[Federal Register Volume 65, Number 209 (Friday, October 27, 2000)]
[Proposed Rules]
[Pages 64482-64498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27044]
[[Page 64481]]
-----------------------------------------------------------------------
Part II
Department of Labor
-----------------------------------------------------------------------
Pension and Welfare Benefits Administration
-----------------------------------------------------------------------
29 CFR Parts 2510 and 2570
Plans Established or Maintained Under or Pursuant to Collective
Bargaining Agreements Under Section 3(40)(A) of ERISA; Proposed Rule
Procedures for Administrative Hearings Regarding Plans Established or
Maintained Pursuant to Collective Bargaining Agreements Under Section
3(40)(A) of ERISA; Proposed Rule
Federal Register / Vol. 65, No. 209 / Friday, October 27, 2000 /
Proposed Rules
[[Page 64482]]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
29 CFR Part 2510
RIN 1210-AA48
Plans Established or Maintained Under or Pursuant to Collective
Bargaining Agreements Under Section 3(40)(A) of ERISA
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: This document contains a proposed regulation under the
Employee Retirement Income Security Act of 1974, as amended, (ERISA or
the Act), setting forth specific criteria that, if met and if certain
other factors set forth in the proposed regulation are not present,
constitute a finding by the Secretary of Labor (the Secretary) that a
plan is established or maintained under or pursuant to one or more
collective bargaining agreements for purposes of section 3(40) of
ERISA. Employee welfare benefit plans that meet the requirements of the
proposed regulation are excluded from the definition of ``multiple
employer welfare arrangements'' under section 3(40) of ERISA and
consequently are not subject to state regulation of multiple employer
welfare arrangements as provided for by the Act. If adopted, the
proposed regulation would affect employee welfare benefit plans, their
sponsors, participants, and beneficiaries, as well as service providers
to plans. Proposed regulations are being published simultaneously with
this proposed regulation that set forth a procedure for obtaining a
determination by the Secretary as to whether a particular employee
welfare benefit plan is established or maintained under or pursuant to
one or more agreements that are collective bargaining agreements for
purposes of section 3(40) of ERISA. The procedure would be available
only in situations where the jurisdiction or law of a state has been
asserted against a plan or other arrangement that contends it meets the
exception for plans established or maintained under or pursuant to one
or more collective bargaining agreements.
DATES: Written comments concerning the proposed regulation must be
received by December 26, 2000.
ADDRESSES: Interested persons are invited to submit written comments
(preferably three copies) concerning this proposed regulation to:
Pension and Welfare Benefits Administration, Room N-5669, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210, (Attention: Proposed Regulation Under Section 3(40)). All
submissions will be open to public inspection at the Public Documents
Room, Pension and Welfare Benefits Administration, Room N-5638, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210.
FOR FURTHER INFORMATION CONTACT: Elizabeth A. Goodman, Office of
Regulations and Interpretations, Pension and Welfare Benefits
Administration, Room N-5669, U.S. Department of Labor, 200 Constitution
Avenue, NW., Washington, DC 20210, (202) 219-8671. This is not a toll-
free number.
SUPPLEMENTARY INFORMATION:
A. Background
The Department is proposing a regulation, based on the report of
the ERISA Section 3(40) Negotiated Rulemaking Advisory Committee
convened by the Department for this purpose, that would implement
section 3(40) of ERISA, 29 U.S.C. 1002(40). Section 3(40)(A) defines
the term multiple employer welfare arrangement (MEWA) in pertinent part
as follows:
The term ``multiple employer welfare arrangement'' 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 benefit
described in paragraph (1) [of section 3 of the Act] to the
employees of two or more employers (including one or more self-
employed individuals), or to their beneficiaries, except that such
term does not include any such plan or other arrangement which is
established or maintained--(i) under or pursuant to one or more
agreements which the Secretary finds to be collective bargaining
agreements. * * *
This provision was added to ERISA by the Multiple Employer Welfare
Arrangement Act of 1983, Sec. 302(b), Pub. L. 97-473, 96 Stat. 2611,
2612 (29 U.S.C. 1002(40)), which also amended section 514(b) of ERISA.
Section 514(a) of the Act provides that state laws which relate to
employee welfare benefit plans are generally preempted by ERISA.
Section 514(b) sets forth exceptions to the general rule of section
514(a) and subjects employee welfare benefit plans that are MEWAs to
various levels of state regulation depending on whether or not the MEWA
is fully insured. Sec. 302(b), Pub. L. 97-473, 96 Stat. 2611, 2613 (29
U.S.C. 1144(b)(6)). \1\
---------------------------------------------------------------------------
\1\ The Multiple Employer Welfare Arrangement Act of 1983 added
section 514(b)(6) which provides a limited exception to ERISA's
preemption of state laws that allows states to exercise regulatory
authority over employee welfare benefit plans that are NEWAs.
Section 514(b) provides, in relevant part, that:
(6)(A) Notwithstanding any other provision of this section--(i)
in the case of an employee welfare benefit plan which is a multiple
employer welfare arrangement and is fully insured (or which is a
multiple employer welfare arrangement subject to an exemption under
subparagraph (B)), any law of any State which regulates insurance
may apply to such arrangement to the extent that such law
provides)--
(I) standards, requiring the maintenance of specified levels of
reserves and specified levels of contributions, which any such plan,
or any trust established under such a plan, must meet in order to be
considered under such law able to pay benefits in full when due, and
(II) provisions to enforce such standards, and (ii) in the case
of any other employee welfare benefit plan which is a multiple
employer welfare arrangement, in addition to this title, any law of
any State which regulates insurance may apply to the extent not
inconsistent with the preceding sections of this title.
Thus, an employee welfare benefit plan that is a MEWA remains
subject to state regulation to the extent provided in section
514(b)(6)(A). ERISA preemption applies only to MEWAs which are
employee welfare benefit plans.
---------------------------------------------------------------------------
The Multiple Employer Welfare Arrangement Act was introduced to
counter what the Congressional drafters termed abuse by the ``operators
of bogus `insurance' trusts.'' 128 Cong. Rec. E2407 (1982) (Statement
of Congressman Erlenborn). In his comments, Congressman Erlenborn noted
that certain MEWA operators had been successful in thwarting timely
investigations and enforcement activities of state agencies by
asserting that such entities were ERISA plans exempt from state
regulation by the terms of section 514 of ERISA. The goal of the bill,
according to Congressman Erlenborn, was to remove ``any potential
obstacle that might exist under current law which could hinder the
ability of the States to regulate multiple employer welfare
arrangements to assure the financial soundness and timely payment of
benefits under such arrangements.'' Id. This concern was also expressed
by the Committee on Education and Labor in the Activity Report of the
Pension Task Force (94th Congress, 2d Session, 1977), cited by
Congressman Erlenborn:
It has come to our attention, through the good offices of the
National
Association of State Insurance Commissioners, that certain
entrepreneurs have undertaken to market insurance products to
employers and employees at large, claiming these products to be
ERISA covered plans. For instance, persons whose primary interest is
in the profiting from the provision of administrative services are
establishing insurance companies and related enterprises. The
entrepreneur will then argue that his enterprise is an ERISA benefit
plan which is protected under ERISA's preemption provision from
state regulation.
[[Page 64483]]
Id. As a result of the addition of section 514(b)(6), certain state
laws regulating insurance may apply to employee welfare benefit plans
that are MEWAs. However, the definition of a MEWA in section 3(40)
provides that an employee welfare benefit plan is not a MEWA if it is
established or maintained under or pursuant to an agreement or
agreements which the Secretary finds to be a collective bargaining
agreement. Such plans, therefore, are not subject to state insurance
regulation under section 514(b)(6).
While the Multiple Employer Welfare Arrangement Act of 1983
significantly enhanced the states' ability to regulate MEWAs, problems
in this area persist. Among other things, the exception for
collectively bargained plans contained in section 3(40) is now being
exploited by some MEWA operators who, through the use of sham unions
and collective bargaining agreements, market fraudulent insurance
schemes under the guise of collectively bargained welfare plans exempt
from state insurance regulation.\2\ Another problem in this area
involves the use of collectively bargained plans as vehicles for
marketing health care coverage to individuals and employers with no
relationship to the bargaining process or the underlying bargaining
agreement.
---------------------------------------------------------------------------
\2\ In addition, the Department has received requests to make
individual determinations concerning the status of particular plans
under section 3(40). See. e.g., Ocean Breeze Festival Park v. Reich,
853 F. Supp. 906, 91 (1994), summary judgment granted sub nom.
Virginia Beach Policemen's Benevolent Association, et al. v. Reich,
881 F. Supp 1059 (E.D. Va. 1995), aff'd, 96 F.3d 1440 (1996);
Amalgamated Local Union No. 335 v. Gallagher, No. 91 CIV 0193(RR)
(E.D.N.Y. April 15, 1991).
---------------------------------------------------------------------------
B. The August 1995 Notice of Proposed Rulemaking
On August 1, 1995, the Department published a Notice of Proposed
Rulemaking on Plans Established or Maintained Pursuant to Collective
Bargaining Agreements in the Federal Register. (60 FR 39209). (August
1995 NPRM). The Department proposed criteria for determining whether an
employee welfare benefit plan is established or maintained under or
pursuant to one or more agreements that the Secretary finds to be
collective bargaining agreements for purposes of section 3(40) of
ERISA. The proposed approach did not have a procedure for obtaining
individual findings by the Department. The Department received numerous
comments on the NPRM. Commenters expressed concerns about their ability
to comply with the standards set forth in the NPRM, and to obtain data
necessary to establish compliance with the criteria proposed by the
Department. Commenters also objected to having State regulators
determine whether a particular agreement was a collective bargaining
agreement.
C. Regulatory Negotiation
The Department continues to believe that regulatory guidance in
this area is necessary. Based on the comments received in response to
the August 1995 NPRM, the Department determined that negotiated
rulemaking was an appropriate method of implementing a revised Notice
of Proposed Rulemaking. On April 15, 1998, the Secretary published in
theFederal Register (63 FR 18345) a notice of intent to establish a
negotiated rulemaking advisory committee under the Negotiated
Rulemaking Act. (5 U.S.C. 561 et seq.) (NRA). The NRA establishes a
framework for the conduct of negotiated rulemaking and encourages
agencies to use negotiated rulemaking to enhance the informal
rulemaking process.
In September 1998, the Secretary established the ERISA Section
3(40) Negotiated Rulemaking Advisory Committee under the NRA and the
Federal Advisory Committee Act (the FACA)(5 U.S.C. App. 2) (Notice of
Establishment). (63 FR 5052). The Committee included a Department
representative and its work has been assisted by a neutral facilitator.
The Committee membership was chosen from the organizations that
submitted comments on the Department's August 1995 NPRM, and from the
petitions and nominations for membership received in response to the
Notice of Intent. The Notice of Establishment outlined the rationale
behind the final composition of the Committee. The members of the ERISA
Section 3(40) Negotiated Rulemaking Advisory Committee are as follows:
Labor Unions: Kathy Krieger, American Federation of Labor and
Congress of Industrial Organizations;
Multiemployer Plans: Gerald Feder (James Ray--alternate), National
Coordinating Committee for Multiemployer Plans; Judith Mazo,
Entertainment Industry Multiemployer Health Plans;
State Governments: Fred Nepple, National Association of Insurance
Commissioners;
Employers/Management: James Kernan, The Associated General
Contractors of America;
Railway Labor Act Plans: Benjamin W. Boley, National Railway Labor
Conference;
Third-Party Administrators: David Livingston, TIC International
Corporation;
Independent agents, brokers and advisors providing health care
products and services to plans and individuals: Nancy Trenti, National
Association of Health Underwriters;
Insurance carriers and managed care companies that finance and
deliver health care: R. Lucia Riddle, Health Insurance Association of
America;
Federal Government: Elizabeth A. Goodman, Pension and Welfare
Benefits Administration.
