[Federal Register Volume 65, Number 209 (Friday, October 27, 2000)]
[Proposed Rules]
[Pages 64482-64498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27044]



[[Page 64481]]

-----------------------------------------------------------------------

Part II





Department of Labor





-----------------------------------------------------------------------



Pension and Welfare Benefits Administration



-----------------------------------------------------------------------



29 CFR Parts 2510 and 2570



Plans Established or Maintained Under or Pursuant to Collective 
Bargaining Agreements Under Section 3(40)(A) of ERISA; Proposed Rule



Procedures for Administrative Hearings Regarding Plans Established or 
Maintained Pursuant to Collective Bargaining Agreements Under Section 
3(40)(A) of ERISA; Proposed Rule

Federal Register / Vol. 65, No. 209 / Friday, October 27, 2000 / 
Proposed Rules

[[Page 64482]]


-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2510

RIN 1210-AA48


Plans Established or Maintained Under or Pursuant to Collective 
Bargaining Agreements Under Section 3(40)(A) of ERISA

AGENCY: Pension and Welfare Benefits Administration, Department of 
Labor.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This document contains a proposed regulation under the 
Employee Retirement Income Security Act of 1974, as amended, (ERISA or 
the Act), setting forth specific criteria that, if met and if certain 
other factors set forth in the proposed regulation are not present, 
constitute a finding by the Secretary of Labor (the Secretary) that a 
plan is established or maintained under or pursuant to one or more 
collective bargaining agreements for purposes of section 3(40) of 
ERISA. Employee welfare benefit plans that meet the requirements of the 
proposed regulation are excluded from the definition of ``multiple 
employer welfare arrangements'' under section 3(40) of ERISA and 
consequently are not subject to state regulation of multiple employer 
welfare arrangements as provided for by the Act. If adopted, the 
proposed regulation would affect employee welfare benefit plans, their 
sponsors, participants, and beneficiaries, as well as service providers 
to plans. Proposed regulations are being published simultaneously with 
this proposed regulation that set forth a procedure for obtaining a 
determination by the Secretary as to whether a particular employee 
welfare benefit plan is established or maintained under or pursuant to 
one or more agreements that are collective bargaining agreements for 
purposes of section 3(40) of ERISA. The procedure would be available 
only in situations where the jurisdiction or law of a state has been 
asserted against a plan or other arrangement that contends it meets the 
exception for plans established or maintained under or pursuant to one 
or more collective bargaining agreements.

DATES: Written comments concerning the proposed regulation must be 
received by December 26, 2000.

ADDRESSES: Interested persons are invited to submit written comments 
(preferably three copies) concerning this proposed regulation to: 
Pension and Welfare Benefits Administration, Room N-5669, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210, (Attention: Proposed Regulation Under Section 3(40)). All 
submissions will be open to public inspection at the Public Documents 
Room, Pension and Welfare Benefits Administration, Room N-5638, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210.

FOR FURTHER INFORMATION CONTACT: Elizabeth A. Goodman, Office of 
Regulations and Interpretations, Pension and Welfare Benefits 
Administration, Room N-5669, U.S. Department of Labor, 200 Constitution 
Avenue, NW., Washington, DC 20210, (202) 219-8671. This is not a toll-
free number.

SUPPLEMENTARY INFORMATION:

A. Background

    The Department is proposing a regulation, based on the report of 
the ERISA Section 3(40) Negotiated Rulemaking Advisory Committee 
convened by the Department for this purpose, that would implement 
section 3(40) of ERISA, 29 U.S.C. 1002(40). Section 3(40)(A) defines 
the term multiple employer welfare arrangement (MEWA) in pertinent part 
as follows:

    The term ``multiple employer welfare arrangement'' means an 
employee welfare benefit plan, or any other arrangement (other than 
an employee welfare benefit plan), which is established or 
maintained for the purpose of offering or providing any benefit 
described in paragraph (1) [of section 3 of the Act] to the 
employees of two or more employers (including one or more self-
employed individuals), or to their beneficiaries, except that such 
term does not include any such plan or other arrangement which is 
established or maintained--(i) under or pursuant to one or more 
agreements which the Secretary finds to be collective bargaining 
agreements. * * *

    This provision was added to ERISA by the Multiple Employer Welfare 
Arrangement Act of 1983, Sec. 302(b), Pub. L. 97-473, 96 Stat. 2611, 
2612 (29 U.S.C. 1002(40)), which also amended section 514(b) of ERISA. 
Section 514(a) of the Act provides that state laws which relate to 
employee welfare benefit plans are generally preempted by ERISA. 
Section 514(b) sets forth exceptions to the general rule of section 
514(a) and subjects employee welfare benefit plans that are MEWAs to 
various levels of state regulation depending on whether or not the MEWA 
is fully insured. Sec. 302(b), Pub. L. 97-473, 96 Stat. 2611, 2613 (29 
U.S.C. 1144(b)(6)). \1\
---------------------------------------------------------------------------

    \1\ The Multiple Employer Welfare Arrangement Act of 1983 added 
section 514(b)(6) which provides a limited exception to ERISA's 
preemption of state laws that allows states to exercise regulatory 
authority over employee welfare benefit plans that are NEWAs. 
Section 514(b) provides, in relevant part, that:
    (6)(A) Notwithstanding any other provision of this section--(i) 
in the case of an employee welfare benefit plan which is a multiple 
employer welfare arrangement and is fully insured (or which is a 
multiple employer welfare arrangement subject to an exemption under 
subparagraph (B)), any law of any State which regulates insurance 
may apply to such arrangement to the extent that such law 
provides)--
    (I) standards, requiring the maintenance of specified levels of 
reserves and specified levels of contributions, which any such plan, 
or any trust established under such a plan, must meet in order to be 
considered under such law able to pay benefits in full when due, and
    (II) provisions to enforce such standards, and (ii) in the case 
of any other employee welfare benefit plan which is a multiple 
employer welfare arrangement, in addition to this title, any law of 
any State which regulates insurance may apply to the extent not 
inconsistent with the preceding sections of this title.
    Thus, an employee welfare benefit plan that is a MEWA remains 
subject to state regulation to the extent provided in section 
514(b)(6)(A). ERISA preemption applies only to MEWAs which are 
employee welfare benefit plans.
---------------------------------------------------------------------------

    The Multiple Employer Welfare Arrangement Act was introduced to 
counter what the Congressional drafters termed abuse by the ``operators 
of bogus `insurance' trusts.'' 128 Cong. Rec. E2407 (1982) (Statement 
of Congressman Erlenborn). In his comments, Congressman Erlenborn noted 
that certain MEWA operators had been successful in thwarting timely 
investigations and enforcement activities of state agencies by 
asserting that such entities were ERISA plans exempt from state 
regulation by the terms of section 514 of ERISA. The goal of the bill, 
according to Congressman Erlenborn, was to remove ``any potential 
obstacle that might exist under current law which could hinder the 
ability of the States to regulate multiple employer welfare 
arrangements to assure the financial soundness and timely payment of 
benefits under such arrangements.'' Id. This concern was also expressed 
by the Committee on Education and Labor in the Activity Report of the 
Pension Task Force (94th Congress, 2d Session, 1977), cited by 
Congressman Erlenborn:

    It has come to our attention, through the good offices of the 
National
    Association of State Insurance Commissioners, that certain 
entrepreneurs have undertaken to market insurance products to 
employers and employees at large, claiming these products to be 
ERISA covered plans. For instance, persons whose primary interest is 
in the profiting from the provision of administrative services are 
establishing insurance companies and related enterprises. The 
entrepreneur will then argue that his enterprise is an ERISA benefit 
plan which is protected under ERISA's preemption provision from 
state regulation.


[[Page 64483]]


    Id. As a result of the addition of section 514(b)(6), certain state 
laws regulating insurance may apply to employee welfare benefit plans 
that are MEWAs. However, the definition of a MEWA in section 3(40) 
provides that an employee welfare benefit plan is not a MEWA if it is 
established or maintained under or pursuant to an agreement or 
agreements which the Secretary finds to be a collective bargaining 
agreement. Such plans, therefore, are not subject to state insurance 
regulation under section 514(b)(6).
    While the Multiple Employer Welfare Arrangement Act of 1983 
significantly enhanced the states' ability to regulate MEWAs, problems 
in this area persist. Among other things, the exception for 
collectively bargained plans contained in section 3(40) is now being 
exploited by some MEWA operators who, through the use of sham unions 
and collective bargaining agreements, market fraudulent insurance 
schemes under the guise of collectively bargained welfare plans exempt 
from state insurance regulation.\2\ Another problem in this area 
involves the use of collectively bargained plans as vehicles for 
marketing health care coverage to individuals and employers with no 
relationship to the bargaining process or the underlying bargaining 
agreement.
---------------------------------------------------------------------------

    \2\ In addition, the Department has received requests to make 
individual determinations concerning the status of particular plans 
under section 3(40). See. e.g., Ocean Breeze Festival Park v. Reich, 
853 F. Supp. 906, 91 (1994), summary judgment granted sub nom. 
Virginia Beach Policemen's Benevolent Association, et al. v. Reich, 
881 F. Supp 1059 (E.D. Va. 1995), aff'd, 96 F.3d 1440 (1996); 
Amalgamated Local Union No. 335 v. Gallagher, No. 91 CIV 0193(RR) 
(E.D.N.Y. April 15, 1991).
---------------------------------------------------------------------------

B. The August 1995 Notice of Proposed Rulemaking

    On August 1, 1995, the Department published a Notice of Proposed 
Rulemaking on Plans Established or Maintained Pursuant to Collective 
Bargaining Agreements in the Federal Register. (60 FR 39209). (August 
1995 NPRM). The Department proposed criteria for determining whether an 
employee welfare benefit plan is established or maintained under or 
pursuant to one or more agreements that the Secretary finds to be 
collective bargaining agreements for purposes of section 3(40) of 
ERISA. The proposed approach did not have a procedure for obtaining 
individual findings by the Department. The Department received numerous 
comments on the NPRM. Commenters expressed concerns about their ability 
to comply with the standards set forth in the NPRM, and to obtain data 
necessary to establish compliance with the criteria proposed by the 
Department. Commenters also objected to having State regulators 
determine whether a particular agreement was a collective bargaining 
agreement.

