MEWAs

Multiple Employer Welfare Arrangements under the

Employee Retirement Income Security Act (ERISA):

A Guide to Federal and State Regulation

U.S. Department of Labor

Employee Benefits Security Administration
This publication has been developed by the U.S. Department of Labor,

Employee Benefits Security Administration.

It is available on the Internet at:

www.dol.gov/ebsa

For a complete list of EBSA publications, call toll-free:

1- 866-444-EBSA (3272)

This material will be made available in alternate format upon request:

Voice phone: (202) 693-8664

TTY: (202) 501-3911

This booklet constitutes a small entity compliance guide for purposes of the

Small Business Regulatory Enforcement Fairness Act of 1996.
MEWAs

Multiple Employer Welfare Arrangements under the

Employee Retirement Income Security Act (ERISA):

A Guide to Federal and State Regulation

U.S. Department of Labor

Employee Benefits Security Administration

Revised September 2004
Foreword

Introduction

Regulation of Multiple Employer

Welfare Arrangements under ERISA

What is an “employee welfare benefit plan”?

What is an “employer”?

What is an “employee organization”?

What types of plans are excluded from

coverage under Title I of ERISA?

What requirements apply to an

employee welfare benefit plan under Title I of ERISA?

To what extent does ERISA govern the

activities of MEWAS that are not "employee welfare benefit plans"?

Regulation of Multiple Employer

Welfare Arrangements under State Insurance Laws

What is the general scope of ERISA preemption?

What is a “multiple employer welfare arrangement”?

Does the arrangement offer or provide benefits to the employees

of two or more employers?

Is the arrangement excluded from the definition of “MEWA”?

To what extent may States regulate

ERISA-covered welfare plans that are MEWAs?

M-1 Filing Requirement for MEWAs

ERISA Advisory Opinions

Table of Contents

1

3

5

6

8

9

11

11

15

17

17

19

20

25

28

33

35
ERISA Enforcement

Appendix A

Advisory Opinion 90-18A

Advisory Opinion 92-05A

UEVEBA Letter

Appendix B

Advisory Opinion Procedure

Appendix C

Federal Register

39

41

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Foreword

This booklet was prepared by the Employee Benefits Security Administration of

the U.S. Department of Labor in an effort to address many of the questions that have

been raised concerning the effect of the Employee Retirement Income Security Act

(ERISA) on Federal and State regulation of “multiple employer welfare arrangements” (MEWAs). It is the hope of the Department that the information contained in

this booklet will not only provide a better understanding of the scope and effect of

ERISA coverage, but also will serve to facilitate State regulatory and enforcement

efforts, as well as Federal-State coordination, in the MEWA area.

1
Introduction

For many years, promoters and others have established and operated multiple employer welfare arrangements (MEWAs), also described as “multiple

employer trusts” or “METs,” as vehicles for marketing health and welfare benefits

to employers for their employees. Promoters of MEWAs have typically represented to employers and State regulators that the MEWA is an employee benefit

plan covered by the Employee Retirement Income Security Act (ERISA) and,

therefore, exempt from State insurance regulation under ERISA’s broad preemption provisions.

By avoiding State insurance reserve, contribution and other requirements

applicable to insurance companies, MEWAs are often able to market insurance

coverage at rates substantially below those of regulated insurance companies,

thus, in concept, making the MEWA an attractive alternative for those small

businesses finding it difficult to obtain affordable health care coverage for their

employees. In practice, however, a number of MEWAs have been unable to pay

claims as a result of insufficient funding and inadequate reserves. Or in the worst

situations, they were operated by individuals who drained the MEWA’s assets

through excessive administrative fees and outright embezzlement.

Prior to 1983, a number of States attempted to subject MEWAs to State

insurance law requirements, but were frustrated in their regulatory and enforcement efforts by MEWA-promoter claims of ERISA-plan status and Federal preemption. In many instances MEWAs, while operating as insurers, had the appearance of an ERISA-covered plan — they provided the same benefits as ERISAcovered plans, benefits were typically paid out of the same type of tax-exempt

trust used by ERISA-covered plans, and, in some cases, filings of ERISArequired documents were made to further enhance the appearance of ERISA-plan

status. MEWA-promoter claims of ERISA-plan status and claims of ERISA

preemption, coupled with the attributes of an ERISA plan, too often served to

impede State efforts to obtain compliance by MEWAs with State insurance laws.

Recognizing that it was both appropriate and necessary for States to be able

to establish, apply and enforce State insurance laws with respect to MEWAs, the

U.S. Congress amended ERISA in 1983, as part of Public Law 97-473, to provide

an exception to ERISA’s broad preemption provisions for the regulation of

MEWAs under State insurance laws.

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While the 1983 ERISA amendments were intended to remove Federal preemption as an impediment to State regulation of MEWAs, it is clear that MEWA

promoters and others have continued to create confusion and uncertainty as to the

ability of States to regulate MEWAs by claiming ERISA coverage and protection

from State regulation under ERISA’s preemption provisions. Obviously, to the

extent that such claims have the effect of discouraging or delaying the application

and enforcement of State insurance laws, the MEWA promoters benefit and those

dependent on the MEWA for their health care coverage bear the risk.

This booklet is intended to assist State officials and others in addressing

ERISA-related issues involving MEWAs. The Employee Benefits Security

Administration has attempted in this booklet to provide a clear understanding of

ERISA’s MEWA provisions, and the effect of those provisions on the respective

regulatory and enforcement roles of the Department of Labor and the States in the

MEWA area. Such understanding should not only facilitate State regulation of

MEWAs, but should also enhance Federal-State coordination efforts with respect

to MEWAs and, in turn, ensure that employees of employers participating in

MEWAs are afforded the benefit of the safeguards intended under both ERISA

and State insurance laws.

The first part of this booklet, Regulation of Multiple Employer Welfare

Arrangements under ERISA, focuses on what constitutes an ERISA-covered

plan and the regulatory and enforcement authority of the Department of Labor

over such plans. The second part of the booklet, Regulation of Multiple Employer Welfare Arrangements under State Insurance Laws, focuses on what is

and what is not a MEWA and the extent to which States are permitted to regulate

MEWAs that are also ERISA-covered welfare benefit plans.

4
Regulation of Multiple Employer Welfare

Arrangements under ERISA

The U.S. Department of Labor, through the Employee Benefits Security

Administration (EBSA), is responsible for the administration and enforcement of

the provisions of Title I of ERISA (29 U.S.C. §1001 et seq.). In general, ERISA

prescribes minimum participation, vesting and funding standards for privatesector pension benefit plans and reporting and disclosure, claims procedure,

bonding and other requirements which apply to both private-sector pension plans

and private-sector welfare benefit plans. ERISA also prescribes standards of

fiduciary conduct which apply to persons responsible for the administration and

management of the assets of employee benefit plans subject to ERISA.

ERISA covers only those plans, funds, or arrangements that constitute an

“employee welfare benefit plan,” as defined in ERISA Section 3(1), or an “employee pension benefit plan,” as defined in ERISA Section 3(2). By definition,

MEWAs do not provide pension benefits; therefore, only those MEWAs that

constitute “employee welfare benefit plans” are subject to ERISA’s provisions

governing employee benefit plans.

Prior to 1983, if a MEWA was determined to be an ERISA-covered plan,

State regulation of the arrangement would have been precluded by ERISA’s

preemption provisions. On the other hand, if the MEWA was not an ERISAcovered plan, which was generally the case, ERISA’s preemption provisions did

not apply and States were free to regulate the entity in accordance with applicable

State law. As a result of the 1983 MEWA amendments to ERISA, discussed in

detail later in this booklet, States are now free to regulate MEWAs whether or not

the MEWA may also be an ERISA-covered employee welfare benefit plan.

Under current law, a MEWA that constitutes an ERISA-covered plan is

required to comply with the provisions of Title I of ERISA applicable to employee

welfare benefit plans, in addition to any State insurance laws that may be applicable to the MEWA. If a MEWA is determined not to be an ERISA-covered plan,

the persons who operate or manage the MEWA may nonetheless be subject to

ERISA’s fiduciary responsibility provisions if such persons are responsible for, or

5
exercise control over, the assets of ERISA-covered plans. In both situations, the

Department of Labor would have concurrent jurisdiction with the State(s) over

the MEWA.

The following discussion provides a general overview of the factors considered by the Department of Labor in determining whether an arrangement is an

“employee welfare benefit plan” covered by ERISA, the requirements applicable

to welfare plans under Title I of ERISA, and the regulation of persons who administer and operate MEWAs as fiduciaries to ERISA-covered welfare plans.

What is an “employee welfare benefit plan”?

The term “employee welfare benefit plan” (or welfare plan) is defined in

Section 3(1) of ERISA, 29 U.S.C. §1002(1), as follows:

any plan, fund, or program which was heretofore or is hereafter

established or maintained by an employer or by an employee

organization, or by both, to the extent that such plan, fund, or

program was established or is maintained for the purpose of

providing for its participants or their beneficiaries, through the

purchase of insurance or otherwise, (A) medical, surgical, or

hospital care or benefits, or benefits in the event of sickness,

accident, disability, death or unemployment, or vacation benefits,

apprenticeship or other training programs, or day care centers,

scholarship funds, or prepaid legal services, or (B) any benefit

described in section 302(c) of the Labor Management Relations

Act, 1947 (other than pensions on retirement or death, and

insurance to provide such pensions).

(Emphasis supplied.)

A determination as to whether a particular arrangement meets the statutory

definition of “welfare plan,” typically involves a two-step analysis. The first part

of the analysis involves a determination as to whether the benefit being provided

is a benefit described in Section 3(1). The second part of the analysis involves a

determination as to whether the benefit arrangement is established or maintained

by an “employer” or an “employee organization.” Each of these steps is discussed below.

6

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Is there a plan, fund or program providing a benefit described in

Section 3(1)?

A plan, fund or program will be considered an ERISA-covered welfare plan

only to the extent it provides one or more of the benefits described in Section

3(1).

As reflected in the definition of “welfare plan,” the benefits included as

welfare plan benefits are broadly described and wide ranging in nature. By

regulation, the Department of Labor has provided additional clarifications as to

what are and are not benefits described in Section 3(1) (See: 29 CFR §2510.3-1).

In most instances, however, it will be fairly clear from the facts whether a benefit

described in Section 3(1) is being provided to participants.

For example, the provision of virtually any type of health, medical, sickness,

or disability benefit will be the provision of a benefit described in Section 3(1).

Where there is an employer or employee organization providing one or more of

the described benefits, the Department has generally held that there is a “plan,”

regardless of whether the program of benefits is written or informal, funded (i.e.,

with benefits provided through a trust or insurance) or unfunded (i.e., with benefits provided from the general assets of the employer or employee organization),

offered on a routine or ad hoc basis, or is limited to a single employee-participant.

If it is determined that a Section 3(1) benefit is being provided, a determination then must be made as to whether the benefit is being provided by a plan

“established or maintained by an employer or by an employee organization, or by

both.” Under Section 3(1), a plan, even though it provides a benefit described in

Section 3(1), will not be deemed to be an ERISA-covered employee welfare

benefit plan unless it is established or maintained by an employer (as defined in

ERISA Section 3(5)), or by an employee organization (as defined in ERISA

Section 3(4)), or by both an employer and employee organization.

For example, MEWAs provide benefits described in Section 3(1) (e.g.,

medical and hospital benefits), but MEWAs generally are not established or

maintained by either an employer or employee organization and, for that reason,

do not constitute ERISA-covered plans.

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❒ What is an “employer”?

The term “employer” is defined in Section 3(5) of ERISA, 29 U.S.C.

§1002(5), to mean:

any person acting directly as an employer, or indirectly in the

interest of an employer, in relation to an employee benefit plan;

and includes a group or association of employers acting for an

employer in such capacity.

Under the definition of “employer,” an employee welfare benefit plan might

be established by a single employer or by a group or association of employers

acting on behalf of its employer-members with respect to the plan. “Employer”

status is rarely an issue where only a single employer is involved in the provision

of welfare benefits to employees. However, questions frequently are raised as to

whether a particular group or association constitutes an “employer” for purposes

of Section 3(5).

In order for a group or association to constitute an “employer” within the

meaning of Section 3(5), there must be a bona fide group or association of employers acting in the interest of its employer-members to provide benefits for their

employees. In this regard, the Department has expressed the view that where

several unrelated employers merely execute identically worded trust agreements

or similar documents as a means to fund or provide benefits, in the absence of

any genuine organizational relationship between the employers, no employer

group or association exists for purposes of Section 3(5). Similarly, where membership in a group or association is open to anyone engaged in a particular trade

or profession regardless of their status as employers (i.e., the group or association

members include persons who are not employers) or where control of the group or

association is not vested solely in employer members, the group or association is

not a bona fide group or association of employers for purposes of Section 3(5).

The following factors are considered in determining whether a bona fide

group or association of employers exists for purposes of ERISA: how members

are solicited; who is entitled to participate and who actually participates in the

association; the process by which the association was formed; the purposes for

which it was formed and what, if any, were the pre-existing relationships of its

8
members; the powers, rights and privileges of employer-members; and who

actually controls and directs the activities and operations of the benefit program.

In addition, employer-members of the group or association that participate in the

benefit program must, either directly or indirectly, exercise control over that

program, both in form and in substance, in order to act as a bona fide employer

group or association with respect to the benefit program. It should be noted that

whether employer-members of a particular group or association exercise control

in substance over a benefit program is an inherently factual issue on which the

Department generally will not rule.

Where no bona fide group or association of employers exists, the benefit

program sponsored by the group or association would not itself constitute an

ERISA-covered welfare plan; however, the Department would view each of the

employer-members that utilizes the group or association benefit program to

provide welfare benefits to its employees as having established separate, singleemployer welfare benefit plans subject to ERISA. In effect, the arrangement

sponsored by the group or association would, under such circumstances, be

viewed merely as a vehicle for funding the provision of benefits (like an insurance company) to a number of individual ERISA-covered plans.

If a benefit program is not maintained by an employer, the program may

nonetheless be an ERISA-covered plan if it is maintained by an “employee organization.”

What is an “employee organization”?

The term “employee organization” is defined in Section 3(4) of ERISA, 29

U.S.C. §1002(4). There are two types of organizations included within the

definition of “employee organization.” The first part of the definition includes:

any labor union or any organization of any kind, or any agency or

employee representation committee, association, group or plan, in

which employees participate and which exists for the purpose, in

whole or in part, of dealing with employers concerning an

employee benefit plan, or other matters incidental to employment

relationships; . . .

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This part of the definition is generally limited to labor unions. In order for

an organization to satisfy this part of the definition of “employee organization,”

employees must participate in the organization (i.e., as voting members) and the

organization must exist, at least in part, for the purpose of dealing with employers

concerning matters relating to employment.

The second part of the definition of “employee organization” includes:

. . . any employees’ beneficiary association organized for the

purpose in whole or in part, of establishing such a plan.

While the term “employees’ beneficiary association” is not defined in Title I

of ERISA, the Department of Labor applies the same criteria it utilized in construing that term under the Welfare and Pension Plans Disclosure Act, which

preceded ERISA’s enactment. Applying those criteria, an organization or association would, for purposes of ERISA Section 3(4), be an “employees’ beneficiary

association” only if: (1) membership in the association is conditioned on employment status (i.e., members must have a commonality of interest with respect

to their employment relationships); (2) the association has a formal organization,

with officers, by-laws, or other indications of formality; (3) the association generally does not deal with an employer (as distinguished from organizations described in the first part of the definition of “employee organization”); and (4) the

association is organized for the purpose, in whole or in part, of establishing an

employee benefit plan.

It should be noted that the term “employees’ beneficiary association” used in

Section 3(4) of ERISA is not synonymous with the term “voluntary employees’

beneficiary association” used in Section 501(c)(9) of the Internal Revenue Code

(the Code). Code Section 501(c)(9) provides a tax exemption for a “voluntary

employees’ beneficiary association” providing life, sickness, accident, or other

benefits to its members or their dependents or beneficiaries. While many trusts

established under ERISA-covered welfare plans obtain an exemption from Federal taxation by satisfying the requirements applicable to voluntary employees’

beneficiary associations, satisfying such requirements under the Internal Revenue

Code is not in and of itself indicative of whether the entity is an “employees’

beneficiary association” for purposes of ERISA Section 3(4).

10
What types of plans are excluded from coverage under Title I of

ERISA?

There are certain arrangements that appear to meet the definition of an

“employee welfare benefit plan” but which nonetheless are not subject to the

provisions of Title I of ERISA.

Section 4(b) of ERISA, 29 U.S.C. §1003(b), specifically excludes from Title

I coverage the following plans: (1) governmental plans (as defined in Section

3(32)); (2) church plans (as defined in Section 3(33)); (3) plans maintained solely

to comply with workers’ compensation, unemployment compensation, or disability insurance laws; and (4) certain plans maintained outside the United States.

In addition, the Department of Labor has issued regulations, 29 CFR

§2510.3-1, which clarify the definition of “employee welfare benefit plan.”

Among other things, these regulations serve to distinguish certain “payroll practices” from what might otherwise appear to be ERISA-covered welfare plans

(e.g., payments of normal compensation to employees out of the employer’s

general assets during periods of sickness or vacation).

What requirements apply to an employee welfare benefit plan

under Title I of ERISA?

In general, an employee welfare benefit plan covered by ERISA is subject to

the reporting and disclosure requirements of Part 1 of Title I; the fiduciary responsibility provisions of Part 4 of Title I; the administration and enforcement provisions of Part 5 of Title I; the continuation coverage provisions of Part 6 of Title I

of ERISA and the health care provisions of Part 7 of ERISA. It is important to

note that, unlike ERISA-covered pension plans, welfare plans are not subject to

the participation, vesting, or funding standards of Parts 2 and 3 of Title I of

ERISA. It also is important to note that merely undertaking to comply with the

provisions of ERISA, such as with the reporting and disclosure requirements,

does not make an arrangement an ERISA-covered plan.

The following is a general overview of the various requirements applicable

to welfare plans subject to ERISA.

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Under Part 1 of Title I, 29 U.S.C. §§1021 - 1031, the administrator of an

employee benefit plan is required to furnish participants and beneficiaries with a

summary plan description (SPD), which describes, in understandable terms, their

rights, benefits, and responsibilities under the plan. If there are material changes

to the plan or changes in the information required to be contained in the summary

plan description, summaries of these changes are also required to be furnished to

participants.

The plan administrator also is required, under Part 1, to file with the Department an annual report (the Form 5500 Series) each year which contains financial

and other information concerning the operation of the plan. The Form 5500

Series is a joint Department of Labor - Internal Revenue Service - Pension Benefit

Guaranty Corporation annual report form series. The forms are filed with the

Department of Labor, which processes the forms and furnishes the data to the

Internal Revenue Service. Pursuant to regulations issued by the Department,

welfare plans with fewer than 100 participants that are fully insured or unfunded

(i.e., benefits are paid from the general assets of the employer) are not required to

file annual reports with the Department of Labor. If a plan administrator is

required to file an annual report, the administrator also generally is required to

furnish participants and beneficiaries with a summary of the information contained in that annual report, i.e., a summary annual report.

The Department of Labor’s regulations governing the application, content,

and timing of the various reporting and disclosure requirements are set forth at 29

CFR §2520.101-1, et seq.

Part 4 of Title I, 29 U.S.C. §1101 - 1114, sets forth standards and rules

governing the conduct of plan fiduciaries. In general, any person who exercises

discretionary authority or control respecting the management of a plan or respecting management or disposition of the assets of a plan is a “fiduciary” for purposes

of Title I of ERISA. Under ERISA, fiduciaries are required, among other things,

to discharge their duties “solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable

expenses of administering the plan.” In discharging their duties, fiduciaries must

act prudently and in accordance with documents governing the plan, insofar as

such documents are consistent with ERISA. (See: ERISA Section 404.) Part 4

also describes certain transactions involving a plan and certain parties, such as

12
the plan fiduciaries, which, as a result of the inherent conflicts of interest present,

are specifically prohibited (See: ERISA Section 406). In certain instances there

may be a statutory exemption or an administrative exemption, granted by the

Department, which permits the parties to engage in what would otherwise be a

prohibited transaction, if the conditions specified in the exemption are satisfied

(See: ERISA Section 408).

Part 5 of Title I, 29 U.S.C. §§1131 - 1145, contains the administration and

enforcement provisions of ERISA. Among other things, these provisions describe

the remedies available to participants and beneficiaries, as well as the Department, for violations of the provisions of ERISA (See: ERISA Sections 501 and

502). With regard to benefit claims, Part 5, at Section 503, requires that each

employee benefit plan maintain procedures for the filing of benefit claims and for

the appeal of claims that are denied in whole or in part (See also: 29 CFR

§2560.503-1).

Part 5 also sets forth, at Section 514, ERISA’s preemption provisions. In

general, Section 514(a) provides that provisions of ERISA shall supersede any

and all State laws insofar as they “relate to” any employee benefit plan. Section

514(b), however, saves certain State laws, as well as Federal laws, from ERISA

preemption, including an exception for the State regulation of MEWAs. These

provisions are discussed in detail later in this booklet.

Part 6 of Title I, 29 U.S.C. §§1161 - 1168, contains the “continuation coverage” provisions, also referred to as the “COBRA” provisions because they were

enacted as part of the Consolidated Omnibus Budget Reconciliation Act of 1985.

In general, the continuation coverage provisions require that participants and their

covered dependents be afforded the option of maintaining coverage under their

health benefit plan, at their own expense, upon the occurrence of certain events

(referred to as “qualifying events”) that would otherwise result in a loss of coverage under the plan. “Qualifying events” include, among other things:

death of the covered employee, termination (other than

by reason of an employee’s gross misconduct), or

reduction of hours of covered employment;

13

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divorce or legal separation of the covered employee from

the employee’s spouse;

a dependent child ceasing to be a dependent under the

generally applicable requirements of the plan.

Continuation coverage may be maintained for periods up to 18 months, 36

months, or even longer depending on the qualifying event and other circumstances.

It is important to note that while Title I of ERISA contains continuation

coverage requirements and participants and beneficiaries may enforce their rights

to continuation coverage in accordance with the remedies afforded them under

Section 502 of Title I of ERISA, the Department of Labor has limited regulatory

and interpretative jurisdiction with respect to the continuation coverage provisions. Specifically, the Department of Labor has responsibility for the COBRA

notification and disclosure provisions, while the Internal Revenue Service has

regulatory and interpretative responsibility for all the other provisions of COBRA

under the Internal Revenue Code.

Part 7 of Title I of ERISA, 29 U.S.C.§1181 et seq., contains provisions

setting forth specific benefit requirements applicable to group health plans and

health insurance issuers under the Health Insurance Portability and Accountability

Act (HIPAA), the Newborns’ and Mothers’ Health Protection Act (Newborn’s

Act), the Mental Health Parity Act (MHPA), and the Women’s Health and Cancer

Rights Act (WHCRA).