The goal of the Committee was to reach consensus on pertinent
issues and draft regulatory text for the purposes of developing a
substantive rule to help the regulated community determine which plans
are indeed established or maintained under or pursuant to one or more
collective bargaining agreements, and therefore not subject to state
regulation, under section 3(40) of ERISA. The Committee conducted eight
public sessions held on October 26-27, 1998, December 16-17, 1998,
February 9-10, 1999, April 20-21, 1999, July 7-8, 1999, August 25-26,
1999, October 13-14, 1999, and November 16-17, 1999. All meetings were
held in Washington, D.C. and allocated time during the meetings for
public participation and comment. In accordance with the FACA's
requirements, minutes of all public Committee meetings have been kept
in the public rulemaking record, together with the materials
distributed among Committee members during such meetings and
correspondence received by the Committee regarding the rulemaking.
During the course of the Committee's deliberations, it received two
written comments from the public. The Committee considered the comments
in drafting its report and the proposed regulatory text.
Under the rules governing the negotiated rulemaking process, and in
accordance with the organizational protocols adopted by the Committee,
the Committee agreed to recommend to the Secretary consensus language
in the form of a proposed rule developed by the Committee. Committee
members agreed not to file adverse public comments on provisions of the
proposed rule on which the Committee had reached consensus.
In the event that the Committee did not reach a full consensus on a
proposed rule, the Committee members agreed to prepare a report to the
Secretary outlining any consensus agreement reached, and summarizing
the reasons for the failure to reach consensus on the complete rule.
The
[[Page 64484]]
Department was prepared to develop a proposed rule on its own, if the
Committee could not reach consensus.
With the exception of sections E-K of the preamble, the text of the
proposed rule and preamble is the Committee's consensus.
D. Description of Proposed Regulation
1. Structure of the Proposed Regulation
The proposed regulation establishes specific criteria that the
Secretary finds must be present in order for one or more agreements to
be collective bargaining agreements for purposes of section 3(40) of
ERISA and also establishes certain criteria for determining when an
employee welfare benefit plan is established or maintained under or
pursuant to such an agreement or agreements for purposes of section
3(40). In drafting proposed regulatory language, the Committee took
into account that section 3(40) not only requires the existence of one
or more bona fide collective bargaining agreements, but also requires
that the plan be ``established or maintained'' under or pursuant to
such an agreement or agreements. The proposed regulation interprets the
exception under section 3(40)(A)(i) as being limited to plans providing
coverage primarily to those individuals with a nexus to the collective
bargaining agreement or agreements under or pursuant to which the plan
is established or maintained. Accordingly, the criteria in the proposed
regulation relating to whether a plan qualifies as ``established or
maintained'' are intended to ensure that the statutory exception is
only available to plans whose participants are predominately the
bargaining unit employees on whose behalf such benefits were negotiated
and other individuals with a close nexus to the bargaining unit or to
the employer(s) of the bargaining unit employees.
The proposed regulation also sets forth certain instances where,
even if the specific criteria apparently are met, an entity will be
deemed not to be established or maintained under or pursuant to one or
more collective bargaining agreements. The proposed regulation also
sets forth certain factors to be considered by a fact finder as to
whether there is a bona fide collective bargaining relationship.
The proposed regulation would, upon adoption, constitute the
Secretary's finding for purposes of determining whether a plan is
established or maintained under or pursuant to one or more collective
bargaining agreements pursuant to section 3(40) of ERISA. The criteria
contained in the proposed regulation are designed to enable entities
and state insurance regulatory agencies to determine in the first
instance whether the requirements of the Act are met. Unlike the August
1995 NPRM, under certain limited circumstances an entity may elect to
petition the Secretary for an individual finding. However, the
Secretary will not make individual findings or determinations as to
whether an entity meets the criteria of the proposed regulation unless
a state's law or jurisdiction is asserted in an administrative or
judicial proceeding against that particular entity. For the procedure
for petitioning for an individual finding and a description of the ALJ
individual finding procedure, see Notice of Proposed Rulemaking 29 CFR
2570 Subpart G (published simultaneously).
The principles and criteria in this proposed rule were developed
solely for the purpose of determining whether or not a multiple
employer welfare plan is a MEWA under section 3(40). In considering and
drafting this proposed regulation, the Committee was not charged with
interpreting or enforcing any other federal laws that relate to
collective bargaining and employee benefits, such as the National Labor
Relations Act, the Internal Revenue Code of 1986 or the Railway Labor
Act. Therefore, nothing in this proposed regulation, or in any ALJ
finding issued pursuant to it under the proposed rules at 29 CFR 2570
Subpart G, is intended to determine the rights and responsibilities of
any party under such other laws. In drafting the proposed regulatory
language, the Committee recognized that a finding by the Secretary that
a plan is maintained pursuant to a collective bargaining agreement as
defined for section 3(40) of ERISA may be considered by parties
applying other laws, but did not believe that such a finding here
would, given the narrow focus of the proposed regulation, conclude the
analysis under such other law.
2. Specific Provisions of the Proposed Regulation
Section 2510.3-40(a)--Scope and Purpose
Section (a), Scope and Purpose, states that the purpose of the
proposed regulation is to set forth a finding by the Secretary that an
employee welfare benefit plan is established or maintained under or
pursuant to one or more collective bargaining agreements if it meets
the criteria in the proposed regulation and does not come within one of
the exclusions.
Section 2510.3-40(b)--Who Is Covered by the Plan
Section (b), Criteria, is divided into four parts: subparagraph (1)
requires that the entity in question be an employee welfare benefit
plan within the meaning of ERISA section 3(1); subparagraph (2) looks
at whether the preponderance of those participants covered by the plan
have a nexus to the bargaining relationships under which the plan is
established or maintained; subparagraph (3) describes the
characteristics of agreements that will qualify them, for purposes of
section 3(40) of ERISA only, as collective bargaining agreements; and
subparagraph (4) sets forth factors to be considered, again for
purposes of section 3(40) only, in determining whether there is a bona
fide collective bargaining relationship underlying the agreements
pursuant to which the plan is established or maintained. If an employee
welfare benefit plan meets the general criteria and is not excluded
under subsection (c), then the Secretary finds that such plan is
``established or maintained under or pursuant to one or more agreements
which the Secretary finds to be collective bargaining agreements'' for
any plan year in which it meets the criteria.
Section 2510.3-40(b)(1)--Entity Must Be a Plan
Subsection (b)(1) requires that an entity be an employee welfare
benefit plan within the meaning of section 3(1) of ERISA in order to be
deemed to be a plan established or maintained under or pursuant to
collective bargaining.
Section 2510.3-40(b)(2)--``The Nexus Group''
Subsection (b)(2) requires that for any plan year 80% of the
participants (as defined in section 3(7) of ERISA) in the plan have a
nexus to the collective bargaining relationship (``the nexus group'').
It also describes the categories of people who are considered to have
that nexus. The numerical tests in the proposed regulation subsection
(b)(2) look at individuals whose coverage is based on their employment,
that is, the participants. The proposed regulation focuses on
participants in order to reduce potential administrative difficulties
for plans in having to account for beneficiaries (e.g., spouses,
dependent children, etc.) who are covered solely by virtue of their
relationship to a participant. Beneficiaries are not counted to
determine whether the 80% test has been met.
[[Page 64485]]
The nexus group includes a broad group of participants--those
commonly found in traditional multiemployer welfare benefit plans, due
to their connection to the plan or the collective bargaining process--
among those covered in the 80% test. This is a change from the August
1995 NPRM, which focused the numerical test on those individuals
covered by the collective bargaining agreement.
In drafting proposed regulatory text, the Committee took into
account that there are other categories of individuals, not
specifically identified in subsection (b)(2), who traditionally may be
covered by multiemployer plans because of their relationship to the
plan or the sponsoring unions or employers, such as employees of an
industry credit union or an administrative entity set up to collect and
reconcile employer contributions and related payments. Based on the
information available to the Committee, the number of such participants
in any given situation is likely to be so small compared to the plan's
total participant population that they would fit well within the 20%
allowance for coverage of non-nexus people. Because plans are not
likely to run the risk of being deemed to be a MEWA by virtue of
covering these incidental categories, it did not appear necessary to
attempt to promulgate an exhaustive list of such individuals for
inclusion in the nexus group. However, the Department invites public
comment identifying any other categories of participants who similarly
have historically been covered under one or more multiemployer plans
because of their traditional and close connection to the bargaining
relationship, the bargaining unit or the employers that contribute to
the plan, and whose participation is material enough to warrant
specific inclusion in the nexus group.
The Committee recommended a 20% margin for coverage of non-nexus
people, even though it understood that the percentage of participants
in collectively bargained plans who are not within one of the nexus
categories is rarely likely to be that high. The Committee believed
that this percentage gives plans enough leeway so that they will not
need to worry about detailed head counts, while offering coverage to,
for instance, a limited number of union members who have not been
covered by collective bargaining agreements because the union has not
yet been recognized as their bargaining representative, or to parties
providing services to the plan for whom health coverage under the plan
is part of their compensation, such as the plan's legal counsel,
administrator, or persons providing computer maintenance or other
contract services.
Whether a plan or other arrangement meets the criteria for the
finding that it is established or maintained under or pursuant to a
collective bargaining agreement within the meaning of section 3(40) is
to be determined based on its characteristics `for a plan year.' A
plan's status `for a plan year' is to be determined as of a point or
points during the plan year that is reasonably representative with
respect to that plan.
Unlike the 1995 NPRM, the proposed regulation does not prescribe
the specific measurement dates. Among other things, the Committee
believed that formal procedures governing the calculation of the level
of non-nexus participation are not needed under this proposal. That is
because the Committee expected that few multiemployer plans would even
cover people who do not fit any of the nexus categories and that plans
should not find it difficult to identify and keep track of the small
number of non-nexus participants. Moreover, the Committee recognized
that, given the wide variety of employment patterns in the industries
covered by multiemployer plans and the potential that unforeseen events
could distort the coverage picture temporarily, no single set of fixed
determination dates was likely to capture a fair picture for the
universe of affected plans.
In the Committee's judgment, attempting to prescribe specific times
and procedures for making the 80% coverage determination could place
undue emphasis on the mechanics of the head count, and would make the
regulation more complex and costly to administer, since the rule should
have to include a wide range of variations and alternatives. At the
same time, mechanical rules broad enough to take care of the spectrum
of plans that are undeniably maintained pursuant to collective
bargaining would lend themselves to relatively easy evasion. MEWA
operators could manipulate participants' coverage dates to make it
appear that the test for collective bargaining status was met on the
official measuring date.
Public comments, plus specific suggestions, are invited on whether
the regulation should be more precise as to the `for a plan year'
determination.
Section 2510.3-40(b)(2)(i)--Participants Covered by the Collective
Bargaining Agreement
The primary component of the nexus group is individuals employed
under one or more of the collective bargaining agreements pursuant to
which contributions are made or coverage is provided under the plan.
Determining who is an employed individual relies on general common law
principles.
Section 2510.3-40(b)(2)(ii)--Retirees
The nexus group includes retired participants who either (a)
participated in the welfare benefit plan at least five of the last 10
years preceding their retirement, or (b) are receiving benefits under a
multiemployer pension plan maintained under the same agreement as the
welfare benefit plan and had at least five years of service (or the
equivalent for plans that determine pension eligibility or entitlement
in a different manner) under that employee pension benefit plan.
Section 2510.3-40(b)(2)(iii)--Statutory Extended Coverage
The nexus group includes participants who were active participants
and are on extended coverage under the plan under legally required
coverage extensions. This includes people whose coverage is based on
the continuation coverage requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985 (COBRA), the Family and Medical Leave
Act and the Uniformed Services Employment and Reemployment Rights Act.
It also includes coverage required to be provided by a court,
arbitration or administrative decision and coverage that remains in
place, pursuant to the National Labor Relations Act, or other
applicable law, after expiration of a collective bargaining agreement.
Section 2510.3-40(b)(2)(iv)--Extended Coverage Under the Terms of the
Plan
Participants with extended coverage under the terms of the plan
(even where the extended coverage opportunity is not required by
statute) are also in the nexus group. This includes common types of
coverage extensions following a period of eligibility based on active
participation, such as self-payment, hour bank, long- or short-term
disability, furlough, or temporary unemployment, as long as the
participant is not required to pay more than the applicable COBRA
premium for the coverage in question.