C. Regulatory Negotiation

    The Department continues to believe that regulatory guidance in 
this area is necessary. Based on the comments received in response to 
the August 1995 NPRM, the Department determined that negotiated 
rulemaking was an appropriate method of implementing a revised Notice 
of Proposed Rulemaking. On April 15, 1998, the Secretary published in 
theFederal Register (63 FR 18345) a notice of intent to establish a 
negotiated rulemaking advisory committee under the Negotiated 
Rulemaking Act. (5 U.S.C. 561 et seq.) (NRA). The NRA establishes a 
framework for the conduct of negotiated rulemaking and encourages 
agencies to use negotiated rulemaking to enhance the informal 
rulemaking process.
    In September 1998, the Secretary established the ERISA Section 
3(40) Negotiated Rulemaking Advisory Committee under the NRA and the 
Federal Advisory Committee Act (the FACA)(5 U.S.C. App. 2) (Notice of 
Establishment). (63 FR 5052). The Committee included a Department 
representative and its work has been assisted by a neutral facilitator. 
The Committee membership was chosen from the organizations that 
submitted comments on the Department's August 1995 NPRM, and from the 
petitions and nominations for membership received in response to the 
Notice of Intent. The Notice of Establishment outlined the rationale 
behind the final composition of the Committee. The members of the ERISA 
Section 3(40) Negotiated Rulemaking Advisory Committee are as follows:
    Labor Unions: Kathy Krieger, American Federation of Labor and 
Congress of Industrial Organizations;
    Multiemployer Plans: Gerald Feder (James Ray--alternate), National 
Coordinating Committee for Multiemployer Plans; Judith Mazo, 
Entertainment Industry Multiemployer Health Plans;
    State Governments: Fred Nepple, National Association of Insurance 
Commissioners;
    Employers/Management: James Kernan, The Associated General 
Contractors of America;
    Railway Labor Act Plans: Benjamin W. Boley, National Railway Labor 
Conference;
    Third-Party Administrators: David Livingston, TIC International 
Corporation;
    Independent agents, brokers and advisors providing health care 
products and services to plans and individuals: Nancy Trenti, National 
Association of Health Underwriters;
    Insurance carriers and managed care companies that finance and 
deliver health care: R. Lucia Riddle, Health Insurance Association of 
America;
    Federal Government: Elizabeth A. Goodman, Pension and Welfare 
Benefits Administration.
    The goal of the Committee was to reach consensus on pertinent 
issues and draft regulatory text for the purposes of developing a 
substantive rule to help the regulated community determine which plans 
are indeed established or maintained under or pursuant to one or more 
collective bargaining agreements, and therefore not subject to state 
regulation, under section 3(40) of ERISA. The Committee conducted eight 
public sessions held on October 26-27, 1998, December 16-17, 1998, 
February 9-10, 1999, April 20-21, 1999, July 7-8, 1999, August 25-26, 
1999, October 13-14, 1999, and November 16-17, 1999. All meetings were 
held in Washington, D.C. and allocated time during the meetings for 
public participation and comment. In accordance with the FACA's 
requirements, minutes of all public Committee meetings have been kept 
in the public rulemaking record, together with the materials 
distributed among Committee members during such meetings and 
correspondence received by the Committee regarding the rulemaking. 
During the course of the Committee's deliberations, it received two 
written comments from the public. The Committee considered the comments 
in drafting its report and the proposed regulatory text.
    Under the rules governing the negotiated rulemaking process, and in 
accordance with the organizational protocols adopted by the Committee, 
the Committee agreed to recommend to the Secretary consensus language 
in the form of a proposed rule developed by the Committee. Committee 
members agreed not to file adverse public comments on provisions of the 
proposed rule on which the Committee had reached consensus.
    In the event that the Committee did not reach a full consensus on a 
proposed rule, the Committee members agreed to prepare a report to the 
Secretary outlining any consensus agreement reached, and summarizing 
the reasons for the failure to reach consensus on the complete rule. 
The

[[Page 64484]]

Department was prepared to develop a proposed rule on its own, if the 
Committee could not reach consensus.
    With the exception of sections E-K of the preamble, the text of the 
proposed rule and preamble is the Committee's consensus.

D. Description of Proposed Regulation

1. Structure of the Proposed Regulation

    The proposed regulation establishes specific criteria that the 
Secretary finds must be present in order for one or more agreements to 
be collective bargaining agreements for purposes of section 3(40) of 
ERISA and also establishes certain criteria for determining when an 
employee welfare benefit plan is established or maintained under or 
pursuant to such an agreement or agreements for purposes of section 
3(40). In drafting proposed regulatory language, the Committee took 
into account that section 3(40) not only requires the existence of one 
or more bona fide collective bargaining agreements, but also requires 
that the plan be ``established or maintained'' under or pursuant to 
such an agreement or agreements. The proposed regulation interprets the 
exception under section 3(40)(A)(i) as being limited to plans providing 
coverage primarily to those individuals with a nexus to the collective 
bargaining agreement or agreements under or pursuant to which the plan 
is established or maintained. Accordingly, the criteria in the proposed 
regulation relating to whether a plan qualifies as ``established or 
maintained'' are intended to ensure that the statutory exception is 
only available to plans whose participants are predominately the 
bargaining unit employees on whose behalf such benefits were negotiated 
and other individuals with a close nexus to the bargaining unit or to 
the employer(s) of the bargaining unit employees.
    The proposed regulation also sets forth certain instances where, 
even if the specific criteria apparently are met, an entity will be 
deemed not to be established or maintained under or pursuant to one or 
more collective bargaining agreements. The proposed regulation also 
sets forth certain factors to be considered by a fact finder as to 
whether there is a bona fide collective bargaining relationship.
    The proposed regulation would, upon adoption, constitute the 
Secretary's finding for purposes of determining whether a plan is 
established or maintained under or pursuant to one or more collective 
bargaining agreements pursuant to section 3(40) of ERISA. The criteria 
contained in the proposed regulation are designed to enable entities 
and state insurance regulatory agencies to determine in the first 
instance whether the requirements of the Act are met. Unlike the August 
1995 NPRM, under certain limited circumstances an entity may elect to 
petition the Secretary for an individual finding. However, the 
Secretary will not make individual findings or determinations as to 
whether an entity meets the criteria of the proposed regulation unless 
a state's law or jurisdiction is asserted in an administrative or 
judicial proceeding against that particular entity. For the procedure 
for petitioning for an individual finding and a description of the ALJ 
individual finding procedure, see Notice of Proposed Rulemaking 29 CFR 
2570 Subpart G (published simultaneously).
    The principles and criteria in this proposed rule were developed 
solely for the purpose of determining whether or not a multiple 
employer welfare plan is a MEWA under section 3(40). In considering and 
drafting this proposed regulation, the Committee was not charged with 
interpreting or enforcing any other federal laws that relate to 
collective bargaining and employee benefits, such as the National Labor 
Relations Act, the Internal Revenue Code of 1986 or the Railway Labor 
Act. Therefore, nothing in this proposed regulation, or in any ALJ 
finding issued pursuant to it under the proposed rules at 29 CFR 2570 
Subpart G, is intended to determine the rights and responsibilities of 
any party under such other laws. In drafting the proposed regulatory 
language, the Committee recognized that a finding by the Secretary that 
a plan is maintained pursuant to a collective bargaining agreement as 
defined for section 3(40) of ERISA may be considered by parties 
applying other laws, but did not believe that such a finding here 
would, given the narrow focus of the proposed regulation, conclude the 
analysis under such other law.

2. Specific Provisions of the Proposed Regulation

Section 2510.3-40(a)--Scope and Purpose

    Section (a), Scope and Purpose, states that the purpose of the 
proposed regulation is to set forth a finding by the Secretary that an 
employee welfare benefit plan is established or maintained under or 
pursuant to one or more collective bargaining agreements if it meets 
the criteria in the proposed regulation and does not come within one of 
the exclusions.

Section 2510.3-40(b)--Who Is Covered by the Plan

    Section (b), Criteria, is divided into four parts: subparagraph (1) 
requires that the entity in question be an employee welfare benefit 
plan within the meaning of ERISA section 3(1); subparagraph (2) looks 
at whether the preponderance of those participants covered by the plan 
have a nexus to the bargaining relationships under which the plan is 
established or maintained; subparagraph (3) describes the 
characteristics of agreements that will qualify them, for purposes of 
section 3(40) of ERISA only, as collective bargaining agreements; and 
subparagraph (4) sets forth factors to be considered, again for 
purposes of section 3(40) only, in determining whether there is a bona 
fide collective bargaining relationship underlying the agreements 
pursuant to which the plan is established or maintained. If an employee 
welfare benefit plan meets the general criteria and is not excluded 
under subsection (c), then the Secretary finds that such plan is 
``established or maintained under or pursuant to one or more agreements 
which the Secretary finds to be collective bargaining agreements'' for 
any plan year in which it meets the criteria.

Section 2510.3-40(b)(1)--Entity Must Be a Plan

    Subsection (b)(1) requires that an entity be an employee welfare 
benefit plan within the meaning of section 3(1) of ERISA in order to be 
deemed to be a plan established or maintained under or pursuant to 
collective bargaining.

Section 2510.3-40(b)(2)--``The Nexus Group''

    Subsection (b)(2) requires that for any plan year 80% of the 
participants (as defined in section 3(7) of ERISA) in the plan have a 
nexus to the collective bargaining relationship (``the nexus group''). 
It also describes the categories of people who are considered to have 
that nexus. The numerical tests in the proposed regulation subsection 
(b)(2) look at individuals whose coverage is based on their employment, 
that is, the participants. The proposed regulation focuses on 
participants in order to reduce potential administrative difficulties 
for plans in having to account for beneficiaries (e.g., spouses, 
dependent children, etc.) who are covered solely by virtue of their 
relationship to a participant. Beneficiaries are not counted to 
determine whether the 80% test has been met.

[[Page 64485]]

    The nexus group includes a broad group of participants--those 
commonly found in traditional multiemployer welfare benefit plans, due 
to their connection to the plan or the collective bargaining process--
among those covered in the 80% test. This is a change from the August 
1995 NPRM, which focused the numerical test on those individuals 
covered by the collective bargaining agreement.
    In drafting proposed regulatory text, the Committee took into 
account that there are other categories of individuals, not 
specifically identified in subsection (b)(2), who traditionally may be 
covered by multiemployer plans because of their relationship to the 
plan or the sponsoring unions or employers, such as employees of an 
industry credit union or an administrative entity set up to collect and 
reconcile employer contributions and related payments. Based on the 
information available to the Committee, the number of such participants 
in any given situation is likely to be so small compared to the plan's 
total participant population that they would fit well within the 20% 
allowance for coverage of non-nexus people. Because plans are not 
likely to run the risk of being deemed to be a MEWA by virtue of 
covering these incidental categories, it did not appear necessary to 
attempt to promulgate an exhaustive list of such individuals for 
inclusion in the nexus group. However, the Department invites public 
comment identifying any other categories of participants who similarly 
have historically been covered under one or more multiemployer plans 
because of their traditional and close connection to the bargaining 
relationship, the bargaining unit or the employers that contribute to 
the plan, and whose participation is material enough to warrant 
specific inclusion in the nexus group.
    The Committee recommended a 20% margin for coverage of non-nexus 
people, even though it understood that the percentage of participants 
in collectively bargained plans who are not within one of the nexus 
categories is rarely likely to be that high. The Committee believed 
that this percentage gives plans enough leeway so that they will not 
need to worry about detailed head counts, while offering coverage to, 
for instance, a limited number of union members who have not been 
covered by collective bargaining agreements because the union has not 
yet been recognized as their bargaining representative, or to parties 
providing services to the plan for whom health coverage under the plan 
is part of their compensation, such as the plan's legal counsel, 
administrator, or persons providing computer maintenance or other 
contract services.
    Whether a plan or other arrangement meets the criteria for the 
finding that it is established or maintained under or pursuant to a 
collective bargaining agreement within the meaning of section 3(40) is 
to be determined based on its characteristics `for a plan year.' A 
plan's status `for a plan year' is to be determined as of a point or 
points during the plan year that is reasonably representative with 
respect to that plan.
    Unlike the 1995 NPRM, the proposed regulation does not prescribe 
the specific measurement dates. Among other things, the Committee 
believed that formal procedures governing the calculation of the level 
of non-nexus participation are not needed under this proposal. That is 
because the Committee expected that few multiemployer plans would even 
cover people who do not fit any of the nexus categories and that plans 
should not find it difficult to identify and keep track of the small 
number of non-nexus participants. Moreover, the Committee recognized 
that, given the wide variety of employment patterns in the industries 
covered by multiemployer plans and the potential that unforeseen events 
could distort the coverage picture temporarily, no single set of fixed 
determination dates was likely to capture a fair picture for the 
universe of affected plans.
    In the Committee's judgment, attempting to prescribe specific times 
and procedures for making the 80% coverage determination could place 
undue emphasis on the mechanics of the head count, and would make the 
regulation more complex and costly to administer, since the rule should 
have to include a wide range of variations and alternatives. At the 
same time, mechanical rules broad enough to take care of the spectrum 
of plans that are undeniably maintained pursuant to collective 
bargaining would lend themselves to relatively easy evasion. MEWA 
operators could manipulate participants' coverage dates to make it 
appear that the test for collective bargaining status was met on the 
official measuring date.
    Public comments, plus specific suggestions, are invited on whether 
the regulation should be more precise as to the `for a plan year' 
determination.