The HIPAA portability rules, at Section 701 of ERISA, place limitations on a

group health plan’s ability to impose pre-existing condition exclusions and

provides special enrollment rights for certain individuals that lose other health

coverage or who experience a life change. Section 702 contains HIPAA’s nondiscrimination rules that prohibit plans or issuers from establishing rules for eligibility to enroll in the plan or charging individuals higher premium amounts based on

a health factor. In addition, Section 703 of Part 7 sets forth provisions for guaranteed renewably in MEWAs and multiemployer plans.

14

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The Newborns’ Act (in Section 711 of ERISA) generally requires group

health plans that offer maternity hospital benefits for mothers and newborns to

pay for at least a 48-hour hospital stay for the mother and newborn following

normal childbirth or a 96-hour hospital stay following a cesarean. MHPA, at

Section 712, provides for parity in the application of annual and dollar limits on

mental health benefits with annual lifetime dollar limits on medical/surgical

benefits. WHCRA, at Section 713, provides protections for patients who elect

breast reconstruction or certain other follow-up care in connection with a

mastectomy.

To what extent does ERISA govern the activities of MEWAs that

are not “employee welfare benefit plans”?

Under ERISA, persons who exercise discretionary authority or control over

the management of ERISA-covered plans or the assets of such plans are considered fiduciaries and, therefore, are subject to ERISA’s fiduciary responsibility

provisions. When the sponsor of an ERISA-covered plan purchases health care

coverage for its employees from a MEWA, the assets of the MEWA generally are

considered to include the assets of the plan (i.e., “plan assets”), unless the MEWA

is a State-licensed insurance company. (See: 29 C.F.R. §§2510.3-101 and

2510.3-102 relating to the definition of “plan assets.”) In exercising discretionary

authority or control over plan assets, such as in the payment of administrative

expenses and in the making of benefit claim determinations, the persons operating the MEWA would be performing fiduciary acts that are governed by ERISA’s

fiduciary provisions. Where a fiduciary breaches statutorily mandated duties

under ERISA, or where a person knowingly participates in such breach, the U.S.

Department of Labor may pursue civil sanctions.

Inasmuch as MEWAs typically are not ERISA-covered welfare plans and the

Department of Labor does not have direct regulatory authority over the business

of insurance, the Department’s investigations of MEWAs necessarily focus on

whether the persons operating MEWAs have breached their fiduciary duties under

ERISA to employee plans that have purchased health coverage from the MEWA.

Because of the factual and transactional nature of fiduciary breach determinations, investigations of possible fiduciary breaches tend to be more complex and

time-consuming than investigations involving alleged violations of specific

15

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statutory requirements, such as the reporting, disclosure, and claims procedure

requirements. For example, MEWA investigations typically require detailed

reviews of the financial records and documents relating to the operation of the

MEWA, the contracts between the MEWA and the service providers to the

MEWA, participation or other agreements between the MEWA and ERISAcovered welfare plans, as well as the actual transactions engaged in by the

MEWA, in order to determine whether there has been a violation of ERISA’s

fiduciary standards.

Accordingly, while the Department may pursue enforcement actions with

respect to MEWAs, such action is considerably different from, and often more

limited than, the remedies generally available to the States under their insurance

laws. In this regard, it is important to note that, in many instances, States may be

able to take immediate action with respect to a MEWA upon determining that the

MEWA has failed to comply with licensing, contribution, or reserve requirements

under State insurance laws, whereas investigating and substantiating a fiduciary

breach under ERISA may take considerably longer.

16
Regulation of Multiple Employer Welfare

Arrangements under State Insurance Laws

As noted in the introduction, States, prior to 1983, were effectively precluded by

ERISA’s broad preemption provisions from regulating any employee benefit plan

covered by Title I of ERISA. As a result, a State’s ability to regulate MEWAs was

often dependent on whether the particular MEWA was an ERISA-covered plan. In an

effort to address this problem, the U.S. Congress amended ERISA in 1983 to establish

a special exception to ERISA’s preemption provisions for MEWAs. This exception,

which is discussed in detail below, was intended to eliminate claims of ERISA-plan

status and Federal preemption as an impediment to State regulation of MEWAs by

permitting States to regulate MEWAs that are ERISA-covered employee welfare

benefit plans.

The following discussion relating to ERISA’s preemption provisions and the

1983 MEWA amendments is intended to clarify what is and what is not a “multiple

employer welfare arrangement” within the meaning of ERISA Section 3(40), and the

extent to which States may regulate MEWAs, as provided by ERISA Section

514(b)(6).

What is the general scope of ERISA preemption?

Under the general preemption clause of ERISA Section 514(a), 29 U.S.C.

§1144(a), ERISA preempts any and all State laws which “relate to” any employee

benefit plan subject to Title I of ERISA. However, there are a number of exceptions to

the broad preemptive effect of Section 514(a) set forth in ERISA Section 514(b), 29

U.S.C. §1144(b), referred to as the “savings clause.”

Section 514(a) of ERISA provides, in relevant part, that:

Except as provided in subsection (b) of this section [Section 514],

the provisions of this title [title I] . . . supersede any and all State

laws insofar as they may now or hereafter relate to any employee

benefit plan . . . .

In determining whether a State law may “relate to” an employee benefit plan, the

U.S. Supreme Court has determined that the words “relate to” should be construed

expansively. In Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983), the Court

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held that “[a] law ‘relates to’ an employee benefit plan, in the normal sense of the

phrase, if it has a connection with or reference to such a plan.” (See also: Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S. 724 (1985).

As noted above, however, while a State law may be found to “relate to” an

employee benefit plan, within the meaning of Section 514(a) of ERISA, the law may

nonetheless be saved from ERISA preemption to the extent that an exception described in Section 514(b) applies.

With regard to the application of State insurance laws to ERISA-covered plans,

Section 514(b)(2) contains two relevant exceptions. This section provides, in relevant

part, that:

(A) Except as provided in subparagraph (B), nothing in this title [title

I] shall be construed to exempt or relieve any person from any law of

any State which regulates insurance....

(B) Neither an employee benefit plan..., nor any trust established under

such a plan, shall be deemed to be an insurance company or other

insurer... for purposes of any law of any State purporting to regulate

insurance companies, insurance contracts,....

Section 514(b)(2)(A) referred to as the "savings clause” essentially preserves to

the States the right to regulate the business of insurance and persons engaged in that

business (See: Metropolitan Life Insurance Co. v. Massachusetts, cited above, for a

discussion of the criteria applied by the U.S. Supreme Court in determining whether a

State law is one that “regulates insurance.”) However, while Section 514(b)(2)(A)

saves from ERISA preemption State laws that regulate insurance, Section

514(b)(2)(B), referred to as the “deemer clause,” makes clear that a State law that

“purports to regulate insurance” cannot deem an employee benefit plan to be an

insurance company.

While plans purchasing insurance are, as a practical matter, indirectly affected

by State insurance laws (inasmuch as the insurance contracts purchased by the plans

are subject to State insurance law requirements), the “deemer clause,” prior to 1983,

effectively prevented the direct application of State insurance laws to ERISA-covered

employee benefit plans. In 1983, however, ERISA was amended, as part of Public

18
Law 97-473 (January 14, 1983), to add Section 514(b)(6) to ERISA’s preemption

provisions.

In general, Section 514(b)(6) provides a special exception for the application of

State insurance laws to ERISA-covered welfare plans that are “multiple employer

welfare arrangements” (MEWAs). Because the application of Section 514(b)(6) is

limited to benefit programs that are MEWAs, the following discussion first reviews

what is and what is not a MEWA for purposes of the Section 514(b)(6) exception,

followed by a detailed review of the exception and its effect on State regulation of

MEWAs.

What is a “multiple employer welfare arrangement”?

The term “multiple employer welfare arrangement” is defined in ERISA Section

3(40), 29 U.S.C. §1002(40). Section 3(40)(A) provides as follows:

(A) 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) [welfare plan

benefits] 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 arrangement that is established or maintained -

under or pursuant to one or more agreements which the

Secretary finds to be collective bargaining agreements;

by a rural electric cooperative; or

by a rural telephone cooperative association*

(Emphasis supplied.)

19

❒

(i)

(ii)

(iii)

* The Rural Telephone Cooperative Associations ERISA Amendments Act of 1991 (Public Law

No. 102-89) amended the definition of “multiple employer welfare arrangement” to exclude

ERISA-covered welfare plans established or maintained by “rural telephone cooperative associations,” as defined in ERISA section 3(40)(B)(v), effective August 14, 1991, the date of enactment.
As reflected above, the definition of MEWA includes both ERISA-covered employee welfare benefit plans and other arrangements which offer or provide medical,

surgical, hospital care or benefits, or benefits in the event of sickness, accident, disability, or

any other benefit described in ERISA Section 3(1) (See: definition of “employee welfare

benefit plan” on page 6 for a complete list of benefits). Therefore, whether a particular

arrangement is or is not an employee welfare benefit plan subject to ERISA is irrelevant for

purposes of determining whether the arrangement is a MEWA. In order to constitute a

MEWA, however, a determination must be made that:

the arrangement offers or provides welfare benefits to the

employees of two or more employers or to the beneficiaries of

such employees (i.e., the arrangement is not a single employer

plan); and

the arrangement is not excepted from the definition of MEWA as

established or maintained under or pursuant to one or more

collective bargaining agreements, or by a rural electric

cooperative, or by a rural telephone cooperative association.

Set forth below are a number of issues which should be considered in making a

MEWA determination.

Does the arrangement offer or provide benefits to the employees of

two or more employers?

Plans maintained by one employer or a group of employers

under common control

If a plan is maintained by a single-employer for the exclusive purpose of providing benefits to that employer’s employees, former employees (e.g., retirees), or beneficiaries (e.g., spouses, former spouses, dependents) of such employees, the plan will be

considered a single employer plan and not a MEWA within the meaning of ERISA

Section 3(40). For purposes of Section 3(40), certain groups of employers which

have common ownership interests are treated as a single employer. In this regard,

Section 3(40)(B)(i) provides that:

20

--

--

❒

1.
two or more trades or businesses, whether or not incorporated,

shall be deemed a single employer if such trades or businesses are

within the same control group.

In determining whether trades or businesses are within the “same control group,”

Section 3(40)(B)(ii) provides that the term “control group” means a group of trades or

businesses under “common control.” Pursuant to Section 3(40)(B)(iii), whether a

trade or business is under “common control” is to be determined under regulations

issued by the Secretary applying principles similar to those applied in determining

whether there is “common control” under section 4001(b) of Title IV of ERISA,

except that common control shall not be based on an interest of less than 25 percent.

Accordingly, trades or businesses with less than a 25 percent ownership interest will

not be considered under “common control” and, therefore, will not be viewed as a

single employer for purposes of determining whether their plan provides benefits to

the employees of two or more employers under Section 3(40).

With regard to situations where there is a 25 percent or more ownership interest,

it should be noted that the Department has not adopted regulations under Section

3(40)(B)(iii). Section 4001(b) of Title IV of ERISA and 29 CFR §4001.3(a) provide,

however, the PBGC will determine that trades or businesses (whether or not incorporated) are under common control if they are “two or more trades or businesses under

common control” as defined in regulations prescribed under Section 414(c) of the

Internal Revenue Code. The regulations issued under Section 414(c) of the Code, see

26 CFR §1.414(c)-2, provide that “common control” generally means, (i) in the case

of a parent-subsidiary group, the entities are connected through at least an 80 percent

ownership interest, or (ii) in the case of a brother-sister group: (a) five or fewer persons own at least an 80 percent interest in each entity, and (b) the same five or fewer

persons together own a greater than 50 percent interest in each entity, taking into

account the ownership of each person only to the extent such ownership is identical

with respect to each organization.

Plans maintained by groups or associations of unrelated

employers

Questions have been raised as to whether a plan sponsored by a group or association acting on behalf of its employer-members, which are not part of a control

group, constitutes a “single employer” for purposes of the MEWA definition. The

question is premised on the fact that the term “employer” is defined in Section 3(5),

21

2.
29 U.S.C. §1002(5), to mean “any person acting directly as an employer, or indirectly

in the interest of an employer, in relation to an employee benefit plan; and includes a

group or association of employers acting for an employer in such capacity.” As

discussed earlier, the Department has taken the position that a bona fide group or

association of employers would constitute an “employer” within the meaning of

ERISA Section 3(5) for purposes of having established or maintained an employee

benefit plan (See: page 8).

However, unlike the specified treatment of a control group of employers as a

single employer, there is no indication in Section 3(40), or the legislative history

accompanying the MEWA provisions, that Congress intended that such groups or

associations be treated as “single employers” for purposes of determining the status of

such arrangements as a MEWA. Moreover, while a bona fide group or association of

employers may constitute an “employer” within the meaning of ERISA Section 3(5),

the individuals typically covered by the group or association-sponsored plan are not

“employed” by the group or association and, therefore, are not “employees” of the

group or association. Rather, the covered individuals are “employees” of the

employer-members of the group or association. Accordingly, to the extent that a plan

sponsored by a group or association of employers provides benefits to the employees

of two or more employer-members (and such employer-members are not part of a

control group of employers), the plan would constitute a MEWA within the meaning

of Section 3(40).

Plans maintained by employee leasing organizations

When a health benefit plan is maintained by an employee leasing organization,

there is often a factual question as to whether the individuals covered by the leasing

organization’s plan are employees of the leasing organization or employees of the

client (often referred to as the “recipient”) employers. If all the employees participating in the leasing organization’s plan are determined to be employees of the leasing

organization, the plan would constitute a “single employer” plan and not a MEWA.

On the other hand, if the employees participating in the plan include employees of

two or more recipient employers or employees of the leasing organization and at least

one recipient employer, the plan would constitute a MEWA because it would be

providing benefits to the employees of two or more employers.

Like a bona fide group or association of employers, an employee leasing

organization may be an “employer” within the meaning of ERISA Section 3(5) to

22

3.
the extent it is acting directly or indirectly in the interest of an employer. However, as with bona fide groups or associations of employers, “employer” status

under Section 3(5) does not in and of itself mean the individuals covered by the

leasing organization plan are “employees” of the leasing organization. As discussed below, in order for an individual to be considered an “employee” of an

“employer” for purposes of the MEWA provisions, an employer-employee

relationship must exist between the employer and the individual covered by the

plan. In this regard, the payment of wages, the payment of Federal, State and

local employment taxes, and the providing of health and/or pension benefits are

not solely determinative of an employer-employee relationship. Moreover, a

contract purporting to create an employer-employee relationship will not be

determinative where the facts and circumstances establish that the relationship

does not exist.

Determinations as to who is an “employee” of an

employer

As discussed above, the term “employer” is defined to encompass not only

persons with respect to which there exists an employer-employee relationship

between the employer and individuals covered by the plan (i.e., persons acting

directly as an employer), but also certain persons, groups and associations, which,

while acting indirectly in the interest of or for an employer in relation to an

employee benefit plan, have no direct employer-employee relationship with the

individuals covered under an employee benefit plan. Therefore, merely establishing that a plan is maintained by a person, group or association constituting an

“employer” within the meaning of ERISA Section 3(5) is not in and of itself

determinative that the plan is a single-employer plan, rather than a plan that

provides benefits to the employees of two or more employers (i.e., a MEWA). A

determination must be made as to the party or parties with whom the individuals

covered by the plan maintain an employer-employee relationship.

The term “employee” is defined in Section 3(6) of ERISA, 29 U.S.C. §1002(6),

to mean “any individual employed by an employer.” (Emphasis supplied.) The

Department has taken the position that an individual is “employed” by an employer,

for purposes of Section 3(6), when an employer-employee relationship exists. While

in most instances the existence, or absence, of an employer-employee relationship will

be clear, there may be situations when the relationship is not entirely free from doubt.

23

4.
In general, whether an employer-employee relationship exists is a question

that must be determined on the basis of the facts and circumstances involved. It

is the position of the Department that, for purposes of Section 3(6), such determinations must be made by applying common law of agency principles.*

 In applying common law principles, consideration must be given to, among other things,

whether the person for whom services are being performed has the right to control

and direct the individual who performs the services, not only as to the result to be

accomplished by the work but also as to the details and means by which the result

is to be accomplished; whether the person for whom services are being performed

has the right to discharge the individual performing the services; whether the

individual performing the services is as a matter of economic reality dependent

upon the business to which he or she renders service, etc. In this regard, it should

be noted that a contract purporting to create an employer-employee relationship

will not control where common law factors (as applied to the facts and circumstances) establish that the relationship does not exist. (See: Advisory Opinion No.

92-05, Appendix A.)

Finally, pursuant to regulations issued by the Department of Labor, certain

individuals are deemed not be “employees” for purposes of Title I of ERISA. Under

the regulations, an individual and his or her spouse are deemed not be “employees”

with respect to a trade or business which is wholly owned by the individual or the

individual and his or her spouse. Also under the regulations, a partner in a partnership

and his or her spouse are deemed not to be “employees” with respect to the partnership. (See: 29 CFR §2510.3-3(b) and (c).)

Is MEWA status conditioned upon the plan being established or

maintained by an employer(s)?

While the definition of MEWA refers to arrangements that offer or provide benefits to the employees of two or more employers, the definition of

MEWA is not limited to arrangements established or maintained by an em24

❒

*

 While common law of agency factors typically have been applied in determining whether a person is

an employee or independent contractor, common law principles are equally applicable to determining

by whom an individual is employed. See: Professional & Executive Leasing, Inc. v. Commissioner,

89 TC No. 19(1987). Also see: Nationwide Mutual Insurance Co. et al. v. Darden, 503 U.S., 318,

112 S. Ct. 1344(1992).
ployer. In fact, Section 3(40) does not condition MEWA status on the arrangement being established or maintained by any particular party. Accordingly, the MEWA status of an arrangement is not affected by the absence of

any connection or nexus between the arrangement and the employers whose

employees are covered by the arrangement. For example, in Advisory Opinion No. 88-05, the Department of Labor concluded that an arrangement established

by an association to provide health benefits to its members, who were full-time

ministers and other full-time employees of certain schools and churches, constituted a MEWA even though there was no employer involvement with the association’s

plan.

Is the arrangement excluded from the definition of MEWA?

Once it has been determined that an ERISA-covered welfare plan provides

benefits to the employees of two or more employers, a determination must be made as

to whether any of the exclusions from MEWA status apply to the arrangement. Pursuant to ERISA Section 3(40)(A), three types of arrangements are specifically excluded

from the definition of “multiple employer welfare arrangement,” even though such

arrangements may provide benefits to the employees of two or more employers. Each

of these types of arrangements is discussed in general terms below.

Plans maintained pursuant to collective bargaining agreements

Section 3(40)(A)(i) of ERISA specifically excludes from the MEWA definition

any plan or other arrangement that is established or maintained “under or pursuant to

one or more agreements which the Secretary finds to be collective bargaining agreements.” The Department has concluded that the exception under Section 3(40)(A)(i)

should be limited to plans providing coverage primarily to those individuals covered

under collective bargaining agreements. Criteria for what constitutes a plan established or maintained under or pursuant to collective bargaining is set forth in the

Department’s regulation at 29 CFR §2510.3-40(b). (See Appendix C). The criteria

are intended to ensure that the statutory exception is only available to plans whose

participant base is predominantly comprised of the bargaining unit employees on

whose behalf such benefits were negotiated and other individuals with a close nexus

to the bargaining unit or the employer(s) of the bargaining unit employees.

The regulation provides that an entity will be treated as established or maintained under or pursuant to collective bargaining for purposes of the exception in

25

❒

1.
Section 3(40)(A)(i) if it meets three affirmative requirements and does not fall within

three exclusions. The affirmative requirements are:

the arrangement itself is an employee welfare benefit plan within

the meaning of Section 3(1) of ERISA;

at least 85 percent of the participants in the plan who are employed

under one or more collective bargaining agreements meeting the

requirements of the regulation or who otherwise fall within one of

the other categories of persons identified in the regulation as

having a “nexus” to the bargaining unit or employers of the

bargaining unit employees; and

the plan is incorporated or referenced in a written agreement

between one or more employers and one or more employee

organizations, which agreement, itself or together with other

agreements among the same parties, is the product of a bona fide

collective bargaining relationship between the employer(s) and the

employee organization(s) and contains certain terms that ordinarily

are in collective bargaining agreements.

The regulation sets forth eight factors indicative of bona fide collective bargaining. The regulation provides that if four of the eight factors are met, there is a rebuttable presumption that the bargaining was bona fide. In addition, the regulation lists a

variety of factors that may be examined to rebut the presumption regarding a plan that

meets four of the eight factors, or to prove a plan is in fact collectively bargained

despite its failure to meet four of eight factors.

The regulation provides, however, that a plan will be deemed to be a MEWA

even if it ostensibly meets the affirmative criteria described above, if: (1) the plan is

self-funded or partially self-funded and is marketed to employers or sole proprietors;

(2) the principal intent of the purported collective bargaining agreement is to evade

compliance with state law and regulations applicable to insurance; or (3) there is

fraud, forgery, or willful misrepresentation that the plan satisfies the affirmative

criteria in the regulation.

The Department also has promulgated regulations at 29 CFR part 2570, subpart

H, providing for administrative hearings to obtain a determination by the Secretary of

26

--

--

--
Labor as to whether a particular entity is an employee welfare benefit plan established

or maintained under or pursuant to one or more collective bargaining agreements for

purposes of Section 3(40) of ERISA. The hearing procedure is 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 in section 3(40)(A)(i) for

collectively bargained plans. A petition for a hearing may be initiated only by the plan

or other arrangement. The regulations specifically provide that filing a petition for a

hearing is not intended to provide a basis for delaying or staying a state proceeding

against the plan or arrangement.

Rural Electric Cooperatives

Section 3(40)(A)(ii) specifically excludes from the definition of MEWA any plan

or other arrangement that is established or maintained by a “rural electric cooperative.”

Section 3(40)(B)(iv) defines the term “rural electric cooperative” to mean:

any organization which is exempt from tax under Section

501(a) of the Internal Revenue Code of 1986 and which is

engaged primarily in providing electric service on a mutual

or cooperative basis, and

any organization described in paragraph (4) or (6) of Section

501(c) of the Internal Revenue Code of 1986 which is

exempt from tax under Section 501(a) of such Code and at

least 80 percent of the members of which are organizations

described in subclause (I).

Rural Telephone Cooperative Associations

Section 3(40)(A)(iii) specifically excludes from the definition of MEWA any plan or

other arrangement that is established or maintained by a “rural telephone cooperative

association.” This exception to MEWA status for rural telephone cooperative associations

became effective on August 14, 1991, the enactment date of the Rural Telephone Cooperative Associations ERISA Amendments Act of 1991 (Public Law No. 102-89).

27

3.