Section 2510.3-40(b)(2)(v)--Reciprocity Agreements
The nexus group includes participants who are covered under the
plan pursuant to a reciprocal agreement with one or more other
multiemployer welfare plans. Reciprocal agreements are most common in
construction and other industries where union-represented workers tend
to travel from
[[Page 64486]]
area to area, following the availability of jobs. They enable workers
to establish or maintain coverage under the plan in their home
jurisdiction based on work in another plan's jurisdiction, under a
collective bargaining agreement that requires contributions to that
other plan.
However, subparagraph (b)(2)(v), does not permit a plan to
circumvent the percentage test by arranging reciprocal agreements with
other plans to shield each plan's non-nexus individuals. Participants
covered under reciprocal agreements are considered part of the nexus
group for the ``receiving'' plan only if they are part of the nexus
group under the ``sending'' plan. The percentage limitations of the
rule may not be avoided by purporting to cover individuals under
``reciprocal'' agreements who do not have a nexus (as defined under
2510.3-40(b)(2)) to the ``sending'' plan.
Section 2510.3-40(b)(2)(vi)--Union, Plan and Fund Employees
Employees of the sponsoring labor organization, the welfare benefit
plan or trust itself and related employee benefit plans, are in the
nexus group as well.
Section 2510.3-40(b)(2)(vii)--``Bargaining Unit Alumni''
Also in the nexus group are so-called ``bargaining unit alumni,''
that is, participants who once were covered under the plan due to their
employment under a collective bargaining agreement, but who (1) are no
longer working in a bargaining-unit capacity; (2) work for one or more
employers that are parties to the agreement; and (3) are covered under
the plan on terms that are generally no more favorable than those that
apply to the bargaining-unit employees. This includes former union-
represented workers who are now in a management capacity.
Section 2510.3-40(b)(2)(viii)--``Special-Class Participants''
The nexus group includes so-called ``special-class participants,''
that is, individuals who are neither union-represented nor bargaining-
unit alumni, but who are employed by employers that contribute to the
plan for their union-represented employees pursuant to the collective
bargaining agreement, and who are covered under the plan on terms that
are generally no more favorable than those that apply to the
bargaining-unit personnel. Some multiemployer plans traditionally have
allowed contributing employers to cover their office staff, along with
their union-represented workforce. Special-class participants totaling
no more than 10% of the total plan participant population are counted
in the nexus group. A plan will not be deemed to be a MEWA merely
because it covers additional special-class participants above that 10%
level, so long as the additional special-class participants, together
with any other participants who are not in the nexus group, constitute
no more than 20% of the total plan participant population.
The Committee believed that special-class participants ordinarily
would constitute no more than 10% of the plan's total participant
population, and so included only a 10% allowance for them in the nexus
group. However, the Committee also recognized that the 10% allowance
might not be adequate in some situations, because, for example, the
ratio of signatory employers' supervisors and office workers to their
union-represented counterparts is subject to fluctuation, particularly
in certain industries. Part of the reason that the proposed regulation
allows plans a 20% margin for coverage of people who are neither
covered by a collective bargaining agreement nor included in one of the
other nexus categories was the potential for special class participants
in excess of the 10% nexus number.
Section 2510.3-40(b)(2)(ix)--Individuals Covered by the Railway Labor
Act
The nexus group includes participants who are, or were for a period
of at least three years, employed under one or more agreements under
the Railway Labor Act between or among one or more ``carriers''
(including ``carriers by air'') and one or more ``representatives'' of
employees for collective bargaining purposes and as defined by the
Railway Labor Act, 29 U.S.C. 151 et seq., providing for such
individuals' current or subsequent participation in the plan, or
providing for contributions to be made to the plan by such carriers.
Section 2510.3-40(b)(2)(x)--Licensed Marine Pilots
Individuals who are licensed marine pilots operating in United
States ports as a state-regulated enterprise are included as part of
the nexus group with respect to a qualified merchant marine plan, as
defined in section 415(b)(2)(F) of the Internal Revenue Code of 1986.
Section 2510.3-40(b)(3)--Nature of the Collective Bargaining Agreement
Subsection (b)(3) requires that the plan be incorporated or
referenced in at least one written agreement between at least one
employee organization and two or more employers. The written agreement
must satisfy five listed criteria. The Committee recognized that the
substance of the agreement among the parties to collective bargaining
often is embodied in more than one document, and not every aspect of
their agreement necessarily is reduced to writing. The Committee also
recognized that a multiemployer plan often is incorporated or
referenced in more than one collective bargaining agreement among
different employers and employee organizations, including but not
limited to project labor agreements, labor harmony agreements, ``me-
too'' or ``one-line'' agreements. For these reasons, the term
``agreement'' necessarily includes the constellation of documents and
understandings that make up the parties' contract, and it automatically
includes multiple agreements, where applicable.
Section 2510.3-40(b)(3)(i)
The first criterion for an agreement under subsection (b)(3) is
that the agreement is the product of a bona fide collective bargaining
relationship. Subsection (b)(4), as described infra, sets forth a
nonexhaustive list of factors relevant for determining whether such a
relationship in fact exists.
Section 2510.3-40(b)(3)(ii)
The second criterion under subsection (b)(3) is that the agreement
in question identifies employers and employee organization(s) that are
parties to and bound by the agreement. The Committee took into
consideration that, in many industries, employers bargain collectively
through multiemployer associations, and the resulting agreement may
identify the association, as agent for the many employers for which the
association bargained. Also, many employers routinely adopt the master
agreement by reference in their collective bargaining agreements to
what are often referred to as ``short-form agreements'' or ``binders.''
Additionally, a written collective bargaining agreement may bind
employers who are neither signatory to that agreement nor identified in
any document, but who are nonetheless legally bound. Therefore, the
criterion that the agreement identify the parties may be satisfied even
if not every one of the employers who are bound by the agreement to
contribute to the plan is named specifically.
Section 2510.3-40(b)(3)(iii)
The third criterion is that the agreement identify the personnel,
job classifications and/or work jurisdiction covered by the agreement.
In the Committee's experience, collective bargaining agreements
generally delineate the personnel covered by the
[[Page 64487]]
agreement by reference to the trade, craft or class, industry or
geographic area in which the employer operates or the job
classifications utilized by the employer.
Section 2510.3-40(b)(3)(iv)
The fourth criterion is that the agreement provides for terms and
conditions of employment in addition to coverage under, or
contributions to, the plan.
Section 2510.3-40(b)(3)(v)
The fifth criterion is that the agreement is not unilaterally
terminable or automatically terminated solely for nonpayment of
benefits under, or contributions to, the plan. This criterion is met
even if the plan trustees have authority to terminate a delinquent
employer's ability to contribute to or otherwise participate in the
plan, as long as the underlying collective bargaining agreement remains
in full force and effect with respect to that employer. Similarly, the
fact that the employee organization may have the right to suspend
performance of its obligations under the agreement in the event of
specified occurrences, which may include the employer's failure to pay
required contributions, does not mean that the agreement is
unilaterally terminable for purposes of this criterion.
Section 2510.3-40(b)(4)--Factors Indicative of a Bona Fide Collective
Bargaining Relationship
Subsection (b)(4) sets forth various factors to be considered in
determining whether there is a bona fide collective bargaining
relationship. In any given case, the decision is to be based on all of
the facts and circumstances. The Committee first had attempted to
develop a list of criteria that could serve as reliable proxies for
what all Committee members recognized were legitimate multiemployer
plans not subject to state insurance regulation. To avoid being
classified as a MEWA, a plan would have to satisfy certain objective
criteria, and it could not have one of the disqualifying
characteristics. That approach eventually gave rise to the flexible
facts and circumstances test proposed here. The Committee realized that
imposing a fixed, bright line profile to define ``collective
bargaining'' for the purposes of this regulation would create more
unintended issues for multiemployer plans without addressing the
problems at which section 3(40) of ERISA was aimed. Those intent on
mimicking real collectively bargained plans as a way to avoid state
insurance regulation would have a blueprint for doing so, while parties
actually involved in collective bargaining, which is sometimes not tidy
and compliance-driven in real life, might inadvertently negotiate a
health or welfare coverage arrangement that simply failed to fit
familiar models or patterns.
Under the proposed rule, the presence or absence of the factors
listed in subsection (b)(4) is to be taken into account in judging
whether an actual collective bargaining relationship exists for
purposes of section (3)(40) of ERISA, but no one factor or set of
factors is intended to be determinative in every case. Indeed, some of
these factors can, by their nature, apply only in specialized
circumstances, and few plans are likely to satisfy all of them. That is
why the proposal includes a range of circumstances commonly associated
with collectively bargained plans. In addition, information on factors
not included in this list may be relevant in individual cases. The
Department invites public comments on the factors listed here, and
suggestions for other factors to be listed.
While the proposed regulation does not define collective bargaining
in terms of specific uniform requirements, it does recognize that where
a significant number of the first eight factors exist, the resultant
plans are more likely than not to be established or maintained under or
pursuant to a collective bargaining agreement within the meaning of
section 3(40) of ERISA. Accordingly, in a Section 3(40) Finding
Proceeding before a Department of Labor ALJ to determine whether a plan
or other arrangement is maintained under or pursuant to a collective
bargaining agreement for this purpose, it is presumed that if at least
four of the first eight listed factors are present, a bona fide
collective bargaining relationship exists, that is, that the
requirements of subsection (b)(3)(i) are met. That shifts the burden to
the party claiming that the arrangement is not the product of a bona
fide collective bargaining relationship to persuade the ALJ to the
contrary (or, to the extent that it meets all of the other criteria in
addition to subsection (b)(3)(i), to show in some other way, such as by
the presence of one of the disqualifying criteria, that the arrangement
does not qualify for a finding under the proposed regulation).
Section 2510.3-40(b)(4)(i)
The first factor to be considered under subsection (b)(4) is that
the agreement provides for contributions to a labor-management trust
fund designed and operated in accordance with the Taft-Hartley Act or
to a plan lawfully negotiated under the Railway Labor Act. A plan can
meet the requirement that the trust be ``structured in accordance''
with the Taft-Hartley Act even if the plan has a minor violation of
that Act's technical requirements. However, there must be more than
just a paper recital of the formalities of the Taft-Hartley Act, the
trust must function as a labor-management trust within the spirit of
the Taft-Hartley Act.
Section 2510.3-40(b)(4)(ii)
The second factor provides that the collective bargaining agreement
under which contributions are made to the employee welfare benefit plan
also requires that substantially all of the participating employers
contribute to a multiemployer pension plan designed and operated in
accordance with the Taft-Hartley Act and the plan qualification
requirements in section 401 of the Internal Revenue Code. In addition,
substantially all of the active participants covered by the employee
welfare benefit plan must be eligible to become participants in that
pension plan. Because the length of service requirements may be
different for the pension plan and the welfare plan, this factor does
not require that substantially all of the welfare plan participants in
fact become pension plan participants, as long as they are eligible to
do so if they meet the pension plan's participation requirements.
Section 2510.3-40(b)(4)(iii)
The third factor applies if the predominant employee organization
that is a party to the collective bargaining agreement relating to the
employee welfare benefit plan has maintained a series of agreements
incorporating or referencing the plan since before January 1, 1983, the
effective date of ERISA section 3(40). The term ``predominant employee
organization,'' which is specifically defined in the regulation, is
used because it is not unusual for a multiemployer plan to be
maintained under agreements with more than one labor union.
``Predominant employee organization'' refers to the union that
represents the plurality of the plan's participants employed under the
agreement. This factor is included as an indicator of the bona fidesof
collective bargaining in recognition of the fact that, if the union has
negotiated for health and welfare coverage under the plan since before
the enactment of ERISA section 3(40), the plan and the collective
bargaining agreement underlying it were not created for the purposes of
avoiding the MEWA amendment to ERISA.
[[Page 64488]]
The Committee received written comments during the course of its
negotiations suggesting that a trust providing health coverage that had
been in existence for a certain period of time be ``grandfathered,''
regardless of the percentage of participants covered by collective
bargaining agreements. The Committee determined that a grandfather that
serves as an indicator of thebona fides of the underlying collective
bargaining process was warranted. See subsections (b)(4)(iii) and
(b)(4)(iv). The purpose of the regulatory finding, however, is not to
determine what plans or arrangements should or could be the subject of
State enforcement action, but rather to define what employee welfare
benefit plans are established or maintained under or pursuant to
collective bargaining within the meaning of section 3(40) of ERISA. The
Committee agreed that, for that purpose, the 80% nexus standard is
appropriate regardless of the length of time the plan or trust has been
in operation. If a plan or arrangement is not established or maintained
under or pursuant to one or more collective bargaining agreements,
whether or not ERISA preemption applies is beyond the scope of this
regulation.