Section 2510.3-40(b)(2)(i)--Participants Covered by the Collective 
Bargaining Agreement

    The primary component of the nexus group is individuals employed 
under one or more of the collective bargaining agreements pursuant to 
which contributions are made or coverage is provided under the plan. 
Determining who is an employed individual relies on general common law 
principles.

Section 2510.3-40(b)(2)(ii)--Retirees

    The nexus group includes retired participants who either (a) 
participated in the welfare benefit plan at least five of the last 10 
years preceding their retirement, or (b) are receiving benefits under a 
multiemployer pension plan maintained under the same agreement as the 
welfare benefit plan and had at least five years of service (or the 
equivalent for plans that determine pension eligibility or entitlement 
in a different manner) under that employee pension benefit plan.

Section 2510.3-40(b)(2)(iii)--Statutory Extended Coverage

    The nexus group includes participants who were active participants 
and are on extended coverage under the plan under legally required 
coverage extensions. This includes people whose coverage is based on 
the continuation coverage requirements of the Consolidated Omnibus 
Budget Reconciliation Act of 1985 (COBRA), the Family and Medical Leave 
Act and the Uniformed Services Employment and Reemployment Rights Act. 
It also includes coverage required to be provided by a court, 
arbitration or administrative decision and coverage that remains in 
place, pursuant to the National Labor Relations Act, or other 
applicable law, after expiration of a collective bargaining agreement.

Section 2510.3-40(b)(2)(iv)--Extended Coverage Under the Terms of the 
Plan

    Participants with extended coverage under the terms of the plan 
(even where the extended coverage opportunity is not required by 
statute) are also in the nexus group. This includes common types of 
coverage extensions following a period of eligibility based on active 
participation, such as self-payment, hour bank, long- or short-term 
disability, furlough, or temporary unemployment, as long as the 
participant is not required to pay more than the applicable COBRA 
premium for the coverage in question.

Section 2510.3-40(b)(2)(v)--Reciprocity Agreements

    The nexus group includes participants who are covered under the 
plan pursuant to a reciprocal agreement with one or more other 
multiemployer welfare plans. Reciprocal agreements are most common in 
construction and other industries where union-represented workers tend 
to travel from

[[Page 64486]]

area to area, following the availability of jobs. They enable workers 
to establish or maintain coverage under the plan in their home 
jurisdiction based on work in another plan's jurisdiction, under a 
collective bargaining agreement that requires contributions to that 
other plan.
    However, subparagraph (b)(2)(v), does not permit a plan to 
circumvent the percentage test by arranging reciprocal agreements with 
other plans to shield each plan's non-nexus individuals. Participants 
covered under reciprocal agreements are considered part of the nexus 
group for the ``receiving'' plan only if they are part of the nexus 
group under the ``sending'' plan. The percentage limitations of the 
rule may not be avoided by purporting to cover individuals under 
``reciprocal'' agreements who do not have a nexus (as defined under 
2510.3-40(b)(2)) to the ``sending'' plan.

Section 2510.3-40(b)(2)(vi)--Union, Plan and Fund Employees

    Employees of the sponsoring labor organization, the welfare benefit 
plan or trust itself and related employee benefit plans, are in the 
nexus group as well.

Section 2510.3-40(b)(2)(vii)--``Bargaining Unit Alumni''

    Also in the nexus group are so-called ``bargaining unit alumni,'' 
that is, participants who once were covered under the plan due to their 
employment under a collective bargaining agreement, but who (1) are no 
longer working in a bargaining-unit capacity; (2) work for one or more 
employers that are parties to the agreement; and (3) are covered under 
the plan on terms that are generally no more favorable than those that 
apply to the bargaining-unit employees. This includes former union-
represented workers who are now in a management capacity.

Section 2510.3-40(b)(2)(viii)--``Special-Class Participants''

    The nexus group includes so-called ``special-class participants,'' 
that is, individuals who are neither union-represented nor bargaining-
unit alumni, but who are employed by employers that contribute to the 
plan for their union-represented employees pursuant to the collective 
bargaining agreement, and who are covered under the plan on terms that 
are generally no more favorable than those that apply to the 
bargaining-unit personnel. Some multiemployer plans traditionally have 
allowed contributing employers to cover their office staff, along with 
their union-represented workforce. Special-class participants totaling 
no more than 10% of the total plan participant population are counted 
in the nexus group. A plan will not be deemed to be a MEWA merely 
because it covers additional special-class participants above that 10% 
level, so long as the additional special-class participants, together 
with any other participants who are not in the nexus group, constitute 
no more than 20% of the total plan participant population.
    The Committee believed that special-class participants ordinarily 
would constitute no more than 10% of the plan's total participant 
population, and so included only a 10% allowance for them in the nexus 
group. However, the Committee also recognized that the 10% allowance 
might not be adequate in some situations, because, for example, the 
ratio of signatory employers' supervisors and office workers to their 
union-represented counterparts is subject to fluctuation, particularly 
in certain industries. Part of the reason that the proposed regulation 
allows plans a 20% margin for coverage of people who are neither 
covered by a collective bargaining agreement nor included in one of the 
other nexus categories was the potential for special class participants 
in excess of the 10% nexus number.

Section 2510.3-40(b)(2)(ix)--Individuals Covered by the Railway Labor 
Act

    The nexus group includes participants who are, or were for a period 
of at least three years, employed under one or more agreements under 
the Railway Labor Act between or among one or more ``carriers'' 
(including ``carriers by air'') and one or more ``representatives'' of 
employees for collective bargaining purposes and as defined by the 
Railway Labor Act, 29 U.S.C. 151 et seq., providing for such 
individuals' current or subsequent participation in the plan, or 
providing for contributions to be made to the plan by such carriers.

Section 2510.3-40(b)(2)(x)--Licensed Marine Pilots

    Individuals who are licensed marine pilots operating in United 
States ports as a state-regulated enterprise are included as part of 
the nexus group with respect to a qualified merchant marine plan, as 
defined in section 415(b)(2)(F) of the Internal Revenue Code of 1986.

Section 2510.3-40(b)(3)--Nature of the Collective Bargaining Agreement

    Subsection (b)(3) requires that the plan be incorporated or 
referenced in at least one written agreement between at least one 
employee organization and two or more employers. The written agreement 
must satisfy five listed criteria. The Committee recognized that the 
substance of the agreement among the parties to collective bargaining 
often is embodied in more than one document, and not every aspect of 
their agreement necessarily is reduced to writing. The Committee also 
recognized that a multiemployer plan often is incorporated or 
referenced in more than one collective bargaining agreement among 
different employers and employee organizations, including but not 
limited to project labor agreements, labor harmony agreements, ``me-
too'' or ``one-line'' agreements. For these reasons, the term 
``agreement'' necessarily includes the constellation of documents and 
understandings that make up the parties' contract, and it automatically 
includes multiple agreements, where applicable.

Section 2510.3-40(b)(3)(i)

    The first criterion for an agreement under subsection (b)(3) is 
that the agreement is the product of a bona fide collective bargaining 
relationship. Subsection (b)(4), as described infra, sets forth a 
nonexhaustive list of factors relevant for determining whether such a 
relationship in fact exists.

Section 2510.3-40(b)(3)(ii)

    The second criterion under subsection (b)(3) is that the agreement 
in question identifies employers and employee organization(s) that are 
parties to and bound by the agreement. The Committee took into 
consideration that, in many industries, employers bargain collectively 
through multiemployer associations, and the resulting agreement may 
identify the association, as agent for the many employers for which the 
association bargained. Also, many employers routinely adopt the master 
agreement by reference in their collective bargaining agreements to 
what are often referred to as ``short-form agreements'' or ``binders.'' 
Additionally, a written collective bargaining agreement may bind 
employers who are neither signatory to that agreement nor identified in 
any document, but who are nonetheless legally bound. Therefore, the 
criterion that the agreement identify the parties may be satisfied even 
if not every one of the employers who are bound by the agreement to 
contribute to the plan is named specifically.

Section 2510.3-40(b)(3)(iii)

    The third criterion is that the agreement identify the personnel, 
job classifications and/or work jurisdiction covered by the agreement. 
In the Committee's experience, collective bargaining agreements 
generally delineate the personnel covered by the

[[Page 64487]]

agreement by reference to the trade, craft or class, industry or 
geographic area in which the employer operates or the job 
classifications utilized by the employer.

Section 2510.3-40(b)(3)(iv)

    The fourth criterion is that the agreement provides for terms and 
conditions of employment in addition to coverage under, or 
contributions to, the plan.

Section 2510.3-40(b)(3)(v)

    The fifth criterion is that the agreement is not unilaterally 
terminable or automatically terminated solely for nonpayment of 
benefits under, or contributions to, the plan. This criterion is met 
even if the plan trustees have authority to terminate a delinquent 
employer's ability to contribute to or otherwise participate in the 
plan, as long as the underlying collective bargaining agreement remains 
in full force and effect with respect to that employer. Similarly, the 
fact that the employee organization may have the right to suspend 
performance of its obligations under the agreement in the event of 
specified occurrences, which may include the employer's failure to pay 
required contributions, does not mean that the agreement is 
unilaterally terminable for purposes of this criterion.