(II)

(I)

2.
Section 3(40)(B)(v), also added to ERISA by Public Law No. 102-89, defines

the term “rural telephone cooperative association” to mean an organization described in

paragraph (4) or (6) of Section 501(c) of the Internal Revenue Code of 1986 which is

exempt from tax under Section 501(a) and at least 80 percent of the members of

which are organizations engaged primarily in providing telephone service to rural

areas of the United States on a mutual, cooperative, or other basis.

To restate the definition of MEWA somewhat differently, a MEWA, within the

meaning of Section 3(40), includes any ERISA-covered employee welfare benefit

plan which is not:

a single employer plan (which includes employers within the

same control group);

a plan established or maintained under or pursuant to a

collective bargaining agreement;

a plan established or maintained by a rural electric

cooperative; or

a plan established or maintained by a rural telephone

cooperative association.

If an ERISA-covered employee welfare benefit plan is a MEWA, States may, as

discussed below, apply and enforce State insurance laws with respect to the plan in accordance with the exception to ERISA preemption under Section 514(b)(6).

To what extent may States regulate ERISA-covered welfare plans

that are MEWAs?

If an ERISA-covered welfare plan is a MEWA, States may apply and enforce

their State insurance laws with respect to the plan to the extent provided by ERISA

Section 514(b)(6)(A), 29 U.S.C. §1144(b)(6)(A). In general, Section 514(b)(6)(A)

provides an exception to ERISA’s broad preemption provisions for the application and

enforcement of State insurance laws with respect to any employee welfare benefit plan

that is a MEWA within the meaning of ERISA Section 3(40).

28

(1)

(2)

(4)

(3)

❒
In effect, Section 514(b)(6)(A) serves to provide an exception to the “deemer

clause” of Section 514(b)(2)(B), which otherwise precludes States from deeming an

ERISA-covered plan to be an insurance company for purposes of State insurance

laws, by permitting States to treat certain ERISA-covered plans (i.e., MEWAs) as

insurance companies, subject to a few limitations. While the range of State insurance

law permitted under Section 514(b)(6)(A) is subject to certain limitations, the Department of Labor believes that these limitations should have little, if any, practical affect

on the ability of States to regulate MEWAs under their insurance laws.

There is nothing in Section 514(b)(6)(A) that limits the applicability of State

insurance laws to only those insurance laws which specifically or otherwise

reference "multiple employer welfare arrangements" or "MEWAs." Similarly,

while the specific application of a particular insurance law to a particular MEWA

is a matter within the jurisdiction of the State, there is nothing in Section

514(b)(6) that would preclude the application of the same insurance laws that

apply to any insurer to ERISA-covered plans which constitute MEWAs, subject

only to the limitations set forth in Section 514(b)(6)(A).

Under Section 514(b)(6)(A), the extent to which State insurance laws may be

applied to a MEWA that is an ERISA-covered plan is dependent on whether or not the

plan is fully insured.

What State insurance laws may be applied to a fully insured plan?

Section 514(b)(6)(A)(i) provides:

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 sub-paragraph (B)), any law of any State which

regulates insurance may apply to such arrangement to the

extent such law provides --

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

29

i

❒
plan, must meet in order to be considered under such law

able to pay benefits in full when due, and

provisions to enforce such standards... (Emphasis

supplied.)

Under Section 514(b)(6)(A)(i), it is clear that, in the case of fully insured

MEWAs, States may apply and enforce any State insurance law requiring the maintenance of specific reserves or contributions designed to ensure that the MEWA will be

able to satisfy its benefit obligations in a timely fashion. Moreover, it is the view of

the Department of Labor that 514(b)(6)(A)(i) clearly enables States to subject

MEWAs to licensing, registration, certification, financial reporting, examination,

audit and any other requirement of State insurance law necessary to ensure compliance with the State insurance reserves, contributions and funding requirements.

What is a “fully insured” MEWA?

Section 514(b)(6)(D) provides that, for purposes of Section 514(b)(6)(A), “a

multiple employer welfare arrangement shall be considered fully insured only if the

terms of the arrangement provide for benefits the amount of all of which the Secretary

determines are guaranteed under a contract, or policy of insurance, issued by an

insurance company, insurance service, or insurance organization, qualified to conduct

business in a State.” In this regard, a determination by the Department of Labor as to

whether a particular MEWA is “fully insured” is not required in order for a State to treat a

MEWA as “fully insured” for purposes of applying State insurance law in accordance with

Section 514(b)(6).

What State insurance laws may be applied to a plan that is not fully

insured?

Section 514(b)(6)(A)(ii) provides:

in the case of any other employee welfare benefit plan which is a

multiple employer welfare arrangement, in addition to this title

[title I], any law of any State which regulates insurance may

apply to the extent not inconsistent with the preceding sections

of this title [Title I]. (Emphasis supplied)

30

--

❒

❒

ii
Accordingly, if a MEWA is not “fully insured,” the only limitation on the applicability

of State insurance laws to the MEWA is that the law not be inconsistent with Title I of

ERISA.

Under what circumstances might a State insurance law be

“inconsistent” with Title I of ERISA?

In general, a State law would be inconsistent with the provisions of Title I to the extent

that compliance with such law would abolish or abridge an affirmative protection or

safeguard otherwise available to plan participants and beneficiaries under Title I or

would conflict with any provision of Title I, making compliance with ERISA impossible. For example, any State insurance law which would adversely affect a

participant’s or beneficiary’s right to request or receive documents described in Title I

of ERISA, or to pursue claims procedures established in accordance with Section 503

of ERISA, or to obtain and maintain continuation health coverage in accordance with

Part 6 of ERISA would be viewed as inconsistent with the provisions of Title I.

Similarly, a State insurance law that would require an ERISA-covered plan to make

imprudent investments would be inconsistent with the provisions of Title I.

On the other hand, a State insurance law generally will not be deemed “inconsistent” with the provisions of Title I if it requires ERISA-covered plans constituting

MEWAs to meet more stringent standards of conduct, or to provide more or greater

protection to plan participants and beneficiaries than required by ERISA. The Department has expressed the view that any State insurance law which sets standards

requiring the maintenance of specified levels of reserves and specified levels of

contributions in order for a MEWA to be considered, under such law, able to pay

benefits will generally not be “inconsistent” with the provisions of Title I for purposes of

Section 514(b)(6)(A)(ii). The Department also has expressed the view that a State law

regulating insurance which requires a license or certificate of authority as a condition

precedent or otherwise to transacting insurance business or which subjects persons who fail

to comply with such requirements to taxation, fines and other civil penalties, including

injunctive relief, would not in and of itself be “inconsistent” with the provisions of title I for

purposes of Section 514(b)(6)(A)(ii). (See: Advisory Opinion 90-18, Appendix A).

31

❒
Has the Department of Labor granted any exemptions from State

regulation for MEWAs which are not fully insured?

Pursuant to Section 514(b)(6)(B), the Secretary of Labor may, under regulations,

exempt from Section 514(b)(6)(A)(ii) MEWAs which are not fully insured. Such

exemptions may be granted on an individual or class basis. While the Department

has the authority to grant exemptions from the requirements of Section

514(b)(6)(A)(ii), such authority does not extend to the requirements of Section

514(b)(6)(A)(i) relating to the maintenance of specified levels of reserves and specified levels of contributions under State insurance laws.

The Department has neither prescribed regulations for such exemptions nor

granted any such exemptions since the enactment of the MEWA provisions in 1983.

32

❒
Form M-1 Filing Requirement for MEWAs

The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

established a filing requirement for MEWAs. The purpose of the Form M-1 filing

requirement is to provide EBSA with information concerning compliance by MEWAs

with the requirements of Part 7 of ERISA (including the provisions of HIPAA, the

Mental Health Parity Act, the Newborns and Mothers’ Health Protection Act, and the

Women’s Health and Cancer Rights Act).

Under the new reporting requirement, the one-page Form M-1 is generally

required to be filed once a year, due on March 1; however, plan administrators can

request a 60-day extension.

To help filers, EBSA has published a guide for completing the Form M-1, which

is available by calling the EBSA toll-free line at 1-866-444-EBSA (3272) and on the

Internet at www.dol.gov/ebsa. Plan administrators may also contact us with any

questions or for assistance in completing the Form M-1 by calling the EBSA Help

Desk at 202-693-3860.

33
ERISA

ADVISORY OPINIONS

Advisory opinions relating to Title I of ERISA are issued by the Employee

Benefits Security Administration and represent the official views of the U.S. Department of Labor on the interpretation and application of the provisions of ERISA.

Advisory opinions are issued pursuant to ERISA Procedure 76-1, which, among other

things, describes the circumstances under which the Department will and will not rule

on particular matters and the effect of advisory opinions generally. A copy of ERISA

Procedure 76-1 is reprinted as Appendix B. Pursuant to Section 12 of ERISA Procedure 76-1, advisory opinions, as well as advisory opinion requests, accompanying

documentation, and related correspondence are available to the general public.

It should be noted that the advisory opinion process is not a fact-finding process.

Advisory opinions are generally based solely on the facts and representations submitted to the Department by the party or parties requesting the opinion. Therefore,

advisory opinions should not be viewed as determinations by the Department as to the

accuracy of any of the facts and representations provided by the requesting party and

cited in such opinions.

Is an advisory opinion on the MEWA status of an arrangement

necessary in order for a State to exercise jurisdiction over the

arrangement?

No. First, there is nothing in ERISA Section 3(40) which conditions MEWA

status on the obtaining of an opinion from the Department. Second, in most instances, the question of whether a particular arrangement is a MEWA will require

factual, rather than interpretative, determinations. That is, if the arrangement meets

the definition of a MEWA - because it is providing health or similar benefits to the

employees of more than one employer (i.e., the arrangement is not a singleemployer plan) and the arrangement is not established or maintained under or pursuant to a collective bargaining agreement or by a rural electric cooperative, or by a rural

telephone cooperative association - the arrangement is, by definition, a MEWA,

whether or not the Department rules on the matter.

35

❒
Is it necessary to determine by advisory opinion whether a MEWA

is an ERISA-covered employee benefit plan?

In most cases, no. While the MEWA exception to ERISA's preemption provisions does impose a few limitations on the ability of States to regulate MEWAs that

are ERISA-covered plans, these limitations, as discussed earlier and in Advisory

Opinion No. 90-18 (See: Appendix A), should not, as a practical matter, have any

significant effect on a State's application and enforcement of its insurance laws with

respect to a MEWA which is an ERISA-covered plan. Accordingly, a determination

as to whether or not a MEWA is an ERISA- covered plan is not necessary in most

instances.

If it is determined that an advisory opinion is necessary, what

information is required in order for the Department to issue a

ruling?

If a MEWA determination is needed, the advisory opinion request should include

sufficient facts and representations to conclude whether the arrangement is providing

benefits described in Section 3(1) of ERISA (See: pages 5-6) whether benefits are

being provided to the employees of two or more employers, whether the employers of

covered employees are members of the same control group of employers, and whether

the arrangement is established or maintained pursuant to or under a collective bargaining agreement or by a rural electric cooperative or rural telephone cooperative

association.

If an ERISA-coverage determination is needed, the advisory opinion request

should also include sufficient information to determine whether the arrangement is

established or maintained by an employer, employee organization, or by both (See:

pages 6-10). An advisory opinion request for such a determination should include

copies of plan and trust documents, constitutions and by-laws, if any, administrative

agreements, employer-participation agreements, collective bargaining agreements, if

applicable, and any other documents or correspondence that might have a bearing on

the status of the arrangement for ERISA purposes.

36

❒

❒
Where should advisory opinion requests be sent?

Requests for advisory opinions involving MEWAs should be sent to the following address:

Office of Regulations and Interpretations

Employee Benefits Security Administration

U.S. Department of Labor

Room N-5669

200 Constitution Avenue, NW

Washington, DC 20210

37

❒
ERISA ENFORCEMENT

Enforcement of the provisions of Title I of ERISA is carried out by the

Employee Benefits Security Administration’s Office of Enforcement. The

Office of Enforcement consists of a national office and 15 field offices located throughout the United States. The national office provides policy

direction and technical and management support for the field offices, in

addition to conducting investigations in selected sensitive areas. Most, if not

all, MEWA-related investigations are conducted by the field offices under the

supervision of an area or district director, with oversight and coordination

provided by the national office.

In an effort to facilitate State and Federal enforcement efforts in the

MEWA area, EBSA’s field offices have established, or are in the process of

pursuing, cooperative arrangements with the States in their jurisdiction pursuant to which the offices will share and discuss cases opened and closed by

EBSA involving MEWAs. In addition, field offices will, in accordance with

such agreements, make available documents obtained through voluntary

production or pursuant to a civil subpoena. In order to ensure proper coordination of MEWA-related initiatives, State officials should direct information

and/or inquiries (other than advisory opinion requests) to the director of the

EBSA area office responsible for their particular State.

For more information for the field office near you, contact EBSA’s Participant and Compliance Assistance toll-free number - 1-866-444-EBSA (3272) - or

view it on the agency’s Web site.

View this and other free EBSA publications at www.dol.gov/ebsa.

39
Appendix A

Advisory Opinions

and

Information Letters

41
July 2, 1990

U.S. Department of Labor

Pension and Welfare Benefits Administration

Washington. DC 20210

90-18A

Mr. J. Scott Kyle ERISA SEC

Texas State Board of Insurance 514(b)(6)(A)(ii)

1110 San Jacinto

Austin, Texas 78701-1998

Dear Mr. Kyle:

This responds to your letter of May 8, 1990, regarding MDPhysicians and Associates, Inc. Employee Benefit Plan

(MDPEBP). You request the views of the Department of Labor concerning issues that arise, as described below,

under section 514(b)(6)(A) of the Employee Retirement Income Security Act of 1974 (ERISA).

In Opinion 90-10A, the Department of Labor (the Department) concluded that MDPEBP is a multiple employer

welfare arrangement (MEWA) within the meaning of section 3(40) of ERISA and, therefore, is subject to state

regulation at least to the extent provided in section 514(b)(6)(A) of ERISA, regardless of whether MDPEBP is an

employee benefit plan covered by title I of ERISA. You state in your letter that MDPhysicians and Associates, Inc.,

which administers MDPEBP, has filed suit against the Texas State Board of Insurance and Texas Attorney General

for a declaratory judgment relating to the ability of the State of Texas to regulate or prohibit MDPEBP.

MDPhysicians and Associates, Inc. contends in its complaint that, among other things, any attempt by the State of

Texas to regulate MDPEBP by requiring licensure of MDPEBP as an insurer would be inconsistent with title I of

ERISA, and that the State of Texas lacks statutory authority to regulate MDPEBP in any respect in the absence of

enabling legislation respecting the regulation of self-insured MEWAs.

You state that Texas does not have legislation specifically aimed at regulation of self-funded MEWAs which are

employee welfare benefit plans covered by title I of ERISA. It is the position of the State Board of Insurance that

such plans are doing an insurance business and are subject to the same requirements as any other insurer

operating in Texas. You further state that the Texas Insurance Code provides that no person or insurer may do the

business of insurance in Texas without specific authorization of statute, unless exempt under the provisions of

Texas or federal law. The Code establishes procedures for issuance of certificates of authority to insurers who meet

statutory requirements. Persons who transact insurance business in Texas without a certificate of authority or valid

claim to exemption are subject to taxation, fines, and other civil penalties, including injunctive relief to effect

cessation of operation.

Assuming, arguendo, that MDPEBP is an employee welfare benefit plan covered by title I of ERISA, you request

the Departmentís views as to whether or not a requirement by the State of Texas that MDPEBP ( or any similar

plan which might be found to be both an employee welfare benefit plan and a MEWA as defined by ERISA) obtain

a certificate of authority to transact insurance business in Texas, and be subject to statutory penalties and

injunction should it operate without a certificate of authority, would be inconsistent with title I of ERISA.

Section 514(b)(6)(A) of ERISA provides an exception to preemption under ERISA section 514(a) for any ERISAcovered employee welfare benefit plan that is a MEWA. In general, the exception permits application of state

insurance law to a MEWA as follows: If the MEWA is ìfully insuredî within the meaning of section 514(b)(6)(D) of

ERISA, state insurance law may apply to the extent it provides standards requiring the maintenance of specified

levels of reserves and contributions, and provisions to enforce such standards (See section 514(b)(6)(A)(i)). If the

MEWA is not fully insured, any law of any state which regulates insurance may apply to the extent not inconsistent with title I of ERISA (See 514(b)(6)(A)(ii)). It appears from your letter that the parties do not dispute that

MDPEBP is not fully insured within the meaning of ERISA section 514(b)(6)(D).

We hope the following is responsive to your request.

First, it is the view of the Department of Labor that section 514(b)(6)(A) saves from ERISA preemption any law of

42
43

any state which regulates insurance, without regard to whether such laws specifically or otherwise reference

MEWAs or employee benefit plans which are MEWAs, subject only to the limitations set forth in subparagraphs

(A)(i) and (A)(ii) of that section. Similarly, while we are unable to rule on the specific application of the Texas

Insurance Code to MDPEBP, a matter within the jurisdiction of the Texas State Board of Insurance, it is the view of

the Department that, with the exception of the aforementioned limitations, there is nothing in ERISA which would

preclude the application of the same state insurance laws which apply to any insurer which is not an ERISAcovered plan to ERISA-covered plans which constitute MEWAs within the meaning of ERISA section 3(40).

Second, it is the view of the Department that Congress, in enacting the MEWA provisions, recognized that the

application and enforcement of state insurance laws to ERISA-covered MEWAs 1/provide both appropriate and

necessary protection for the participants and beneficiaries covered by such plans, in addition to those protections

afforded by ERISA. For this reason, the Department is of the opinion that in the context of section 514(b)(6)(A)(ii),

which, in the case of a MEWA which is not fully insured, saves from ERISA preemption any law of any state

which regulates insurance to the extent such law is not inconsistent with the provisions of title I of ERISA, a state

law which regulates insurance would be inconsistent with the provisions of title I to the extent that compliance

with such law would abolish or abridge an affirmative protection or safeguard otherwise available to plan

participants and beneficiaries under title I of ERISA,2/ or conflict with any provision of title I of ERISA. 3/ For

example, state insurance law which would require an ERISA-covered MEWA to make imprudent investments

would be deemed to be ìinconsistentî with the provisions of title I of ERISA because compliance with such a law

would ìconflictî with the fiduciary responsibility provisions of ERISA section 404, and, as such, would be

preempted pursuant to the provisions of ERISA section 514(b)(6)(A)(ii).4/

However, a state insurance law will, generally, not be deemed ìinconsistentî with the provisions of title I of ERISA

if it requires ERISA-covered MEWAs to meet more stringent standards of conduct, or to provide more or greater

protections to plan participants and beneficiaries, than required by ERISA. For example, state insurance laws

which would require more informational disclosure to plan participants of an ERISA-covered MEWA will not be

deemd by the Department to be ìinconsistentî with the provisions of ERISA. Similarly, a state insurance law

prohibiting a fiduciary of an ERISA-covered MEWA from availing himself of an ERISA statutory or administratively-granted exemption permitting certain behavior will not be deerned by the Department to be ìinconsistentî

with the provisions of ERISA.

1/ The principles discussed in this letter apply to those MEWAs which are also title I plans, and, thus, such

MEWAs will be referred to as ìERISA-covered MEWAsî .

2/For example, any state insurance law which would adversely affect a participantís or beneficiaryís rights under

title I of ERISA to review or receive documents to which the participant or beneficiary is otherwise entitled would

be viewed as inconsistent with the provisions of title I. Similarly, any state insurance law which would adversely

affect a participantís or beneficiaryís right to continuation of health coverage in accordance with Part 6 of title I or

to pursue claims procedures established in accordance with section 503 of title I would be viewed as inconsistent

with the provisions of title I of ERISA.

3/In this regard, the Department believes an actual conflict with the provisions of ERISA will occur when state

insurance law makes compliance a ìphysical impossibilityî. See Florida Lime & Avocado Growers. Inc., v. Paul,

373 U.S. 132, 142-43, 83 S.Ct. 1210, 1217, 10 L.Ed.2d 248 (1963).

4/While certain permissive state insurance laws may not be ìinconsistentî with the provisions of title I of ERISA

as here defined, the behavior permitted under such laws may yet be denied to ERISA-covered MEWAs and their

fiduciaries pursuant to ERISA section 514(b)(6)(A)(ii), which applies the provisions of title I as well as state

insurance laws which are not inconsistent with the provisions of title I of ERISA to such MEWAs. For example,

neither ERISA-covered MEWAs nor their fiduciary managers may take advantage of laws which would permit an

ERISA-covered MEWA to engage in transactions which are prohibited under the provisions of ERISA section 406;

to effectuate exculpatory provisions relieving a fiduciary from responsibility or liability for any responsibility,

obligation, or duty under ERISA; or, to fail to meet the reporting and disclosure requirements contained in part 1

of title I of ERISA.
44

Finally, the Department also notes that, in its opinion, any state insurance law which sets standards requiring the

maintenance of specified levels of reserves and specified levels of contributions to be met in order for a MEWA to

be considered, under such law, able to pay benefits in full when due will generally not be considered to be

ìinconsistentî with the provisions of title I of ERISA pursuant to ERISA section 514(b) (6)(A) (ii) .

Thus, it is the opinion of the Department that a state law regulating insurance which requires the obtaining of a

license or certificate of authority as a condition precedent or otherwise to transacting insurance business or which

subjects persons who fail to comply with such requirements to taxation, fines, and other civil penalties, including

injunctive relief, would not in and of itself adversely affect the protections and safeguards Congress intended to be

available to participants and beneficiaries or conflict with any provision of title I of ERISA, and, therefore, would

not, for purposes of section 514(b)(6)(A)(ii), be inconsistent with the provisions of title I. Moreover, given the clear

intent of Congress to permit states to apply and enforce their insurance laws with respect to ERISA-covered

MEWAs, as evidenced by the enactment of the MEWA provisions, it is the view of the Department that it would be

contrary to Congressional intent to conclude that states, while having the authority to apply insurance laws to

such plans, do not have the authority to require and enforce registration, licensing, reporting and similar

requirements necessary to establish and monitor compliance with those laws.

Finally, we would note that while section 514(b)(6)(B) of ERISA provides that the Secretary of Labor may prescribe

regulations under which .the Department may exempt MEWAs from state regulation under section

514(b)(6)(A)(ii), the Department has neither prescribed regulations in this area, nor granted any such exemptions.

This letter constitutes an advisory opinion under ERISA Procedures 76-1.

Sincerely,

Robert J. Doyle

Director of Regulations

 and Interpretaions
January 27, 1992

Mr. Chuck Huff 92-05A

Georgia Insurance Department ERISA SECTION

Seventh Floor, West Tower 3(40), 514(b)(6)

Floyd Building

2 Martin Luther King, Jr., Drive

Atlanta, Georgia 30334

Dear Mr. Huff:

This is in response to your request regarding the status of a self-funded health benefit program sponsored by

Action Staffing, Inc. (Action) under title I of the Employee Retirement Income Security Act (ERISA). Specifically,

you have requested an opinion as to whether the Action health benefit program is an employee welfare benefit

plan within the meaning of section 3(1) of title I of ERISA, and whether the Action health benefit program is a

multiple employer welfare arrangement (MEWA), within the meaning of ERISA section 3(40) and, therefore,

subject to applicable state insurance laws at least to the extent permitted under section 514(b)(6)(A) of title I of

ERISA.

