principles, relying in good faith upon the recommendations of a qualified consultant or actuary as to the proper rate of contribution per Participant." You represent that the administrator has not obtained the recommendation of a consultant or actuary as to a contribution rate or established contribution requirements for Denny's. The trustee is empowered under the Trust documents to sue Denny's to collect unpaid employer contributions, but you indicated that, in the absence of any contribution requirements being set by the Administrator, the trustee would have to wait until the Trust was obligated to distribute bi-weekly vacation pay checks to sue Denny's for the amounts it needed to make those payments. Denny's, however, has voluntarily made sufficient contributions to the Trust to maintain a constant minimum account balance of at least $250,000.

You represent that the Plan distributes vacation pay by checks from a non-interest bearing bank account Denny's opened in its capacity as plan administrator. The bank account is designated the Denny's Inc. Employee Vacation Trust Account (Trust Account). Denny's determines the amount of vacation benefits to be paid in each two-week period, and generally deposits that amount into the Trust Account usually the day before the amount is paid out by the Trust in the form of vacation pay checks. The Trust Account issues vacation pay checks on the same bi-weekly schedule as Denny's normal payroll and the vacation pay checks include general payroll information from Denny's such as total wages paid and total year-to-date deductions for income taxes. The Plan covers approximately 32,000 participants, and pays approximately $8 million in benefits each year. The amount passed through the Trust Account in a typical week equals or exceeds the $250,000 balance that Denny's maintains in the Trust.

Section 3(1) of Title I of ERISA defines the term "employee welfare benefit plan" to include: [A]ny plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 (other than pensions on retirement or death, and insurance to provide such pensions).

In regulation 29 § C.F.R. 2510.3-1, the Department of Labor clarified the definition of "employee welfare benefit plan" by describing certain arrangements that would not constitute employee welfare benefit plans within the meaning of section 3(1) of ERISA. Section 2510.3-1(b) of the regulation describes certain exempt payroll practices, and specifically provides that an employer program of compensating employees for vacation benefits out of the employer's general assets is not a welfare plan covered under Title I of ERISA. In the preamble of the regulation, the Department stated that "[s]ection 2510.3-1(b) distinguishes welfare plans from employer payroll practices which, although related to benefits described in [section 3(1) of ERISA], are more closely associated with normal wages or salary . . . ."  If vacation benefits are paid from a source other than the general assets of the employer, the conditions of the safe-harbor regulation are not met. In the Department's view, assets held in a separate trust with terms such as those described above in the Plans VEBA Trust document do not constitute general assets of the employer for purposes of the Department's regulation at 29 C.F.R. § 2510.3-1(b). Accordingly, the Plan would not be an exempt payroll practice under that regulation.

Vacation pay programs that fail to satisfy all of the conditions of the regulation, however, are not necessarily covered by Title I of ERISA. Rather, such programs are subject to further evaluation under section 3(1) of ERISA to determine whether the program includes the requisite elements to constitute an ERISA employee benefit plan. In that regard, the Supreme Court in Massachusetts v. Morash, 490 U.S. 107 (1989), explained that "[t]he reference to vacation payments in § 3(1) should be understood to include within the scope of ERISA those vacation benefit funds, analogous to other welfare benefits, in which either the employee's right to a benefit is contingent upon some future occurrence or the employee bears a risk different from his ordinary employment risk." Id. at 116. The Court also noted that extensive state regulation of vesting, funding and participation rights of vacation benefits may afford more protection for vacation benefits than ERISA, and indicated a reluctance to cause their preemption in situations where not clearly indicated. Id. at 119. Although the Morash court observed that "the creation of a separate fund to pay employees vacation benefits would subject a single employer to the regulatory provisions of ERISA[,]" id. at 114, the discussion in Morash suggests that the mere presence of a trust or other separate account from which vacation benefits are paid should not automatically result in ERISA coverage in the absence of the trust providing genuine protections to the accrued benefits under the plan or otherwise presenting risks ERISA was intended to address.(1)

Accordingly, in the Department's view, to determine whether the use of a trust or other separate account to pay vacation benefits in a vacation pay program such as Denny's should result in the program being treated as an "employee benefit plan" subject to Title I of ERISA, the program should be evaluated to determine whether the trust is a bona fide separate fund, whether the trust has the direct legal obligation to pay benefits under the plan, whether there is a contribution obligation enforceable against the employer, and whether contributions are actuarially determined, established through collective bargaining, or otherwise bear a relationship to the plans accruing liability.(2)

In light of the above and based on the information submitted, the Department is unable to conclude that the Plan is an employee welfare benefit plan within the meaning of ERISA section 3(1). In this case, it appears that there is a separate trust with a direct legal obligation to pay the benefits due under the Plan. However, contributions do not appear to bear any relationship to the Plans accruing liability and the administrator has not exercised its power under the Trust document to establish a rate of contribution per participant based on actuarial principles. The fact that the Trust documents may be read to impose a legal obligation on Denny's to contribute amounts every two weeks sufficient to pay vacation wages as they become due, and the fact that Denny's may voluntarily maintain a minimum balance of $250,000 in the Trust does not, in the Department's view, operate to change the essential nature of the Trust as a mere pass-through vehicle for the employer's payment of ordinary vacation wages or result in the Trust constituting a separate fund that provides genuine protections for the approximately $8 million in benefits that accrue under the plan each year.

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


John J. Canary
Chief, Division of Coverage, Reporting, and Disclosure
Office of Regulations and Interpretations


  1. For example, in emphasizing that the Morash decision concerned vacation benefits paid by a single employer out of its general assets, the court observed that: "An entirely different situation would be presented if a separate fund had been created by a group of employers to guarantee the payment of vacation benefits to laborers who regulatory shift their jobs from one employer to another. Employees who are beneficiaries of such a trust face far different risks and have far greater need for the reporting and disclosure requirements that the federal law imposes than those whose vacation benefits come from the same fund from which they receive their paychecks." Morash, 490 U.S. at 120. See also Alaska Airlines, Inc. v. Oregon Bureau of Labor, 122 F.3d 812 (9th Cir. 1997) (use of an "advance and recapture" trust in a single employer program did not convert sick leave program into an ERISA covered plan); Czechowski v. Tandy Corp., 731 F. Supp. 406 (N.D. Cal. 1990).

  2. This letter should not be read as expressing any view on whether an ERISA covered plan providing other welfare benefits through a pass-through trust would be treated as holding plan assets. See Advisory Opinion 92-24A (Nov. 6, 1992) and Advisory Opinion 99-08A (May 20, 1999).