Section 2510.3-40(b)(4)--Factors Indicative of a Bona Fide Collective 
Bargaining Relationship

    Subsection (b)(4) sets forth various factors to be considered in 
determining whether there is a bona fide collective bargaining 
relationship. In any given case, the decision is to be based on all of 
the facts and circumstances. The Committee first had attempted to 
develop a list of criteria that could serve as reliable proxies for 
what all Committee members recognized were legitimate multiemployer 
plans not subject to state insurance regulation. To avoid being 
classified as a MEWA, a plan would have to satisfy certain objective 
criteria, and it could not have one of the disqualifying 
characteristics. That approach eventually gave rise to the flexible 
facts and circumstances test proposed here. The Committee realized that 
imposing a fixed, bright line profile to define ``collective 
bargaining'' for the purposes of this regulation would create more 
unintended issues for multiemployer plans without addressing the 
problems at which section 3(40) of ERISA was aimed. Those intent on 
mimicking real collectively bargained plans as a way to avoid state 
insurance regulation would have a blueprint for doing so, while parties 
actually involved in collective bargaining, which is sometimes not tidy 
and compliance-driven in real life, might inadvertently negotiate a 
health or welfare coverage arrangement that simply failed to fit 
familiar models or patterns.
    Under the proposed rule, the presence or absence of the factors 
listed in subsection (b)(4) is to be taken into account in judging 
whether an actual collective bargaining relationship exists for 
purposes of section (3)(40) of ERISA, but no one factor or set of 
factors is intended to be determinative in every case. Indeed, some of 
these factors can, by their nature, apply only in specialized 
circumstances, and few plans are likely to satisfy all of them. That is 
why the proposal includes a range of circumstances commonly associated 
with collectively bargained plans. In addition, information on factors 
not included in this list may be relevant in individual cases. The 
Department invites public comments on the factors listed here, and 
suggestions for other factors to be listed.
    While the proposed regulation does not define collective bargaining 
in terms of specific uniform requirements, it does recognize that where 
a significant number of the first eight factors exist, the resultant 
plans are more likely than not to be established or maintained under or 
pursuant to a collective bargaining agreement within the meaning of 
section 3(40) of ERISA. Accordingly, in a Section 3(40) Finding 
Proceeding before a Department of Labor ALJ to determine whether a plan 
or other arrangement is maintained under or pursuant to a collective 
bargaining agreement for this purpose, it is presumed that if at least 
four of the first eight listed factors are present, a bona fide 
collective bargaining relationship exists, that is, that the 
requirements of subsection (b)(3)(i) are met. That shifts the burden to 
the party claiming that the arrangement is not the product of a bona 
fide collective bargaining relationship to persuade the ALJ to the 
contrary (or, to the extent that it meets all of the other criteria in 
addition to subsection (b)(3)(i), to show in some other way, such as by 
the presence of one of the disqualifying criteria, that the arrangement 
does not qualify for a finding under the proposed regulation).

Section 2510.3-40(b)(4)(i)

    The first factor to be considered under subsection (b)(4) is that 
the agreement provides for contributions to a labor-management trust 
fund designed and operated in accordance with the Taft-Hartley Act or 
to a plan lawfully negotiated under the Railway Labor Act. A plan can 
meet the requirement that the trust be ``structured in accordance'' 
with the Taft-Hartley Act even if the plan has a minor violation of 
that Act's technical requirements. However, there must be more than 
just a paper recital of the formalities of the Taft-Hartley Act, the 
trust must function as a labor-management trust within the spirit of 
the Taft-Hartley Act.

Section 2510.3-40(b)(4)(ii)

    The second factor provides that the collective bargaining agreement 
under which contributions are made to the employee welfare benefit plan 
also requires that substantially all of the participating employers 
contribute to a multiemployer pension plan designed and operated in 
accordance with the Taft-Hartley Act and the plan qualification 
requirements in section 401 of the Internal Revenue Code. In addition, 
substantially all of the active participants covered by the employee 
welfare benefit plan must be eligible to become participants in that 
pension plan. Because the length of service requirements may be 
different for the pension plan and the welfare plan, this factor does 
not require that substantially all of the welfare plan participants in 
fact become pension plan participants, as long as they are eligible to 
do so if they meet the pension plan's participation requirements.

Section 2510.3-40(b)(4)(iii)

    The third factor applies if the predominant employee organization 
that is a party to the collective bargaining agreement relating to the 
employee welfare benefit plan has maintained a series of agreements 
incorporating or referencing the plan since before January 1, 1983, the 
effective date of ERISA section 3(40). The term ``predominant employee 
organization,'' which is specifically defined in the regulation, is 
used because it is not unusual for a multiemployer plan to be 
maintained under agreements with more than one labor union. 
``Predominant employee organization'' refers to the union that 
represents the plurality of the plan's participants employed under the 
agreement. This factor is included as an indicator of the bona fidesof 
collective bargaining in recognition of the fact that, if the union has 
negotiated for health and welfare coverage under the plan since before 
the enactment of ERISA section 3(40), the plan and the collective 
bargaining agreement underlying it were not created for the purposes of 
avoiding the MEWA amendment to ERISA.

[[Page 64488]]

    The Committee received written comments during the course of its 
negotiations suggesting that a trust providing health coverage that had 
been in existence for a certain period of time be ``grandfathered,'' 
regardless of the percentage of participants covered by collective 
bargaining agreements. The Committee determined that a grandfather that 
serves as an indicator of thebona fides of the underlying collective 
bargaining process was warranted. See subsections (b)(4)(iii) and 
(b)(4)(iv). The purpose of the regulatory finding, however, is not to 
determine what plans or arrangements should or could be the subject of 
State enforcement action, but rather to define what employee welfare 
benefit plans are established or maintained under or pursuant to 
collective bargaining within the meaning of section 3(40) of ERISA. The 
Committee agreed that, for that purpose, the 80% nexus standard is 
appropriate regardless of the length of time the plan or trust has been 
in operation. If a plan or arrangement is not established or maintained 
under or pursuant to one or more collective bargaining agreements, 
whether or not ERISA preemption applies is beyond the scope of this 
regulation.

Section 2510.3-40(b)(4)(iv)

    Under the fourth factor, the predominant employee organization that 
is a party to the agreement relating to the employee welfare benefit 
plan must have been a national or international union, or a federation 
of national and international unions, or affiliated with such a union 
or federation, since before January 1, 1983.

Section 2510.3-40(b)(4)(v)

    The fifth factor is that there has been a determination, following 
a government-supervised election or a contested proceeding, that the 
predominant employee organization that is a party to the agreement 
relating to the employee welfare benefit plan is the lawfully 
recognized or designated collective bargaining representative with 
respect to one or more bargaining units of personnel covered by such 
agreement.

Section 2510.3-40(b)(4)(vi)

    The sixth factor applies to plans where the employees' coverage 
(but not necessarily coverage for employees' dependents) is, in large 
part, employer-funded. It applies where employers pay at least 75% of 
the premiums or contributions required for the coverage of active 
participants under the plan, or 75% of the premiums or contributions 
for retirees in the case of a retiree-only plan. For this purpose, 
coverage for dental or vision care, or coverage for excepted benefits 
under the Health Insurance Portability and Accountability Act is 
disregarded, unless the employer pays at least 75% of the premiums or 
contributions for that coverage. This calculation is illustrated in the 
proposed regulation at subsection (e), Example 4.

Section 2510.3-40(b)(4)(vii)

    The seventh factor applies where the predominant employee 
organization provides, sponsors or jointly sponsors a hiring hall and/
or a state certified apprenticeship program, the services of which are 
available to substantially all active participants in the plan. The 
actual nature of the services offered by the employee organization will 
control, rather than the existence of self-serving paper formalities 
that purport to document the existence of such services.

Section 2510.3-40(b)(4)(viii)

    The eighth and last factor relevant to the presumption of the bona 
fides of the collective bargaining relationship underlying the plan 
applies to collective bargaining agreements in the building and 
construction industry, where some states have prevailing wage statutes 
for public works projects. This factor applies where a state agency has 
made an investigation and a determination about whether the collective 
bargaining agreement is bona fide in the course of making a prevailing 
wage determination, such as under Article 8 of NYS Labor Law, section 
220.

Section 2510.3-40(b)(4)(ix)

    Subsection (b)(4)(ix) sets forth additional subjective and 
objective indicia that may be considered in determining the existence 
of a bona fide collective bargaining relationship. This provision gives 
examples of some of the kinds of indicia that the Committee considered 
relevant and probative of the existence of a bona fide collective 
bargaining relationship. The examples given, which were not meant to be 
exhaustive, reflect the Committee's understanding of the realities of 
collective bargaining. For example, where a collectively bargained plan 
covers self-employed participants, there is usually a reason grounded 
in the employment patterns and bargaining structures in that industry, 
such as owner-operators who remain in the plan whether or not they are 
currently working under an agreement.

Section 2510.3-40(c)--Exclusions

    Section (c), Exclusions, sets forth specific circumstances where, 
regardless of whether an employee welfare benefit plan meets the 
general criteria provisions in section (b), an employee welfare benefit 
plan shall not be deemed to be established or maintained under or 
pursuant to one or more agreements which the Secretary finds to be 
collective bargaining agreements for any plan year where the 
circumstances are present.

Section 2510.3-40(c)(1)

    Subsection (c)(1)(i) addresses the use of insurance agents and 
brokers (referred to in the regulation as ``insurance producers'') to 
market self-funded or partially self-funded plans to employers. Many of 
the problems in this area involved commercial schemes marketed by (1) 
insurance producers; or (2) by individuals who are disqualified or 
ineligible for a license to serve as insurance producers; or (3) by 
other individuals who are paid on a commission-type basis.
    Subsection (c)(1)(i) provides that where a plan is self-funded or 
partially self-funded, and it is marketed by insurance producers or by 
individuals who are disqualified from, ineligible for, or have failed 
to obtain a license to serve as an insurance producer, but who engage 
in activities for which such a license is required, it will be excluded 
from the regulatory finding in subsection (b), regardless of the method 
of compensation for marketing. Subsection (c)(1)(i) also takes a plan 
out of the regulatory finding if individuals other than those described 
above are paid on a commission basis to market the plan. This was 
designed to prevent avoidance of the above limitation by use of people 
other than insurance producers. The qualification involving payment on 
a commission basis was intended to distinguish this kind of commercial 
enterprise from union organizing that features health or other welfare 
benefits.
    Subsection (c)(1)(ii) addresses the concept of ``marketing'' for 
the purposes of subsection (c)(1)(i). The Committee recognized that 
insurance producers have a role in the administration of multiemployer 
plans, and they can be compensated appropriately for those services. 
Those services--including offering or selling those services to the 
plan--do not trigger the exclusion, and the regulation makes this 
clear. The regulation is not intended to preclude insurance producers 
from selling insurance coverage to the trustees of a multiemployer 
plan, i.e., marketing

[[Page 64489]]

insurance products to a plan that is or seeks to become partly or fully 
insured. Nor is union organizing among insurance producers the kind of 
marketing that this regulation addresses. On the other hand, marketing 
to employers does include selling health coverage under the guise of 
enrolling their employees in union membership. This subsection does not 
purport to provide an exhaustive list of what is or is not 
``marketing.'' The Department seeks suggestions on whether there should 
be further clarification of the definition of ``marketing.''
    The Committee also recognized that enterprises that are not really 
operating pursuant to a bona fide collective bargaining relationship 
may attempt to market health coverage commercially under the guise of 
union organizing, using media such as the Internet, and without using 
insurance producers or paying other individuals on a commission-type 
basis. While such a situation would not come within the subsection 
(c)(1) exclusion for marketing, if the facts indicated that the primary 
objective was not to achieve broader representation of workers in 
regard to their employment, but rather to provide health coverage 
without having to comply with state regulation, that conduct could be 
evidence of a scheme, sham or artifice intended to evade state 
regulation that would cause the undertaking to be treated as a MEWA 
under subsection (c)(2).

Section 2510.3-40(c)(2)

    Subsection (c)(2) is a general provision excluding arrangements 
that on the surface meet the affirmative criteria of the regulation, 
but that in fact are designed to evade compliance with state law and 
insurance regulation. This exclusion recognizes that sophisticated 
entities might mimic the characteristics of collective bargaining as 
set forth in the regulation, but in fact be providing commercial health 
coverage without complying with state law.
    Such a scheme might be present, for example, if parties who 
collaborate in a project to sell self-funded health coverage to 
otherwise unrelated members of the public set up an organization that 
they label a labor union, advertise broadly in commercial venues and 
have people who pay premiums sign forms that are labeled ``union 
membership cards.'' The attempt to camouflage their commercial 
enterprise as a collectively bargained arrangement would be a scheme to 
evade state law that would cause it to be a MEWA, even if on its face 
it appears to meet the criteria that would qualify it for a finding 
under subsection (b) of the proposed regulation.

