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Employee Benefits Security Administration

Advisory Opinion

October 4, 2000

Stephen M. Saxon, Esq.
Jon W. Breyfogle, Esq.
Groom Law Group, Chartered
1701 Pennsylvania Avenue, NW
Washington, DC 20006-5893

2000-12A
ERISA Sec. 401(c)

Dear Messrs. Saxon and Breyfogle:

This is in response to your request on behalf of Aetna Inc. (Aetna) for an advisory opinion. Specifically, you seek guidance regarding the definition of a “Transition Policy” contained in the Department of Labor (the Department) regulation at 29 C.F.R. 2550.401c- 1(h)(6).

You represent that a wholly-owned indirect subsidiary of Aetna, Aetna Life Insurance Company (ALIC), has issued a number of traditional group annuity contracts to policyholders. Some policyholders of ALIC group annuity contracts (Policyholders) have asked ALIC to make changes to their group annuity contracts (Group Annuity Contracts) as a result of corporate reorganizations of the employee benefit plans’ sponsors (Policyholder Corporate Reorganizations).

Your request details the following situations with which ALIC has been confronted because of Policyholder-initiated requests for Group Annuity Contract changes resulting from Policyholder Corporate Reorganizations. Because numerous Policyholder requests are based on similar facts, those facts are set forth in the following examples.

In the first example, ALIC has issued a Group Annuity Contract to the Trustee of the Company A Retirement Plan (Plan A). You represent that the original Group Annuity Contract was issued to the Trustee of Plan A on or before December 31, 1998, and qualifies as a Transition Policy within the meaning of the Department’s regulation at 29 C.F.R. 2550.401c- 1(h)(6). In 1999, Company A sold one of its divisions, which became a separate company called Company B. A group of Company A employees who were covered by Plan A have been transferred to Company B and are now covered by new Plan B (which is substantially similar to Plan A). Company A and Company B agreed on the value of assets to be transferred from Plan A to Plan B to cover the accrued benefits of Plan B participants. Company A and Company B request that ALIC segregate funds attributable to Plan B and allocate those funds to a “clone” group annuity contract to be issued to the Trustee of Plan B. Company A affirmatively consents to the issuance of the clone group annuity contract. You represent that the clone group annuity contract will have the same premiums, policy guarantees, and other terms and conditions as the original Group Annuity Contract issued to the Trustee of Plan A. The clone group annuity contract will cover the former employees of Company A, and it may also cover other employees of Company B covered by Plan B. You further represent that no market value adjustments or deferred sales charges will apply when the Group Annuity Contract is cloned since these group annuity contracts will be treated as ongoing group annuity contracts.

In the second example, ALIC has issued a Group Annuity Contract to the Trustee of the Company A Retirement Plan (Plan A). You represent that the original Group Annuity Contract was issued to the Trustee of Plan A on or before December 31, 1998, and qualifies as a Transition Policy within the meaning of the Department’s regulation at 29 C.F.R. 2550.401c- 1(h)(6). In 1999, Company A and Company B merged to form Company C. Plan A was then merged with Company B Retirement Plan to form Plan C. Company C has requested that ALIC amend the Group Annuity Contract to change the name of the policyholder to the Trustee of Plan C and to change the jurisdiction in which the Group Annuity Contract is issued. Company C affirmatively consents to the amendment of the Group Annuity Contract. This may be accomplished through the issuance of a new “face” page to the Group Annuity Contract or a rider to the Group Annuity Contract. You represent that the amended Group Annuity Contract will have the same premiums, policy guarantees, and, except as described below, other terms and conditions as the original Group Annuity Contract issued to the Trustee of Plan A, but it will be owned by a new plan and will cover persons who were employees of Company A and Company B, as well as any new employees of Company C.

You represent that if Company C elects to guarantee plan benefits for the new group of plan participants under the Group Annuity Contract (e.g., through the purchase of annuities), the amount transferred to ALIC to guarantee these additional benefits is determined in the same manner that pre-existing guaranteed benefits were determined. You represent that ALIC will not change any of its contractual commitments and guarantees when the Group Annuity Contract is amended, including those contract provisions relating to credited and guaranteed interest, annuity options, annuity purchase rates, and expenses. You further represent that no market value adjustments or deferred sales charges will apply when the Group Annuity Contract is amended since the amended Group Annuity Contract will be treated as an ongoing group annuity contract.

You represent that there are a few states that require unique contract provisions which are intended to offer additional consumer protections. Where a Group Annuity Contract has been issued in such a state, ALIC will not eliminate such protective contract rights if the amended Group Annuity Contract is to be issued in a new state that does not impose a similar requirement. You further represent that ALIC will add a new contractual right to a Group Annuity Contract if necessary to comply with the laws of the new state jurisdiction. Thus, Policyholders’ rights under an amended Group Annuity Contract may be improved, but not diminished.

