Information Letter 03-01-2006

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March 1, 2006

The Honorable Mike Kreidler
Insurance Commissioner
Washington Office of Insurance Commissioner
P.O. Box 40255
Olympia, WA 98504-0255

Dear Commissioner Kreidler:

This is in response to the request we received from your Office regarding the definition of "multiple employer welfare arrangement" (MEWA) in section 3(40) of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you ask whether a professional employer organization (PEO) and its client companies would be a "control group" within the meaning of ERISA section 3(40)(B)(i) by reason of the PEO entering into agreements with its client companies under which the PEO is given an option to purchase an 80% interest in each client company.

You indicate that this issue has arisen in connection with a PEO's challenge to an order issued by the Washington Insurance Commissioner directing the PEO to cease and desist marketing an unlicensed insurance program to employers in Washington State. The PEO claims the health benefit arrangement it markets to client employers is not subject to state insurance regulation because the existence of the option agreements to purchase its client employer's businesses makes its health benefit program a single-employer "employee welfare benefit plan" within the meaning of section 3(1) of ERISA that is not subject to state insurance regulation as a MEWA under section 514(b)(6) of ERISA.

You state that discovery obtained from the PEO to date has not revealed any business purpose for the option agreements other than to enable the PEO to claim that its health benefit program is exempt from State insurance regulation as a MEWA. The option agreements are entered into in connection with an agreement that the PEO would provide employee benefits to the employees of the client employer or benefit related services to the client employer. The option agreements also terminate upon the termination of the benefit or service agreement. Neither the PEO nor any client employer has produced any evidence that the PEO and the client employers consider themselves under common control for any tax or regulatory purpose other than for the purpose of avoiding MEWA status under ERISA and state insurance law. You indicated that, although the PEO has been in business since 2002, there is no evidence that any option agreement has been exercised and the PEO has not offered any evidence indicating that there is any reasonable likelihood that the PEO will, or has the financial capability to, exercise the options to purchase the companies that it claims are members of its controlled group. You further state that any exercise of the option agreements would appear to violate Washington law because the PEO's arrangement includes chiropractors, dentists and oral surgeons. You represent that a PEO could not acquire a dental, chiropractic, or surgical practice under Washington law because Washington law prohibits corporations, other than professional service corporations, from engaging in the practice of medicine. Moreover, only licensed professionals and certain qualified trusts, may own shares of professional service corporations.

The question you pose regarding the status of the PEO health benefit program as a MEWA involves interpretation of whether the Department would treat the PEO and its client employers as a "single employer" by reason of being a "group of trades or businesses under common control" for purposes of section 3(40) of ERISA.

Section 3(40)(A) of ERISA provides, in pertinent part, that the term "multiple employer welfare arrangement", also referred to as MEWA, "means an employee welfare benefit plan, or any other arrangement (other than an employee welfare benefit plan), which is established or maintained for the purpose of offering or providing any [welfare] benefit described in [section 3(1) of ERISA] to the employees of two or more employers (including one or more self-employed individuals), or to their beneficiaries . . . ." If a plan is maintained by a single employer for the exclusive purpose of providing benefits to that employers employees, former employees, or their beneficiaries, the plan would be a single employer plan and not a MEWA within the meaning of ERISA section 3(40). In this connection, ERISA section 3(40)(B)(i) provides that, for purposes of section 3(40), "two or more trades or businesses, whether or not incorporated, shall be deemed a single employer if such trades or businesses are within the same control group. In determining whether trades or businesses are within the same control group", section 3(40)(B)(ii) provides that the term "control group" means a "group of trades or businesses under common control". Pursuant to section 3(40)(B)(iii), whether a trade or business is under "common control" with another trade or business is to be determined under regulations issued by the Secretary of Labor "applying principles similar to the principles applied" in determining whether there is "common control" under section 4001(b) of Title IV of ERISA, except that common control shall not be based on an interest of less than 25 percent.