Section 2510.3-40(b)(4)(iv)
Under the fourth factor, the predominant employee organization that
is a party to the agreement relating to the employee welfare benefit
plan must have been a national or international union, or a federation
of national and international unions, or affiliated with such a union
or federation, since before January 1, 1983.
Section 2510.3-40(b)(4)(v)
The fifth factor is that there has been a determination, following
a government-supervised election or a contested proceeding, that the
predominant employee organization that is a party to the agreement
relating to the employee welfare benefit plan is the lawfully
recognized or designated collective bargaining representative with
respect to one or more bargaining units of personnel covered by such
agreement.
Section 2510.3-40(b)(4)(vi)
The sixth factor applies to plans where the employees' coverage
(but not necessarily coverage for employees' dependents) is, in large
part, employer-funded. It applies where employers pay at least 75% of
the premiums or contributions required for the coverage of active
participants under the plan, or 75% of the premiums or contributions
for retirees in the case of a retiree-only plan. For this purpose,
coverage for dental or vision care, or coverage for excepted benefits
under the Health Insurance Portability and Accountability Act is
disregarded, unless the employer pays at least 75% of the premiums or
contributions for that coverage. This calculation is illustrated in the
proposed regulation at subsection (e), Example 4.
Section 2510.3-40(b)(4)(vii)
The seventh factor applies where the predominant employee
organization provides, sponsors or jointly sponsors a hiring hall and/
or a state certified apprenticeship program, the services of which are
available to substantially all active participants in the plan. The
actual nature of the services offered by the employee organization will
control, rather than the existence of self-serving paper formalities
that purport to document the existence of such services.
Section 2510.3-40(b)(4)(viii)
The eighth and last factor relevant to the presumption of the bona
fides of the collective bargaining relationship underlying the plan
applies to collective bargaining agreements in the building and
construction industry, where some states have prevailing wage statutes
for public works projects. This factor applies where a state agency has
made an investigation and a determination about whether the collective
bargaining agreement is bona fide in the course of making a prevailing
wage determination, such as under Article 8 of NYS Labor Law, section
220.
Section 2510.3-40(b)(4)(ix)
Subsection (b)(4)(ix) sets forth additional subjective and
objective indicia that may be considered in determining the existence
of a bona fide collective bargaining relationship. This provision gives
examples of some of the kinds of indicia that the Committee considered
relevant and probative of the existence of a bona fide collective
bargaining relationship. The examples given, which were not meant to be
exhaustive, reflect the Committee's understanding of the realities of
collective bargaining. For example, where a collectively bargained plan
covers self-employed participants, there is usually a reason grounded
in the employment patterns and bargaining structures in that industry,
such as owner-operators who remain in the plan whether or not they are
currently working under an agreement.
Section 2510.3-40(c)--Exclusions
Section (c), Exclusions, sets forth specific circumstances where,
regardless of whether an employee welfare benefit plan meets the
general criteria provisions in section (b), an employee welfare benefit
plan shall not be deemed to be established or maintained under or
pursuant to one or more agreements which the Secretary finds to be
collective bargaining agreements for any plan year where the
circumstances are present.
Section 2510.3-40(c)(1)
Subsection (c)(1)(i) addresses the use of insurance agents and
brokers (referred to in the regulation as ``insurance producers'') to
market self-funded or partially self-funded plans to employers. Many of
the problems in this area involved commercial schemes marketed by (1)
insurance producers; or (2) by individuals who are disqualified or
ineligible for a license to serve as insurance producers; or (3) by
other individuals who are paid on a commission-type basis.
Subsection (c)(1)(i) provides that where a plan is self-funded or
partially self-funded, and it is marketed by insurance producers or by
individuals who are disqualified from, ineligible for, or have failed
to obtain a license to serve as an insurance producer, but who engage
in activities for which such a license is required, it will be excluded
from the regulatory finding in subsection (b), regardless of the method
of compensation for marketing. Subsection (c)(1)(i) also takes a plan
out of the regulatory finding if individuals other than those described
above are paid on a commission basis to market the plan. This was
designed to prevent avoidance of the above limitation by use of people
other than insurance producers. The qualification involving payment on
a commission basis was intended to distinguish this kind of commercial
enterprise from union organizing that features health or other welfare
benefits.
Subsection (c)(1)(ii) addresses the concept of ``marketing'' for
the purposes of subsection (c)(1)(i). The Committee recognized that
insurance producers have a role in the administration of multiemployer
plans, and they can be compensated appropriately for those services.
Those services--including offering or selling those services to the
plan--do not trigger the exclusion, and the regulation makes this
clear. The regulation is not intended to preclude insurance producers
from selling insurance coverage to the trustees of a multiemployer
plan, i.e., marketing
[[Page 64489]]
insurance products to a plan that is or seeks to become partly or fully
insured. Nor is union organizing among insurance producers the kind of
marketing that this regulation addresses. On the other hand, marketing
to employers does include selling health coverage under the guise of
enrolling their employees in union membership. This subsection does not
purport to provide an exhaustive list of what is or is not
``marketing.'' The Department seeks suggestions on whether there should
be further clarification of the definition of ``marketing.''
The Committee also recognized that enterprises that are not really
operating pursuant to a bona fide collective bargaining relationship
may attempt to market health coverage commercially under the guise of
union organizing, using media such as the Internet, and without using
insurance producers or paying other individuals on a commission-type
basis. While such a situation would not come within the subsection
(c)(1) exclusion for marketing, if the facts indicated that the primary
objective was not to achieve broader representation of workers in
regard to their employment, but rather to provide health coverage
without having to comply with state regulation, that conduct could be
evidence of a scheme, sham or artifice intended to evade state
regulation that would cause the undertaking to be treated as a MEWA
under subsection (c)(2).
Section 2510.3-40(c)(2)
Subsection (c)(2) is a general provision excluding arrangements
that on the surface meet the affirmative criteria of the regulation,
but that in fact are designed to evade compliance with state law and
insurance regulation. This exclusion recognizes that sophisticated
entities might mimic the characteristics of collective bargaining as
set forth in the regulation, but in fact be providing commercial health
coverage without complying with state law.
Such a scheme might be present, for example, if parties who
collaborate in a project to sell self-funded health coverage to
otherwise unrelated members of the public set up an organization that
they label a labor union, advertise broadly in commercial venues and
have people who pay premiums sign forms that are labeled ``union
membership cards.'' The attempt to camouflage their commercial
enterprise as a collectively bargained arrangement would be a scheme to
evade state law that would cause it to be a MEWA, even if on its face
it appears to meet the criteria that would qualify it for a finding
under subsection (b) of the proposed regulation.
Section 2510.3-40(c)(3)
Subsection (c)(3) provides an exclusion in the event of fraud,
forgery, or willful misrepresentation regarding the plan's conformance
with the affirmative criteria of the regulation. The Committee was
aware of situations where documentation of collective bargaining had
been manufactured for the purposes of misleading state regulators as to
the availability of federal preemption.
Section 2510.3-40(d)--Definitions
The following terms are defined in the regulation: ``active
participant,'' ``agreement,'' ``individual employed,'' ``insurance
producer,'' and ``predominant employee organization.''
Economic Analysis Under Executive Order 12866
Under Executive Order 12866, the Department must determine whether
the regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f), the order defines a
``significant regulatory action'' as an action that is likely to result
in a rule (1) having an annual effect on the economy of $100 million or
more, or adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.
Pursuant to the terms of the Executive Order, it has been
determined that this action is ``significant'' and therefore subject to
review by the Office of Management and Budget (OMB). OMB has determined
that this proposed rulemaking is significant within the meaning of
section 3(f)(4) of the Executive Order. Consistent with the Executive
Order, the Department of Labor (the Department) has undertaken an
assessment of the costs and benefits of this regulatory action.
The analysis is detailed below.
Summary
Pursuant to the requirements of Executive Order 12866 the
Department has analyzed the economic impact of this proposed regulation
and has concluded that the proposed regulation's benefits exceed its
costs although neither is quantified. The proposed regulation yields
positive benefits by reducing uncertainty over which health, life,
disability or other welfare benefit arrangements are multiple employer
welfare arrangements under section 3(40) and therefore not subject to
state regulation. It also yields positive benefits by clarifying when
state regulation applies and when it is preempted.
The regulation sets forth a substantive standard for distinguishing
whether a welfare plan sponsored by more than one employer is
established or maintained under or pursuant to one or more collective
bargaining agreements. Plans so established or maintained are excluded
from the definition of multiple employer welfare arrangements (MEWAs)
and consequently are not subject to state regulation. The regulation
will serve to distinguish multiemployer collectively bargained plans,
which are not subject to state regulation, from MEWAs, which are so
subject.
The regulation, which is a product of negotiated rulemaking, is
designed so that the benefits outweigh the costs. The adoption of this
regulation will limit uncertainty in determining whether certain plans
are established or maintained under or pursuant to one or more
collective bargaining agreements. Although the criteria established in
this proposal should generally reduce disputes over applicability of
state laws, a very small number of entities may still become involved
in disputes over assertions of state law jurisdiction and, in certain
circumstances, may seek administrative determinations by the Secretary.
The Department has concluded that the cost of such determinations will
be small relative to the cost of settling such disputes through
litigation or other currently available means.
The regulation's elements are grounded in documentation that plans
or their agents generally maintain as part of usual business practices.
The regulation also has some elements of flexibility, allowing plans to
demonstrate the existence of a bona fide collective bargaining
agreement, one of the regulatory factors, by satisfying any four of
eight specified factors. Finally, the regulation is both sufficiently
broad to embrace all plans established or
[[Page 64490]]
maintained under or pursuant to one or more collective bargaining
agreements and exclusive enough to ensure the applicability of state
regulation wherever such is not the case. Only a very small number of
entities are likely to be treated differently under the regulation than
they are now. Plans will be determined to be MEWAs only when they are
not established or maintained under or pursuant to a collective
bargaining agreement, in which case the additional cost attributable to
state regulation will be outweighed by the benefit of additional
protections for participants and beneficiaries.
Background
For the protection of welfare benefit plan participants and
beneficiaries, multiple employer welfare arrangements (MEWAs) providing
health insurance are subject to both state and federal regulation. An
exception to the rule applies to MEWAs established or maintained under
or pursuant to one or more agreements which the Secretary finds to be
collective bargaining agreements. Because collectively bargained
employee welfare benefit plans are not subject to state insurance
regulation, unscrupulous operators have created arrangements which
purport to offer health, life, disability or other welfare benefit
insurance and are promoted as plans established or maintained pursuant
to one or more collective bargaining agreements, but in fact are not.
These operators have sold insurance to employers, usually for reduced
premiums, and then have been unable to pay the insurance claims filed
by the employees. At the same time, they have retained large
administrative fees for themselves.
The General Accounting Office, in a March 1992 Report titled
``Employee Benefits: States Need Labor's Help Regulating Multiple
Employer Welfare Arrangements,'' (GAO/HRD-92-40) estimated that sham
MEWAs owed $124 million in claims, affecting 398,000 participants and
beneficiaries. State insurance offices, however, were only able to
recover $10 million, often as a result of dissolution of the MEWAs
following their insolvency.
At various times, both Congress and the Department have published
guidelines in an attempt to help states regulate MEWAs, but, without a
definition for a collective bargaining agreement, sham MEWAs have
continued to operate and to claim the collective bargaining agreement
exception when confronted with state regulation. In order to establish
jurisdiction, states initiated administrative or legal proceedings
contesting the defendant's status as a collectively bargained plan or
were themselves the subject of declaratory judgment or removal actions
by entities claiming the exception. Likewise, for both MEWAs and some
plans established or maintained under collective bargaining agreements,
there was uncertainty about their legal status and, consequently, about
the applicability of insurance regulations and the recordkeeping and
reporting required.