According to your letter, Action identifies its operations as those of a ìstaff leasingî company. Action markets its

services and issues proposals to potential client employers in a variety of trades and businesses. If a client

employer agrees to the terms of the proposal, an Agreement for Services is executed with Action. Under the terms

of the Agreement for Services, a specimen copy of which accompanied your request, Action agrees to lease

personnel to the client employer, subject to the payment of certain fees being paid by the client employer. Pursuant

to the ìServicesî section of the Agreement for Services, it is provided that:

Action shall . . . provide the following services with regard to the leased employees: The

recruitment, hiring, directing and controlling of employees in their day-to-day assignments; the disciplining, replacing, termination and the designation of the date of

separation from employment; the promotion, reward, evaluation and from time to time

the redetermination of the wages, hours and other terms and conditions of employment

of the employees. . .

Action maintains a self-funded health program for leased employees.

With regard to its health benefit program, Action represents that the program is an ERISA-covered employee

welfare benefit plan maintained by a single employer, i.e., Action.

Information submitted with your request, however, indicates that, in at least one instance, an Action client, with

employees participating in the Action health benefit program, hired Action to enable employees to participate in

the Action health benefit program. According to the information provided, the client, rather than Action, retains

the right to control, evaluate, direct, hire and fire all employees.

ERISA section 3(40)(A) defines the term ìmultiple employer welfare arrangementî to mean:

. . . 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) to the employees of two or more employers (including one or

more self-employed individuals), or to their beneficiaries, except that such arrangement does not

include any plan or arrangement which is established or maintained --

(i) under or pursuant to one or more agreements which the Secretary finds to be

collective bargaining agreements,

(ii) by a rural electric cooperative, or

(iii) by a rural telephone cooperative association.

45
* Although we conclude in this situation that some of the individuals participating as ìemployeesî in the health benefit program

are ìemployeesî of the client employers, the Department notes that Action may also considered an ìemployerî within the

meaning of ERISA section 3(5).

Inasmuch as there is no indication that the Action health benefit program is established or maintained under or

pursuant to one or more collective bargaining agreements, by a rural electric cooperative, or by a rural telephone

cooperative association, the only issue relating to the health programís status as a MEWA appears to be whether

the program provides benefits, as described in ERISA section 3(1), ìto the employees of two or more employers.î

The resolution of this issue is dependent on whether, for purposes of ERISA section 3(40), the employees covered

by the Action health benefit program are employees of a single employer (i.e., Action) or more than one employer

(i.e., Actionís clients).

ERISA section 3(5) defines the term ìemployerî to mean:

. . . any person acting directly as an employer, or indirectly in the interest of an employer, in

relation to an employee benefit plan; and includes a group or association of employers acting

for an employer in such capacity.

As reflected above, the term ìemployerî, for purposes of title I of ERISA, encompasses not only persons with

respect to whom there exists an employer-employee relationship between the employer and individuals covered

by the plan (i.e., persons acting directly as an employer), but also certain persons, groups and associations, which,

while acting indirectly in the interest of or for an employer in relation to an employee benefit plan, have no direct

employer-employee relationship with the individuals covered under an employee benefit plan. Therefore, merely

because a person, group or association may be determined to be an ìemployerî within the meaning of ERISA

section 3(5) does not mean that the individuals covered by the plan with respect to which the person, group or

association is an ìemployerî are ìemployeesî of that employer.

The term ìemployeeî is defined in ERISA section 3(6) to mean ìany individual employed by an employer. î

(Emphasis added). An individual is ìemployedî by an employer, for purposes of section 3(6), when an employeremployee relationship exists. For purposes of section 3(6), whether an employer-employee relationship exists will

be determined by applying common law principles and taking into account the remedial purposes of ERISA. In

making such determinations, therefore, consideration must be given to whether the person for whom services are

being performed has the right to control and direct the individual who performs the services, not only as to the

result to be accomplished by the work, but also as to the details and means by which the result is to be accomplished; whether the person for whom services are being performed has the right to discharge the individual

performing the services; and whether the individual performing the services is as a matter of economic reality

dependent upon the business to which he or she renders services, among other considerations.

While the Action Agreement for Services submitted with your request purports, with respect to the leased

employees, to establish in Action the authority and control associated with a common law employer-employee

relationship, your submission indicates that in at least one instance the client employer, rather than Action,

actually retained and exercised such authority and control.* In this regard, it should be noted that a contract

purporting to create an employer-employee relationship will not control where common law factors (as applied to

the facts and circumstances) establish that the relationship does not exist.

It should also be noted that it is the view of the Department that where the employees participating in the plan of

an employee leasing organization include ìemployeesî of two or more client (or ìrecipientî) employers, or

employees of the leasing organization and at least one client employer, the plan of the leasing organization would,

by definition, constitute a MEWA because the plan would be providing benefits to the employees of two or more

employers.

On the basis of the information provided, the Action health benefit program covered at least one clientís employees with respect to whom Action did not have an employer-employee relationship and, accordingly, were not

46
ìemployeesî of Action within the meaning of ERISA section 3(6). Therefore, in the absence of any indication that

Action and its client employers constitute a ìcontrol groupî within the meaning of ERISA section 3(40)(B)(i), it is

the view of the Department that the Action health benefit program provides benefits to the employees of two or

more employers and is, therefore, a multiple employer welfare arrangement within the meaning section 3(40)(A).

Accordingly, the preemption provisions of ERISA would not preclude state regulation of the Action health benefit

program to the extent provided in ERISA section 514(b)(6)(A). In this regard, we are enclosing, for your information, a copy of Opinion 90-18A (dated July 2, 1990) which discusses the scope of the statesí authority to regulate

MEWAs pursuant to section 514(b)(6)(A) of ERISA.

Because your request for an opinion was concerned primarily with the issue of whether or not the Action health

benefit program is subject to the applicable regulatory authority of the State of Georgiaís insurance laws or is

saved from such authority under the general preemption provision of section 514(a) of title I of ERISA, and

because of the opinion above, we have determined it is not necessary at this time to render an opinion as to

whether the Action health benefit program is an employee welfare benefit plan within the meaning of section 3(1)

of that title.

This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, it is issued subject to the

provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions.

Sincerely,

Robert J. Doyle

Director of Regulations

and Interpretations

Enclosure

47
March 1, 2002

Commissioner Mike Pickens

Arkansas Insurance Department

1200 West Third Street

Little Rock, AR 72201-1904

Dear Commissioner Pickens :

This is in reply to a letter, dated February 11, 2002, from Sara Farris, Associate Counsel with the Arkansas

Insurance Department, requesting information regarding the applicability of Title I of the Employee Retirement

Income Security Act of 1974, as amended (ERISA). Specifically, she asked for the view of the Department of Labor

(Department) on whether section 514 of Title I of ERISA precludes the Arkansas Department of Insurance (ADOI)

from regulating the United Employers Voluntary Employees Beneficiary Association (UEVEBA), National

Association for Working Americans (NAWA), and American Benefit Plans (ABP).

We understand that the ADOI has initiated a cease and desist proceeding alleging illegal insurance

activities by UEVEBA, NAWA, ABP, and John Rhondo aka John Ramirez and David Neal. An issue has arisen in

that proceeding as to whether ADOI has jurisdiction to regulate UEVEBA as an unauthorized insurer or as an

unlicensed multiple employer welfare arrangement (MEWA). UEVEBA is contending that it is not subject to state

insurance regulation by reason of Title I of ERISA. Ms. Farris provided us a with copy of a transcript from the

February 1, 2002, hearing in the cease and desist order proceeding and copies of the respondentsí exhibits and

selected ADOI exhibits. The following summary is based solely on information in the transcript and exhibits ; it is

not, and should not be treated as, factual findings of the Department.

UEVEBA states that it is organized under section 501(c)(9) of the Internal Revenue Code as a tax-exempt,

non-profit voluntary employeesí beneficiary association (VEBA) and as a VEBA trust.1

 The trustee of the VEBA

trust is ìThe 4 Corners Company, LLC,î which acts through its managing member John Rhondo aka John

Ramirez.

The UEVEBA Defined Contribution Health and Welfare Limited Benefit Medical Plan is a prototype plan

document developed by ABP. The prototype documents also include a summary plan description, trust agreement, and adoption agreement. The UEVEBA prototype plan document provides for medical, dental, vision,

hearing and pharmaceutical benefits, and life insurance. NAWA, either directly or through ABP, markets the

UEVEBA arrangement and assists employers in the process of adopting the UEVEBA prototype plan and

becoming participating employers in the VEBA trust. Employers, by executing the UEVEBA adoption agreement

used in Arkansas, establish their own individual employee welfare benefit plans under the terms and conditions

set forth in the UEVEBA prototype plan document. The employers also execute a standard trust joinder agreement

where the employer, among other things, agrees to join UEVEBA, designates UEVEBA as the planís trust,

authorizes the VEBA trustee to act on behalf of the employer in administering the VEBA trust, and agrees to make

contributions to the VEBA trust for the payment of benefits for the employerís eligible employees, spouses,

dependents or beneficiaries.2

 The prototype summary plan description is used to disclose information about

benefits, rights and obligations under the plan and is distributed to eligible employees. It appears that more than

two, and possibly as many as 400 or more, separate and unrelated private sector employers have adopted the

1

 UEVEBAís name appears to have been changed in 1998 from the ìCalifornia Association of Medical Professionals

Voluntary Employees Beneficiary Association Trust.î 2 A trust joinder agreement attached to a January 10, 2002 letter from John Ramirez to the Colorado Commissioner of Insurance

identified UEVEBA as the ìUnited Employers Voluntary Employees Beneficiary Association I (Herein ëVEBAí)î while copies of

other trust joinder agreements identified UEVEBA as ìUnited Vendors of America Chapter I Voluntary Employeesí Beneficiary

Association (the ëUEVEBAí) . . . .î We have assumed for purposes of this letter that these differences reflect different trade names

under which UEVEBA conducts its operations.

48
UEVEBA prototype plan document and use the UEVEBA arrangement to provide benefits to their eligible

employees, spouses, dependents, and other beneficiaries.

Under the UEVEBA prototype adoption agreement used in Arkansas, contributions from participating

employers are made to a pooled trust account held by the VEBA trustee for the benefit of eligible employees, and

their spouses, dependents and other beneficiaries. It appears that third party administrators (TPAs) have been

designated by the VEBA trustee to act as representatives in operating a ìRegistered Officeî and transacting

business on behalf of the VEBA trustee. In some cases, employer contributions may be deposited in a TPAís

UEVEBA Deposit Bank Account and transmitted to the VEBA pooled trust account. UEVEBA provides benefits to

covered employees, and their spouses, dependents and beneficiaries from the VEBA pooled trust account.3

 In the

event the VEBA pooled trust account is insufficient to pay benefits due, UEVEBA agreed that it would file a claim

under a reinsurance contract it entered into with Equity Reinsurance International (ERI), a division of Cosmopolitan Life Insurance Company. Under the reinsurance contract, ERI agreed, subject to certain terms, conditions, and

limitations in the contract, to indemnify UEVEBA for benefit liabilities it assumed in connection with employers

who adopted the UEVEBA arrangement. UEVEBAís pooled trust account arrangement is structured so that the

single employer plans share actuarial risks with each other as part of participating in the UEVEBA arrangement.

Section 514(a) of Title I of ERISA generally preempts state laws purporting to regulate an employee benefit

plan covered under that title. There are, however, exceptions to this general preemption provision. The relevant

exception for purposes of your inquiry is in subsection 514(b)(6)(A), which allows state insurance regulation of

MEWAs and MEWA trusts without regard to whether they are employee benefit plans covered by Title I of ERISA.

Section 3(40)(A) of ERISA defines the term MEWA, in relevant part, to mean : ì[A]n 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 [section 3(1) of ERISA] 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 ó (i) under or pursuant

to one or more agreements which the Secretary [of Labor] finds to be collective bargaining agreements, (ii) by a

rural electric cooperative, or (iii) by a rural telephone cooperative association.î

If a MEWA is not itself an ERISA covered plan, which is generally the case, ERISAís preemption provisions

do not apply and States are free to regulate the MEWA in accordance with applicable state law. In such cases, the

Department would view each of the employer members that use the MEWA to provide welfare benefits to its

employees as having established separate welfare benefit plans subject to ERISA.4

 In effect, the MEWA would be

merely a vehicle for funding and administering the provision of benefits (like an insurance company) to a number

of separate ERISAcovered plans. The Department has concurrent jurisdiction with the States to regulate persons

who operate such MEWAs to the extent those persons have responsibility for, or control over, the assets of ERISA

plans that participate in the MEWA.5

If the MEWA is itself an ERISA-covered plan, it would be subject to the provisions of ERISA governing

employee welfare benefit plans, and would also be subject to a broad range of state insurance laws.

Section 514(b)(6)(A)(i) of ERISA provides that, in the case of a MEWA that is itself a plan and is fully

insured, states may apply to and enforce against the MEWA any state insurance law requiring the maintenance of

3

 Although adoption agreements refer to benefits provided under insurance contracts purchased by the plan administrator and

held by the VEBA trust, such insurance contracts were not in the materials we received.

4

 UEVEBA appears to allow plans to participate that are not be subject to Title I of ERISA (e.g ., governmental plans, church plans,

and certain plans covering only self-employed individuals and their spouses). Participation by non-ERISA plans does not change

the Title I conclusion regarding the Statesí ability to regulate the MEWA.

5

 When the sponsor of an ERISA-covered plan uses a MEWA to provide health care coverage for its employees, the assets of the

MEWA generally are considered to include the assets of the plan, unless the MEWA is a state licensed insurance company. In

exercising discretionary authority or control over plan assets, such as paying administrative expenses and making benefit claim

determinations, the person or persons operating the MEWA would be performing fiduciary acts governed by ERISAís fiduciary

provisions.

49
specific reserves or contributions designed to ensure that the MEWA will be able to satisfy its benefit obligations in

a timely fashion. In the Departmentís view, section 514(b)(6)(A)(i) enables states to subject such MEWAs to

licensing, registration, certification, financial reporting, examination, audit and any other requirement of state

insurance law necessary to ensure compliance with state insurance reserve, contribution and funding requirements. Section 514(b)(6)(D) provides that a MEWA is ìfully insuredî for this purpose ìonly if the terms of the

arrangement provide for benefits the amount of all of which the Secretary determines are guaranteed under a

contract, or policy of insurance, issued by an insurance company, insurance service or insurance organization,

qualified to conduct business in a State.î

In the case of a MEWA that is itself a plan but is not fully insured, section 514(b)(6)(A)(ii) allows any state

insurance laws to be applied to the MEWA subject only to the limitation that the law is ìnot inconsistentî with

Title I of ERISA. The Department has expressed the view that a state insurance law would not be inconsistent with

Title I if it requires a MEWA to meet more stringent standards of conduct, or to provide greater protection to plan

participants and beneficiaries than required by ERISA. The Department has also expressed the view that a state

law regulating insurance would not, in and of itself, be inconsistent with the provisions of Title I if it requires a

license or certificate of authority as a condition to transacting business, requires maintenance of specific reserves

or contributions designed to ensure that the MEWA will be able to satisfy its benefit obligations in a timely fashion,

requires financial reporting, examination or audit, or subjects persons who fail to comply to taxation, fines, civil

penalties, and injunctive relief.

We understand that UEVEBA and the other respondents argue that section 514(b)(6)(C) of ERISA forbids

Arkansas from regulating the UEVEBA arrangement because the VEBA trust acts a pooled trust holding the assets

of single employer plans that participate in the UEVEBA arrangement. This argument misconstrues section

514(b)(6)(C). That section provides that nothing in provisions of section 514(b)(6)(A) that specifically allow states

to regulate MEWAs ìshall affect the manner or the extent to which the provisions of this subchapter apply to an

employee welfare benefit plan which is not a MEWA and which is a plan, fund, or program participating in,

subscribing to, or otherwise using a MEWA to fund or administer benefits to such planís participants and

beneficiaries.î In analyzing this provision, it is important to distinguish between (1) individual employee benefit

plans that obtain benefits through a MEWA, and (2) the MEWA itself. Section 514(b)(6)(C) prevents individual

employee benefit plans covered by ERISA from themselves being deemed insurance companies or otherwise

regulated as insurance under state insurance law merely because they utilize a MEWA in obtaining benefits; the

section does not provide immunity to the MEWA itself from state insurance regulation, or to a pooled trust

forming part of a MEWA. See Atlantic Health Care Benefits Trust v. Foster, 809 F.Supp. 365, 370 (M.D.Pa., 1992).

The information supplied indicates that the UEVEBA arrangement is being operated for the purpose of

providing health and welfare benefits to employees of two or more employers. Nothing in the material we

received suggested that the UEVEBA arrangement is established or maintained under or pursuant to one or more

agreements that the Secretary of Labor has found to be collective bargaining agreements, or by a rural electric

cooperative or rural telephone cooperative association as defined in section 3(40) of ERISA. Accordingly, in the

Departmentís view, it is a MEWA. It does not appear that any of the respondents are claiming that the UEVEBA

arrangement is itself an ERISA-covered plan, and nothing in the information you provided suggests that the

UEVEBA arrangement is itself such a plan. Therefore, ERISAís preemption provisions do not apply with respect to

the UEVEBA arrangement (as distinguished from any individual ERISA-covered plans that obtain benefits

through UEVEBA), and Arkansas is free to regulate the UEVEBA arrangement in accordance with applicable state

law. Further, even if it the UEVEBA arrangement were itself found to be an ERISA-covered plan, Title I of ERISA

does not preclude the application of Arkansas insurance law or regulations to the UEVEBA arrangement in

accordance with section 514(b)(6)(A) of ERISA as described above.

50
We hope this information is of assistance to you. Should you have any questions concerning this letter,

please contact me at (202) 693-8531. I have also enclosed a brochure prepared by the Department entitled ìMultiple

Employer Welfare Arrangements Under the Employee Retirement Income Security Act : A Guide to Federal and

State Regulation.î

Sincerely,

John J. Canary

Chief, Division of Coverage, Reporting and Disclosure

Office of Regulations and Interpretations

Enclosure

cc: John Rhondo aka John Ramirez

51
Appendix B

Advisory Opinion

Procedure

53
It is the practice of the Department of Labor (the

Department) to answer inquiries of individuals or organizations affected, directly or indirectly, by the Employee

Retirement Income Security Act of 1974 (Pub. L. 93-406,

hereinafter “the Act”) as to their status under the Act and

as to the effect of certain acts and transactions. The answers to such inquiries are categorized as “information

letters” and “advisory opinions.” This “ERISA Procedure”

(ERISA Proc. 76-1) describes the general procedures of

the Department in issuing information letters and advisory opinions under the Act, and is designed to promote

efficient handling of inquiries and to facilitate prompt responses.

Section 7 of this procedure (instructions to individuals and organizations requesting advisory opinions relating to prohibited transactions and common definitions) is

reserved. This section will set forth the procedures to be

followed to obtain an advisory opinion relating to prohibited transactions and common definitions, such as whether

a person is a party in interest and a disqualified person. In

general, this section will incorporate a revenue procedure

to be published by the Internal Revenue Service.

This advisory opinion procedure consists of rules of

agency procedure and practice, and is therefore excepted

under 5 U.S.C. 552(b)(3)(A) of the Administrative Procedure Act from the ordinary notice and comment provisions for agency rulemaking. Accordingly, the procedure

is effective August 27, 1976.

SEC. 1. Purpose. The purpose of this ERISA Procedure is to describe the general procedures of the Department of Labor (the Department) in issuing information

letters and advisory opinions to individuals and organizations under the Employee Retirement Income Security Act

of 1974 (Pub. L. 93-406), hereinafter referred to as “the

Act.” This ERISA Procedure also informs individuals and

organizations, and their authorized representatives, where

they may direct requests for information letters and advisory opinions, and outlines procedures to be followed in

order to promote efficient handling of their inquiries.

SEC. 2. General practice. It is the practice of the

Department to answer inquiries of individuals and organizations, whenever appropriate, and in the interest of

sound administration of the Act, as to their status under

the Act and as to the effects of their acts or transactions.

One of the functions of the Department is to issue information letters and advisory opinions in such matters.

SEC. 3. Definitions. .01 An “information letter” is

a written statement issued either by the Pension and Welfare Benefit Programs (Office of Employee Benefits Security), U.S. Department of Labor, Washington, D.C. or a

Regional Office or an Area Office of the Labor-Management Services Administration, U.S. Department of Labor,

that does no more than call attention to a well-established

interpretation or principle of the Act, without applying it

to a specific factual situation. An information letter may

be issued to any individual or organization when the nature of the request from the individual or the organization

suggests that it is seeking general information, or where

the request does not meet all the requirements of section 6

or 7 of this procedure, and it is believed that such general

information will assist the individual or organization.

.02 An “advisory opinion” is a written statement issued to an individual or organization, or to the authorized

representative of such individual or organization, by the

Administrator of Pension and Welfare Benefit Programs

or his delegate, that interprets and applies the Act to a

specific factual situation. Advisory opinions are issued only

by the Administrator of Pension and Welfare Benefit Programs or his delegate.

.03 Individuals and organizations are those persons

described in section 4 of this procedure.

SEC. 4. Individuals and organizations who may request advisory opinions or information letters. .01 Any

individual or organization affected directly or indirectly,

by the Act may request an information letter or an advisory opinion from the Department.

.02 A request by or for an individual or organization

must be signed by the individual or organization, or by

the authorized representative of such individual or organization. See section 7.03 of this procedure.

SEC. 5. Discretionary Authority to Render Advisory

Opinions. .01 The Department will issue advisory opinions involving the interpretation of the application of one

or more sections of the Act, regulations promulgated under the Act, interpretive bulletins, or exemptions issued

by the Department to a specific factual situation. Generally, advisory opinions will be issued by the Department

only with respect to prospective transactions (i.e., a transaction which will be entered into). Moreover, there are

certain areas where, because of the inherently factual nature of the problem involved, or because the subject of the

request for opinion is under investigation for a violation

of the Act, the Department ordinarily will not issue advisory opinions. Generally, an advisory opinion will not be

issued on alternative courses of proposed transactions, or

on hypothetical situations, or where all parties involved

are not sufficiently identified and described, or where material facts or details of the transaction are omitted.

.02 The Department ordinarily will not issue advisory opinions relating to the following sections of the Act:

.02(a) Section 3(18), relating to whether certain

consideration constitutes adequate consideration;

.02(b) Section 3(26), relating to whether the valuation of any asset is at current value;

.02(c) Section 3(27), relating to whether the valuation of any asset is at present value;

.02(d) Section 102(a)(1), relating to whether a summary plan description is written in a manner calculated to

be understood by the average participant.