Section 2510.3-40(c)(3)

    Subsection (c)(3) provides an exclusion in the event of fraud, 
forgery, or willful misrepresentation regarding the plan's conformance 
with the affirmative criteria of the regulation. The Committee was 
aware of situations where documentation of collective bargaining had 
been manufactured for the purposes of misleading state regulators as to 
the availability of federal preemption.

Section 2510.3-40(d)--Definitions

    The following terms are defined in the regulation: ``active 
participant,'' ``agreement,'' ``individual employed,'' ``insurance 
producer,'' and ``predominant employee organization.''

Economic Analysis Under Executive Order 12866

    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, it has been 
determined that this action is ``significant'' and therefore subject to 
review by the Office of Management and Budget (OMB). OMB has determined 
that this proposed rulemaking is significant within the meaning of 
section 3(f)(4) of the Executive Order. Consistent with the Executive 
Order, the Department of Labor (the Department) has undertaken an 
assessment of the costs and benefits of this regulatory action.
    The analysis is detailed below.

Summary

    Pursuant to the requirements of Executive Order 12866 the 
Department has analyzed the economic impact of this proposed regulation 
and has concluded that the proposed regulation's benefits exceed its 
costs although neither is quantified. The proposed regulation yields 
positive benefits by reducing uncertainty over which health, life, 
disability or other welfare benefit arrangements are multiple employer 
welfare arrangements under section 3(40) and therefore not subject to 
state regulation. It also yields positive benefits by clarifying when 
state regulation applies and when it is preempted.
    The regulation sets forth a substantive standard for distinguishing 
whether a welfare plan sponsored by more than one employer is 
established or maintained under or pursuant to one or more collective 
bargaining agreements. Plans so established or maintained are excluded 
from the definition of multiple employer welfare arrangements (MEWAs) 
and consequently are not subject to state regulation. The regulation 
will serve to distinguish multiemployer collectively bargained plans, 
which are not subject to state regulation, from MEWAs, which are so 
subject.
    The regulation, which is a product of negotiated rulemaking, is 
designed so that the benefits outweigh the costs. The adoption of this 
regulation will limit uncertainty in determining whether certain plans 
are established or maintained under or pursuant to one or more 
collective bargaining agreements. Although the criteria established in 
this proposal should generally reduce disputes over applicability of 
state laws, a very small number of entities may still become involved 
in disputes over assertions of state law jurisdiction and, in certain 
circumstances, may seek administrative determinations by the Secretary. 
The Department has concluded that the cost of such determinations will 
be small relative to the cost of settling such disputes through 
litigation or other currently available means.
    The regulation's elements are grounded in documentation that plans 
or their agents generally maintain as part of usual business practices. 
The regulation also has some elements of flexibility, allowing plans to 
demonstrate the existence of a bona fide collective bargaining 
agreement, one of the regulatory factors, by satisfying any four of 
eight specified factors. Finally, the regulation is both sufficiently 
broad to embrace all plans established or

[[Page 64490]]

maintained under or pursuant to one or more collective bargaining 
agreements and exclusive enough to ensure the applicability of state 
regulation wherever such is not the case. Only a very small number of 
entities are likely to be treated differently under the regulation than 
they are now. Plans will be determined to be MEWAs only when they are 
not established or maintained under or pursuant to a collective 
bargaining agreement, in which case the additional cost attributable to 
state regulation will be outweighed by the benefit of additional 
protections for participants and beneficiaries.

Background

    For the protection of welfare benefit plan participants and 
beneficiaries, multiple employer welfare arrangements (MEWAs) providing 
health insurance are subject to both state and federal regulation. An 
exception to the rule applies to MEWAs established or maintained under 
or pursuant to one or more agreements which the Secretary finds to be 
collective bargaining agreements. Because collectively bargained 
employee welfare benefit plans are not subject to state insurance 
regulation, unscrupulous operators have created arrangements which 
purport to offer health, life, disability or other welfare benefit 
insurance and are promoted as plans established or maintained pursuant 
to one or more collective bargaining agreements, but in fact are not. 
These operators have sold insurance to employers, usually for reduced 
premiums, and then have been unable to pay the insurance claims filed 
by the employees. At the same time, they have retained large 
administrative fees for themselves.
    The General Accounting Office, in a March 1992 Report titled 
``Employee Benefits: States Need Labor's Help Regulating Multiple 
Employer Welfare Arrangements,'' (GAO/HRD-92-40) estimated that sham 
MEWAs owed $124 million in claims, affecting 398,000 participants and 
beneficiaries. State insurance offices, however, were only able to 
recover $10 million, often as a result of dissolution of the MEWAs 
following their insolvency.
    At various times, both Congress and the Department have published 
guidelines in an attempt to help states regulate MEWAs, but, without a 
definition for a collective bargaining agreement, sham MEWAs have 
continued to operate and to claim the collective bargaining agreement 
exception when confronted with state regulation. In order to establish 
jurisdiction, states initiated administrative or legal proceedings 
contesting the defendant's status as a collectively bargained plan or 
were themselves the subject of declaratory judgment or removal actions 
by entities claiming the exception. Likewise, for both MEWAs and some 
plans established or maintained under collective bargaining agreements, 
there was uncertainty about their legal status and, consequently, about 
the applicability of insurance regulations and the recordkeeping and 
reporting required.

Reducing Uncertainty

    Confusion about whether a plan was established or maintained under 
or pursuant to an agreement which the Secretary finds to be a 
collective bargaining agreement has made it difficult for the states to 
enforce appropriate laws. With this proposed regulation pertaining to 
the collective bargaining agreement exception applicable to MEWAs 
(ERISA section 3(40)(A)(i)), the Department is promulgating a set of 
guidelines which will aid employers, third parties, and participants 
and beneficiaries of plans, as well as state agencies, in determining 
the legal status of a welfare benefit plan. Specifically, the proposed 
regulation sets out the various factors indicative of when a plan is 
established or maintained under or pursuant to a bona fide collective 
bargaining agreement.
    The regulation proposed today will benefit states and plans by 
providing a tool with which to independently determine the legal status 
of a welfare benefit plan or arrangement without recourse to the 
Department or to the courts. The result will be a positive limitation 
of uncertainty for plans and arrangements and the states, and a 
reduction in time and expense attributable to court actions or requests 
to the Department for guidance. Plans and arrangements will benefit 
from the assurance of knowing their correct legal status, and states, 
through warranted intervention, will be better able to protect 
employers, participants, and beneficiaries from unscrupulous MEWA 
operators.
    For the majority of plans established or maintained under or 
pursuant to collective bargaining agreements, this regulation will 
serve to codify the manner in which the plans are currently operating. 
Plan status under the regulation generally will be clear based on 
signed agreements, filings with the IRS, participation in related 
industries, or other design features which categorize a plan as a 
collectively bargained plan or a MEWA. Most plans, therefore, will not 
perceive any need to reassess their status systematically. It is 
possible, however, that some plans will undertake such an assessment 
and comparison test. The Department has estimated below the number of 
plans likely to comparison test.
    Under ERISA, multiemployer collectively bargained plans are 
required to file an annual financial report, the Form 5500. Data from 
the 1995 filings showed 2,180 filings (6.0 million participants) from 
ERISA multiemployer welfare benefit plans established or maintained 
under or pursuant to collective bargaining agreements. The Department 
also examined the number of MEWAs. Preliminary findings of an analysis 
conducted by the RAND Corporation of data from the 1997 Robert Wood 
Johnson Foundation Employer Health Insurance Survey, indicate that 
there are approximately 2,000 MEWAs (both ERISA-plan and non-ERISA-plan 
MEWAs), covering 4.1 million employees. The total number of MEWAs and 
collectively bargained plans, which represents the total universe of 
arrangements that might question their legal status and comparison test 
under this proposed regulation, is 4,180. (10.1 million participants).
    The Department was unable to identify any direct measure of the 
number of plans or arrangements whose status is uncertain or whose 
status would remain uncertain under the proposed regulation. Therefore, 
in order to assess the economic impact of reduced uncertainty under the 
proposed regulation, the Department examined proxies for the number of 
arrangements that might be subject to such uncertainty. First, the 
Department estimated the total number of MEWAs and collectively 
bargained plans, taking this to reflect the universe of arrangements 
which would encompass the small subset of arrangements subject to 
uncertainty. The Department then tallied the number of inquiries to the 
Department concerning MEWAs and the number of MEWA-related lawsuits to 
which the Department has been party, taking this to represent a 
reasonable indicator of arrangements that have been subject to 
uncertainty in the past.
    Department data indicate that for the ten-year period from 1990 to 
1999, the Department received 88 MEWA-related inquiries. These include 
inquiries received from state and federal agencies and the private 
sector. On an annualized basis, this represents approximately 9 MEWA-
related requests for information per year. The Department also 
considered the number of MEWA-related lawsuits which were filed during 
the years 1990-1999. Department data indicate that it has been a party 
to 375

[[Page 64491]]

civil and 75 criminal cases from 1990-1999. The total number of 
lawsuits would be 450 lawsuits, or 45 lawsuits annually. For purposes 
of this analysis, it has been assumed that each case involves a 
different arrangement. Accordingly, the estimated number of 
arrangements that historically may have demonstrated uncertainty over 
their legal status would be 9 plus 45, or 54 plans per year. The 
estimated 54 plans, as a percentage of the total number of 4,180 MEWAs 
and collectively bargained plans, amounts to approximately 1.3 percent.
    In one sense, this historical number of plans and arrangements may 
represent only a subset of all those that faced uncertainty over their 
status. Some plans and arrangements may have confronted uncertainty but 
not become the subject of an inquiry to the Department or a lawsuit to 
which the Department was party. On the other hand, this number 
overstates the number of plans and arrangements that faced uncertainty 
because it is known that only a portion of miscellaneous inquiries and 
civil and criminal actions involved issues related to collective 
bargaining agreements or other MEWA-related matters. The number may 
also overstate the number of plans or arrangements likely to face 
uncertainty because the issue of whether federal preemption applies is 
not presented in suits brought by the federal government; ERISA 
generally applies both to plans and to MEWAs. The Department therefore 
views 54 plans per year as a conservatively high estimate of the number 
of plans or arrangements that might perceive a need to systematically 
assess their status under the proposed regulation.
    The cost to the 54 plans of conducting such an assessment is 
expected to be small. It will largely be attributed to reviewing 
records kept by third parties or by the plan or arrangement in the 
ordinary course of business. The Department assumes that this review 
requires 16 hours of a lawyer's or comparable professional's time plus 
5 hours clerical staff time. Department data suggest that average 
compensation costs for lawyers and clerical workers amount to $72 per 
hour and $21 per hour respectively. Third party service providers to 
plans or arrangements, such as private law firms, typically bill at 
higher rates than this. However, it is expected that the cost of an in-
house attorney will equate to the cost of a firm attorney due to firms' 
efficiencies of time and resources attributable to specialists' greater 
expertise and experience in a given field. The total cost then would be 
$1,173 per plan or arrangement, or about $63,342 on aggregate per year 
for 54 plans. This cost would be incurred only once for a given plan or 
arrangement unless its circumstances changed substantially relative to 
the standard. It is expected that this cost will be far outweighed by 
savings to plans and arrangements from avoiding the need to engage in 
litigation or seek guidance from the Department in order to determine 
their status. These net savings represent a net benefit from this 
proposed regulation.
    Following such assessments, some fraction of these 54 plans or 
arrangements might nonetheless dispute a state's assertions of 
jurisdiction and consequently seek an administrative determination from 
the Secretary, incurring attendant costs. The Department has elected to 
attribute the net benefit from these savings not to this proposed 
regulation, but to the accompanying proposed regulation that 
established an administrative process for determining such plans' or 
arrangements' status.

