DOL Enforcement Policy for Welfare Plans with Participant Contributions
The purpose of this Release is to announce the Pension and Welfare Benefits Administration's revised enforcement policy with respect to cafeteria and certain other contributory welfare plans and to provide general guidance on the application of the trust and reporting and disclosure rules under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) to such plans.
The Participant Contribution Regulation
In 1988, the Department published the plan assets-participant contribution regulation (29 CFR 2510.3-102) defining when amounts that a participant pays to or has withheld by an employer for contribution to a plan (including elective contributions) constitute plan assets. The regulation (effective August 15, 1988) provides that such contributions become plan assets as of the earliest date they can reasonably be segregated from the employer's general assets, but in no event later than 90 days from receipt by the employer.
With respect to the application of the plan assets-participant contribution regulation, the Department notes that the regulation contemplates that all amounts that a participant pays to or has withheld by an employer for purposes of obtaining benefits under a plan become plan assets without regard to when related plan expenses or benefits are paid by the employer. At such time as participant contributions can reasonably be segregated from the employer's general assets and, therefore, constitute plan assets, plan fiduciaries are obligated under ERISA to treat those assets as any other assets of the plan, which includes ensuring compliance with applicable trust and reporting and disclosure requirements of ERISA.
Technical Release No. 88-1
Recognizing that the application of the plan assets-participant contribution regulation may have presented particular problems for plan sponsors and fiduciaries of cafeteria plans, the Department announced, in Technical Release No. 88-1 (August 12, 1988), an enforcement policy pursuant to which the Department would not assert a violation in any enforcement proceeding solely because of the failure to hold participant contributions to cafeteria plans in trust, pending consideration by the Department of regulatory relief from the trust requirement. In conjunction with the enforcement policy, the Department also expressed a willingness to consider regulatory relief from the trust requirements for other types of contributory welfare plans.
The Department notes that, while the Technical Release invited applications for regulatory relief for contributory welfare plans generally, the announced enforcement policy was expressly limited to ERISA's trust requirements as they apply to cafeteria plans.
Application of Reporting and Disclosure Requirements
Since the publication of Technical Release No. 88-1, a number of questions have been raised regarding the application of ERISA's reporting and disclosure requirements to contributory welfare plans in general and to cafeteria plans electing not to establish a trust in reliance on Technical Release No. 88-1. Specifically, these questions relate to the circumstances under which such plans may avail themselves of the reporting and disclosure exemptions set forth in regulations at 29 CFR 2520.104-20 and 2520.104-44. In general, these regulations provide relief for certain welfare plans from various reporting and disclosure requirements of part 1 of title I of ERISA, including, in the case of plans with fewer than 100 participants, the requirement to file an annual report and, in the case of a plan with 100 or more participants, the requirement to engage an independent qualified public accountant.
Pursuant to the regulations, exemptive relief is available only to those welfare plans with respect to which: (i) Benefits are paid solely from the general assets of the employer (or employee organization) maintaining the plan; or (ii) benefits are provided exclusively through insurance contracts or through a qualified health maintenance organization (HMO), the premiums for which are paid directly by the employer (or employee organization) from its general assets or partly from its general assets and partly from contributions from its employees (or members), provided that contributions by participants are forwarded to the insurance carrier or HMO by the employer (or employee organization) within three months of receipt; or (iii) benefits are provided partly from the general assets of the sponsor and partly through insurance contracts or through a qualified HMO, as described in (ii). (See: sections 2520.104-20 and 2520.104-44 for specific relief and conditions).
In accordance with the terms of the regulations, the relief afforded by §§2520.104-20 and 2520.104-44 is not available to any welfare plan with respect to which benefits or premiums are paid from a trust. Moreover, even in the absence of a trust, (e.g., where a cafeteria plan elects not to establish a trust in reliance on Technical Release No. 88-1), the exemptive relief would, in the absence of additional relief, be available only to those contributory welfare plans which apply participant contributions toward the payment of premiums in accordance with the terms of the regulations. For example, a welfare plan that applies participant contributions directly to the payment of benefits (or indirectly by way of reimbursement to the employer) would not qualify for exemptive relief because the benefits under such a plan could not be considered as paid .solely from the general assets of the employer." At least part of the benefits of such a plan would be considered paid from plan assets. Once the participant contributions are used, directly or indirectly, to pay benefits, they are, by definition, segregable from the employer's general assets.
Enforcement Policy Statement
The Department is continuing to consider whether, and to what extent, relief from the trust requirements may be appropriate for certain types of contributory welfare plans. In connection with its consideration of the trust issues, the Department also is considering the extent to which reporting and disclosure relief may be appropriate for contributory welfare plans with respect to which relief from the trust requirement is made available.
The Department recognizes that there has been considerable confusion on the part of sponsors and fiduciaries of cafeteria and other contributory welfare plans with respect to the scope of the enforcement policy set forth in Technical Release No. 88-1 and with respect to the application of the reporting and disclosure exemptions referred to above. The Department also recognizes that requiring such plans to be brought into compliance with the trust and reporting and disclosure requirements for which the Department is currently considering regulatory relief may result in many sponsors incurring significant, and possibly unnecessary, administrative costs and burdens pending final resolution of the nature and scope of the relief to be provided in this area. For these reasons, the Department has decided to announce the following enforcement policy, which is intended to provide interim relief to plan sponsors and fiduciaries of certain contributory welfare plans pending consideration of these issues by the Department.
In the case of a cafeteria plan described in section 125 of the Internal Revenue Code, the Department will not assert a violation in any enforcement proceeding solely because of a failure to hold participant contributions in trust. Nor, in the absence of a trust, will the Department assert a violation in any enforcement proceeding or assess a civil penalty with respect to a cafeteria plan because of a failure to meet the reporting requirements by reason of not coming within the exemptions set forth in §§2520.104-20 and 2520.104-44 solely as a result of using participant contributions to pay plan benefits or expenses attendant to the provision of benefits.
In the case of any other contributory welfare plan with respect to which participant contributions are applied only to the payment of premiums in a manner consistent with §§2520.104-20(b)(2)(ii) or (iii) and 2520.104-44(b)(1)(ii) or (iii), as applicable, the Department will not assert a violation in any enforcement proceeding or assess a civil penalty solely because of a failure to hold participant contributions in trust.
In the case of either of these types of plans, with respect to which a trust is not established in reliance on this Release, the reporting exemptions would continue to be available where participant contributions are used within three months of receipt to pay premiums as provided in §§2520.104-20 and 2520.104-44.
This Release supersedes Technical Release No. 88-1. The enforcement policy set forth in this Release shall remain in effect until the earlier of December 31, 1993, or the adoption of final regulations providing relief from the trust and reporting and disclosure requirements of Title I of ERISA.
The Department cautions that the foregoing enforcement policy in no way relieves plan sponsors and fiduciaries of their obligation to ensure that participant contributions are applied only to the payment of benefits and reasonable administrative expenses of the plan. Utilization of participant contributions for any other purpose may result not only in civil sanctions under Title I of ERISA but also criminal sanctions under 18 U.S.C. 664. See U.S. v. Grizzle, 933 F.2d 943 (11th Cir. 1991).
Signed at Washington, DC, this 28th day of May 1992
Alan D. Lebowitz
Deputy Assistant Secretary for Program Operations
U.S. Department of Labor
Pension and Welfare Benefits Administration