.02(e) Section 103(a)(3)(A), relating to whether the

financial statements and schedules required to be included

in the Annual Report are presented fairly in conformity

with generally accepted accounting principles applied on

a consistent basis;

.02(f) Section 103(b)(1), relating to whether a matter must be included in a financial statement in order to

fully and fairly present the financial statement of the plan;

.02(g) Section 202 (other than section 202(a)(3) and

ERISA Proc. 76-1—Procedure for ERISA

Advisory Opinions.

54
(b)(1)) relating to minimum participation standards;

.02(h) Section 203 (other than sections 202(a)(3)(B),

(b)(1) (flush language), (b)(2), (b)(3)(A);

.02(i) Section 204 of the Act (other than sections

204(b)(1)(B), (b)(1)(A), (C), (D), (E)), relating to benefit accrual requirements;

.02(j) Section 205(e), relating to the period during

which a participant may elect in writing not to receive a

joint and survivor annuity;

.02(k) Section 208, relating to mergers and consolidation of plans or transfer of plan assets;

.02(1) Section 209(a)(1), relating to whether the

report required by section 209(a)(1) is sufficient to inform the employee of his accrued benefits under the plan,

etc.

.02(m) Sections 302 through 305, relating to minimum funding standards;

.02(n) Section 403(c)(1), relating to the purposes

for which plan assets must be held;

.02(o) Section 404(a), relating to fiduciary duties

as applied to particular conduct; and,

.02(p) Section 407(a)(2) and (3) and (c)(1), relating to fair market value, as applied to whether the value

of any particular security or real property constitutes fair

market value.

This list is not all inclusive and the Department may

decline to issue advisory opinions relating to other sections of the Act whenever warranted by the facts and circumstances of a particular case. The Department may,

when it is deemed appropriate and in the best interest of

sound administration of the Act, issue information letters

calling attention to established principles under the Act,

even though the request that was submitted was for an

advisory opinion.

.03 Pending the adoption of regulations (either temporary or final) involving the interpretation of the application of a provision of the Act, consideration will be given

to the issuance of advisory opinions relating to such provisions of the Act only under the following conditions:

.03(a) If an inquiry presents an issue on which the

answer seems to be clear from the application of the provisions of the Act to the facts described, the advisory opinion will be issued in accordance with the procedures contained herein.

.03(b) If an inquiry presents an issue on which the

answer seems reasonably certain but not entirely free from

doubt, an advisory opinion will be issued only if it is established to the satisfaction of the Department, that a business emergency requires an advisory opinion or that unusual hardship to the plan or its participants and beneficiaries will result from failure to obtain an advisory opinion. In any case in which the individual or organization

believes that a business emergency exists or that an unusual hardship to the plan or its participants and beneficiaries will result from the failure to obtain an advisory

opinion, the individual or organization should submit with

the request a separate letter setting forth the facts necessary for the Department to make a determination in this

regard. In this connection, the Department will not deem

a “business emergency” to result from circumstances

within the control of the individual or organization such

as, for example, scheduling within an inordinately short

time the closing date of a transaction or a meeting of the

Board of Directors or the shareholders of a corporation.

.03(c) If an inquiry presents an issue that cannot be

reasonably resolved prior to the issuance of a regulation,

an advisory opinion will not be issued.

.04 The Department ordinarily will not issue advisory opinions on the form or effect in operation of a plan,

fund, or program (or a particular provision or provisions

thereof) subject to Title I of the Act. For example, the Department will not issue an advisory opinion on whether a

plan satisfies the requirements of Parts 2 and 3 of Title I

of the Act.

SEC. 6. Instructions to individuals and organizations

requesting advisory opinions from the Department. .01 If

an advisory opinion is desired, a request should be submitted to: Office of Regulations and Interpretations, Room

N5669, Pension and Welfare Benefits Administration, U.S.

Department of Labor, 200 Constitution Avenue, N.W.,

Washington, D.C. 20210.

.02 A request for an advisory opinion must contain

the following information:

.02(a) The name and type of plan or plans (e.g., pension, profit-sharing, or welfare plan); the Employer Identification Number (EIN); the Plan Number (PN) used by

the plan in reporting to the Department of Labor on Form

EBS-1 or a copy of the first two pages of the most recent

Form EBS-1 filed with the Department.

.02(b) A detailed description of the act or acts or

transaction or transactions with respect to which an advisory opinion is requested. Where the request pertains to

only one step of a larger integrated act or transaction, the

facts, circumstances, etc., must be submitted with respect

to the entire transaction. In addition, a copy of all documents submitted must be included in the individual’s or

organization’s statement and not merely incorporated by

reference, and must be accompanied by an analysis of their

bearing on the issue or issues, specifying the pertinent

provisions.

.02(c) A discussion of the issue or issues presented

by the act or acts or transaction or transactions which

should be addressed in the advisory opinion.

.02(d) If the individual or organization is requesting a particular advisory opinion, the requesting party must

furnish an explanation of the grounds for the request, together with a statement of relevant supporting authority.

Even though the individual or organization is urging no

particular determination with regard to a proposed or prospective act or acts or transaction or transactions, the party

requesting the ruling must state such party’s views as to

the results of the proposed act or acts or transaction or

transactions and furnish a statement of relevant authority

to support such views.

.03 A request for an advisory opinion by or for an

individual or organization must be signed by the individual

or organization or by the individual’s or organization’s

authorized representative. If the request is signed by a

representative of an individual or organization, or the representative may appear before the Department in connec55
56

tion with the request, the request must include a statement

that the representative is authorized to represent the individual or organization.

.04 A request for an advisory opinion that does not

comply with all the provisions of this procedure will be

acknowledged, and the requirements that have not been

met will be noted. Alternatively, at the discretion of the

Department, the Department will issue an information letter to the individual or organization.

.05 If the individual or organization or the authorized representative, desires a conference in the event the

Department contemplates issuing an adverse advisory

opinion, such desire should be stated in writing when filing the request or soon thereafter in order that the Department may evaluate whether in the sole discretion of the

Department, a conference should be arranged and at what

stage of the consideration a conference would be most

helpful.

.06 It is the practice of the Department to process

requests for information letters and advisory opinions in

regular order and as expeditiously as possible. Compliance with a request for consideration of a particular matter ahead of its regular order, or by a specified time, tends

to delay the disposition of other matters. Requests for processing ahead of the regular order, made in writing (submitted with the request or subsequent thereto) and showing clear need for such treatment, will be given consideration as the particular circumstances warrant. However,

no assurance can be given that any letter will be processed

by the time requested. The Department will not consider a

need for expedited handling to arise if the request shows

such need has resulted from circumstances within the control of the person making the request.

.07 An individual or organization, or the authorized

representative desiring to obtain information relating to

the status of his or her request for an advisory opinion

may do so by contacting the Office of Regulatory Standards and Exceptions, Pension and Welfare Benefit Programs, U.S. Department of Labor, Washington, D.C.

SEC. 7. Instructions to individuals and organizations

requesting advisory opinions relating to prohibited transactions and common definitions. .01 [Reserved]

.02 [Reserved]

.03 [Reserved]

SEC. 8. Conferences at the Department of Labor. If

a conference has been requested and the Department determines that a conference is necessary or appropriate,

the individual or organization or the authorized representative will be notified of the time and place of the conference. A conference will normally be scheduled only when

the Department in its sole discretion deems it will be necessary or appropriate in deciding the case. If conferences

are being arranged with respect to more than one request

for an opinion letter involving the same individual or organization, they will be so scheduled as to cause the least

inconvenience to the individual or organization.

SEC. 9. Withdrawal of requests. The individual or

organization’s request for an advisory opinion may be

withdrawn at any time prior to receipt of notice that the

Department intends to issue an adverse opinion, or the

issuance of an opinion. Even though a request is withdrawn, all correspondence and exhibits will be retained

by the Department and will not be returned to the individual or organization.

SEC. 10. Effect of Advisory Opinion. An advisory

opinion is an opinion of the Department as to the application of one or more sections of the Act, regulations promulgated under the Act, interpretive bulletins, or exemptions. The opinion assumes that all material facts and representations set forth in the request are accurate, and applies only to the situation described therein. Only the parties described in the request for opinion may rely on the

opinion, and they may rely on the opinion only to the extent that the request fully and accurately contains all the

material facts and representations necessary to issuance

of the opinion and the situation conforms to the situation

described in the request for opinion.

SEC. 11. Effect of Information Letters. An information letter issued by the Department is informational only

and is not binding on the Department with respect to any

particular factual situation.

SEC. 12. Public inspection. .01 Advisory opinions

shall be open to public inspection at the Public Disclosure

Room, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 20216.

.02 Background files (including the request for an

advisory opinion, correspondence between the Department

and the individual or organization requesting the advisory

opinion) shall be available upon written request. Background files may be destroyed after three years from the

date of issuance.

.03 Advisory opinions will be modified to delete references to proprietary information prior to disclosure. Any

information considered to be proprietary should be so

specified in a separate letter at the time of request. Other

than proprietary information, all materials contained in

the public files shall be available for inspection pursuant

to section 12.02.

.04 The cost of search, copying and deletion of any

references to proprietary information will be borne by the

person requesting the advisory opinion or the background

file.

SEC. 13. Effective date. This procedure is effective

August 27, 1976, the date of its publication in the Federal

Register.

Signed at Washington, D.C., this 24th day of August 1976.

James D. Hutchinson

Administrator of Pension and

Welfare Benefit Programs

U.S. Department of Labor
Appendix C

Regulations

57
Department of Labor

Employee Benefits Security Administration

29 CFR Part 2510 and 2570

RIN 1210-AA48

Employee Retirement Income Security Act of 1974;

Procedures for Administrative Hearings Regarding

Plans Established or Maintained Under or Pursuant to

Collective Bargaining Agreements Under Section

3(40)(A) of ERISA

AGENCY: Employee Benefits Security Administration,

Labor.

ACTION: Final rule.

SUMMARY: This document contains a 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 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, such as health care plans, that meet the

requirements of the 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. Regulations

published elsewhere in this issue of the Federal Register

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 is available only in

situations where the jurisdiction or law of a state has

been asserted against an entity that contends it meets the

exception for plans established or maintained under or

pursuant to one or more collective bargaining

agreements. This regulation is intended to assist labor

organizations, plan sponsors and state insurance

departments in determining whether a plan is a

“multiple employer welfare arrangement” within the

meaning of section 3(40) of ERISA.

EFFECTIVE DATE: June 9, 2003.

FOR FURTHER INFORMATION CONTACT:

Elizabeth A. Goodman, Office of Regulations and

Interpretations, Employee Benefits Security

Administration, U.S. Department of Labor, 200

Constitution Avenue, NW., Room N-5669, Washington,

DC 20210, (202) 693-8510. This is not a toll-free

number.

SUPPLEMENTARY INFORMATION:

A. Background

The Statute

Section 3(40) of ERISA defines the term

multiple employer welfare arrangement (MEWA), in

pertinent part, as 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 selfemployed individuals), or to their beneficiaries, except

that such term does not include any such plan or other

arrangement which is established or maintained under

or pursuant to one or more agreements which the

Secretary finds to be collective bargaining agreements.

This definition 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)) (the MEWA amendments), which also

amended section 514(b) of ERISA to narrow the scope

of federal preemption of state laws applicable to

MEWAs. The purpose of the MEWA amendments

generally was to permit states to regulate employee

welfare benefit plans that are MEWAs; the extent of the

states’ jurisdiction over such entities under the MEWA

amendments depends 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)).

The Multiple Employer Welfare

Arrangement Act of 1983, which was introduced to

counter what the Congressional drafters termed abuse

by the “operators of bogus ‘insurance’ trusts,” see 128

Cong. Rec. E2407 (1982) (Statement of Congressman

Erlenborn), significantly enhanced the states’ ability to

regulate MEWAs. Nevertheless, problems in this area

persist. Among other things, the exception for

collectively bargained plans contained in section 3(40)

has been 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.

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. The definition of a

MEWA in section 3(40) was drafted to exclude certain

types of plans. As pertains to this rulemaking, section

3(40)(A)(i) of ERISA provides that employee welfare

benefit plans that are found by the Secretary of Labor

(the Secretary) to be established or maintained under or

pursuant to one or more collective bargaining

agreements are not MEWAs for purposes of ERISA.

Such collectively bargained plans, as a result, were not

made subject to the regulatory jurisdiction of the states

pursuant to the MEWA amendments.

58
The Department of Labor (the Department)

notes that also appearing in today’s Federal Register are

final regulations relating to filing the Form M-1 and

Civil Monetary Penalties for failure or refusal to file the

Form M-1. For information on the Form M-1 and

related civil monetary penalties, contact Deborah S.

Hobbs or Amy J. Turner, Employee Benefits Security

Administration, U.S. Department of Labor, Room C5331, 200 Constitution Ave., NW., Washington, DC

20210 (telephone (202) 693-8335) (this is not a tollfree number).

The Proposed Regulations

On October 27, 2000, the Department

published a notice in the Federal Register (65 FR

64482) containing a proposed regulation (the criteria

regulation) setting forth specific criteria that, if met in

the case of a specific plan, and provided that certain

other factors set forth in the proposed regulation are not

present, would constitute a finding by the Secretary

pursuant to section 3(40)(A)(i) of ERISA 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. The Department also

simultaneously published in the Federal Register (65 FR

64498) proposed regulations (the procedural

regulations) that set forth an administrative procedure

for obtaining, under certain limited circumstances, an

individualized 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 proposed regulations followed the

recommendations of the ERISA section 3(40)

Negotiated Rulemaking Advisory Committee (the

Committee). The Committee was convened under the

Negotiated Rulemaking Act (the NRA) and the Federal

Advisory Committee Act (the FACA), 5 U.S.C. App. 2,

to assist the Department in developing proposed

regulations to implement section 3(40)(A)(i) of ERISA,

29 U.S.C. 1002(40)(A)(i).

The criteria regulation set forth standards

that, if satisfied, would constitute a finding by 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).

 The proposed regulation established four

general criteria for a finding that a plan was established

or maintained under or pursuant to collective bargaining

for purposes of section 3(40)(A)(i). First, the entity in

question had to be an employee welfare benefit plan

within the meaning of ERISA section 3(1). Second, the

preponderance of those participants covered by the plan

(at least 80%) had to have a nexus to the bargaining

relationships under or pursuant to which the plan was

established or maintained (referred to as the “nexus”

group or test). Third, the agreements under or pursuant

to which the plan is established or maintained had to

have certain characteristics that indicate that they were,

for purposes of section 3(40) of ERISA only, collective

bargaining agreements, including that the agreements

were the product of a “bona fide collective bargaining

relationship.” Fourth, the proposed regulation listed

eight specific “factors” deemed to indicate the

existence, for purposes of section 3(40) only, of a bona

fide collective bargaining relationship. If at least four of

those specified factors were present, the regulation

indicated that a bona fide collective bargaining

relationship underlying the agreements under or

pursuant to which the plan is established or maintained

could be presumed to exist.

 The proposed criteria regulation included a

ninth non-specific “factor” in the list. The ninth factor

indicated that the Secretary would consider, in making a

finding, whether “other objective or subjective indicia

of actual collective bargaining and representation” were

present. The inclusion of this “catch-all” factor

recognized that, in any particular case, other facts might

need to be taken into account to determine whether a

bona fide collective bargaining relationship existed,

especially where the entity did not meet at least four of

the eight specific factors, or where, despite meeting four

of the eight factors, there were other facts indicating

that a bona fide collective bargaining relationship did

not exist.

The proposed criteria regulation also

specified circumstances that, if present, would lead to a

conclusion that an employee welfare benefit plan is not

established or maintained under or pursuant to one or

more agreements that the Secretary finds to be

collective bargaining agreements. The regulation stated

that, for any plan year in which the specified

circumstances were present, a plan that otherwise met

the criteria of the regulation should not be deemed to be

excluded from the MEWA definition by virtue of section

3(40)(A)(i).

The proposed regulation provided that, under

certain limited circumstances, an entity would be

permitted to petition the Secretary for an individual

finding. The ability to petition, however, would arise

under the proposed regulation only if a state’s law or

jurisdiction had been asserted against the entity in an

administrative or judicial proceeding. The procedural

regulations set forth specific processes for petitioning

for an individual finding.

Public Comments

Subsequent to publication of the proposed

regulations, the Department received seven public

comments. The Department reconvened the Committee

and held a public meeting on March 1, 2002, to obtain

the Committee’s views on the public comments. Minutes

of this meeting, as well as other meetings, of the

Committee are available for inspection by the public in

the Department’s Public Disclosure Room, 200

Constitution Avenue, NW., N1513, Washington, DC

20210.

The following discussion summarizes the

issues raised by the public comments, the Committee’s

59
discussion of those issues at the public meeting, and the

Department’s decisions, which are reflected in the final

regulations.

1. Whether the Factors Set Forth in the Proposed

Criteria Regulation as Presumptive of Bona Fide

Collective Bargaining Should Be Expanded or Modified

Two commenters suggested that the

Department should expand the list of factors indicative

of a bona fide collective bargaining relationship. One

commenter argued that such an expansion is necessary

to make sure that small employers and employers in

manufacturing, warehousing, service and other nonconstruction related industries could easily meet this

criterion. The commenter further suggested that

government certification of a union, as a collective

bargaining agent should be a stand-alone safe harbor

factor. The other commenter noted that newly

established unions, particularly those organizing in the

health care field, might have difficulty meeting four of

the eight factors. That commenter suggested that an

additional factor—that the welfare plan was being

administered along sound actuarial principles—be

added to the list of factors. The commenter also

suggested that the examples set out as part of the nonspecific ninth factor be listed individually as separate

factors that could be counted towards meeting the “safe

harbor.”

In discussing these comments, the Committee

noted that these issues were not new and had been

considered by the Committee in its initial deliberations.

It was noted that the language of the proposed

regulation went as far as possible to be inclusive of

various types of collective bargaining relationships. The

purpose of the ninth “catch-all” factor is to take into

account that the eight specific factors may not

encompass all bona fide collective bargaining

relationships. Concerns were also expressed about

lowering the threshold for what constitutes a bona fide

collective bargaining relationship. Bona fide

collectively bargained arrangements are not likely to be

challenged under the regulation by the states. The

consensus of the Committee was that the eight factors

should not be expanded or modified.

After consideration of the comments and the

Committee’s discussion, the Department has decided not

to expand or modify the factors presumptive of a bona

fide collective bargaining relationship. The final

regulation therefore retains, in section 2510.3-

40(b)(4)(i)-(viii), the factors as originally proposed. In

the view of the Department, the regulation carefully

distinguishes between the specific factors that generally

evidence a bona fide collective bargaining relationship

and the types of activities and fact patterns that are

common to sham MEWA operators. Expanding or

modifying the factors to include less well-established or

less common situations, or making any single factor a

stand-alone safe-harbor, may make it easier for sham

MEWA operators to mimic the regulation’s factors

presumptive of a bona fide collective bargaining

relationship.

The Department also declines to add to the

factors, as suggested by one commenter, the fact that the

plan is maintained on sound actuarial principles.

Although maintaining a plan on sound actuarial

principles is important in other regards, that a plan is

actuarially sound does not necessarily evidence the

existence of a bona fide collective bargaining

relationship. The Department notes, however, that the

final regulations are structured to take into account the

possibility that a bona fide collective bargaining

relationship might, in some case, fail to meet the “safe

harbor” factors. In addition to including the ninth catchall factor, the regulations permit entities that assert they

are in fact established or maintained under or pursuant

to bona fide collective bargaining, and against which

state law or jurisdiction is asserted, to petition for an

individualized finding from the Department as to their

status.

2. Whether the Definition of Collective Bargaining

Agreement Should Be Modified

The Department received one comment

suggesting that the definition of collective bargaining

agreement in section 2510.3-(40)(b)(3) needed to be

modified to correct a technical defect. As proposed, the

regulation required that a plan be “incorporated or

referenced in a written agreement between two or more

employers and one or more employee organizations.”

The commenter argued that the requirement of a

minimum of two employers, rather than one, was

unnecessarily narrow, since there may be situations

where a plan that originally was established or

maintained under or pursuant to a collective bargaining

agreement signed by two or more employers, is now

maintained only by one due to a dwindling number of

participating employers, although the plan still covers

the employees of more than one employer.

The Committee, in discussing this issue,

considered whether, in addition to the reasons

articulated by the commenter, the language of paragraph

2510.3-40(b)(3) should be changed to make clear that

the regulation applies to plans established or maintained

under or pursuant to collective bargaining by a single

employer but covering the employees of other employers

who do not bind themselves to the collective bargaining

agreement. It was noted that such entities are MEWAs.

The Committee’s discussion focused on the fact that it is

important for the regulation to make clear that such

entities are subject to evaluation under the regulation to

see whether in fact they meet the exception under

section 3(40) for plans established or maintained under

or pursuant to collective bargaining.

On the basis of the public comment and the

Committee’s discussion, the Department has determined

to amend 2510.3-40 to provide that the conditions of

(b)(3) will be met if the written agreement referencing

the plan is between one or more employers, rather than

60
two or more employers, and one or more employee

organizations.

3. Whether the Nexus Group Categories Should Be

Expanded or Modified

As part of the process for determining whether a

preponderance of the participants covered by the plan

have a nexus to the bargaining relationships under or

pursuant to which the plan is established or maintained,

the proposed criteria regulation defined a “nexus group”

of categories of participants who could be counted

towards the 80% coverage level set in the proposed

regulation as demonstrating such a preponderance. One

commenter requested that the nexus group categories be

expanded to include employees of an employer trade

association that has negotiated any of the multiemployer

agreements under or pursuant to which a plan is

established or maintained. The commenter noted that the

proposed regulation included, as part of the nexus

group, employees of employee organizations that

sponsor or jointly sponsor a plan, or are represented on

the committee, joint board of trustees, or other similar

group of representatives of the parties who sponsor the

plan. The commenter noted that employees of employer

associations might have a similar connection to the

collective bargaining process. The commenter asserted

that employer trade associations often are involved in

negotiating collective bargaining agreements on behalf

of many employers, and that such employers routinely

become signatories to, or otherwise adopt, agreements

that have been negotiated by their employer

associations. The multiemployer plans that result from

such bargaining often cover the employees of the

employer association as well as the employees of the

employers represented by the association.

The Committee concluded that, as a matter

of parity, employees of an authorized representative of

employers in collective bargaining should be included in

the nexus group, just as are employees of the employee

organization.

Based on its consideration of the comment

and the Committee’s discussion, the Department has

determined to amend 2530.3-40(b)(2)(vi) to include, as

a separate category, the employees of an authorized

employer representative that actually engaged in the

collective bargaining that led to the agreement that

references the plan as described in 2510.3-40(b)(3)(i).