Reducing Uncertainty
Confusion about whether a plan was established or maintained under
or pursuant to an agreement which the Secretary finds to be a
collective bargaining agreement has made it difficult for the states to
enforce appropriate laws. With this proposed regulation pertaining to
the collective bargaining agreement exception applicable to MEWAs
(ERISA section 3(40)(A)(i)), the Department is promulgating a set of
guidelines which will aid employers, third parties, and participants
and beneficiaries of plans, as well as state agencies, in determining
the legal status of a welfare benefit plan. Specifically, the proposed
regulation sets out the various factors indicative of when a plan is
established or maintained under or pursuant to a bona fide collective
bargaining agreement.
The regulation proposed today will benefit states and plans by
providing a tool with which to independently determine the legal status
of a welfare benefit plan or arrangement without recourse to the
Department or to the courts. The result will be a positive limitation
of uncertainty for plans and arrangements and the states, and a
reduction in time and expense attributable to court actions or requests
to the Department for guidance. Plans and arrangements will benefit
from the assurance of knowing their correct legal status, and states,
through warranted intervention, will be better able to protect
employers, participants, and beneficiaries from unscrupulous MEWA
operators.
For the majority of plans established or maintained under or
pursuant to collective bargaining agreements, this regulation will
serve to codify the manner in which the plans are currently operating.
Plan status under the regulation generally will be clear based on
signed agreements, filings with the IRS, participation in related
industries, or other design features which categorize a plan as a
collectively bargained plan or a MEWA. Most plans, therefore, will not
perceive any need to reassess their status systematically. It is
possible, however, that some plans will undertake such an assessment
and comparison test. The Department has estimated below the number of
plans likely to comparison test.
Under ERISA, multiemployer collectively bargained plans are
required to file an annual financial report, the Form 5500. Data from
the 1995 filings showed 2,180 filings (6.0 million participants) from
ERISA multiemployer welfare benefit plans established or maintained
under or pursuant to collective bargaining agreements. The Department
also examined the number of MEWAs. Preliminary findings of an analysis
conducted by the RAND Corporation of data from the 1997 Robert Wood
Johnson Foundation Employer Health Insurance Survey, indicate that
there are approximately 2,000 MEWAs (both ERISA-plan and non-ERISA-plan
MEWAs), covering 4.1 million employees. The total number of MEWAs and
collectively bargained plans, which represents the total universe of
arrangements that might question their legal status and comparison test
under this proposed regulation, is 4,180. (10.1 million participants).
The Department was unable to identify any direct measure of the
number of plans or arrangements whose status is uncertain or whose
status would remain uncertain under the proposed regulation. Therefore,
in order to assess the economic impact of reduced uncertainty under the
proposed regulation, the Department examined proxies for the number of
arrangements that might be subject to such uncertainty. First, the
Department estimated the total number of MEWAs and collectively
bargained plans, taking this to reflect the universe of arrangements
which would encompass the small subset of arrangements subject to
uncertainty. The Department then tallied the number of inquiries to the
Department concerning MEWAs and the number of MEWA-related lawsuits to
which the Department has been party, taking this to represent a
reasonable indicator of arrangements that have been subject to
uncertainty in the past.
Department data indicate that for the ten-year period from 1990 to
1999, the Department received 88 MEWA-related inquiries. These include
inquiries received from state and federal agencies and the private
sector. On an annualized basis, this represents approximately 9 MEWA-
related requests for information per year. The Department also
considered the number of MEWA-related lawsuits which were filed during
the years 1990-1999. Department data indicate that it has been a party
to 375
[[Page 64491]]
civil and 75 criminal cases from 1990-1999. The total number of
lawsuits would be 450 lawsuits, or 45 lawsuits annually. For purposes
of this analysis, it has been assumed that each case involves a
different arrangement. Accordingly, the estimated number of
arrangements that historically may have demonstrated uncertainty over
their legal status would be 9 plus 45, or 54 plans per year. The
estimated 54 plans, as a percentage of the total number of 4,180 MEWAs
and collectively bargained plans, amounts to approximately 1.3 percent.
In one sense, this historical number of plans and arrangements may
represent only a subset of all those that faced uncertainty over their
status. Some plans and arrangements may have confronted uncertainty but
not become the subject of an inquiry to the Department or a lawsuit to
which the Department was party. On the other hand, this number
overstates the number of plans and arrangements that faced uncertainty
because it is known that only a portion of miscellaneous inquiries and
civil and criminal actions involved issues related to collective
bargaining agreements or other MEWA-related matters. The number may
also overstate the number of plans or arrangements likely to face
uncertainty because the issue of whether federal preemption applies is
not presented in suits brought by the federal government; ERISA
generally applies both to plans and to MEWAs. The Department therefore
views 54 plans per year as a conservatively high estimate of the number
of plans or arrangements that might perceive a need to systematically
assess their status under the proposed regulation.
The cost to the 54 plans of conducting such an assessment is
expected to be small. It will largely be attributed to reviewing
records kept by third parties or by the plan or arrangement in the
ordinary course of business. The Department assumes that this review
requires 16 hours of a lawyer's or comparable professional's time plus
5 hours clerical staff time. Department data suggest that average
compensation costs for lawyers and clerical workers amount to $72 per
hour and $21 per hour respectively. Third party service providers to
plans or arrangements, such as private law firms, typically bill at
higher rates than this. However, it is expected that the cost of an in-
house attorney will equate to the cost of a firm attorney due to firms'
efficiencies of time and resources attributable to specialists' greater
expertise and experience in a given field. The total cost then would be
$1,173 per plan or arrangement, or about $63,342 on aggregate per year
for 54 plans. This cost would be incurred only once for a given plan or
arrangement unless its circumstances changed substantially relative to
the standard. It is expected that this cost will be far outweighed by
savings to plans and arrangements from avoiding the need to engage in
litigation or seek guidance from the Department in order to determine
their status. These net savings represent a net benefit from this
proposed regulation.
Following such assessments, some fraction of these 54 plans or
arrangements might nonetheless dispute a state's assertions of
jurisdiction and consequently seek an administrative determination from
the Secretary, incurring attendant costs. The Department has elected to
attribute the net benefit from these savings not to this proposed
regulation, but to the accompanying proposed regulation that
established an administrative process for determining such plans' or
arrangements' status.
Reclassifying Incorrectly Classified Plans and Arrangements
Some number of plans, but unlikely any more than the same fraction
of the 54 estimated to face uncertainty over status, will be
reclassified as a result of comparison testing against the proposed
regulation's standard. Plans formerly classified (either by error or
intentionally self-classified in an attempt to avoid state law
requirements) as collectively bargained plans may be newly classified
as MEWAs under this proposed regulation. These MEWAs will incur costs
to comply with newly applied protective state regulations. Applicable
regulations vary from state to state, making it difficult to estimate
the cost of compliance, but it is likely that costs might include those
attributable to audits, funding and reserving, reporting, premium taxes
and assessments, provision of state-mandated benefits, underwriting and
rating rules, market conduct standards, and managed care patient
protection rules, among other costs. These costs may be higher for
those MEWAs that conduct business in more than one state.
The Department considered an estimate of the cost to plans newly
classified as MEWAs as follows. Relevant literature suggests that in
the upper range these costs can amount to 10 percent of premium. (The
cost may be substantially more than this if the arrangement would
otherwise have benefitted from insuring a population whose health costs
are far lower than average. However, these added costs would be
transfers and not true economic costs, because they would serve as
cross-subsidies which reduce costs for populations that are costlier
than average.) As noted above, the universe of 4,180 plans and
arrangements that includes those potentially subject to uncertainty
covered 10.1 million participants, or about 2,400 participants per
arrangement on average. Industry surveys put the cost of health
coverage at about $4,500 per employee and retiree per year. Applying
these figures to 54 plans or arrangements that might face uncertainty
over status--an upper bound on the number likely to be reclassified--
produces an upper-bound estimate cost of about $58 million.
The Department has concluded that actual costs will be far lower
than this, and will be outweighed by the benefit of the associated
protections. As noted above, it is likely that the true number of
arrangements that are reclassified will be a fraction of the estimated
54 that might face uncertainty over status. Among those that are
reclassified, some would have voluntarily elected to comply with state
regulatory requirements and therefore would not incur any cost from the
application of state law. For those that would not have provided such
benefits, the cost of providing them would largely be offset by the
benefits themselves. Most important, the added cost from state
regulation would be offset by the benefits from the protections that
state regulation provide. GAO in 1992 identified $124 million in unpaid
claims owed by sham MEWAs. Department enforcement actions separately
identified MEWA monetary violations of $84 million, and more than 100
investigations remain open. With state licensing and solvency
requirements in place, at least some incidences of the $124 million in
unpaid claims cited in the GAO study or the $84 million in violations
would most likely not have occurred.
It is also possible that some plans or arrangements heretofore
classified as MEWAs will be reclassified as collectively bargained
plans. However, it seems unlikely that many will, because those that
can qualify as collectively bargained plans have an economic incentive
to do so. Any that are so classified may choose to benefit from
savings, there being no obligation to comply with state regulatory
requirements. There will be no meaningful loss of benefits from the
removal of state protections in such cases because the combination of a
legitimate collective bargaining
[[Page 64492]]
agreement and the application of ERISA provides adequate protections.
Paperwork Reduction Act
This Notice of Proposed Rulemaking is not subject to the
requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et
seq.) because it does not contain a ``collection of information'' as
defined in 44 U.S.C. 3502(3).
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are
likely to have a significant economic impact on a substantial number of
small entities. Unless an agency certifies that a proposed rule will
not have a significant economic impact on a substantial number of small
entities, section 603 of the RFA requires that the agency present an
initial regulatory flexibility analysis at the time of the publication
of the notice of proposed rulemaking describing the impact of the rule
on small entities and seeking public comment on such impact. Small
entities include small businesses, organizations and governmental
jurisdictions.
For purposes of analysis under the RFA, PWBA proposes to continue
to consider a small entity to be an employee benefit plan with fewer
than 100 participants. The basis of this definition is found in section
104(a)(2) of the Employee Retirement Income Security Act of 1974
(ERISA), which permits the Secretary of Labor to prescribe simplified
annual reports for pension plans which cover fewer than 100
participants. Under section 104(a)(3), the Secretary may also provide
for exemptions or simplified annual reporting and disclosure for
welfare benefit plans. Pursuant to the authority of section 104(a)(3),
the Department has previously issued at 29 CFR 2520.104-20, 2520.104-
21, 2520.104-41, 2520.104-46 and 2520.104b-10 certain simplified
reporting provisions and limited exemptions from reporting and
disclosure requirements for small plans, including unfunded or insured
welfare plans covering fewer than 100 participants and which satisfy
certain other requirements.
Further, while some large employers may have small plans, in
general most small plans are maintained by small employers. Thus, PWBA
believes that assessing the impact of this proposed rule on small plans
is an appropriate substitute for evaluating the effect on small
entities. The definition of small entity considered appropriate for
this purpose differs, however, from a definition of small business
which is based on size standards promulgated by the Small Business
Administration (SBA) (13 CFR 121.201) pursuant to the Small Business
Act (15 U.S.C. 631 et seq.). PWBA therefore requests comments on the
appropriateness of the size standard used in evaluating the impact of
this proposed rule on small entities.
On this basis, however, PWBA has preliminarily determined that this
rule will not have a significant economic impact on a substantial
number of small entities. In support of this determination, and in an
effort to provide a sound basis for this conclusion, PWBA has prepared
the following regulatory flexibility analysis.
(1) Reasons for Action. PWBA is proposing this regulation because
it believes that regulatory guidance in determining criteria for what
is a ``plan or arrangement which is established or maintained under or
pursuant to one or more agreements which the Secretary finds to be
collective bargaining agreements,'' ERISA 3(40)(A)(1), 29 U.S.C.
Sec. 1002(40)(a)(1) is necessary to ensure: (a) That state insurance
regulators have ascertainable guidelines to help regulate MEWAs
operating in their jurisdictions, and; (b) that sponsors of employee
welfare benefit plans will be able to determine independently whether
their plans are excepted plans under section 3(40) of ERISA. A more
detailed discussion of the agency's reasoning for issuing the proposed
regulation is found in the Background section, above.
(2) Objective. The objective of the proposed regulation is to
provide criteria for the application of an exception to the definition
of the term ``multiple employer welfare arrangement'' (MEWA) which is
found in ERISA section 3(40). An extensive list of authority may be
found in the Statutory Authority section, below.