Reclassifying Incorrectly Classified Plans and Arrangements

    Some number of plans, but unlikely any more than the same fraction 
of the 54 estimated to face uncertainty over status, will be 
reclassified as a result of comparison testing against the proposed 
regulation's standard. Plans formerly classified (either by error or 
intentionally self-classified in an attempt to avoid state law 
requirements) as collectively bargained plans may be newly classified 
as MEWAs under this proposed regulation. These MEWAs will incur costs 
to comply with newly applied protective state regulations. Applicable 
regulations vary from state to state, making it difficult to estimate 
the cost of compliance, but it is likely that costs might include those 
attributable to audits, funding and reserving, reporting, premium taxes 
and assessments, provision of state-mandated benefits, underwriting and 
rating rules, market conduct standards, and managed care patient 
protection rules, among other costs. These costs may be higher for 
those MEWAs that conduct business in more than one state.
    The Department considered an estimate of the cost to plans newly 
classified as MEWAs as follows. Relevant literature suggests that in 
the upper range these costs can amount to 10 percent of premium. (The 
cost may be substantially more than this if the arrangement would 
otherwise have benefitted from insuring a population whose health costs 
are far lower than average. However, these added costs would be 
transfers and not true economic costs, because they would serve as 
cross-subsidies which reduce costs for populations that are costlier 
than average.) As noted above, the universe of 4,180 plans and 
arrangements that includes those potentially subject to uncertainty 
covered 10.1 million participants, or about 2,400 participants per 
arrangement on average. Industry surveys put the cost of health 
coverage at about $4,500 per employee and retiree per year. Applying 
these figures to 54 plans or arrangements that might face uncertainty 
over status--an upper bound on the number likely to be reclassified--
produces an upper-bound estimate cost of about $58 million.
    The Department has concluded that actual costs will be far lower 
than this, and will be outweighed by the benefit of the associated 
protections. As noted above, it is likely that the true number of 
arrangements that are reclassified will be a fraction of the estimated 
54 that might face uncertainty over status. Among those that are 
reclassified, some would have voluntarily elected to comply with state 
regulatory requirements and therefore would not incur any cost from the 
application of state law. For those that would not have provided such 
benefits, the cost of providing them would largely be offset by the 
benefits themselves. Most important, the added cost from state 
regulation would be offset by the benefits from the protections that 
state regulation provide. GAO in 1992 identified $124 million in unpaid 
claims owed by sham MEWAs. Department enforcement actions separately 
identified MEWA monetary violations of $84 million, and more than 100 
investigations remain open. With state licensing and solvency 
requirements in place, at least some incidences of the $124 million in 
unpaid claims cited in the GAO study or the $84 million in violations 
would most likely not have occurred.
    It is also possible that some plans or arrangements heretofore 
classified as MEWAs will be reclassified as collectively bargained 
plans. However, it seems unlikely that many will, because those that 
can qualify as collectively bargained plans have an economic incentive 
to do so. Any that are so classified may choose to benefit from 
savings, there being no obligation to comply with state regulatory 
requirements. There will be no meaningful loss of benefits from the 
removal of state protections in such cases because the combination of a 
legitimate collective bargaining

[[Page 64492]]

agreement and the application of ERISA provides adequate protections.

Paperwork Reduction Act

    This Notice of Proposed Rulemaking is not subject to the 
requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.) because it does not contain a ``collection of information'' as 
defined in 44 U.S.C. 3502(3).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency certifies that a proposed rule will 
not have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires that the agency present an 
initial regulatory flexibility analysis at the time of the publication 
of the notice of proposed rulemaking describing the impact of the rule 
on small entities and seeking public comment on such impact. Small 
entities include small businesses, organizations and governmental 
jurisdictions.
    For purposes of analysis under the RFA, PWBA proposes to continue 
to consider a small entity to be an employee benefit plan with fewer 
than 100 participants. The basis of this definition is found in section 
104(a)(2) of the Employee Retirement Income Security Act of 1974 
(ERISA), which permits the Secretary of Labor to prescribe simplified 
annual reports for pension plans which cover fewer than 100 
participants. Under section 104(a)(3), the Secretary may also provide 
for exemptions or simplified annual reporting and disclosure for 
welfare benefit plans. Pursuant to the authority of section 104(a)(3), 
the Department has previously issued at 29 CFR 2520.104-20, 2520.104-
21, 2520.104-41, 2520.104-46 and 2520.104b-10 certain simplified 
reporting provisions and limited exemptions from reporting and 
disclosure requirements for small plans, including unfunded or insured 
welfare plans covering fewer than 100 participants and which satisfy 
certain other requirements.
    Further, while some large employers may have small plans, in 
general most small plans are maintained by small employers. Thus, PWBA 
believes that assessing the impact of this proposed rule on small plans 
is an appropriate substitute for evaluating the effect on small 
entities. The definition of small entity considered appropriate for 
this purpose differs, however, from a definition of small business 
which is based on size standards promulgated by the Small Business 
Administration (SBA) (13 CFR 121.201) pursuant to the Small Business 
Act (15 U.S.C. 631 et seq.). PWBA therefore requests comments on the 
appropriateness of the size standard used in evaluating the impact of 
this proposed rule on small entities.
    On this basis, however, PWBA has preliminarily determined that this 
rule will not have a significant economic impact on a substantial 
number of small entities. In support of this determination, and in an 
effort to provide a sound basis for this conclusion, PWBA has prepared 
the following regulatory flexibility analysis.
    (1) Reasons for Action. PWBA is proposing this regulation because 
it believes that regulatory guidance in determining criteria for what 
is a ``plan or arrangement which is established or maintained under or 
pursuant to one or more agreements which the Secretary finds to be 
collective bargaining agreements,'' ERISA 3(40)(A)(1), 29 U.S.C. 
Sec. 1002(40)(a)(1) is necessary to ensure: (a) That state insurance 
regulators have ascertainable guidelines to help regulate MEWAs 
operating in their jurisdictions, and; (b) that sponsors of employee 
welfare benefit plans will be able to determine independently whether 
their plans are excepted plans under section 3(40) of ERISA. A more 
detailed discussion of the agency's reasoning for issuing the proposed 
regulation is found in the Background section, above.
    (2) Objective. The objective of the proposed regulation is to 
provide criteria for the application of an exception to the definition 
of the term ``multiple employer welfare arrangement'' (MEWA) which is 
found in ERISA section 3(40). An extensive list of authority may be 
found in the Statutory Authority section, below.
    (3) Estimate of Small Entities Affected. For purposes of this 
discussion, the Department has deemed a small entity to be an employee 
benefit plan with fewer than 100 participants. The basis of this 
definition is found in section 104(a)(2) of ERISA, which permits the 
Secretary of Labor to prescribe simplified annual reports for pension 
plans which cover fewer than 100 participants. For this purpose, it is 
assumed that arrangements with fewer than 100 participants and which 
are: (1) Multiemployer collectively bargained group health plans; (2) 
non-collectively bargained multiple employer group health plans, or; 
(3) other multiple employer arrangements which provide medical 
benefits, are small plans. PWBA believes that assessing the impact of 
this proposed rule on small plans is an appropriate substitute for 
evaluating the effect on small entities as that term is defined in the 
RFA. No small governmental jurisdictions will be affected.
    IRS filings and Department data indicate that there are a possible 
4,180 plans that could be classified as a collectively bargained plan 
or a MEWA and that could be affected by the new criteria for defining 
what is a collective bargaining agreement. It is expected, however, 
that a very small number of these arrangements will have fewer than 100 
participants. By their nature, the affected arrangements must involve 
at least two employers, which decreases the likelihood of coverage of 
fewer than 100 participants. Also, underlying goals of the formation of 
these arrangements, such as gaining purchasing and negotiating power 
through economies of scale, improving administrative efficiencies, and 
gaining access to additional benefit design features, are not readily 
accomplished if the group of covered lives remains small. While there 
are no statistics to determine the number of small plans among the 
4,180, based on the health coverage reported in the Employee Benefits 
Supplement to the 1993 Current Population Survey and a 1993 Small 
Business Administration survey of retirement and other benefit 
coverages in small firms, research data indicates that there are more 
than 2.5 million private group health plans with fewer than 100 
participants. Thus, even if every one of the 4,180 plans included fewer 
than 100 participants, which is highly unlikely, the number of plans 
affected would represent approximately one-tenth of one percent of all 
small group health plans. Accordingly, the Department has determined 
that this regulation will not have a significant economic impact on a 
substantial number of small entities.
    Although relatively few small plans and other arrangements are 
expected to be affected by this proposal, it is known that the 
employers typically involved in these plans or arrangements are often 
small (that is, they have fewer than 500 employees, which is generally 
consistent with the definition of small entity found in regulations 
issued by the Small Business Administration (13 CFR 121.201)). The 
Department knows of no data that would support a direct measure of the 
number of small employers potentially impacted by the proposed 
regulation. However, because

[[Page 64493]]