4. Whether the Regulation Should Be Expanded To

Include Entities That Are Not Collectively Bargained,

i.e., Long-Established MEWAs, Union-Only Sponsored

Public Sector Benefit Plans

The Department received two comments

suggesting that the regulation should be expanded to

include certain types of entities that technically are not

established or maintained under or pursuant to

collective bargaining. The commenters were concerned

that issuance of regulations providing clear guidance

addressing what the Secretary finds to be collective

bargaining for the purposes of the collective bargaining

exception in 3(40) of ERISA might result in more state

regulation of entities that are not established pursuant to

collective bargaining than there had been in the absence

of regulations.

The first commenter was a long-established

MEWA that contended that it should be excluded from

the scope of the MEWA definition pursuant to a

“grandfather” provision in the regulation, allowing it to

operate free of state regulation even though it is not a

plan established or maintained under or pursuant to

collective bargaining, because it had been operating on

a financially sound basis for many years. A similar

comment had been previously submitted to the

Committee for consideration prior to the issuance of its

Report to the Secretary. Another commenter requested

that the preamble to the regulation discuss the nature of

legal defense funds for peace officers, which are

established by employee organizations for the

employees of more than one employer, but are not

actually the subject of collective bargaining.

The Committee reiterated its belief, as noted

in the preamble to the proposed criteria regulation, that

the regulation should serve only to define what

constitutes a plan that is established or maintained under

or pursuant to collective bargaining. The Department

believes that the issues raised by these commenters go

beyond the scope of the regulation and, therefore, has

determined not to modify the final regulation in

response to these comments.

5. Whether and How the Procedural Regulation Should

Be Modified in Order To Obviate the Possibility That It

May Hinder or Impede Timely State Enforcement

Actions

One commenter expressed concern that the

availability of administrative proceedings for an

individualized section 3(40) finding in cases where the

jurisdiction or law of a state has been asserted may

result in delays in state enforcement that could

substantially hinder a state’s ability to take timely

enforcement actions against sham MEWA operators.

The commenter stated that time is often of the essence in

such circumstances and that a delay of even a few days

in a state’s taking effective action against a MEWA may

seriously increase the harm to the participants in the

MEWA by permitting the amount of unpaid medical

benefit claims to increase, allowing the plan to collect

additional illegal premiums, and impinging or

eliminating the states’ ability to preserve assets by

giving the plan operators and opportunity to transfer and

hide funds. The commenter specifically identified the

need to be able to obtain preliminary and permanent

injunctive relief and cease and desist orders where sham

union plans are continuing to collect premiums or

failing to pay claims. The commenter asserted that,

unless the Department made clear that the availability of

administrative proceedings was not meant to provide a

61
basis for a stay or delay of state enforcement actions,

the regulations should not be implemented.

Recognizing the need to ensure that the

regulations assist, rather than hinder, state enforcement

efforts against sham MEWA operators and that there are

situations where time is of the essence for effective

enforcement by the states, the Committee recommended

that the regulatory language be clarified to emphasize

that the section 3(40) ALJ proceedings are not a basis in

themselves for a stay-of-state administrative or judicial

proceedings against a putative MEWA.

As proposed, paragraph 2510.3-40(g)(2) of

the criteria regulation provided that “nothing in this

section or in part 2570, subpart H 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 subpoena.” In response to

the commenter and the concerns of the Committee, the

Department has amended that paragraph to state that

“nothing in this section or in part 2570, subpart H of

this chapter is intended to provide the basis for a stay or

delay of a state administrative or court proceeding or

enforcement of a subpoena.”

Miscellaneous Changes

In its consideration of a final regulation, the

Committee questioned whether consideration should be

given to the effect of plan mergers on counting years of

service for purposes of the determining the “nexus”

group. In this regard, the Committee noted that the

nexus group in section 2510.3-40(b)(2) includes retirees

who either participated in the welfare benefit plan for at

least five of the last 10 years preceding their retirement

or 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), and have at least five years of service or the

equivalent under that pension plan. The Committee

suggested that participation in the pre-merger

multiemployer plans should also be considered in

determining whether employees meet the requirements

of these categories of the nexus group. The Committee

also raised the issue of whether employment in the

bargaining unit under the pre-merger plan should be

considered for determining whether an individual is a

bargaining unit alumnus under 2510.3-40(b)(2)(vii)

where the merger was based on a merger of unions. The

Committee noted that Example 2 of the proposed

regulation addresses how a merger affects the

evaluation of the factors in (b)(4)(iii) and (iv) and

suggested that another example could be added to the

final regulation to address the effect of merging unions

and multiemployer plans on the nexus group analysis.

After considering the issues raised by the Committee,

the Department has determined that it is appropriate to

clarify the examples at 2510.3-40(e) to make clear that,

in the case of a merger of multiemployer plans,

participation in a predecessor plan or employment with

a predecessor union may be considered for purposes of

determining the nexus group individuals in section

2510.3-40(b)(2)(ii) and (vii). In this regard, a new

paragraph (3) was added to Example 2 to clarify that

the merger of two unions and the related pension and

health and welfare plans will not affect the

determinations of who is a “retiree” or a “bargaining

unit alumni” for purposes of determining the nexus

group under the regulation.

In reviewing the 75% test in paragraph

(b)(4)(vi) of 2510.3-40, the Department decided that the

regulation should be modified to make clear that in

determining the amount of premiums or contributions to

which the 75% test applies does not include any amount

that a participant or beneficiary might be required to

pay as a co-pay or deductible under the provided

coverage. Accordingly, the Department has modified

paragraph 2510.3-40(b)(4)(iv) to make clear that, in

addition to dental or vision care and coverage for

excepted benefits under 29 CFR 2590.732(b), amounts

payable by participants and beneficiaries as copayments or deductibles are disregarded for purposes of

the 75% test. In so clarifying this provision, however,

the Department notes that if an entity were to establish a

co-payment or deductible schedule designed solely to

satisfy the criteria of paragraph 2510.3-40(b)(4)(vi),

without actually requiring substantial employer

contributions, evidence of such a design may be

considered in evaluating whether for purposes of

2510.3-40(c)(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. The Department further

notes that the collective bargaining history appropriately

may be examined in a 3(40) proceeding, including a

review of those factors in section 2510.3-40(b)(4).

Independent of the Committee’s review of

the regulations, the Department considered whether the

proposed 80% minimum coverage requirement for the

“nexus” test is too low. In the August 1, 1995, proposed

regulation, the Department proposed that no less than

85% of the individuals covered by a plan must be within

the “nexus” group. A number of commenters on that

regulation expressed concern that the percentage was

too high. In developing a new proposal, the Committee

recommended, and the Department proposed, an 80%

test. In this regard, the preamble to the proposal

indicated that “[t]he 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.” 65

FR 64485 (Oct. 27, 2000). While comments were

specifically invited on the 80% test, no comments were

received on that provision. Moreover, the Department

received no comments suggesting that changing the 80%

test to an 85% test would present a problem for affected

plans. The Department further notes that H.R. 2563 of

the 107th Congress, the “Bipartisan Patients Protection

Act,” as passed by the U.S. House of Representatives,

among other things, amends ERISA section 3(40)(A)(i)

to clarify the standards applicable to determining

whether a plan is established or maintained pursuant to

62
collective bargaining agreements. See section 423 of

H.R. 2563. Although similar in many respects to the

regulatory standards proposed by the Department, H.R.

2563 limits the percentage of non-nexus group

individuals to 15 percent.

On the basis of the comments, as well as the

discussions of the Committee, the Department does not

believe that, in the absence of any data to the contrary,

requiring 85% of the covered individuals to be within

the “nexus” group, rather than 80%, will have any

significant effect on the status of otherwise bona fide

collectively bargained plans. Increasing the “nexus”

group percentage to 85% should enhance the

regulation’s deterrent effect on sham MEWA operators

who attempt to masquerade as collectively bargained

plans in order to avoid state insurance regulation and

oversight. In an environment where problems with sham

MEWA operators are growing, the Department believes

that any action it can take to reduce the likelihood of

health insurance fraud against workers and their

families is action that should be taken. Accordingly, the

Department determined it appropriate to modify

paragraph (b)(2) of 2510.3-40 to require that at least

85% of the participants in the plan be within the

“nexus” group (described in subparagraphs (i) through

(x) of 2510.3-40(b)(2)).

B. Economic Analysis Under Executive Order 12866

Under Executive Order 12866, the

Department must determine whether a 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”

within the meaning of 3(f)(4), and therefore subject to

review by the Office of Management and Budget

(OMB). Consistent with the Executive Order, the

Department has undertaken an assessment of the costs

and benefits of this regulatory action. This analysis is

detailed below.

Summary

Although neither the benefits nor costs have

been fully quantified, the Department believes that the

benefits of this final regulation more than justify its

costs. The final regulation yields positive benefits by

reducing uncertainty over which welfare benefit plans

are excepted from the definition of a multiple employer

welfare arrangement under section 3(40) and are

therefore not subject to state regulation. The Department

sought comments from the public concerning its analysis

of benefits and costs of the proposed regulation. Having

received no comments, the Department has relied on its

initial analysis in concluding that the benefits of the

final regulation justify its costs.

The regulation’s elements for distinguishing

collectively bargained plans from MEWAs are

verifiable through documentation that plans or their

agents generally maintain as part of usual business

practices. The regulation also incorporates elements of

flexibility, allowing entities 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 include all plans established or

maintained under or pursuant to one or more collective

bargaining agreements, yet is discriminating enough to

ensure that state law will apply to entities not meeting

the criteria. Only a very small number of entities are

likely to be treated differently as a result of

promulgation of this criteria regulation. In the case of

the few entities that will be determined to be not

collectively bargained plans, the additional cost

attributable to state regulation is outweighed by the

benefit that such state regulation will provide by way of

additional protections for participants and beneficiaries.

Background

It is the view of the Department that the

uncertainty created by the lack of clear criteria for

distinguishing collectively bargained plans from

MEWAs has encouraged unscrupulous operators of

sham MEWAs in attempts to escape or delay state

regulatory efforts by asserting that states lack

jurisdiction to regulate such entities because they are

excluded from the definition of MEWA by reason of the

exception for collectively bargained plans. In order to

establish their authority to regulate, states have had to

take additional steps, such as initiating administrative or

legal proceedings contesting the defendant’s status as a

collectively bargained plan, and have been the subject

of actions initiated by sham MEWA operators, such as

suits for federal declaratory judgment or removal

actions.

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. The criteria regulation will

reduce or eliminate this uncertainty. It will provide

63
greater clarity for entities and states and reduce the time

and expense attributable to court actions or requests to

the Department for guidance.

Benefits of the Regulation—Reducing Uncertainty

Plans and arrangements will benefit from

greater assurance concerning their actual legal status.

States, through an enhanced ability to regulate based on

the greater certainty offered by the regulation, will be

better able to protect employers, participants, and

beneficiaries from unscrupulous MEWA operators.

Further, the majority of plans established or maintained

under or pursuant to collective bargaining agreements

currently operate in a manner that is consistent with the

regulation. Most entities will therefore not perceive any

need to undertake a systematic reassessment of their

status under the regulation. It is possible, however, that

some will choose to undertake such an assessment by

“comparison testing” the plan’s operations against the

“safe harbor” criteria established in the final regulation.

The Department has estimated below the number of

entities likely to undertake a status assessment and the

costs likely to be associated with those activities.

Costs of the Regulation

Entities Potentially Affected. To estimate the number of

entities potentially affected by the final rule, the

Department examined available data on multiemployer

welfare plans established or maintained under or

pursuant to collective bargaining agreements, and the

number of entities self-reporting as MEWAs. Under

ERISA, multiemployer collectively bargained plans are

required to file an annual financial report, the Form

5500. MEWAs are required to file the Form M-1

annually. The 1998 Form 5500 filings by multiemployer

collectively bargained plans numbered about 2,000

(with about 6 million participants). The MEWAs that

filed Form M-1 for the year 2000, pursuant to section

101 of ERISA and related interim final rules (65 FR

7152, February 11, 2000) numbered about 600 (with

about 2 million participants).1 The total number of

MEWAs and collectively bargained plans, which

represents the total universe of arrangements that might

have questions about their legal status and “comparison

test” under this regulation, is estimated at about 2,600

(8 million participants).

The Department was unable to identify any

direct measure of the number of entities whose status is

uncertain or whose status would remain uncertain under

the regulation. Therefore, in order to assess the

economic impact of reduced uncertainty under the

regulation, the Department examined proxies for the

number of entities that might be subject to such

uncertainty. After estimating the total number of

MEWAs and collectively bargained plans at 2,600, 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 the number of entities that have been

subject to uncertainty in the past.

Department data indicate that in recent

years, the Department has received an average of about

nine MEWA-related requests for information each year

from state and federal agencies and the private sector.

The Department also considered the number of MEWArelated lawsuits that were filed by the Department in

recent years. An average of about 45 actions have been

brought each year. For purposes of this analysis, it has

been assumed that each case involved a different

MEWA. Accordingly, the Department has estimated for

purposes of this economic analysis that approximately

54 entities (45 + 9) annually may have reason to be

uncertain about their legal status with respect to section

3(40) of ERISA, or about two percent of the estimated

total number of 2,600 MEWAs and collectively

bargained plans.

The Department views this approximate

number of 54 entities per year as a conservatively high

estimate of the number of entities whose status could be

made more certain by issuance of this regulation. On

one hand, because some number of entities may confront

uncertainty without becoming either the subject of an

inquiry addressed to the Department or a lawsuit to

which the Department is party, this estimate may

represent only a subset of the entities that face

uncertainty over their status. On the other hand, this

estimate may overstate the number of entities that face

uncertainty because it is known that not all requests to

the Department or court actions actually raised issues

related directly to the collective bargaining exception

under section 3(40).

Assessment of Status. The Department

estimates the cost to the 54 entities of conducting an

assessment of their status under the regulation to be

small. Such cost would be largely generated by

reviewing records kept by third parties or by the entity

in the ordinary course of business. The Department

assumes that such a review requires 16 hours of an

attorney’s or comparable professional’s time, plus 5

hours of clerical staff time. At $72 per hour and $21 per

hour respectively, the total cost would be $1,173 per

entity, or about $63,342 on aggregate per year for 54

entities. This cost would be incurred only once for a

given entity unless its circumstances changed

substantially relative to the standard. The Department

believes that the cost is more than justified by savings to

entities that, by conducting this assessment, avoid 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 of this regulation.

Following a self-assessment of status, some

fraction of these 54 entities might nonetheless find

themselves in a situation leading them to seek an

64

1

 This represents a smaller number of plans and fewer participants than the

numbers projected at the time of the proposal. Because the Form M-1

requirement had not been fully implemented at the time of the proposal,

actual information on its use was not available, and the Department relied

on survey data regarded as the most comparable at the time.
administrative determination from the Secretary under

the procedural regulations, incurring attendant costs,

perhaps because a state’s jurisdiction or laws are

asserted against the entity. The administrative process

under the procedural regulations is, in the Department’s

view, an efficient and less costly process for resolving

such disputes than would be available in the absence of

the procedural regulations. The Department has elected

to attribute the net benefit from these savings not to this

regulation, but to the accompanying procedural

regulations.

Reclassifying Incorrectly Classified

Entities. Some number of entities, generally a subset of

the 54 estimated annually to face uncertainty over

status, will be reclassified as a result of comparison

testing against the regulation’s criteria. Entities that

formerly considered themselves to be excluded from the

MEWAs definition as collectively bargained plans may

be required under the criteria regulation to classify

themselves as MEWAs. These MEWAs will likely incur

costs to comply with newly applicable state

requirements. Such requirements 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 reserves,

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.

Relevant literature suggests these costs can

amount to ten percent of premium.2 The cost may be

substantially more if a state regulates premium rates and

the entity otherwise would have benefited from insuring

a population whose health costs are far lower than

average. However, these added costs are transfers and

not true economic costs because they serve as crosssubsidies that reduce costs for populations that are

costlier than average.

65

2 Data from the Health Insurance Association of America (Source Book of

Health Insurance Data, 1999-2000) suggests that insurance companies’

loss ratios for group health insurance policies historically ranged from

about 85 percent to 90 percent. The inverse of the loss ratio, or about 10

percent to 15 percent, generally would include all of these costs except

those associated with benefit mandates and some managed care

protections, as well as insurance company profits, income taxes, and

normal administrative overhead. Loss ratios tend to be higher (and these

costs lower) for larger group policies, and MEWAs are likely to be large.

The cost of benefit mandates and managed care protection will very across

states depending on their extent and across MEWAs depending largely on

the degree to which they otherwise are included voluntarily in the

insurance products they provide. One study estimated that mandates raise

premiums by between 4 percent and 13 percent (Gail A. Jensen and

Michael A. Morrisey, Mandated Benefit Laws and Employer-Sponsored

Health Insurance (Washington, DC: HIAA 1999)).

As noted above, the universe of 2,600

entities that includes those potentially subject to

uncertainty covers 8 million participants, or about 3,100

participants per entity 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 entities that might face uncertainty over status—an

upper bound on the number likely to be reclassified—

produces an upper-bound estimated cost of about $75

million.3

The Department has concluded that actual

costs will be far lower than this and will be outweighed

by the benefit of the associated protections that will

flow from clarifying the state’s authority to regulate. As

noted above, it is likely that the true number of entities

that are reclassified as MEWAs will be a fraction of the

estimated 54 that annually might face uncertainty over

status. Among those that are reclassified, certain entities

likely would already have elected voluntarily to comply

with some of the state regulatory requirements and

therefore would not incur any cost from the application

of state law. For those that would not have complied

with relevant state law, operation of the regulation may

impose additional costs, such as meeting solvency

requirements or providing mandated benefits. The

additional costs are offset and justified by increased

security for plans and improved coverage for

participants. Thus, the added cost from state regulation

would be offset by the benefits derived from the

protections that state regulations provide. GAO, in

1992, identified $124 million in unpaid claims owed by

sham MEWAs. Department enforcement actions

involving MEWAs in recent years have identified

monetary violations of approximately $121.6 million.

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 $121.6 million in

violations would most likely not have occurred.

 It is also possible that some entities

considered to be MEWAs because they are not

collectively bargained will be reclassified under the

criteria regulation as collectively bargained plans.

However, this number seems likely to be very small

because entities that can legitimately be treated as

collectively bargained have an economic incentive to do

so. Any entities that are so classified benefit from the

savings of having no obligation to comply with state

regulatory requirements. There is no meaningful loss of

benefits from the absence of state protections in such

cases because the combination of a legitimate collective

bargaining agreement and the application of ERISA

provides adequate protections.

3

 Recent data from actual Form M-1 filings results in a higher estimated

number of participants per entity than was indicated in the proposal;

therefore, the estimated cost for the final regulation exceeds the $58

million cost estimate for the proposal.
C. Paperwork Reduction Act

This Notice of Final 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).

D. 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 rule will not have a significant

economic impact on a substantial number of small

entities, section 604 of the RFA requires that the agency

present a regulatory flexibility analysis at the time of

the publication of the notice of final rulemaking

describing the impact of the rule on small entities. Small

entities include small businesses, organizations and

governmental jurisdictions.

For purposes of analysis under the RFA, the

Employee Benefits Security Administration (EBSA)

continues 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

ERISA, which permits the Secretary of Labor to

prescribe simplified annual reports for pension plans

that 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

benefit plans covering fewer than 100 participants and

that satisfy certain other requirements.

Further, while some large employers may

have small plans, generally, most small plans are

maintained by small employers. Thus, EBSA believes

that assessing the impact of this 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 that 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.). At the

time of the proposed rule, EBSA requested comments on

the appropriateness of the size standard used in

evaluating the impact of this rule on small entities; no

comments were received that would cause the

Department to reevaluate its size standard.

On this basis, however, EBSA has

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, EBSA has

prepared the following final regulatory flexibility

analysis.

(1) Reasons for Action. EBSA is proposing

this regulation because it believes that regulatory

guidance concerning the definition of 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)) is necessary to ensure that state

insurance regulators have ascertainable guidelines to

help regulate MEWAs operating in their jurisdictions.

The guidance will also allow sponsors of employee

welfare benefit plans to determine independently

whether their entities are excepted under section 3(40)

of ERISA. A more detailed discussion of the agency’s

reasoning for issuing the regulation is found above.

(2) Objective. The objective of the

regulation is to provide criteria for the application of an

exception to the definition “multiple employer welfare

arrangement” (MEWA) found in section 3(40) of

ERISA for a “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.” An extensive list of

authority may be found in the Statutory Authority

section, below.

(3) Estimate of Small Entities Affected.

Form 5500 filings and Form M-1 filings indicate that

there are about 2,600 entities that could be classified as

collectively bargained plans or MEWAs and that could

be affected by the new criteria for defining collectively

bargained plans. It is expected, however, that a very

small number of these entities will have fewer than 100

participants. By their nature, the affected entities must

involve at least two employers, which decreases the

likelihood of their covering fewer than 100 participants.

Also, the underlying goals behind the formation of these

entities, 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.

Available data indicate that about 200 or

eight percent of the 2,600 entities have fewer than 100

participants. 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, the Department estimates that

there are more than 2.5 million private group health

plans with fewer than 100 participants. Thus, the

number of small plans and MEWAs potentially affected

is very small in light of this large number of small plans.

Even if every one of the 2,600 entities at issue had

fewer than 100 participants, the number of entities

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

66
have a significant economic impact on a substantial

number of small entities.

Although relatively few small plans and

other entities are expected to be affected by this

proposal, it is known that the employers typically

involved in these entities 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)). At the time of the proposed

regulation, the Department sought comments and data

with respect to the number of small employers

potentially impacted by the establishment of a standard

for determining whether a welfare benefit plan is

established or maintained under or pursuant to one or

more collective bargaining agreements. No comments or

data were received in response to this request; the

Department therefore continues to believe that, because

these plans and arrangements involve at least two

employers, and assuming that each is small, it can be

estimated that at least 5,200 small employers may be

affected.

It is possible that a small employer

participating in what it thinks is a legitimate MEWA

may find that it has unknowingly participated in a sham

MEWA and will need to change its method of providing

welfare benefits to its employees. By enabling states to

regulate fraudulent and financially unsound MEWAs,

therefore, the regulation may limit the sources of

welfare benefits available to some small businesses,

requiring them to seek alternative coverage for their

employees. The greater benefit for employers, however,

is an increased certainty that the MEWAs that remain in

business will meet state regulatory standards and will be

more certain to provide 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. 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 are routinely prepared

and held by a collectively bargained multiemployer plan

in the ordinary course of business. For any entities that

are newly determined to be MEWAs under the

regulation, there will be an economic impact related to

the start-up costs of compliance with state regulations.

These costs arise from state requirements, however, and

not the requirements of this regulation. Start-up costs

under state regulations may include expenses of

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

final rule.