(3) Estimate of Small Entities Affected. For purposes of this
discussion, the Department has deemed a small entity to be an employee
benefit plan with fewer than 100 participants. The basis of this
definition is found in section 104(a)(2) of ERISA, which permits the
Secretary of Labor to prescribe simplified annual reports for pension
plans which cover fewer than 100 participants. For this purpose, it is
assumed that arrangements with fewer than 100 participants and which
are: (1) Multiemployer collectively bargained group health plans; (2)
non-collectively bargained multiple employer group health plans, or;
(3) other multiple employer arrangements which provide medical
benefits, are small plans. PWBA believes that assessing the impact of
this proposed rule on small plans is an appropriate substitute for
evaluating the effect on small entities as that term is defined in the
RFA. No small governmental jurisdictions will be affected.
IRS filings and Department data indicate that there are a possible
4,180 plans that could be classified as a collectively bargained plan
or a MEWA and that could be affected by the new criteria for defining
what is a collective bargaining agreement. It is expected, however,
that a very small number of these arrangements will have fewer than 100
participants. By their nature, the affected arrangements must involve
at least two employers, which decreases the likelihood of coverage of
fewer than 100 participants. Also, underlying goals of the formation of
these arrangements, such as gaining purchasing and negotiating power
through economies of scale, improving administrative efficiencies, and
gaining access to additional benefit design features, are not readily
accomplished if the group of covered lives remains small. While there
are no statistics to determine the number of small plans among the
4,180, based on the health coverage reported in the Employee Benefits
Supplement to the 1993 Current Population Survey and a 1993 Small
Business Administration survey of retirement and other benefit
coverages in small firms, research data indicates that there are more
than 2.5 million private group health plans with fewer than 100
participants. Thus, even if every one of the 4,180 plans included fewer
than 100 participants, which is highly unlikely, the number of plans
affected would represent approximately one-tenth of one percent of all
small group health plans. Accordingly, the Department has determined
that this regulation will not have a significant economic impact on a
substantial number of small entities.
Although relatively few small plans and other arrangements are
expected to be affected by this proposal, it is known that the
employers typically involved in these plans or arrangements are often
small (that is, they have fewer than 500 employees, which is generally
consistent with the definition of small entity found in regulations
issued by the Small Business Administration (13 CFR 121.201)). The
Department knows of no data that would support a direct measure of the
number of small employers potentially impacted by the proposed
regulation. However, because
[[Page 64493]]
these plans and arrangements involve at least two employers, and
assuming conservatively that each is small, it can be estimated that at
least 8,360 small employers may be affected. The Department seeks
comments and supporting data with respect to the number of small
employers potentially impacted by the establishment of a standard for
determining whether a welfare plan is established or maintained under
or pursuant to one or more collective bargaining agreements.
In addition, any one of the employers participating in a MEWA or
plan established or maintained under or pursuant to a collective
bargaining agreement may find that it has unknowingly participated in a
sham MEWA and will need to join a new plan. By restricting fraudulent
and financially unsound MEWAs, therefore, the proposed regulation may
limit the sources of health care, life, disability or other welfare
benefit coverage offered to some small businesses, requiring them to
seek alternative coverage for their employees. The greater benefit for
employers, however, is that there is an increased certainty that the
remaining MEWAs will meet state regulatory standards and will be
capable of providing promised health, life, disability or other welfare
benefits to employees. Consequently, employers will receive a net
benefit from the reduced incidence of fraud and insolvency among the
pool of MEWAs in the marketplace.
(4) Reporting and Recordkeeping. No identical reporting or
recordkeeping is required under the proposed rule. In most cases, the
records used to determine if a welfare benefit plan is established or
maintained under or pursuant to a collective bargaining agreement will
be routinely prepared and held by a collectively bargained
multiemployer plan in the ordinary course of business. For any plans
which are newly determined to be MEWAs, there will be an economic
impact related to the start-up costs of compliance with state
regulations. Start-up costs may include expensing registration,
licensing, financial reporting, auditing, and any other requirement of
state insurance law. Reporting and filing this information with the
state would require the professional skills of an attorney, accountant,
or other health benefit plan professional; however, post start-up, the
majority of the recordkeeping and reporting could be handled by
clerical staff.
(5) Duplication. No federal rules have been identified that
duplicate, overlap, or conflict with the proposed rule.
(6) Alternatives. The proposed regulation represents the consensus
report of a committee established to provide an alternative to a
Department Notice of Proposed Rulemaking on Plans Established or
Maintained pursuant to Collective Bargaining Agreements, published in
the Federal Register in 1995. At that time, recognizing that guidance
was needed to clarify the collective bargaining exception to the MEWA
regulation, the Department proposed certain criteria related to
describing the collective bargaining agreement. Commenters on the
proposal expressed concerns related to plan compliance and the issue of
state regulation.
Based on the comments received, the Department turned to negotiated
rulemaking as an appropriate alternative to implementing a revised
Notice of Proposed Rulemaking. In September 1998, the Secretary
established the ERISA Section 3(40) Negotiated Rulemaking Advisory
Committee under the Negotiated Rulemaking Act. (5 U.S.C. 561 et seq.)
The Committee membership included representatives from labor unions,
multiemployer plans, state governments, employer/management
associations, Railway Labor Act plans, third-party administrators,
independent agents and brokers of health care products, insurance
carriers and the federal government. This regulation represents the
Committee's consensus, in the form of a proposed rule, for guiding
state governments and plans in determining whether an entity has been
established or maintained under or pursuant to one or more collective
bargaining agreements and is therefore not subject to state regulation.
Based on the fact that this Notice of Proposed Rulemaking is the result
of a Committee decision by consensus, and the fact that the Committee
represents a cross section of the state, federal, association, and
private sector health care universe, the Department believes that as an
alternative to the 1995 NPRM this regulation will accomplish the stated
objectives of the Secretary and will have a beneficial impact on small
employer participation in MEWAs. The Department has concluded that the
proposed regulation is less costly in comparison with alternative
methods of determining compliance with section 3(40), such as case-by-
case analysis by PWBA of each employee welfare plan or litigation. In
addition, not defining specific guidelines for compliance with section
3(40) and permitting sham MEWAs to continue to function would raise
costs to small businesses in terms of loss of coverage and unpaid
claims. No other significant alternatives which would minimize economic
impact on small entities have been identified.
It would be inappropriate to create an exemption under the proposed
regulation for small MEWAs because small MEWAs are not less likely to
be underfunded or otherwise have inadequate reserves to meet the
benefit claims submitted for payment than are large MEWAs.
Small Business Regulatory Enforcement Fairness Act
The rule being issued here is subject to the provisions of the
Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C.
801 et seq.) and, if finalized, will be transmitted to Congress and the
Comptroller General for review. The rule is not a ``major rule'' as
that term is defined in 5 U.S.C. 804, because it is not likely to
result in (1) an annual effect on the economy of $100 million or more;
(2) a major increase in costs or prices for consumers, individual
industries, or federal, state, or local government agencies, or
geographic regions; or (3) significant adverse effects on competition,
employment, investment, productivity, innovation, or on the ability of
United States-based enterprises to compete with foreign-based
enterprises in domestic or export markets.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub.L.
104-4), as well as Executive Order 12875, this proposed rule does not
include any federal mandate that may result in expenditures by state,
local, or tribal governments, or the private sector, which may impose
an annual burden of $100 million.
Executive Order 13132
When an agency promulgates a regulation that has federalism
implications, Executive Order 13132 (64 FR 43255, August 10, 1999),
requires that the Agency provide a federalism summary impact statement.
Pursuant to section 6(c) of the Order, such a statement must include a
description of the extent of the agency's consultation with State and
local officials, a summary of the nature of their concerns and the
agency's position supporting the need to issue the regulation, and a
statement of the extent to which the concerns of the State have been
met.
This proposed regulation has federalism implications because it
sets forth standards and procedures for determining whether certain
entities
[[Page 64494]]
may be regulated under certain state law or whether such state laws are
preempted with respect to such entities. The state laws at issue are
those that regulate the business of insurance. A representative from
the National Association of Insurance Commissioners (NAIC), which
represents the interests of state governments in the regulation of
insurance, participated in this rulemaking from the inception of the
Negotiated Rulemaking Committee.
In the course of this rulemaking, the NAIC raised the following
concerns: (1) That the rule allow MEWAs to be easily distinguishable
from collectively bargained plans so that MEWAs may be properly
subjected to state jurisdiction and regulation; (2) that the rule
prevent the unlicensed sale of health insurance; and; (3) that losses
to individuals in the form of unreimbursed and denied medical claims be
stopped.
The Department's position with regard to this rulemaking is that
there is an overwhelming need for this regulation. Sham operators have
been exploiting the lack of regulation in this area by claiming to be
established or maintained pursuant to collective bargaining, thereby
avoiding state regulation. These operators have marketed unlicensed
health insurance to small employers free of state solvency and reserve
requirements and have therefore offered health insurance at
significantly cheaper rates than state-licensed insurance companies.
Ultimately these operations have gone bankrupt, leaving participants
with significant unpaid claims and without health insurance. This
regulation will provide objective criteria to distinguish collectively
bargained plans from arrangements subject to state insurance law. It
will also provide entities that claim to be exempt from state
regulation, an expedited procedure to obtain a finding from the
Department under certain conditions.
By providing objective criteria distinguishing collectively
bargained plans from arrangements subject to state insurance law, the
regulation should facilitate state enforcement efforts against
arrangements attempting to misuse the collectively bargained exception
in section 3(40) of ERISA. In that regard, the regulation should make
more difficult the sale of unlicensed insurance under the guise of
collectively bargained plans and limit the losses to individuals in the
form of unreimbursed and denied medical and other welfare benefit
insurance claims resulting from that type of sham arrangement.
Statutory Authority
This regulation is proposed pursuant to the authority in sections
107, 209, 504, and 505 of ERISA (Pub. L. 93-406, 88 Stat. 894, 29
U.S.C. 1027, 1059, 1134, 1135) and under Secretary of Labor's Order No.
1-87, 52 FR 13139, April 21, 1987.
List of Subjects in 29 CFR Part 2510
Collective bargaining, Employee benefit plans, Pensions.
Proposed Regulation
For the reasons set out in the preamble, the Department proposes to
amend Part 2510 of Chapter XXV of Title 29 of the Code of Federal
Regulations as follows:
PART 2510--[AMENDED]
1. The authority citation for Part 2510 is revised to read as
follows:
Secs. 3(2), 3(40), 111(c), 505, Pub. L. 93-406, 88 Stat. 852,
894, (29 U.S.C. 1002(2), 1002(40), 1031, 1135); Secretary of Labor's
Order No. 27-74, 1-86, 1-87, and Labor Management Services
Administration Order No. 2-6.
Section 2510.3-101 is also issued under sec. 102 of
Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978),
effective December 31, 1978 (44 FR 1065, January 3, 1978); 3 CFR,
1978 Comp., p. 332, and sec. 11018(d) of Pub. L. 99-272, 100 Stat.
82.
Section 2510.3-102 is also issued under sec. 102 of
Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978),
effective December 31, 1978 (44 FR 1065, January 3, 1978); 3 CFR,
1978 Comp., p. 332, and sec. 11018(d) of Pub. L. 99-272, 100 Stat.
82.
2. Section 2510.3-40 is added to read as follows:
Sec. 2510.3-40 Plans Established or Maintained Under or Pursuant to
Collective Bargaining Agreements Under Section 3(40)(A) of ERISA.
(a) Scope and purpose. Section 3(40)(A) of the Employee Retirement
Income Security Act of 1974 (ERISA) provides that the term ``multiple
employer welfare arrangement'' (MEWA) does not include an employee
welfare benefit plan which is established or maintained under or
pursuant to one or more agreements which the Secretary of Labor (the
Secretary) finds to be collective bargaining agreements. This section
sets forth a finding by the Secretary that an arrangement is an
employee welfare benefit plan established or maintained under or
pursuant to one or more collective bargaining agreements if the plan
meets the criteria in this section. This section also sets forth a
finding by the Secretary that certain arrangements are not employee
welfare benefit plans established or maintained under or pursuant to a
collective bargaining agreement, regardless of whether they purport to
meet the regulatory criteria. No finding by the Secretary in or
pursuant to this section shall constitute a finding for any purpose
other than the exception for plans established or maintained under or
pursuant to one or more collective bargaining agreements under section
3(40) of ERISA. The procedure for obtaining a finding by the Secretary
in a particular case where there is an attempt to assert state
jurisdiction or the application of state law with respect to a plan or
other arrangement that allegedly is covered under Title I of ERISA, is
set forth in 29 CFR part 2570, subpart G.