these plans and arrangements involve at least two employers, and 
assuming conservatively that each is small, it can be estimated that at 
least 8,360 small employers may be affected. The Department seeks 
comments and supporting data with respect to the number of small 
employers potentially impacted by the establishment of a standard for 
determining whether a welfare plan is established or maintained under 
or pursuant to one or more collective bargaining agreements.
    In addition, any one of the employers participating in a MEWA or 
plan established or maintained under or pursuant to a collective 
bargaining agreement may find that it has unknowingly participated in a 
sham MEWA and will need to join a new plan. By restricting fraudulent 
and financially unsound MEWAs, therefore, the proposed regulation may 
limit the sources of health care, life, disability or other welfare 
benefit coverage offered to some small businesses, requiring them to 
seek alternative coverage for their employees. The greater benefit for 
employers, however, is that there is an increased certainty that the 
remaining MEWAs will meet state regulatory standards and will be 
capable of providing promised health, life, disability or other welfare 
benefits to employees. Consequently, employers will receive a net 
benefit from the reduced incidence of fraud and insolvency among the 
pool of MEWAs in the marketplace.
    (4) Reporting and Recordkeeping. No identical reporting or 
recordkeeping is required under the proposed rule. In most cases, the 
records used to determine if a welfare benefit plan is established or 
maintained under or pursuant to a collective bargaining agreement will 
be routinely prepared and held by a collectively bargained 
multiemployer plan in the ordinary course of business. For any plans 
which are newly determined to be MEWAs, there will be an economic 
impact related to the start-up costs of compliance with state 
regulations. Start-up costs may include expensing registration, 
licensing, financial reporting, auditing, and any other requirement of 
state insurance law. Reporting and filing this information with the 
state would require the professional skills of an attorney, accountant, 
or other health benefit plan professional; however, post start-up, the 
majority of the recordkeeping and reporting could be handled by 
clerical staff.
    (5) Duplication. No federal rules have been identified that 
duplicate, overlap, or conflict with the proposed rule.
    (6) Alternatives. The proposed regulation represents the consensus 
report of a committee established to provide an alternative to a 
Department Notice of Proposed Rulemaking on Plans Established or 
Maintained pursuant to Collective Bargaining Agreements, published in 
the Federal Register in 1995. At that time, recognizing that guidance 
was needed to clarify the collective bargaining exception to the MEWA 
regulation, the Department proposed certain criteria related to 
describing the collective bargaining agreement. Commenters on the 
proposal expressed concerns related to plan compliance and the issue of 
state regulation.
    Based on the comments received, the Department turned to negotiated 
rulemaking as an appropriate alternative to implementing a revised 
Notice of Proposed Rulemaking. In September 1998, the Secretary 
established the ERISA Section 3(40) Negotiated Rulemaking Advisory 
Committee under the Negotiated Rulemaking Act. (5 U.S.C. 561 et seq.) 
The Committee membership included representatives from labor unions, 
multiemployer plans, state governments, employer/management 
associations, Railway Labor Act plans, third-party administrators, 
independent agents and brokers of health care products, insurance 
carriers and the federal government. This regulation represents the 
Committee's consensus, in the form of a proposed rule, for guiding 
state governments and plans in determining whether an entity has been 
established or maintained under or pursuant to one or more collective 
bargaining agreements and is therefore not subject to state regulation. 
Based on the fact that this Notice of Proposed Rulemaking is the result 
of a Committee decision by consensus, and the fact that the Committee 
represents a cross section of the state, federal, association, and 
private sector health care universe, the Department believes that as an 
alternative to the 1995 NPRM this regulation will accomplish the stated 
objectives of the Secretary and will have a beneficial impact on small 
employer participation in MEWAs. The Department has concluded that the 
proposed regulation is less costly in comparison with alternative 
methods of determining compliance with section 3(40), such as case-by-
case analysis by PWBA of each employee welfare plan or litigation. In 
addition, not defining specific guidelines for compliance with section 
3(40) and permitting sham MEWAs to continue to function would raise 
costs to small businesses in terms of loss of coverage and unpaid 
claims. No other significant alternatives which would minimize economic 
impact on small entities have been identified.
    It would be inappropriate to create an exemption under the proposed 
regulation for small MEWAs because small MEWAs are not less likely to 
be underfunded or otherwise have inadequate reserves to meet the 
benefit claims submitted for payment than are large MEWAs.

Small Business Regulatory Enforcement Fairness Act

    The rule being issued here is subject to the provisions of the 
Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 
801 et seq.) and, if finalized, will be transmitted to Congress and the 
Comptroller General for review. The rule is not a ``major rule'' as 
that term is defined in 5 U.S.C. 804, because it is not likely to 
result in (1) an annual effect on the economy of $100 million or more; 
(2) a major increase in costs or prices for consumers, individual 
industries, or federal, state, or local government agencies, or 
geographic regions; or (3) significant adverse effects on competition, 
employment, investment, productivity, innovation, or on the ability of 
United States-based enterprises to compete with foreign-based 
enterprises in domestic or export markets.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub.L. 
104-4), as well as Executive Order 12875, this proposed rule does not 
include any federal mandate that may result in expenditures by state, 
local, or tribal governments, or the private sector, which may impose 
an annual burden of $100 million.

Executive Order 13132

    When an agency promulgates a regulation that has federalism 
implications, Executive Order 13132 (64 FR 43255, August 10, 1999), 
requires that the Agency provide a federalism summary impact statement. 
Pursuant to section 6(c) of the Order, such a statement must include a 
description of the extent of the agency's consultation with State and 
local officials, a summary of the nature of their concerns and the 
agency's position supporting the need to issue the regulation, and a 
statement of the extent to which the concerns of the State have been 
met.
    This proposed regulation has federalism implications because it 
sets forth standards and procedures for determining whether certain 
entities

[[Page 64494]]

may be regulated under certain state law or whether such state laws are 
preempted with respect to such entities. The state laws at issue are 
those that regulate the business of insurance. A representative from 
the National Association of Insurance Commissioners (NAIC), which 
represents the interests of state governments in the regulation of 
insurance, participated in this rulemaking from the inception of the 
Negotiated Rulemaking Committee.
    In the course of this rulemaking, the NAIC raised the following 
concerns: (1) That the rule allow MEWAs to be easily distinguishable 
from collectively bargained plans so that MEWAs may be properly 
subjected to state jurisdiction and regulation; (2) that the rule 
prevent the unlicensed sale of health insurance; and; (3) that losses 
to individuals in the form of unreimbursed and denied medical claims be 
stopped.
    The Department's position with regard to this rulemaking is that 
there is an overwhelming need for this regulation. Sham operators have 
been exploiting the lack of regulation in this area by claiming to be 
established or maintained pursuant to collective bargaining, thereby 
avoiding state regulation. These operators have marketed unlicensed 
health insurance to small employers free of state solvency and reserve 
requirements and have therefore offered health insurance at 
significantly cheaper rates than state-licensed insurance companies. 
Ultimately these operations have gone bankrupt, leaving participants 
with significant unpaid claims and without health insurance. This 
regulation will provide objective criteria to distinguish collectively 
bargained plans from arrangements subject to state insurance law. It 
will also provide entities that claim to be exempt from state 
regulation, an expedited procedure to obtain a finding from the 
Department under certain conditions.
    By providing objective criteria distinguishing collectively 
bargained plans from arrangements subject to state insurance law, the 
regulation should facilitate state enforcement efforts against 
arrangements attempting to misuse the collectively bargained exception 
in section 3(40) of ERISA. In that regard, the regulation should make 
more difficult the sale of unlicensed insurance under the guise of 
collectively bargained plans and limit the losses to individuals in the 
form of unreimbursed and denied medical and other welfare benefit 
insurance claims resulting from that type of sham arrangement.

Statutory Authority

    This regulation is proposed pursuant to the authority in sections 
107, 209, 504, and 505 of ERISA (Pub. L. 93-406, 88 Stat. 894, 29 
U.S.C. 1027, 1059, 1134, 1135) and under Secretary of Labor's Order No. 
1-87, 52 FR 13139, April 21, 1987.

List of Subjects in 29 CFR Part 2510

    Collective bargaining, Employee benefit plans, Pensions.

Proposed Regulation

    For the reasons set out in the preamble, the Department proposes to 
amend Part 2510 of Chapter XXV of Title 29 of the Code of Federal 
Regulations as follows:

PART 2510--[AMENDED]

    1. The authority citation for Part 2510 is revised to read as 
follows:

    Secs. 3(2), 3(40), 111(c), 505, Pub. L. 93-406, 88 Stat. 852, 
894, (29 U.S.C. 1002(2), 1002(40), 1031, 1135); Secretary of Labor's 
Order No. 27-74, 1-86, 1-87, and Labor Management Services 
Administration Order No. 2-6.
    Section 2510.3-101 is also issued under sec. 102 of 
Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), 
effective December 31, 1978 (44 FR 1065, January 3, 1978); 3 CFR, 
1978 Comp., p. 332, and sec. 11018(d) of Pub. L. 99-272, 100 Stat. 
82.
    Section 2510.3-102 is also issued under sec. 102 of 
Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), 
effective December 31, 1978 (44 FR 1065, January 3, 1978); 3 CFR, 
1978 Comp., p. 332, and sec. 11018(d) of Pub. L. 99-272, 100 Stat. 
82.

    2. Section 2510.3-40 is added to read as follows:


Sec. 2510.3-40  Plans Established or Maintained Under or Pursuant to 
Collective Bargaining Agreements Under Section 3(40)(A) of ERISA.

    (a) Scope and purpose. Section 3(40)(A) of the Employee Retirement 
Income Security Act of 1974 (ERISA) provides that the term ``multiple 
employer welfare arrangement'' (MEWA) does not include an employee 
welfare benefit plan which is established or maintained under or 
pursuant to one or more agreements which the Secretary of Labor (the 
Secretary) finds to be collective bargaining agreements. This section 
sets forth a finding by the Secretary that an arrangement is an 
employee welfare benefit plan established or maintained under or 
pursuant to one or more collective bargaining agreements if the plan 
meets the criteria in this section. This section also sets forth a 
finding by the Secretary that certain arrangements are not employee 
welfare benefit plans established or maintained under or pursuant to a 
collective bargaining agreement, regardless of whether they purport to 
meet the regulatory criteria. No finding by the Secretary in or 
pursuant to this section shall constitute a finding for any purpose 
other than the exception for plans established or maintained under or 
pursuant to one or more collective bargaining agreements under section 
3(40) of ERISA. The procedure for obtaining a finding by the Secretary 
in a particular case where there is an attempt to assert state 
jurisdiction or the application of state law with respect to a plan or 
other arrangement that allegedly is covered under Title I of ERISA, is 
set forth in 29 CFR part 2570, subpart G.
    (b) General criteria. The Secretary finds, for purposes of section 
3(40) of ERISA, that an employee welfare benefit plan is ``established 
or maintained under or pursuant to one or more agreements which the 
Secretary finds to be collective bargaining agreements'' for any plan 
year in which the plan meets the criteria set forth in paragraphs 
(b)(1), (2), (3), and (4) of this section, and is not excluded under 
paragraph (c) of this section:
    (1) The entity is an employee welfare benefit plan within the 
meaning of section 3(1) of ERISA.
    (2) At least 80% of the participants in the plan are:
    (i) Individuals employed under one or more agreements meeting the 
criteria of paragraph (b)(3) of this section, under which contributions 
are made to the plan, or pursuant to which coverage under the plan is 
provided;
    (ii) Retirees who either participated in the welfare benefit plan 
at least five of the last 10 years preceding their retirement, or:
    (A) Are receiving benefits as participants under a multiemployer 
pension benefit plan that is maintained under the same agreement 
referred to in paragraph (b)(2)(i) of this section, and
    (B) Have at least five years of service or the equivalent under 
that multiemployer pension benefit plan;
    (iii) Participants on extended coverage under the plan pursuant to 
the requirements of a statute or court or administrative agency 
decision, including but not limited to the continuation coverage 
requirements of the Consolidated Omnibus Budget Reconciliation Act of 
1985, sections 601-609, the Family and Medical Leave Act, 29 U.S.C. 
2601 et seq., the Uniformed Services Employment and Reemployment Rights 
Act of 1994, 38 U.S.C. 4301 et seq., or the National Labor Relations 
Act, 29 U.S.C. 158(a)(5);
    (iv) Participants who were active participants and whose coverage 
is