67

(6) Alternatives. The regulation adopts

generally the views of the consensus report of the

Committee that was established to provide an

alternative to the Department’s earlier Notice of

Proposed Rulemaking on Plans Established or

Maintained Under or Pursuant to Collective Bargaining

Agreements, published in the Federal Register (60 FR

39209, Aug. 1, 1995). At that time, recognizing that

guidance was needed to clarify the collective bargaining

exception to the MEWA regulation, the Department had

proposed certain criteria describing the collective

bargaining agreement. Commenters on the first

proposed regulation expressed concerns related to plan

compliance and the issue of state regulation.

Based on the comments received, the

Department subsequently turned to negotiated

rulemaking, establishing the Committee to assist the

Department in developing acceptable criteria. The

Committee 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. Because this rule takes into

account the Committee’s consensus views, and because

the Committee represented a full cross-section of the

parties affected by the rule, including state, federal,

association, and private sector health care

organizations, the Department believes that, as an

alternative to the 1995 NPRM, this regulation

accomplishes the stated objectives of the Secretary and

will have a beneficial effect on small employer

participation in MEWAs.

The Department has concluded that the

implementation of the regulation will be less costly than

alternative methods of determining compliance with

section 3(40), such as through case-by-case analysis by

EBSA of each employee welfare benefit plan or

litigation. In addition, if the Department elected not to

define specific guidelines for the application of section

3(40), thereby enabling sham MEWAs to continue to

evade state regulation, costs for small businesses would

rise in terms of loss of coverage and unpaid claims. No

other significant alternatives that would minimize

economic impact on small entities were identified.

Further, the Department has concluded that it

would be inappropriate to create a specific exemption

under the regulation for small MEWAs because small

MEWAs are just as likely as large MEWAs to be

underfunded or otherwise have inadequate reserves to

meet the benefit claims submitted for payment.

E. Small Business Regulatory Enforcement Fairness

Act

The rule being issued here is subject to the

Congressional Review Act provisions of the Small

Business Regulatory Enforcement Fairness Act of 1996

(5 U.S.C. 801 et seq.) and has been 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.

F. Unfunded Mandates Reform Act

For purposes of the Unfunded Mandates

Reform Act of 1995 (2 U.S.C. 1501 et seq.), as well as

Executive Order 12875, this 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.

G. Executive Order 13132

When an agency promulgates a regulation

that has federalism implications, Executive Order 13132

(64 FR 43255, August 10, 1999), requires the Agency

to 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 regulation has federalism implications

because it sets forth standards and procedures for

determining whether certain entities may be regulated

under certain state laws 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.

From the inception of the Committee through

final deliberations on comments received on the

proposed regulation, a representative from the National

Association of Insurance Commissioners (NAIC),

representing the interests of state governments in the

regulation of insurance, participated in the rulemaking.

NAIC raised the following concerns at Committee

meetings: (1) That the rule should allow MEWAs to be

easily distinguishable from collectively bargained plans

so that MEWAs properly may be subjected to state

jurisdiction and regulation; (2) that the rule should

prevent the unlicensed sale of health insurance; and (3)

that losses to individuals in the form of unreimbursed

and denied medical claims should be eliminated.

The Department’s position is that there is a

substantial need for this regulation. Unscrupulous

individuals have been able to exploit the lack of clear

guidance regarding the criteria for determining whether

an entity is established or maintained pursuant to

collective bargaining agreements to create entities that

falsely promise benefits they are unable to provide.

These operators, free of state solvency and reserve

requirements, have marketed unlicensed health

insurance to small employers, often offering health

insurance at significantly lower rates than state-licensed

insurance companies. Ultimately, these operations have

often gone bankrupt, leaving individuals with significant

unpaid health claims and without health insurance. The

lack of clear guidance has hampered states in their

efforts to regulate these entities, and appropriate state

regulation would reduce or eliminate the risk of losses

to employers, employees and their families.

This regulation provides objective criteria

for distinguishing collectively bargained plans from

arrangements subject to state insurance law. The

regulation will facilitate state enforcement efforts

against arrangements attempting to misuse the

collectively bargained exception in section 3(40) of

ERISA. In that regard, the regulation will reduce the

incidence of sale of unlicensed insurance under the

guise of collectively bargained plans and will limit the

losses to individuals in the form of unreimbursed

medical and other welfare benefit insurance claims.

The Department notes further, as discussed

more fully above, that one commenter expressed

concern that the availability of administrative

proceedings for an individualized section 3(40) finding

in cases where the jurisdiction or law of a state has been

asserted may result in delays in state enforcement that

could substantially hinder a state’s ability to take timely

enforcement actions against sham MEWA operators.

Recognizing the need to ensure that the regulations

assist, rather than hinder, state enforcement efforts

against sham MEWA operators, and taking into account

the input of the Committee, including the NAIC

representative, the Department has amended the

regulation to make clear that it is not intended to

provide the basis for a stay or delay of any state actions,

including administrative or court proceedings and

enforcement subpoenas, where immediate state

enforcement action is warranted.

List of Subjects in 29 CFR Part 2510

Collective bargaining, Employee benefit

plans, Pensions.

nFor the reasons set forth in the preamble, 29 CFR part

2510 is amended as follows:

PART 2510—[AMENDED] DEFINITION OF TERMS

USED IN SUBCHAPTERS C, D, E, F, AND G OF

THIS CHAPTER

n1. The authority citation for part 2510 is revised to

read as follows:

Authority: 29 U.S.C. 1002(2), 1002(21), 1002(37),

1002(40), 1031, and 1135; Secretary of Labor’s Order

1-2003, 68 FR 5374; Sec. 2510.3-101 also issued under

sec. 102 of Reorganization Plan No. 4 of 1978, 43 FR

47713, 3 CFR, 1978 Comp., p. 332 and E.O. 12108, 44

FR 1065, 3 CFR, 1978 Comp., p. 275, and 29 U.S.C.

1135 note. Sec. 2510.3-102 also issued under sec. 102

68
of Reorganization Plan No. 4 of 1978, 43 FR 47713, 3

CFR, 1978 Comp., p. 332 and E.O. 12108, 44 FR 1065,

3 CFR, 1978 Comp., p. 275.

n2. Add new section 2510.3-40 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 that is established or

maintained under or pursuant to one or more agreements

that the Secretary of Labor (the Secretary) finds to be

collective bargaining agreements. This section sets forth

criteria that represent a finding by the Secretary whether

an arrangement is an employee welfare benefit plan

established or maintained under or pursuant to one or

more collective bargaining agreements. A plan is

established or maintained under or pursuant to

collective bargaining if it meets the criteria in this

section. However, even if an entity meets the criteria in

this section, it will not be an employee welfare benefit

plan established or maintained under or pursuant to a

collective bargaining agreement if it comes within the

exclusions in the section. Nothing 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. 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, the Secretary has set forth a

procedure for obtaining individualized findings at 29

CFR part 2570, subpart H.

(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 85% 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

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

69

maintained under the same agreements referred to in

paragraph (b)(3) 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, 29 U.S.C. 1169, 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 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

that are 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;

(C) Other employee benefit plans or trust

funds to which contributions are made pursuant to the

same agreement described in paragraph (b)(3) of this

section; or

(D) An employer association that is the

authorized employer representative that actually

engaged in the collective bargaining that led to the

agreement that references the plan as described in

paragraph (b)(3) 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) 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 stateregulated 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 one 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 H,

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. In

such a proceeding, the Secretary may also consider

whether other objective or subjective indicia of actual

collective bargaining and representation are present as

set out in paragraph (b)(4)(ix) of this section.

(i) The agreement referred to in paragraph

(b)(3) of this section provides for contributions to a

labor-management trust fund structured according to

section 302(c)(5), (6), (7), (8), or (9) of the TaftHartley 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 governmentsupervised 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

employers pay 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, coverage for excepted benefits under 29

CFR 2590.732(b), and amounts paid by participants and

beneficiaries as co-payments or deductibles in

accordance with the terms of the plan are disregarded;

(vii) The predominant employee organization

that is a party to the agreement described in paragraph

(b)(3) of this section provides, sponsors, or jointly

sponsors a hiring hall(s) and/or a state-certified

apprenticeship program(s) that provides 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

70
agreement 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 selfemployed individuals in the employee welfare benefit

plan established or maintained under or pursuant to such

agreement.

(c) Exclusions. 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:

(1) The plan is self-funded or partially selffunded and is marketed to employers or sole proprietors

(i) By one or more insurance producers as

defined in paragraph (d) of this section;

(ii) By an individual who is disqualified

from, or ineligible for, or has failed to obtain, 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

(iii) By individuals (other than individuals

described in paragraphs (c)(1)(i) and (ii) of this section)

who are paid on a commission-type basis to market the

plan.

(iv) For the purposes of this paragraph

(c)(1):

(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

71

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 categories of participants under

paragraph (b)(2) of this section:

In determining whether at least 85% 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[[Page 17483]]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 of those individuals who would

otherwise be deemed to be nexus individuals because

Categories of participants

1. Individuals working under CBAs........................................

2. Retirees..............................................................................

3. “Special Class”—Non-CBA, non-CBA-alumni...................

4. Non-nexus participants.......................................................

Total.....................................................

0

0

50 (10%)

15 (3%)

65(13%)

Total number Nexus group Non-nexus

335 (67%)

50 (10%)

100 (20%)

15 (3%)

500 (100%)

335 (67%)

50 (10%)

50 (10%)

 0

435 (87%)
they are the type of individuals described in paragraph

(b)(2)(viii), the number 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 85% criterion under paragraph (b)(2)

because a total of 435 (335 individuals covered by the

collective bargaining agreement, plus 50 retirees, plus

50 individuals employed by signatory employers), or

87%, 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 85% test has been met.

Example 2. (i) 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 before January

1, 1983.

(ii) 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 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.

(iii) Assume the same facts as in paragraphs

(i) and (ii) of this Example. In addition to maintaining

the health and welfare plans described in those

paragraphs, International Union MG also maintained

the National MG Pension Plan and International Union

RE maintained the National RE Pension Plan. When the

unions merged and the health and welfare plans were

merged, National MG Pension Plan and National RE

Pension Plan were merged to form National MRGE

Pension Plan. When the unions merged, the employees

and retirees covered under the pre-merger plans

continued to be covered under the post-merger plans

pursuant to the collective bargaining agreements and

also were given credit in the post-merger plans for their

years of service and coverage in the pre-merger plans.

Retirees who originally were covered under the premerger plans and continue to be covered under the postmerger plans based on their past service and coverage

would be considered to be “retirees” for purposes of

2550.3-40(b)(2)(ii). Likewise, bargaining unit alumni

who were covered under the pre-merger plans and

continued to be covered under the post-merger plans

based on their past service and coverage and their

continued employment with employers that are parties to

an agreement described in paragraph (b)(3) of this

section would be considered to be bargaining unit

alumni for purposes of 2550.3-40(b)(2)(vii).

Example 3. Assume the same facts as in

paragraph (ii) 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 since before January 1, 1983.

Example 4. (i) 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)(4)(vi) of this section.

(ii) 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.

72
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

who are unrelated to the employers bound by the

collective bargaining agreement, whose employees

would not be “nexus group” members, and whose

insurance carrier has withdrawn from the market in

their locality. He persuades the client group to retain

him to find them other coverage. The client group 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; Fund M is a MEWA under

paragraph (c)(1) of this section.

Example 7. 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. In

this example, Plan A meets the criteria for a regulatory

finding under this section 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 85% 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. 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

Web sites publicizing the new arrangement with the

Medical Consortium. Concurrently, Medical

Consortium’s Web site 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. 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. 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

73
employers. The Consortium, acting on behalf of its

employer members, negotiates a collective bargaining

agreement with Union A that provides terms and

conditions of employment, including coverage under

Plan A. 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. 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 selfemployed 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 18% of the population of Plan A

during the current Plan Year. In this example, Plan A

now fails to meet the criteria in paragraphs (b)(2) and

(b)(3) of this section, because more than 15% of its

participants are individuals who are not employed under

agreements that are the product of a bona fide collective

bargaining relationship and who do not fall within any

of the other nexus categories set forth in paragraph

(b)(2) of this section. Moreover, even if the number of

additional participants enrolled through the Medical

Consortium, together with any other participants who

did not fall within any of the nexus categories, did not

exceed 15% 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 29 CFR part 2570,

subpart H 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 29 CFR part 2570,

subpart H will constitute a finding whether the entity in

that proceeding is an employee welfare benefit plan

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 29 CFR part

2570, subpart H is intended to provide the basis for a

stay or delay of a state administrative or court

proceeding or enforcement of a subpoena.

Signed this 31st day of March 2003.

Ann L. Combs,

Assistant Secretary,

Employee Benefits Security Administration.

[FR Doc. 03-8113 Filed 4-7-03; 8:45 am]

74
of section 3(40) of the Employee Retirement Income

Security Act of 1974 (ERISA). These rules (the

procedural regulations) are being published

simultaneously with a final regulation (the criteria

regulation) setting forth specific criteria that, if met and

if certain other factors set forth in the final regulation

are not present, constitute a finding by 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). Both of these

final rulemakings take into account the views expressed

by the ERISA section 3(40) Negotiated Rulemaking

Advisory Committee (the Committee), which was

convened by the Department under the Negotiated

Rulemaking Act (NRA) and the Federal Advisory

Committee Act (the FACA), 5 U.S.C. App. 2. Together,

these final regulations will assist states, plan sponsors,

and administrators of employee benefit plans, in

determining the scope of state regulatory authority over

plans or other arrangements as set forth in sections

3(40) and 514(b)(6) of ERISA.

The procedural rules provide for administrative

hearings to obtain a determination by the Secretary as to

whether a particular plan is established or maintained

under or pursuant to one or more collective bargaining

agreements for purposes of section 3(40) of ERISA. The

rules are modeled on the procedures set forth in 29 CFR

sections 2570.60 through 2570.71 regarding civil

penalties under section 502(c)(2) of ERISA related to

reports required to be filed under ERISA section

101(b)(1) and are designed to maintain the maximum

degree of uniformity with those rules that is consonant

with the need for an expedited procedure

accommodating the specific characteristics necessary

for proceedings under section 3(40). Accordingly, the

rules adopt many, although not all, of the provisions of

subpart A of 29 CFR part 18 for the 3(40) proceedings.

In this regard, it should be noted that the rules apply

only to adjudicatory proceedings before administrative

law judges (ALJs) of the United States Department of

Labor (the Department). An administrative hearing is

available under these rules only to an entity that

contends it meets the exception provided in section

3(40)(A)(i) for plans established or maintained under or

pursuant to collective bargaining agreements and only if

the jurisdiction or law of a state has been asserted

against that entity.

These procedural rules were published in the

Federal Register in proposed form on October 27, 2000,

(65 FR 64498), simultaneously with the proposed

criteria regulation. As discussed more fully in the

preamble to the final criteria regulation, the Department

received seven comments on the proposed criteria and

procedural regulations, only one of which related to the

procedural regulations. After considering the views of

the Committee, which was reconvened by the

Department for that purpose and met in public session

on March 1, 2002, the Department has determined to

issue the final procedural regulations in the same format

and language as proposed.

The Department received only one comment

relating to the proposed procedural rules. This comment

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2570

RIN 1210-AA48

Procedures for Administrative Hearings Regarding

Plans Established or Maintained Pursuant to

Collective Bargaining Agreements Under Section

3(40)(A) of ERISA

AGENCY: Employee Benefits Security

Administration, Department of Labor.

ACTION: Final rule.

SUMMARY: This document contains regulations under

the Employee Retirement Income Security Act of 1974,

as amended, (ERISA or the Act) describing procedures

for administrative hearings to obtain a determination by

the Secretary of Labor (Secretary) as to whether a

particular employee welfare benefit plan is established

or maintained under or pursuant to one or more

collective bargaining agreements for purposes of section

3(40) of ERISA. An administrative hearing is available

only if 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. A separate document published

elsewhere in this issue of the Federal Register contains

a rule setting forth the criteria for determining when an

employee welfare benefit plan is established or

maintained under or pursuant to one or more collective

bargaining agreements for purposes of section 3(40) of

ERISA. These regulations are intended to assist labor

organizations, plan sponsors and state insurance

departments in determining whether a plan is a

“multiple employer welfare arrangement” within the

meaning of section 3(40) of ERISA.

EFFECTIVE DATE: June 9, 2003.

FOR FURTHER INFORMATION CONTACT:

Elizabeth A. Goodman, Office of Regulations and

Interpretations, Employee Benefits Security

Administration, U.S. Department of Labor, 200

Constitution Avenue, NW., Room N-5669, Washington,

DC 20210, (202) 693-8510. This is not a toll-free

number.

SUPPLEMENTARY INFORMATION:

A. Background

These final rules set forth an administrative

procedure for obtaining a determination by the

Secretary of Labor (the Secretary) as to whether a

particular employee benefit plan is established or

maintained under or pursuant to one or more agreements

that are collective bargaining agreements for purposes

75
also concerned the criteria regulation and is discussed in

the preamble to that final rule. As described in the

preamble to the final criteria regulation, the Department

has clarified the language of paragraph (g)(2) of the

criteria regulation to emphasize that the ALJ

proceedings do not provide a basis for a stay-of-state

administrative or judicial proceedings. The language of

the procedural regulations remains unchanged.

B. Economic Analysis Under Executive Order 12866

Under Executive Order 12866, the Department

must determine whether a 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”

within the meaning of 3(f)(4), and therefore subject to

review by the Office of Management and Budget

(OMB). Consistent with the Executive Order, 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, at the time of the Notice of Proposed

Rulemaking, the Department sought comments and

information from the public on its analysis of the

benefits and costs of the proposed regulation. Having

received none, the Department believes, based on its

original discussion, that the benefits of this final

regulation justify its costs. The regulation will benefit

plans, states, insurers, and organized labor by reducing

the cost of resolving some disputes over a state’s right

to regulate certain multiple employer welfare benefit

arrangements, facilitating the conduct of hearings,

reducing disputes over a plan or arrangement’s status,

and improving the efficiency and ensuring the

consistency in determinations of such jurisdiction.

Background

When state law or jurisdiction is asserted over an

entity that claims to be excepted from state regulation

under the collective bargaining exception, the entity has

the option of using these procedures to resolve the

dispute. In the absence of the procedure provided under

these regulations for determining whether a given plan

or arrangement is established or maintained pursuant to

a collective bargaining agreement, such disputes have

generally been resolved in courts. The Department

believes that resolving disputes through the procedures

established by these regulations will generally be more

efficient and less costly than resolving the disputes in a

court of law. Also, determinations made in the single,

specialized venue of administrative hearings are likely

to be more consistent than determinations made in

multiple, non-specialized court venues.

Benefits of the Regulation

The procedure established by these regulations

will complement the criteria established by the criteria

regulation. Together, the regulations will assist in

accurately identifying MEWAs and collectively

bargained plans and ensure that disputes over such

classifications are resolved efficiently. For purposes of

its assessment of the economic impact of the

regulations, the Department has attributed the net

benefits of ensuring accurate determinations to the

criteria regulation.

It has attributed the net benefits of ensuring

efficient resolution of disputes to these procedural

regulations.

Determining Jurisdiction Accurately and Consistently

The criteria regulation will reduce existing

confusion about whether an entity falls under the

collective bargaining agreement exception. However,

given the wide variety of agreements, plans and

arrangements, as well as the potential for conflicting

determinations where a MEWA is conducting business

in more than one state, some uncertainties might remain.

The Department has therefore established a procedure

for obtaining an individualized hearing before a

Department of Labor ALJ and for final appeals to the

Secretary or the Secretary’s delegate to determine an

entity’s legal status.

Employers and employees will benefit from an

administrative decision that provides greater assurance

that the entity will comply with applicable federal and

state laws designed to protect welfare benefits. In

addition, both the petitioner and the state whose

authority is being asserted will benefit from the uniform

application of criteria by the ALJ, avoiding any

confusion that would result from inconsistent decisions.

Finally, state insurance departments that receive a

timely resolution about an entity’s status as a MEWA

will be able to swiftly deal with sham MEWAs and then

76
re-direct saved resources to other areas. Because an

ALJ decision will be based on the criteria regulation,

the Department has attributed the net benefit from the

reclassification of currently inaccurately classified plans

or arrangements (and the consequent application of

appropriate state or federal protections) to that

regulation.

Resolving Disputes Efficiently

An administrative hearing under the final

regulations will economically benefit the small number

of plans or arrangements that dispute state assertion of

law or jurisdiction. The Department foresees improved

efficiencies through use of administrative hearings that

are at the option of entities over which state jurisdiction

has been asserted. An administrative hearing allows the

various parties to obtain a decision in a timely, efficient,

and less costly manner than is usual in federal or state

court proceedings, thus benefiting employers and

employees.

The Department’s analysis of costs involved in

adjudication in a federal or state court versus an

administrative hearing assumes that parties seeking to

establish regulatory authority incur a baseline cost to

resolve the question of status in federal or state court

proceeding. This baseline cost includes, but is not

limited to, expenditures for document production,

attorney fees, filing fees, depositions, etc.

Because regulatory authority may be decided in

motions or pleadings in cases where that issue is not

primary, the direct cost of using only the courts as a

decision-maker for such issues is too variable to

specify; however, custom and practice indicate that the

cost of an administrative hearing is similar to or

represents a cost savings compared with the baseline

cost of litigating in federal or state court. Because the

procedures and evidentiary rules of an administrative

hearing generally track the Federal Rules of Civil

Procedure and of Evidence, document production is

similar for both an administrative hearing and for a

federal or state court proceeding. Documents such as

by-laws, administrative agreements, collective

bargaining agreements, and other documents and

instruments governing the entity are generally kept in

the normal course of business, and it is likely that the

cost for an administrative hearing will be no more than

that which would be incurred in preparation for

litigation in a federal or state court. Certain

administrative hearing practices and other new

procedures initiated by this regulation may, however,

represent a cost savings over litigation. For example,

neither party need employ an attorney; the prehearing

exchange is short and general; either party may move to

shorten the time for the scheduling of a proceeding,

including the time for conducting discovery; the general

formality of the hearing may vary, particularly

depending on whether the petitioner is appearing pro se;

an expedited hearing is possible; and, the ALJ generally

has 30 days after receipt of the transcript of an oral

hearing or after the filing of all documentary evidence if

no oral hearing is conducted to reach a decision.

The Department cannot predict that any or all of

these conditions will exist, nor can it predict that any of

these factors represent a cost-savings. However, it is

likely that the specialized knowledge of ERISA that the

ALJ will bring to the process will facilitate a prompt

decision, reduce costs, and introduce a consistent

standard to what has been a confusion of decisions on

regulatory authority. ALJ case histories will educate

MEWAs and states by articulating the characteristics of

a collectively bargained plan, which clarity will in turn

promote compliance with appropriate federal and state

regulations. Participants and beneficiaries of

arrangements that are newly identified as MEWAs will

especially benefit from appropriate state oversight that

provides for secure contributions and paid-up claims. In

its Notice of Proposed Rulemaking, the Department

solicited comments on the comparative cost of a trial in

federal or state court versus an administrative hearing

on the issue of whether an entity is a plan is established

or maintained under or pursuant to an agreement or

agreements that the Secretary finds to be collective

bargaining agreements for purposes of section 3(40) of

ERISA. No comments concerning the comparative costs

of a trial versus an administrative hearing were

received.

