By: HUB’s EB Compliance Team
Trusts are legal arrangements whereby one or more trustees hold property for the benefit of one or more beneficiaries. Trusts are also important in employee benefits because §403(a) of the Employee Retirement Income Security Act of 1974 (“ERISA”) states, subject to certain exceptions “all assets of an employee benefit plan shall be held in trust by one or more trustees.”
Trust Exemptions
However, §403(b) of ERISA describes available exemptions to the trust requirement. Most of these individual exemptions are quite nuanced and beyond the scope of this piece. The most important exemption for employers with health and welfare benefits relates to fully-insured plans where the assets of a plan consist of insurance contracts or policies issued by an insurance company qualified to do business in a State, or any assets of a plan which are held by such an insurance company. Essentially this exemption allows plan sponsors to pay premiums for fully-insured plans without using a trust.
However, this exemption only applies to the insurance contracts themselves and insurance company assets. The money used to pay for the insurance is a different matter. In general, employer funds used to pay for the insurance contracts are not plan assets (although there are limited exceptions). But what about participant contributions?
Participant Contributions are Plan Assets Under ERISA
If employees or other plan beneficiaries (such as those on COBRA) pay any portion of the cost of benefits, those contributions are plan assets under ERISA. This includes contributions made by current and former employees, pre- or post-tax, and via payroll deduction or paid directly to the employer (such as those made by an employee on FMLA).
Under Department of Labor (“DOL”) regulations, participant contributions (including amounts withheld from participants’ pay) are considered plan assets as of the earliest they “can reasonably be segregated from the employer's general assets.” While the regulations say the maximum time for this to occur is 90 days from the date of the withholding, this is the absolute maximum and should not be viewed as a safe harbor. In other words, the DOL’s perspective is that you have send participant contributions to the insurer as soon as you reasonably can; you can’t rely on that 90-day period.
Because participant contributions are plan assets, they are subject to ERISA’s fiduciary rules. This means they must be used for the exclusive benefit of plan participants or to pay reasonable and proper administrative expenses of the plan. Money taken from participants cannot be used for a different purpose (such as paying corporate expenses). Doing so is a prohibited transaction resulting in potential penalties and participant lawsuits.
Additionally, plan assets generally must be held in a trust, as noted above. Therefore, a literal application of this rule would mean an employer with a health plan (whether insured or self-funded) would need to establish a trust solely to hold participant contributions.
DOL Non-Enforcement Policy
However, there is good news. In 1992, the Department of Labor issued DOL Technical Release 92-01. This isn’t an additional exemption, but rather a non-enforcement of the trust requirement by the DOL when certain conditions are met.
To rely on this non-enforcement policy, the employer’s health plan must either:
- Do both of the following:
- Only collect participant contributions through a cafeteria plan; and
- Apply all participant contributions to the payment of insurance premiums, plan benefits, or permissible plan expenses within 90 days of when they are collected; or
- For insured plans, participant contributions must be applied to the payment of insurance premiums or permissible plan expenses within 90 days of when they are collected from participants, whether or not the premiums are collected through a cafeteria plan.
For self-funded plans that collect COBRA or other after-tax contributions (as most will), it appears this Technical Release would not apply since those contributions are generally not made through a cafeteria plan. However, the DOL has confirmed in the preamble to a set of 1996 regulations that the non-enforcement policy still applies COBRA and other after-tax contributions (like retiree contributions) collected through a cafeteria plan. For this reason, as a best practice, employers may want to include references in their cafeteria plans to the collection of COBRA and other after-tax contributions. However, these after-tax contributions do not have to follow the strict cafeteria plan change in status rules; election changes for after-tax contributions may be allowed at any time.
Conclusion
Most plans do not have a trust to hold participant contributions. However, employers would be well advised to take the following steps to ensure their ability to utilize the DOL non-enforcement policy:
- Make sure participant contributions are used to pay benefits, insurance premiums, and/or plan expenses within 90 days of when they are collected from participants. This is usually the case since participant contributions are often far less than the cost of the plan. This generally should not require setting up a separate account to hold those contributions.
- Check your cafeteria plan to see if it includes language discussing collecting COBRA or other after-tax contributions.
On the other hand, employers wishing to establish a trust should consult with legal counsel and their financial advisors to determine the best course of action.
If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.