You request an opinion that, under the circumstances described, the clone group annuity contract and the amended Group Annuity Contract will qualify as Transition Policies within the meaning of the Department’s regulation at 29 C.F.R. 2550.401c-1(h)(6).

Section 401(c)(1)(A) of ERISA, as added by section 1460 of the Small Business Job Protection Act of 1996, provides that the Secretary of Labor must issue 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 to provide guidance with respect to the application of Title I to the general account assets of insurers. Section 401(c)(1)(D) of ERISA provides, in part, that the regulations will only apply to those general account policies which are issued by an insurer to or for the benefit of an employee benefit plan on or before December 31, 1998. Section 401(c)(7) of ERISA provides that, for purposes of section 401(c) of ERISA, the term “policy” includes a contract.

Section 401(c)(2) of ERISA provides that the Secretary of Labor must ensure that the regulations issued under section 401(c)(1) of ERISA are administratively feasible and protect the interests and rights of the plan and of its participants and beneficiaries.

Pursuant to section 401(c) of ERISA, on January 5, 2000, the Department issued final regulation 29 C.F.R. 2550.401c-1, clarifying the application of ERISA to insurance company general accounts. This regulation at 29 C.F.R. 2550.401c-1(a)(2) describes the general rule that, when a plan has acquired a Transition Policy (as defined in 29 C.F.R. 2550.401c-1(h)(6)), the plan’s assets include the Transition Policy, but do not include any of the underlying assets of the insurer’s general account if the insurer satisfies the requirements of paragraphs (c) through (f) of 29 C.F.R. 2550.401c-1.

This regulation at 29 C.F.R. 2550.401c-1(h)(6) defines a “Transition Policy” as a policy or contract of insurance (other than a guaranteed benefit policy) that is issued by an insurer to, or on behalf of, an employee benefit plan on or before December 31, 1998, and which is supported by the assets of the insurer’s general account. As explained in 29 C.F.R. 2550.401c- 1(h)(6)(ii)(A), a policy will not fail to be a Transition Policy merely because the policy is amended or modified to comply with the requirements of section 401(c) of ERISA and 29 C.F.R. 2550.401c-1. Further, as explained in 29 C.F.R. 2550.401c-1(h)(6)(ii)(B), a policy will not fail to be a Transition Policy merely because the policy is amended or modified pursuant to a merger, acquisition, demutualization, conversion, or reorganization authorized by applicable State law, provided that the premiums, policy guarantees, and the other terms and conditions of the policy remain the same, except that a membership interest in a mutual insurance company may be eliminated from the policy in exchange for separate consideration (e.g., shares of stock or policy credits).

You have assumed, and the Department agrees, that 29 C.F.R. 2550.401c-1(h)(6)(ii)(B) is limited to insurer mergers, acquisitions, demutualizations, and reorganizations. You represent that the Group Annuity Contracts will be amended or cloned pursuant to Policyholder Corporate Reorganizations, not insurer reorganizations.

The Department’s regulation at 29 C.F.R. 2550.401c-1 provides conditions under which plan investments in Transition Policies do not result in insurers holding plan assets, thus providing a safe harbor for insurers from ERISA’s fiduciary responsibility provisions. As required by section 401(c)(2) of ERISA, 29 C.F.R. 2550.401c-1 protects the interests and rights of the plan and of its participants and beneficiaries by providing that, in order to come within this safe harbor, insurers must satisfy the requirements of paragraphs (c) through (f) of 29 C.F.R. 2550.401c-1. These requirements include disclosures to plan fiduciaries, termination procedures allowing plans to terminate a policy upon 90 days notice to the insurer, and the duty to manage the general account assets prudently (irrespective of whether the assets are plan assets). The insurer must also provide notification of “insurer-initiated amendments” at least 60 days prior to their taking effect. The Department’s regulation at 29 C.F.R. 2550.401c-1(h)(8) defines “insurer- initiated amendment” and specifically provides that, for purposes of this definition, any amendment or change which is made with the affirmative consent of the policyholder is not an insurer-initiated amendment.

The Department’s regulation at 29 C.F.R. 2550.401c-1 does not address the effect of policyholder-initiated amendments on a Transition Policy. However, the Department recognizes that certain amendments made to accommodate changes in the corporate structure of the plan’s sponsor are not material for purposes of the definition of a Transition Policy.

It is the Department’s view that the clone group annuity contract and the amended Group Annuity Contract as described in your submission, each of which has been requested by the Policyholder as a result of the Policyholder Corporate Reorganizations described herein, would not fail to meet the definition of a “Transition Policy” contained in 29 C.F.R. 2550.401c- 1(h)(6)(i). The Department notes that ALIC must satisfy the requirements of paragraphs (c) through (f) of 29 C.F.R. 2550.401c-1 with respect to the clone group annuity contract and the amended Group Annuity Contract in order for the safe harbor at 29 C.F.R. 2550.401c-1 to apply.

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

Sincerely,
Louis Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations