ERISA requires that plan assets be held in trust so that they are protected from claims of the employer. With pension plans, it is generally easy to determine when assets become plan assets and when they should be held in trust. For welfare benefit plans, such as health plans, the situation is more complicated. Employers often use their general assets to pay claims under a self-funded plan. While employee contributions are typically considered “plan assets,” the Department of Labor has a nonenforcement policy with respect to employee contributions that are made on a pre-tax basis under an employer’s cafeteria plan. Thus, many employers do not establish trusts for their welfare benefit plans.
A Ninth Circuit court of appeals case recently dealt with the trust requirement with a multiple employer plan established for firefighters in California. The plan was a long term disability plan funded by participant contributions deposited into a Wells Fargo checking account to which the officers of the third party administrator were the signatories. The checking account was not a formal trust account and there was no formal trust agreement. The Department of Labor claimed in a lawsuit that this violated the trust requirement of ERISA.
The Ninth Circuit said that the fact that there was not a formal trust did not mean that the assets were not held in trust. The court held that under federal common law, the third party administrator (Wells Fargo) held the assets in trust for the plan beneficiaries. No formal trust document was necessary and there was no violation of the trust requirement.
The Department of Labor was unhappy with this decision and asked for the Ninth Circuit to revisit it. The Ninth Circuit refused an en banc reconsideration but reissued its opinion reiterating that the assets were held in trust under federal common law even though there was no formal trust agreement in place.
One would expect that if the assets were held in trust, a form 5500 would need to be filed because the trust would then not be unfunded. Funded benefit plans must be audited and file a more comprehensive Form 5500 if there are more than 100 participants. However, the court also concluded that the plan was a totally unfunded welfare benefit plan because the benefits were paid from the general assets of the employee organization that sponsored the plan. Because the plan was unfunded, no summary annual report needed to be distributed.
The court also found that the third party administrator engaged in a prohibited transaction by paying itself fees from the plan assets even though the agreement with the sponsoring association authorized the third party administrator to pay its fees and expenses from the plan account.
So the court found that a trust held sufficient assets to make the third party administrator’s payment of its fee a prohibited transaction, but the plan was nevertheless unfunded for purposes of the summary annual report requirement. The court also found no violation of the trust requirement even though there was no formal trust. This is probably inside baseball for all but ERISA geeks. We will have to see if other circuits take similar approaches to ERISA trusts. However, in light of the Department of Labor’s dissatisfaction with this case, we would not recommend other plan sponsors rely on the common law in lieu of establishing a formal trust in situations in which ERISA requires a trust.