The Secretary has not issued regulations under ERISA section 3(40)(B). The regulation under section 4001(b) of Title IV of ERISA, which also treats trades or businesses under common control as a single employer, adopts the definition of common control set forth in the regulations under section 414(c) of the Internal Revenue Code of 1986 (Code). See 29 C.F.R. § 4001.3. It is our understanding that under Code section 414 (c), common control generally means (i) in the case of a parent-subsidiary group, the entities are connected through at least an 80% ownership interest, or (ii) in the case of a brother-sister group: (a) five or fewer people own at least an 80% interest in each entity and, (b) the same five or fewer people together own a greater than 50% interest in each entity taking into account the ownership of each person only to the extent such ownership is identical with respect to each organization. See 26 CFR § 1.414(c)-2. The regulations under section 414(c) take into account certain constructive ownership interests. Of particular relevance to your inquiry, if a person has an option to acquire any outstanding interest in an organization, such interest shall be considered as owned by such person. 26 C.F.R. § 1.414(c)-4(b).

In the absence of regulations under section 3(40)(B)(iii), the Department would generally follow ERISA section 4001(b), and therefore the Code section 414(c) rules, in interpreting ERISA's MEWA preemption provisions. The Department, however, believes it is important in interpreting section 3(40)(B)(i) to keep in mind the different policies underlying the section 4001(b) single employer concept and the single employer provision in section 3(40) of ERISA.(1) The effect of single employer treatment under ERISA section 4001(b) and Code section 414(c) is to ignore separate formal business structures of an employer and of businesses under common control with the employer in order to expand with respect to a particular plan the range of businesses subject to certain PBGC liabilities and the range of businesses to which the tax qualification rules would apply. See H. Conf. Rep. 1280, 93d Cong., 2d Sess. 266, 376 (1974); H. Rep. 807, 93d Cong., 2d Sess. 50 (1974). In contrast, Congress's objective in enacting the MEWA preemption provisions was to remove impediments to the States ability to regulate multiple employer welfare arrangements and assure the financial soundness and timely payment of benefits under such arrangements. See 128 Cong. Rec. E2407 (1982) (statement of Congressman Ehrlenborn on the purpose of Pub. L. 97-473 which added ERISA section 3(40) and ERISA section 514(b) reducing the scope of ERISA preemption of State law applicable to ERISA-covered plans that are MEWAs). It would be inconsistent with the goals and purposes underlying ERISA section 3(40)(B) to read the common control language of the statute in a vacuum so as to treat separate businesses as a single employer based on an artifice entered into for the purpose of using ERISA preemption as a shield against state insurance regulation of a health benefit program being marketed to those separate employers and their employees.

The Department, therefore, is of the view that the PEO must be able to demonstrate that there is a "substantial business purpose" for the option agreements other than avoiding State insurance regulation of a health benefit program it offers to its client employers before the Department will give any weight to the option agreements in determining whether the PEO and its client employers should be treated as a single employer for purposes of section 3(40) of ERISA.(2) Furthermore, this letter should not be read as expressing the view that the particular PEO health benefit program involved in your proceeding is itself an "employee welfare benefit plan" within the meaning of section 3(1) of ERISA, or that the option agreements involved in your proceeding are valid, or that the option agreement arrangement is sufficient to constitute common control under ERISA section 4001(b), as administered by the PBGC, or Code section 414(c), as administered by the Internal Revenue Service which has interpretive authority over that section and the regulations issued thereunder.

We hope that this information is of assistance to you.


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


  1. The statutory text in section 3(40) of ERISA calling for application of similar principles contrasts with section 4001(b) under which the PBGC's common control regulations are to be "consistent and coextensive with" the Treasury regulations under sections 414(c) of the Code. That difference reflects, in the Department's view, an expectation that single employer determinations under section 3(40) of ERISA should account for the different policies underlying ERISAs MEWA preemption provisions.
  2. A substantial business purpose test applies in the context of ERISA section 3(37) to address arrangements constructed to obtain the benefits of being regulated as a multiemployer plan under ERISA. See 29 C.F.R. § 2510.3-37.