C. 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

that 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 604 of the RFA requires that the agency

present a final regulatory flexibility analysis at the time

of the publication of the notice of final rulemaking

describing the impact of the rule on small entities. Small

entities include small businesses, organizations, and

governmental jurisdictions.

For purposes of analysis under the RFA, EBSA

continues 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

ERISA, which permits the Secretary of Labor to

prescribe simplified annual reports for pension plans

that 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

77
for small plans, including unfunded or insured welfare

benefit 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, EBSA believes that assessing

the impact of this final 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 that 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.). In its

Notice of Proposed Rulemaking, EBSA requested

comments on the appropriateness of the size standard

used; no comments were received.

On this basis, EBSA has determined that this rule

does 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, EBSA has prepared the following

final regulatory flexibility analysis.

(1) Reason for the Action. The Department is

establishing a procedure for an administrative hearing

so that states and entities will be able to obtain 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

collective bargaining agreements for purposes of an

exception to section 3(40) of ERISA.

(2) Objectives. The objective of these regulations

is to make available to plans an individualized

procedure for obtaining a hearing before a Department

of Labor ALJ, and for appeals of an ALJ decision to the

Secretary or the Secretary’s delegate. The procedure is

appropriate for the resolution of a dispute regarding an

entity’s legal status in situations where the jurisdiction

or law of a state has been asserted against a plan that

contends it meets the exception for plans established or

maintained under or pursuant to one or more collective

bargaining agreements.

(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. No small governmental

jurisdictions are affected.

Based on Form 5500 filings and Form M-1 filings

by MEWAs pursuant to interim final rules published in

the Federal Register on February 11, 2000 (65 FR

7152), it is estimated that there about 2,600 entities that

can be classified as either collectively bargained plans

or as MEWAs; however, EBSA believes 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.

The number of small plans found within the group

of 2,600 collectively bargained plans or MEWAs is

about 200, or eight percent. 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

indicate that there are more than 2.5 million private

group health plans with fewer than 100 participants.

Thus, the 200 small entities potentially affected

represent a very small portion of all small group health

plans. Even if all 2,600 potentially affected entities

were to have fewer than 100 participants, they would

represent approximately one-tenth of one percent of all

small group health plans.

The Department is not aware of any source of

information indicating the number of instances in which

state law or jurisdiction has been asserted over these

entities, or the portion of those instances that involved

the collective bargaining agreement exception.

However, in order to develop an estimate of the number

of plans or arrangements that might seek to clarify their

legal status by using an administrative hearing as

proposed by these regulations, the Department

examined the number of lawsuits to which the

Department had previously been a party. While this

number is not viewed as a measure of the incidence of

the assertion of state jurisdiction, it is considered the

only reasonable available proxy for an estimate of a

maximum number of instances in which the applicability

of state requirements might be at issue.

In recent years, the Department has been a party

to an average of 45 legal actions annually. The

proportion of these lawsuits that involved a dispute over

state jurisdiction based on a plan’s or an arrangement’s

legal status is unknown. On the whole, 45 is therefore

considered a reasonable estimate of an upper bound

number of plans that could have been a party to a

lawsuit involving a determination of the plan’s legal

status. Because this procedural regulation and the

related criteria regulation are expected to reduce the

number of disputes, the Department assumes that 45

represents a conservatively high estimate of the number

of plans or arrangements that would petition for an

administrative hearing. Of all small plans and

arrangements, then, the greatest number of plans or

arrangements likely to petition for an administrative

hearing represents a tiny fraction of the total number of

small plans.

In addition, the Department has assumed that an

entity’s exercise of the opportunity to petition for a

finding will generally be less costly than available

alternatives. Accordingly, the Department has concluded

that these regulations will not have a significant

economic impact on a substantial number of small

entities.

(4) Reporting and Recordkeeping. In most cases,

the records that will be used to support a petition for a

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hearing pursuant to these procedures will be maintained

by plans and MEWAs in the ordinary course of their

business. Certain documents, such as affidavits, would

likely be required to be prepared specifically for

purposes of the petition. It is assumed that documents

will most often be assembled and drafted by attorneys,

although this is not required by the express terms of the

procedure.

(5) Duplication. No federal rules have been

identified that duplicate, overlap, or conflict with the

final rule.

(6) Alternatives. The regulations are based on the

consensus report of the Committee. Recognizing that

guidance was needed in clarifying collective bargaining

exceptions to the MEWA regulation, in 1995, the

Department had published a Notice of Proposed

Rulemaking on Plans Established or Maintained Under

or Pursuant to Collective Bargaining Agreements in the

Federal Register (60 FR 39209). Under the terms of the

1995 NPRM, it would have been within the authority of

state insurance regulators to identify and regulate

MEWAs operating in their jurisdictions. The 1995

proposal did not establish a method for obtaining

individual findings by the Department.

The Department received numerous comments on

the NPRM expressing concerns about plans’ abilities to

meet the standards set forth in the NPRM. Commenters

also objected to granting authority to state regulators for

determining whether a particular agreement was a

collective bargaining agreement. Commenters strongly

preferred that determination of whether a plan was

established under or pursuant to a collective bargaining

agreement lie with a federal agency and not with

individual states.

Based on the comments received, the Department

turned to negotiated rulemaking as an appropriate

method of developing a revised Notice of Proposed

Rulemaking. In September 1998, the Secretary

established the Committee under the NRA. 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 a Department Notice of Intent. These

regulations are based on the Committee’s consensus on

the need for an individualized administrative proceeding

in limited circumstances for determining the legal status

of an entity. Based on the fact that the Committee

represented a cross section of the state, federal,

association, and private sector insurance organizations

concerned with these issues, the Department believes

that, as an alternative to the 1995 NPRM, these

regulations accomplish the stated objectives of the

Secretary and will have a beneficial effect on MEWAs,

state insurance regulators, small employers who offer

group health coverage, and plan participants. No other

significant alternatives that would minimize the

economic impact on small entities have been identified.

Participating in an administrative hearing to

determine legal status is a voluntary undertaking on the

part of a plan or arrangement. It would be inappropriate

to create an exemption for small entities under the

regulation because small entities are as much in need of

clarification of their legal status as are larger entities.

D. Paperwork Reduction Act

In accordance with the Paperwork Reduction Act

of 1995 (PRA 95) (44 U.S.C. 3501 et seq.), the

Department submitted the information collection request

(ICR) included in the Procedures for Administrative

Hearings Regarding Plans Established or Maintained

Pursuant to Collective Bargaining Agreements under

section 3(40)(A) of ERISA to the Office of Management

and Budget (OMB) for review and clearance at the time

the NPRM was published in the Federal Register (65

FR 64498). A request for comments on the ICR was

included in the NPRM. No comments were received

about the ICR, and no changes have been made to the

ICR in connection with this Notice of Final Rulemaking.

OMB subsequently approved the ICR under control

number 1210-0119. The approval will expire on

January 31, 2004.

Agency: Employee Benefits Security

Administration, Department of Labor.

Title: Petition for Finding under section 3(40) of

ERISA.

OMB Number: 1210-0119.

Affected Public: Business or other for-profit; notfor-profit institutions.

Respondents: 45.

Responses: 45.

Average Time Per Response: 32 hours.

Estimated Total Burden Hours: 1.

Estimated Total Burden Cost (Operating and

Maintenance): $104,100.

E. Small Business Regulatory Enforcement Fairness Act

The rule being issued here is subject to the

Congressional Review Act provisions of the Small

Business Regulatory Enforcement Fairness Act of 1996

(5 U.S.C. 801 et seq.) and has been 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.

F. Unfunded Mandates Reform Act

For purposes of the Unfunded Mandates Reform

Act of 1995 (2 U.S.C. 1501 et seq.), 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.

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G. Executive Order 13132

When an agency promulgates a regulation that has

federalism implications, Executive Order 13132 (64 FR

43255, Aug. 10, 1999) requires the Agency to 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 regulation has Federalism implications

because it sets forth standards and procedures for an

ALJ hearing for determining whether certain entities

may be regulated under certain state laws 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 member of the National

Association of Insurance Commissioners (NAIC),

representing the interest of state governments in the

regulation of insurance, participated in the negotiations

throughout the negotiated rulemaking process that

provided the basis for this regulation.

In response to comments from the public about the

proposed rule, the NAIC raised a concern that the

process by which the Department issues ALJ

determinations regarding the collectively bargained

status of entities should move forward as quickly as

possible and not result in a stay of state enforcement

proceedings against MEWAs. The final regulation

specifically states that the proceedings shall be

conducted as expeditiously as possible and that the

parties shall make every effort to avoid delay at each

stage of the proceeding. The companion regulation that

establishes criteria for determining whether an

employee benefit plan is established or maintained

under or pursuant to one or more collective bargaining

agreements for purposes of section 3(40) of ERISA

provides that ALJ proceedings under this regulation are

not intended to provide the basis for a stay or delay of a

state administrative or court proceeding or enforcement

of a subpoena.

List of Subjects in 29 CFR Part 2570

Administrative practice and procedure, Claims,

Employee benefit plans, Government employees, Law

enforcement, Penalties, Pensions, Reporting and

recordkeeping requirements.

For the reasons set out in the preamble, Part 2570 of

Chapter XXV of Title 29 of the Code of Federal

Regulations is amended to read as follows:

PART 2570—[AMENDED]

1. The authority citation for part 2570 is revised to read

as follows:

Authority: 5 U.S.C. 8477, 29 U.S.C. 1002(40),

1021, 1108, 1132, 1135; sec. 102, Reorganization Plan

No. 4 of 1978, 43 FR 47713, 3 CFR, 1978 Comp. p.

332, and E.O. 12108, 44 FR 1065, 3 CFR, 1978 Comp.,

p. 275; Secretary of Labor’s Order 1-2003, 68 FR 5374

(Feb. 3, 2003).

2. Add new Subpart H to read as follows:Subpart H—

Procedures for Issuance of Findings Under ERISA

Sec. 3(40)

Sec.

2570.150 Scope of rules.

2570.151 In general.

2570.152 Definitions.

2570.153 Parties.

2570.154 Filing and contents of petition.

2570.155 Service.

2570.156 Expedited proceedings.

2570.157 Allocation of burden of proof.

2570.158 Decision of the Administrative Law Judge.

2570.159 Review by the Secretary.

Sec. 2570.150 Scope of rules.

The rules of practice set forth in this subpart H

apply to “section 3(40) Finding Proceedings” (as

defined in Sec. 2570.152(g)), under section 3(40) of

the Employee Retirement Income Security Act of 1974

(ERISA or the Act). Refer to 29 CFR 2510.3-40 for the

definition of relevant terms of section 3(40) of ERISA,

29 U.S.C. 1002(40). To the extent that the regulations in

this subpart differ from the regulations in subpart A of

29 CFR part 18, the regulations in this subpart apply to

matters arising under section 3(40) of ERISA rather

than the rules of procedure for administrative hearings

published by the Department’s Office of Administrative

Law Judges in subpart A of 29 CFR part 18. These

proceedings shall be conducted as expeditiously as

possible, and the parties shall make every effort to avoid

delay at each stage of the proceedings.

Sec. 2570.151 In general.

If there is an attempt to assert state jurisdiction or

the application of state law, either by the issuance of a

state administrative or court subpoena to, or the

initiation of administrative or judicial proceedings

against, a plan or other arrangement that alleges it is

covered by title I of ERISA, 29 U.S.C. 1003, the plan or

other arrangement may petition the Secretary to make a

finding under section 3(40)(A)(i) of ERISA that it is a

plan established or maintained under or pursuant to an

agreement or agreements that the Secretary finds to be

collective bargaining agreements for purposes of section

3(40) of ERISA.

Sec. 2570.152 Definitions.

For section 3(40) Finding Proceedings, this

section shall apply instead of the definitions in 29 CFR

18.2.

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(a) ERISA means the Employee Retirement

Income Security Act of 1974, et seq., 29 U.S.C. 1001, et

seq., as amended.

(b) Order means the whole or part of a final

procedural or substantive disposition by the

administrative law judge of a matter under section 3(40)

of ERISA. No order will be appealable to the Secretary

except as provided in this subpart.

(c) Petition means a written request under the

procedures in this subpart for a finding by the Secretary

under section 3(40) of ERISA that a plan is established

or maintained under or pursuant to one or more

collective bargaining agreements.

(d) Petitioner means the plan or arrangement filing

a petition.

(e) Respondent means:

(1) A state government instrumentality charged

with enforcing the law that is alleged to apply or which

has been identified as asserting jurisdiction over a plan

or other arrangement, including any agency,

commission, board, or committee charged with

investigating and enforcing state insurance laws,

including parties joined under Sec. 2570.153;

(2) The person or entity asserting that state law or

state jurisdiction applies to the petitioner;

(3) The Secretary of Labor; and

(4) A state not named in the petition that has

intervened under Sec. 2570.153(b).

(f) Secretary means the Secretary of Labor, and

includes, pursuant to any delegation or sub-delegation

of authority, the Assistant Secretary for Employee

Benefits Security or other employee of the Employee

Benefits Security Administration.

(g) Section 3(40) Finding Proceeding means a

proceeding before the Office of Administrative Law

Judges (OALJ) relating to whether the Secretary finds

an entity to be a plan to be established or maintained

under or pursuant to one or more collective bargaining

agreements within the meaning of section 3(40) of

ERISA.

Sec. 2570.153 Parties.

For section 3(40) Finding Proceedings, this

section shall apply instead of 29 CFR 18.10.

(a) The term “party” with respect to a Section

3(40) Finding Proceeding means the petitioner and the

respondents.

(b) States not named in the petition may

participate as parties in a Section 3(40) Finding

Proceeding by notifying the OALJ and the other parties

in writing prior to the date for filing a response to the

petition. After the date for service of responses to the

petition, a state not named in the petition may intervene

as a party only with the consent of all parties or as

otherwise ordered by the ALJ.

(c) The Secretary of Labor shall be named as a

“respondent” to all actions.

(d) The failure of any party to comply with any

order of the ALJ may, at the discretion of the ALJ, result

in the denial of the opportunity to present evidence in

the proceeding.

Sec. 2570.154 Filing and contents of petition.

(a) A person seeking a finding under section 3(40)

of ERISA must file a written petition by delivering or

mailing it to the Chief Docket Clerk, Office of

Administrative Law Judges (OALJ), 800 K Street,

NW., Suite 400, Washington, DC 20001-8002, or by

making a filing by any electronic means permitted under

procedures established by the OALJ.

(b) The petition shall—

(1) Provide the name and address of the entity for

which the petition is filed;

(2) Provide the names and addresses of the plan

administrator and plan sponsor(s) of the plan or other

arrangement for which the finding is sought;

(3) Identify the state or states whose law or

jurisdiction the petitioner claims has been asserted over

the petitioner, and provide the addresses and names of

responsible officials;

(4) Include affidavits or other written evidence

showing that:

(i) State jurisdiction has been asserted over or

legal process commenced against the petitioner pursuant

to state law;

(ii) The petitioner is an employee welfare benefit

plan as defined at section 3(1) of ERISA (29 U.S.C.

1002(1)) and 29 CFR 2510.3-1 and is covered by title I

of ERISA (see 29 U.S.C. 1003);

(iii) The petitioner is established or maintained for

the purpose of offering or providing benefits described

in section 3(1) of ERISA (29 U.S.C. 1002(1)) to

employees of two or more employers (including one or

more self-employed individuals) or their beneficiaries;

(iv) The petitioner satisfies the criteria in 29 CFR

2510.3-40(b); and

(v) Service has been made as provided in Sec.

2570.155.

 (5) The affidavits shall set forth such facts as

would be admissible in evidence in a proceeding under

29 CFR part 18 and shall show affirmatively that the

affiant is competent to testify to the matters stated

therein. The affidavit or other written evidence must set

forth specific facts showing the factors required under

paragraph (b)(4) of this section.

Sec. 2570.155 Service.

For section 3(40) proceedings, this section shall

apply instead of 29 CFR 18.3. (a) In general. Copies

of all documents shall be served on all parties of record.

All documents should clearly designate the docket

number, if any, and short title of all matters. All

documents to be filed shall be delivered or mailed to the

Chief Docket Clerk, Office of Administrative Law

Judges (OALJ), 800 K Street, NW., Suite 400,

Washington, DC 20001-8002, or to the OALJ Regional

Office to which the proceeding may have been

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transferred for hearing. Each document filed shall be

clear and legible.

(b) By parties. All motions, petitions, pleadings,

briefs, or other documents shall be filed with the Office

of Administrative Law Judges with a copy, including

any attachments, to all other parties of record. When a

party is represented by an attorney, service shall be

made upon the attorney. Service of any document upon

any party may be made by personal delivery or by

mailing by first class, prepaid U.S. mail, a copy to the

last known address. The Secretary shall be served by

delivery to the Associate Solicitor, Plan Benefits

Security Division, ERISA Section 3(40) Proceeding, PO

Box 1914, Washington, DC 20013. The person serving

the document shall certify to the manner and date of

service.

(c) By the Office of Administrative Law Judges.

Service of orders, decisions and all other documents

shall be made to all parties of record by regular mail to

their last known address.

(d) Form of pleadings (1) Every pleading shall

contain information indicating the name of the

Employee Benefits Security Administration (EBSA) as

the agency under which the proceeding is instituted, the

title of the proceeding, the docket number (if any)

assigned by the OALJ and a designation of the type of

pleading or paper (e.g., notice, motion to dismiss, etc.).

The pleading or paper shall be signed and shall contain

the address and telephone number of the party or person

representing the party. Although there are no formal

specifications for documents, they should be typewritten

when possible on standard size 8\1/2\ x 11 inch paper.

(2) Illegible documents, whether handwritten,

typewritten, photocopies, or otherwise, will not be

accepted. Papers may be reproduced by any duplicating

process provided all copies are clear and legible.Sec.

2570.156 Expedited proceedings. For section 3(40)

Finding Proceedings, this section shall apply instead of

29 CFR 18.42.

(a) At any time after commencement of a

proceeding, any party may move to advance the

scheduling of a proceeding, including the time for

conducting discovery.

(b) Except when such proceedings are directed by

the Chief Administrative Law Judge or the

administrative law judge assigned, any party filing a

motion under this section shall:

(1) Make the motion in writing;

(2) Describe the circumstances justifying

advancement;

(3) Describe the irreparable harm that would

result if the motion is not granted; and

(4) Incorporate in the motion affidavits to support

any representations of fact.

(c) Service of a motion under this section shall be

accomplished by personal delivery, or by facsimile,

followed by first class, prepaid, U.S. mail. Service is

complete upon personal delivery or mailing.

(d) Except when such proceedings are required, or

unless otherwise directed by the Chief Administrative

Law Judge or the administrative law judge assigned, all

parties to the proceeding in which the motion is filed

shall have ten (10) days from the date of service of the

motion to file an opposition in response to the motion.

(e) Following the timely receipt by the

administrative law judge of statements in response to

the motion, the administrative law judge may advance

pleading schedules, discovery schedules, prehearing

conferences, and the hearing, as deemed appropriate;

provided, however, that a hearing on the merits shall not

be scheduled with less than five (5) working days notice

to the parties, unless all parties consent to an earlier

hearing.

(f) When an expedited hearing is held, the decision of

the administrative law judge shall be issued within

twenty (20) days after receipt of the transcript of any

oral hearing or within twenty (20) days after the filing

of all documentary evidence if no oral hearing is

conducted.

Sec. 2570.157 Allocation of burden of proof.

For purposes of a final decision under Sec.

2570.158 (Decision of the Administrative Law Judge)

or Sec. 2570.159 (Review by the Secretary), the

petitioner shall have the burden of proof as to whether it

meets 29 CFR 2510.3-40.

Sec. 2570.158 Decision of the Administrative Law

Judge.

For section 3(40) finding proceedings, this section

shall apply instead of 29 CFR 18.57.

(a) Proposed findings of fact, conclusions of law,

and order. Within twenty (20) days of filing the

transcript of the testimony, or such additional time as

the administrative law judge may allow, each party may

file with the administrative law judge, subject to the

judge’s discretion under 29 CFR 18.55, proposed

findings of fact, conclusions of law, and order together

with the supporting brief expressing the reasons for such

proposals. Such proposals and brief shall be served on

all parties, and shall refer to all portions of the record

and to all authorities relied upon in support of each

proposal.

(b) Decision based on oral argument in lieu of

briefs. In any case in which the administrative law judge

believes that written briefs or proposed findings of fact

and conclusions of law may not be necessary, the

administrative law judge shall notify the parties at the

opening of the hearing or as soon thereafter as is

practicable that he or she may wish to hear oral

argument in lieu of briefs. The administrative law judge

shall issue his or her decision at the close of oral

argument, or within 30 days thereafter.

(c) Decision of the administrative law judge.

Within 30 days, or as soon as possible thereafter, after

the time allowed for the filing of the proposed findings

of fact, conclusions of law, and order, or within thirty

(30) days after receipt of an agreement containing

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consent findings and order disposing of the disputed

matter in whole, the administrative law judge shall

make his or her decision. The decision of the

administrative law judge shall include findings of fact

and conclusions of law, with reasons therefore, upon

each material issue of fact or law presented on the

record. The decision of the administrative law judge

shall be based upon the whole record. It shall be

supported by reliable and probative evidence. Such

decision shall be in accordance with the regulations

found at 29 CFR 2510.3-40 and shall be limited to

whether the petitioner, based on the facts presented at

the time of the proceeding, is a plan established or

maintained under or pursuant to collective bargaining

for the purposes of section 3(40) of ERISA.

Sec. 2570.159 Review by the Secretary.

(a) A request for review by the Secretary of an

appealable decision of the administrative law judge may

be made by any party. Such a request must be filed

within 20 days of the issuance of the final decision or

the final decision of the administrative law judge will

become the final agency order for purposes of 5 U.S.C.

701 et seq.

(b) A request for review by the Secretary shall

state with specificity the issue(s) in the administrative

law judge’s final decision upon which review is sought.

The request shall be served on all parties to the

proceeding.

(c) The review by the Secretary shall not be a de

novo proceeding but rather a review of the record

established by the administrative law judge.

(d) The Secretary may, in his or her discretion,

allow the submission of supplemental briefs by the

parties to the proceeding.

(e) The Secretary shall issue a decision as

promptly as possible, affirming, modifying, or setting

aside, in whole or in part, the decision under review,

and shall set forth a brief statement of reasons therefor.

Such decision by the Secretary shall be the final agency

action within the meaning of 5 U.S.C. 704.

Signed this 31st day of March, 2003.

Ann L. Combs, Assistant Secretary,

Employee Benefits Security Administration.

[FR Doc. 03-8114 Filed 4-7-03; 8:45 am]

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