(b) General criteria. The Secretary finds, for purposes of section
3(40) of ERISA, that an employee welfare benefit plan is ``established
or maintained under or pursuant to one or more agreements which the
Secretary finds to be collective bargaining agreements'' for any plan
year in which the plan meets the criteria set forth in paragraphs
(b)(1), (2), (3), and (4) of this section, and is not excluded under
paragraph (c) of this section:
(1) The entity is an employee welfare benefit plan within the
meaning of section 3(1) of ERISA.
(2) At least 80% of the participants in the plan are:
(i) Individuals employed under one or more agreements meeting the
criteria of paragraph (b)(3) of this section, under which contributions
are made to the plan, or pursuant to which coverage under the plan is
provided;
(ii) Retirees who either participated in the welfare benefit plan
at least five of the last 10 years preceding their retirement, or:
(A) Are receiving benefits as participants under a multiemployer
pension benefit plan that is maintained under the same agreement
referred to in paragraph (b)(2)(i) of this section, and
(B) Have at least five years of service or the equivalent under
that multiemployer pension benefit plan;
(iii) Participants on extended coverage under the plan pursuant to
the requirements of a statute or court or administrative agency
decision, including but not limited to the continuation coverage
requirements of the Consolidated Omnibus Budget Reconciliation Act of
1985, sections 601-609, the Family and Medical Leave Act, 29 U.S.C.
2601 et seq., the Uniformed Services Employment and Reemployment Rights
Act of 1994, 38 U.S.C. 4301 et seq., or the National Labor Relations
Act, 29 U.S.C. 158(a)(5);
(iv) Participants who were active participants and whose coverage
is
[[Page 64495]]
otherwise extended under the terms of the plan, including but not
limited to extension by reason of self-payment, hour bank, long or
short-term disability, furlough or temporary unemployment, provided
that the charge to the individual for such extended coverage is no more
than the applicable premium under section 604 of the Act;
(v) Participants whose coverage under the plan is maintained
pursuant to a reciprocal agreement with one or more other employee
welfare benefit plans established or maintained under or pursuant to
one or more collective bargaining agreements and that are multiemployer
plans;
(vi) Individuals employed by:
(A) An employee organization that sponsors, jointly sponsors or is
represented on the association, committee, joint board of trustees, or
other similar group of representatives of the parties who sponsor the
plan,
(B) The plan or associated trust fund, or
(C) Other employee benefit plans or trust funds to which
contributions are made pursuant to the same agreement described in
paragraph (b)(2)(i) of this section;
(vii) individuals who were employed under an agreement described in
paragraph (b)(3) of this section, provided that they are employed by
one or more employers that are parties to an agreement described in
paragraph (b)(3) and are covered under the plan on terms that are
generally no more favorable than those that apply to similarly situated
individuals described in paragraph (b)(2)(i) of this section;
(viii) Individuals (other than individuals described in paragraph
(b)(2)(i) of this section) who are employed by employers that are bound
by the terms of an agreement described in paragraph (b)(3)(i) of this
section and that employ personnel covered by such agreement, and who
are covered under the plan on terms that are generally no more
favorable than those that apply to such covered personnel. For this
purpose, such individuals in excess of 10% of the total population of
participants in the plan are disregarded;
(ix) Individuals who are, or were for a period of at least three
years, employed under one or more agreements between or among one or
more ``carriers'' (including ``carriers by air'') and one or more
``representatives'' of employees for collective bargaining purposes and
as defined by the Railway Labor Act, 45 U.S.C. 151 et seq., providing
for such individuals' current or subsequent participation in the plan,
or providing for contributions to be made to the plan by such carriers;
or
(x) Individuals who are licensed marine pilots operating in United
States ports as a state-regulated enterprise and are covered under an
employee welfare benefit plan that meets the definition of a qualified
merchant marine plan, as defined in section 415(b)(2)(F) of the
Internal Revenue Code (26 U.S.C.).
(3) The plan is incorporated or referenced in a written agreement
between two or more employers and one or more employee organizations,
which agreement, itself or together with other agreements among the
same parties:
(i) Is the product of a bona fide collective bargaining
relationship between the employers and the employee organization(s);
(ii) Identifies employers and employee organization(s) that are
parties to and bound by the agreement;
(iii) Identifies the personnel, job classifications and/or work
jurisdiction covered by the agreement;
(iv) Provides for terms and conditions of employment in addition to
coverage under, or contributions to, the plan; and
(v) Is not unilaterally terminable or automatically terminated
solely for non-payment of benefits under or contributions to, the plan.
(4) For purposes of paragraph (b)(3)(i), of this section, the
following factors, among others, are to be considered in determining
the existence of a bona fide collective bargaining relationship. In any
proceeding initiated under 29 CFR part 2570 Subpart G, the existence of
a bona fide collective bargaining relationship under paragraph
(b)(3)(i) shall be presumed where at least four of the factors set out
in paragraphs (b)(4)(i) through (viii), of this section are
established:
(i) The agreement referred to in paragraph (b)(3) of this section
provide(s) for contributions to a labor-management trust fund
structured according to section 302(c)(5), (6), (7), (8), or (9) of the
Taft-Hartley Act, 29 U.S.C. 186(c)(5), (6), (7), (8) or (9), or to a
plan lawfully negotiated under the Railway Labor Act;
(ii) The agreement referred to in paragraph (b)(3) of this section
requires contributions by substantially all of the participating
employers to a multiemployer pension plan that is structured in
accordance with section 401 of the Internal Revenue Code (26 U.S.C.),
and is either structured in accordance with section 302(c)(5) of the
Taft-Hartley Act, 29 U.S.C. 186(c)(5), or is lawfully negotiated under
the Railway Labor Act, and substantially all of the active participants
covered by the employee welfare benefit plan are also eligible to
become participants in that pension plan;
(iii) The predominant employee organization that is a party to the
agreement referred to in paragraph (b)(3) of this section has
maintained a series of agreements incorporating or referencing the plan
since before January 1, 1983;
(iv) The predominant employee organization that is a party to the
agreement referred to in paragraph (b)(3) of this section has been a
national or international union, or a federation of national and
international unions, or has been affiliated with such a union or
federation, since before January 1, 1983;
(v) A court, government agency or other third-party adjudicatory
tribunal has determined, in a contested or adversary proceeding, or in
a government-supervised election, that the predominant employee
organization that is a party to the agreement described in paragraph
(b)(3) of this section is the lawfully recognized or designated
collective bargaining representative with respect to one or more
bargaining units of personnel covered by such agreement;
(vi) Employers who are parties to the agreement described in
paragraph (b)(3) of this section pay at least 75% of the premiums or
contributions required for the coverage of active participants under
the plan or, in the case of a retiree only plan, the employer pays at
least 75% of the premiums or contributions required for the coverage of
the retirees. For this purpose, coverage under the plan for dental or
vision care, or coverage for excepted benefits under 29 CFR
2590.732(b), is disregarded;
(vii) The predominant employee organization that is a party to the
agreement described in paragraph (b)(3) of this section (b)(3)
provides, sponsors or jointly sponsors a hiring hall(s) and/or a state-
certified apprenticeship program(s) that provide services that are
available to substantially all active participants covered by the plan;
(viii) The agreement described in paragraph (b)(3) of this section
has been determined to be a bona fide collective bargaining agreement
for purposes of establishing the prevailing practices with respect to
wages and supplements in a locality, pursuant to a prevailing wage
statute of any state or the District of Columbia.
(ix) There are other objective or subjective indicia of actual
collective bargaining and representation, such as that arm's length
negotiations occurred between the parties to the agreement described in
paragraph (b)(3) of this section; that the predominant employee
organization that is party to such agreement actively represents
employees covered by such agreement
[[Page 64496]]
with respect to grievances, disputes or other matters involving
employment terms and conditions other than coverage under or
contributions to the employee welfare benefit plan; that there is a
geographic, occupational, trade, organizing or other rationale for the
employers and bargaining units covered by such agreement; that there is
a connection between such agreement and the participation, if any, of
self-employed individuals in the employee welfare benefit plan
established or maintained under or pursuant to such agreement.
(c) Exclusions. (1) An employee welfare benefit plan shall not be
deemed to be ``established or maintained under or pursuant to one or
more agreements which the Secretary finds to be collective bargaining
agreements'' for any plan year in which:
(i) The plan is self-funded or partially self-funded, and is
marketed to employers or sole proprietors:
(A) By one or more insurance producers as defined in paragraph (d)
of this section,
(B) By an individual who is disqualified from or ineligible for, or
has failed to obtain, such a license to serve as an insurance producer
to the extent that the individual engages in an activity for which such
license is required, or
(C) By individuals (other than individuals described in paragraphs
(c)(1)(i) (A) and (B) of this section) who are paid on a commission-
type basis to market the plan;
(ii) For the purposes of this paragraph (c):
(A) ``Marketing'' does not include administering the plan,
consulting with plan sponsors, counseling on benefit design or
coverage, or explaining the terms of coverage available under the plan
to employees or union members;
(B) ``Marketing'' does include the marketing of union membership
that carries with it plan participation by virtue of such membership,
except for membership in unions representing insurance producers
themselves;
(2) The agreement under which the plan is established or maintained
is a scheme, plan, stratagem or artifice of evasion, a principal intent
of which is to evade compliance with state law and regulations
applicable to insurance; or
(3) There is fraud, forgery or willful misrepresentation as to the
factors relied on to demonstrate that the plan satisfies the criteria
set forth in paragraph (b) of this section.
(d) Definitions. (1) Active participant means a participant who is
not retired and who is not on extended coverage under paragraphs
(b)(2)(iii) or (b)(2)(iv) of this section.
(2) Agreement means the contract embodying the terms and conditions
mutually agreed upon between or among the parties to such agreement.
Where the singular is used in this section, the plural is automatically
included.
(3) Individual employed means any natural person who furnishes
services to another person or entity in the capacity of an employee
under common law, without regard to any specialized definitions or
interpretations of the terms ``employee,'' ``employer,'' or
``employed'' under federal or state statutes other than ERISA.
(4) Insurance producer means an agent, broker, consultant, or
producer who is an individual, entity, or sole proprietor, that is
licensed under the laws of the state to sell, solicit, or negotiate
insurance.
(5) Predominant employee organization means, where more than one
employee organization is a party to an agreement, either the
organization representing the plurality of individuals employed under
such agreement, or organizations that in combination represent the
majority of such individuals.
(e) Examples. The operation of the provisions of this section may
be illustrated by the following examples.
Example 1. Plan A has 500 participants, in the following 4 types
of participants under paragraph (b)(2) of this section:
----------------------------------------------------------------------------------------------------------------
Type of participants Total number Nexus group Non-nexus
----------------------------------------------------------------------------------------------------------------
1. Individuals working under CBAs..... 320 (64%) 320 (64%) 0
2. Retirees........................... 50 (10%) 50 (10%) 0
3. ``Special Class''--Non-CBA, non- 100 (20%) 50 (10%) 50 (10%)
alumni.
4. Non-nexus participants............. 30 (6%) 0 30 (6%)
-------------------------------------------------------------------------
Total............................. 500 (100%) 420 (84%) 80 (16%)
----------------------------------------------------------------------------------------------------------------
(2) In determining whether at least 80% of Plan A's participant
population is made up of individuals with the required nexus to the
collective bargaining agreement as required by paragraph (b)(2) of
this section, the Plan may count as part of the nexus group only 50
(10% of the total plan population) of the 100 individuals described
in paragraph (b)(2)(viii) of this section. That is because the
number of individuals meeting the category of individuals in
paragraph (b)(2)(viii) exceeds 10% of the total participant
population by 50 individuals. The paragraph specifies that those
individuals who are deemed to be nexus individuals because they are
the type of individuals described in paragraph (b)(2)(viii) in
excess of 10% of the total plan population may not be counted in the
nexus group. Here, 50 of the 100 individuals employed by signatory
employers, but not covered by the collective bargaining agreement,
are counted as nexus individuals and 50 are not counted as nexus
individuals. Nonetheless, the Plan satisfies the 80% criterion under
paragraph (b)(2) because a total of 420 (320 individuals covered by
the collective bargaining agreement, plus 50 retirees, plus 50
individuals employed by signatory employers), or 84%, of the 500
participants in Plan A are individuals who may be counted as nexus
participants under paragraph (b)(2). Beneficiaries (e.g., spouses,
dependent children, etc.) are not counted to determine whether the
80% test has been met.
Example 2. (1) International Union MG and its Local Unions have
represented people working primarily in a particular industry for
over 60 years. Since 1950, most of their collective bargaining
agreements have called for those workers to be covered by the
National MG Health and Welfare Plan. During that time, the number of
union-represented workers in the industry, and the number of active
participants in the National MG Health and Welfare Plan, first grew
and then declined. New Locals were formed and later were shut down.
Despite these fluctuations, the National MG Health and Welfare Plan
meets the factors described in paragraphs (b)(4)(iii) and (iv) of
this section, as the plan has been in existence pursuant to
collective bargaining agreements to which the International Union
and its affiliates have been parties, since prior to January 1,
1983.
(2) Assume the same facts, except that on January 1, 1999,
International Union MG merged with International Union RE to form
International Union MRGE. MRGE and its Locals now represent the
active participants in the National MG Health and Welfare Plan and
in the National RE Health and Welfare Plan which, for 45 years, had
been maintained under collective bargaining agreements negotiated by
International Union
[[Page 64497]]
RE and its Locals. Since International Union MRGE is the
continuation of, and successor to, the MG and RE unions, the two
plans continue to meet the factors in paragraphs (b)(4)(iii) and
(iv) of this section. This also would be true if the two plans were
merged.
Example 3. Assume the same facts as in paragraph (2) of Example
2 with respect to International Union MG. However, in 1997, one of
its Locals and the employers with which it negotiates agree to set
up a new multiemployer health and welfare plan that only covers the
individuals represented by that Local Union. That plan would not
meet the factor in paragraph (b)(4)(iii) of this section, as it has
not been incorporated or referenced in collective bargaining
agreements, dating back to before January 1, 1983.
Example 4. (1) Pursuant to a collective bargaining agreement
between various employers and Local 2000, the employers contribute
$2 per hour to the Fund for every hour that a covered employee works
under the agreement. The covered employees are automatically
entitled to health and disability coverage from the Fund for every
calendar quarter the employees have 300 hours of additional covered
service in the preceding quarter. The employees do not need to make
any additional contributions for their own coverage, but must pay
$250 per month if they want health coverage for their dependent
spouse and children. Because the employer payments cover 100% of the
required contributions for the employees' own coverage, the Local
2000 Employers Health and Welfare Fund meets the ``75% employer
payment'' factor under paragraph (b)(3)(vi) of this section.
(2) Assume, however, that the negotiated employer contribution
rate was $1 per hour, and the employees could only obtain health
coverage for themselves if they also elected to contribute $1 per
hour, paid on a pre-tax basis through salary reduction. The Fund
would not meet the 75% employer payment factor, even though the
employees' contributions are treated as employer contributions for
tax purposes. Under ERISA, and therefore under this section,
elective salary reduction contributions are treated as employee
contributions. The outcome would be the same if a uniform employee
contribution rate applied to all employees, whether they had
individual or family coverage, so that the $1 per hour employee
contribution qualified an employee for his or her own coverage and,
if he or she had dependents, dependent coverage as well.
Example 5. Arthur is a licensed insurance broker, one of whose
clients is Multiemployer Fund M, a partially self-funded plan.
Arthur takes bids from insurance companies on behalf of Fund M for
the insured portion of its coverage, helps the trustees to evaluate
the bids, and places the Fund's health insurance coverage with the
carrier that is selected. Arthur also assists the trustees of Fund M
in preparing material to explain the plan and its benefits to the
participants, as well as in monitoring the insurance company's
performance under the contract. At the Trustees' request, Arthur
meets with a group of employers with which the union is negotiating
for their employees' coverage under Fund M, and he explains the cost
structure and benefits that Fund M provides. Arthur is not engaged
in marketing within the meaning of paragraph (c)(1) of this section,
so the fact that he provides these administrative services and sells
insurance to the Fund itself does not affect the plan's status as a
plan established or maintained under or pursuant to a collective
bargaining agreement. This is the case, whether or how he is
compensated.
Example 6. Assume the same facts as Example 5, except that
Arthur has a group of clients unrelated to the employees covered by
or the employers bound to the collective bargaining agreement, whose
insurance carrier has withdrawn from the market in their locality.
He persuades them to retain him to find them other coverage. The
group of clients has no relationship with the labor union that
represents the participants in Fund M. However, Arthur offers them
coverage under Fund M, and persuades the Fund's Trustees to allow
the client group to join Fund M in order to broaden Fund M's
contribution base. Arthur's activities in obtaining coverage for the
unrelated group under Fund M constitutes marketing through an
insurance producer, which makes Fund M a MEWA under paragraph (c)(1)
of this section.
Example 7. (1) Union A represents thousands of construction
workers in a three-state geographic region. For many years, Union A
has maintained a standard written collective bargaining agreement
with several hundred large and small building contractors, covering
wages, hours, and other terms and conditions of employment for all
work performed in Union A's geographic territory. The terms of those
agreements are negotiated every three years between Union A and a
multiemployer Association, which signs on behalf of those employers
who have delegated their bargaining authority to the Association.
Hundreds of other employers--including both local and traveling
contractors--have chosen to become bound to the terms of Union A's
standard area agreement for various periods of time and in various
ways, such as by signing short-form binders or ``me too''
agreements, executing a single job or project labor agreement, or
entering into a subcontracting arrangement with a signatory
employer. All of these employ individuals represented by Union A and
contribute to Plan A, a self-insured multiemployer health and
welfare plan established and maintained under Union A's standard
area agreement. During the past year, the trustees of Plan A have
brought lawsuits against several signatory employers seeking
contributions allegedly owed, but not paid to the trust. In
defending that litigation, a number of employers have sworn that
they never intended to operate as union contractors, that their
employees want nothing to do with Union A, that Union A procured
their assent to the collective bargaining agreement solely by
threats and fraudulent misrepresentations, and that Union A has
failed to file certain reports required by the Labor Management
Reporting and Disclosure Act. In at least one instance, a petition
for a decertification election has been filed with the National
Labor Relations Board.
(2) In this example, Plan A qualifies for the regulatory finding
that it is a multiemployer plan established and maintained under or
pursuant to one or more collective bargaining agreements, assuming
that its participant population satisfies the 80% test of paragraph
(b)(2) of this section and that none of the disqualifying factors in
paragraph (c) of this section is present. Plan A's status for the
purpose of this section is not affected by the fact that some of the
employers who deal with Union A have challenged Union A's conduct,
or have disputed under labor statutes and legal doctrines other than
ERISA section 3(40) the validity and enforceability of their
putative contract with Union A, regardless of the outcome of those
disputes.
Example 8. (1) Assume the same facts as Example 7. Plan A's
benefits consultant recently entered into an arrangement with the
Medical Consortium, a newly formed organization of health care
providers, which allows the Plan to offer a broader range of health
services to Plan A's participants while achieving cost savings to
the Plan and to participants. Union A, Plan A, and Plan A's
consultant each have added a page to their websites publicizing the
new arrangement with the Medical Consortium. Concurrently, Medical
Consortium's website prominently publicizes its recent affiliation
with Plan A and the innovative services it makes available to the
Plan's participants. Union A has mailed out informational packets to
its members describing the benefit enhancements and encouraging
election of family coverage. Union A has also begun distributing
similar material to workers on hundreds of non-union construction
job sites within its geographic territory.
(2) In this example, Plan A remains a plan established and
maintained under or pursuant to one or more collective bargaining
agreements under section 3(40) of ERISA. Neither Plan A's
relationship with a new organization of health care providers, nor
the use of various media to publicize Plan A's attractive benefits
throughout the area served by Union A, alters Plan A's status for
purpose of this section.
Example 9. (1) Assume the same facts as in Example 7. Union A
undertakes an area-wide organizing campaign among the employees of
all the health care providers who belong to the Medical Consortium.
When soliciting individual employees to sign up as union members,
Union A distributes Plan A's information materials and promises to
bargain for the same coverage. At the same time, when appealing to
the employers in the Medical Consortium for voluntary recognition,
Union A promises to publicize the Consortium's status as a group of
unionized health care service providers. Union A eventually succeeds
in obtaining recognition based on its majority status among the
employees working for Medical Consortium employers. The Consortium,
acting on behalf of its employer members, negotiates a collective
bargaining agreement with Union A that provides terms and
[[Page 64498]]
conditions of employment, including coverage under Plan A.
(2) In this example, Plan A still meets the criteria for a
regulatory finding that it is collectively bargained under section
3(40) of ERISA. Union A's recruitment and representation of a new
occupational category of workers unrelated to the construction
trade, its promotion of attractive health benefits to achieve
organizing success, and the Plan's resultant growth, do not take
Plan A outside the regulatory finding.
Example 10. (1) Assume the same facts as in Example 7. The
Medical Consortium, a newly formed organization, approaches Plan A
with a proposal to make money for Plan A and Union A by enrolling a
large group of employers, their employees, and self-employed
individuals affiliated with the Medical Consortium. The Medical
Consortium obtains employers' signatures on a generic document
bearing Union A's name, labeled ``collective bargaining agreement,''
which provides for health coverage under Plan A and compliance with
wage and hour statutes, as well as other employment laws. Employees
of signatory employers sign enrollment documents for Plan A and are
issued membership cards in Union A; their membership dues are
regularly checked off along with their monthly payments for health
coverage. Self-employed individuals similarly receive union
membership cards and make monthly payments, which are divided
between Plan A and the Union. Aside from health coverage matters,
these new participants have little or no contact with Union A. The
new participants enrolled through the Consortium amount to 23% of
the population of Plan A during the current Plan Year.
(2) In this example, Plan A now fails to meet the criteria in
paragraphs (b)(2) and (b)(3) of this section, because more than 20%
of its participants are individuals who are not employed under
agreements that are the product of bona fide collective bargaining
relationship and who do not fall within any of the other nexus
categories set forth in paragraph (b)(2). Moreover, even if the
number of additional participants enrolled through the Medical
Consortium, together with any other participants that did not fall
within any of the nexus categories, did not exceed 20% of the total
participant population under the plan, the circumstances in this
example would trigger the disqualification of paragraph (c)(2) of
this section, because Plan A now is being maintained under a
substantial number of agreements that are a ``scheme, plan,
stratagem or artifice of evasion'' intended primarily to evade
compliance with state laws and regulations pertaining to insurance.
In either case, the consequence of adding the participants through
the Medical Consortium is that Plan A is now a MEWA for purposes of
section 3(40) of ERISA and is not exempt from state regulation by
virtue of ERISA.
(f) Cross-reference. See part 2570, subpart G of this chapter for
procedural rules relating to proceedings seeking an Administrative Law
Judge finding by the Secretary under Section 3(40) of ERISA.
(g) Effect of proceeding seeking Administrative Law Judge Section
3(40) finding.
(1) An Administrative Law Judge finding issued pursuant to the
procedures in part 2570, subpart G of this chapter, will constitute a
finding that the employee welfare benefit plan at issue in that
proceeding is established or maintained under or pursuant to an
agreement that the Secretary finds to be a collective bargaining
agreement for purposes of Section 3(40) of ERISA.
(2) Nothing in this section or in part 2570, subpart G of this
chapter is intended to have any effect on applicable law relating to
stay or delay of a state administrative or court proceeding or
enforcement of a subpoena.
(h) Effective date. This regulation is effective December 26, 2000.
Signed this 16th day of October 2000.
Leslie B. Kramerich,
Acting Assistant Secretary, Pension and Welfare Benefits
Administration.
[FR Doc. 00-27044 Filed 10-26-00; 8:45 am]
BILLING CODE 4510-29-P