[[Page 64495]]

otherwise extended under the terms of the plan, including but not 
limited to extension by reason of self-payment, hour bank, long or 
short-term disability, furlough or temporary unemployment, provided 
that the charge to the individual for such extended coverage is no more 
than the applicable premium under section 604 of the Act;
    (v) Participants whose coverage under the plan is maintained 
pursuant to a reciprocal agreement with one or more other employee 
welfare benefit plans established or maintained under or pursuant to 
one or more collective bargaining agreements and that are multiemployer 
plans;
    (vi) Individuals employed by:
    (A) An employee organization that sponsors, jointly sponsors or is 
represented on the association, committee, joint board of trustees, or 
other similar group of representatives of the parties who sponsor the 
plan,
    (B) The plan or associated trust fund, or
    (C) Other employee benefit plans or trust funds to which 
contributions are made pursuant to the same agreement described in 
paragraph (b)(2)(i) of this section;
    (vii) individuals who were employed under an agreement described in 
paragraph (b)(3) of this section, provided that they are employed by 
one or more employers that are parties to an agreement described in 
paragraph (b)(3) and are covered under the plan on terms that are 
generally no more favorable than those that apply to similarly situated 
individuals described in paragraph (b)(2)(i) of this section;
    (viii) Individuals (other than individuals described in paragraph 
(b)(2)(i) of this section) who are employed by employers that are bound 
by the terms of an agreement described in paragraph (b)(3)(i) of this 
section and that employ personnel covered by such agreement, and who 
are covered under the plan on terms that are generally no more 
favorable than those that apply to such covered personnel. For this 
purpose, such individuals in excess of 10% of the total population of 
participants in the plan are disregarded;
    (ix) Individuals who are, or were for a period of at least three 
years, employed under one or more agreements between or among one or 
more ``carriers'' (including ``carriers by air'') and one or more 
``representatives'' of employees for collective bargaining purposes and 
as defined by the Railway Labor Act, 45 U.S.C. 151 et seq., providing 
for such individuals' current or subsequent participation in the plan, 
or providing for contributions to be made to the plan by such carriers; 
or
    (x) Individuals who are licensed marine pilots operating in United 
States ports as a state-regulated enterprise and are covered under an 
employee welfare benefit plan that meets the definition of a qualified 
merchant marine plan, as defined in section 415(b)(2)(F) of the 
Internal Revenue Code (26 U.S.C.).
    (3) The plan is incorporated or referenced in a written agreement 
between two or more employers and one or more employee organizations, 
which agreement, itself or together with other agreements among the 
same parties:
    (i) Is the product of a bona fide collective bargaining 
relationship between the employers and the employee organization(s);
    (ii) Identifies employers and employee organization(s) that are 
parties to and bound by the agreement;
    (iii) Identifies the personnel, job classifications and/or work 
jurisdiction covered by the agreement;
    (iv) Provides for terms and conditions of employment in addition to 
coverage under, or contributions to, the plan; and
    (v) Is not unilaterally terminable or automatically terminated 
solely for non-payment of benefits under or contributions to, the plan.
    (4) For purposes of paragraph (b)(3)(i), of this section, the 
following factors, among others, are to be considered in determining 
the existence of a bona fide collective bargaining relationship. In any 
proceeding initiated under 29 CFR part 2570 Subpart G, the existence of 
a bona fide collective bargaining relationship under paragraph 
(b)(3)(i) shall be presumed where at least four of the factors set out 
in paragraphs (b)(4)(i) through (viii), of this section are 
established:
    (i) The agreement referred to in paragraph (b)(3) of this section 
provide(s) for contributions to a labor-management trust fund 
structured according to section 302(c)(5), (6), (7), (8), or (9) of the 
Taft-Hartley Act, 29 U.S.C. 186(c)(5), (6), (7), (8) or (9), or to a 
plan lawfully negotiated under the Railway Labor Act;
    (ii) The agreement referred to in paragraph (b)(3) of this section 
requires contributions by substantially all of the participating 
employers to a multiemployer pension plan that is structured in 
accordance with section 401 of the Internal Revenue Code (26 U.S.C.), 
and is either structured in accordance with section 302(c)(5) of the 
Taft-Hartley Act, 29 U.S.C. 186(c)(5), or is lawfully negotiated under 
the Railway Labor Act, and substantially all of the active participants 
covered by the employee welfare benefit plan are also eligible to 
become participants in that pension plan;
    (iii) The predominant employee organization that is a party to the 
agreement referred to in paragraph (b)(3) of this section has 
maintained a series of agreements incorporating or referencing the plan 
since before January 1, 1983;
    (iv) The predominant employee organization that is a party to the 
agreement referred to in paragraph (b)(3) of this section has been a 
national or international union, or a federation of national and 
international unions, or has been affiliated with such a union or 
federation, since before January 1, 1983;
    (v) A court, government agency or other third-party adjudicatory 
tribunal has determined, in a contested or adversary proceeding, or in 
a government-supervised election, that the predominant employee 
organization that is a party to the agreement described in paragraph 
(b)(3) of this section is the lawfully recognized or designated 
collective bargaining representative with respect to one or more 
bargaining units of personnel covered by such agreement;
    (vi) Employers who are parties to the agreement described in 
paragraph (b)(3) of this section pay at least 75% of the premiums or 
contributions required for the coverage of active participants under 
the plan or, in the case of a retiree only plan, the employer pays at 
least 75% of the premiums or contributions required for the coverage of 
the retirees. For this purpose, coverage under the plan for dental or 
vision care, or coverage for excepted benefits under 29 CFR 
2590.732(b), is disregarded;
    (vii) The predominant employee organization that is a party to the 
agreement described in paragraph (b)(3) of this section (b)(3) 
provides, sponsors or jointly sponsors a hiring hall(s) and/or a state-
certified apprenticeship program(s) that provide services that are 
available to substantially all active participants covered by the plan;
    (viii) The agreement described in paragraph (b)(3) of this section 
has been determined to be a bona fide collective bargaining agreement 
for purposes of establishing the prevailing practices with respect to 
wages and supplements in a locality, pursuant to a prevailing wage 
statute of any state or the District of Columbia.
    (ix) There are other objective or subjective indicia of actual 
collective bargaining and representation, such as that arm's length 
negotiations occurred between the parties to the agreement described in 
paragraph (b)(3) of this section; that the predominant employee 
organization that is party to such agreement actively represents 
employees covered by such agreement

[[Page 64496]]

with respect to grievances, disputes or other matters involving 
employment terms and conditions other than coverage under or 
contributions to the employee welfare benefit plan; that there is a 
geographic, occupational, trade, organizing or other rationale for the 
employers and bargaining units covered by such agreement; that there is 
a connection between such agreement and the participation, if any, of 
self-employed individuals in the employee welfare benefit plan 
established or maintained under or pursuant to such agreement.
    (c) Exclusions. (1) An employee welfare benefit plan shall not be 
deemed to be ``established or maintained under or pursuant to one or 
more agreements which the Secretary finds to be collective bargaining 
agreements'' for any plan year in which:
    (i) The plan is self-funded or partially self-funded, and is 
marketed to employers or sole proprietors:
    (A) By one or more insurance producers as defined in paragraph (d) 
of this section,
    (B) By an individual who is disqualified from or ineligible for, or 
has failed to obtain, such a license to serve as an insurance producer 
to the extent that the individual engages in an activity for which such 
license is required, or
    (C) By individuals (other than individuals described in paragraphs 
(c)(1)(i) (A) and (B) of this section) who are paid on a commission-
type basis to market the plan;
    (ii) For the purposes of this paragraph (c):
    (A) ``Marketing'' does not include administering the plan, 
consulting with plan sponsors, counseling on benefit design or 
coverage, or explaining the terms of coverage available under the plan 
to employees or union members;
    (B) ``Marketing'' does include the marketing of union membership 
that carries with it plan participation by virtue of such membership, 
except for membership in unions representing insurance producers 
themselves;
    (2) The agreement under which the plan is established or maintained 
is a scheme, plan, stratagem or artifice of evasion, a principal intent 
of which is to evade compliance with state law and regulations 
applicable to insurance; or
    (3) There is fraud, forgery or willful misrepresentation as to the 
factors relied on to demonstrate that the plan satisfies the criteria 
set forth in paragraph (b) of this section.
    (d) Definitions. (1) Active participant means a participant who is 
not retired and who is not on extended coverage under paragraphs 
(b)(2)(iii) or (b)(2)(iv) of this section.
    (2) Agreement means the contract embodying the terms and conditions 
mutually agreed upon between or among the parties to such agreement. 
Where the singular is used in this section, the plural is automatically 
included.
    (3) Individual employed means any natural person who furnishes 
services to another person or entity in the capacity of an employee 
under common law, without regard to any specialized definitions or 
interpretations of the terms ``employee,'' ``employer,'' or 
``employed'' under federal or state statutes other than ERISA.
    (4) Insurance producer means an agent, broker, consultant, or 
producer who is an individual, entity, or sole proprietor, that is 
licensed under the laws of the state to sell, solicit, or negotiate 
insurance.
    (5) Predominant employee organization means, where more than one 
employee organization is a party to an agreement, either the 
organization representing the plurality of individuals employed under 
such agreement, or organizations that in combination represent the 
majority of such individuals.
    (e) Examples. The operation of the provisions of this section may 
be illustrated by the following examples.
    Example 1. Plan A has 500 participants, in the following 4 types 
of participants under paragraph (b)(2) of this section:

----------------------------------------------------------------------------------------------------------------
         Type of participants                Total  number             Nexus group               Non-nexus
----------------------------------------------------------------------------------------------------------------
1. Individuals working under CBAs.....  320 (64%)                320 (64%)                0
2. Retirees...........................  50 (10%)                 50 (10%)                 0
3. ``Special Class''--Non-CBA, non-     100 (20%)                50 (10%)                 50 (10%)
 alumni.
4. Non-nexus participants.............  30 (6%)                  0                        30 (6%)
                                       -------------------------------------------------------------------------
    Total.............................  500 (100%)               420 (84%)                80 (16%)
----------------------------------------------------------------------------------------------------------------

    (2) In determining whether at least 80% of Plan A's participant 
population is made up of individuals with the required nexus to the 
collective bargaining agreement as required by paragraph (b)(2) of 
this section, the Plan may count as part of the nexus group only 50 
(10% of the total plan population) of the 100 individuals described 
in paragraph (b)(2)(viii) of this section. That is because the 
number of individuals meeting the category of individuals in 
paragraph (b)(2)(viii) exceeds 10% of the total participant 
population by 50 individuals. The paragraph specifies that those 
individuals who are deemed to be nexus individuals because they are 
the type of individuals described in paragraph (b)(2)(viii) in 
excess of 10% of the total plan population may not be counted in the 
nexus group. Here, 50 of the 100 individuals employed by signatory 
employers, but not covered by the collective bargaining agreement, 
are counted as nexus individuals and 50 are not counted as nexus 
individuals. Nonetheless, the Plan satisfies the 80% criterion under 
paragraph (b)(2) because a total of 420 (320 individuals covered by 
the collective bargaining agreement, plus 50 retirees, plus 50 
individuals employed by signatory employers), or 84%, of the 500 
participants in Plan A are individuals who may be counted as nexus 
participants under paragraph (b)(2). Beneficiaries (e.g., spouses, 
dependent children, etc.) are not counted to determine whether the 
80% test has been met.
    Example 2. (1) International Union MG and its Local Unions have 
represented people working primarily in a particular industry for 
over 60 years. Since 1950, most of their collective bargaining 
agreements have called for those workers to be covered by the 
National MG Health and Welfare Plan. During that time, the number of 
union-represented workers in the industry, and the number of active 
participants in the National MG Health and Welfare Plan, first grew 
and then declined. New Locals were formed and later were shut down. 
Despite these fluctuations, the National MG Health and Welfare Plan 
meets the factors described in paragraphs (b)(4)(iii) and (iv) of 
this section, as the plan has been in existence pursuant to 
collective bargaining agreements to which the International Union 
and its affiliates have been parties, since prior to January 1, 
1983.
    (2) Assume the same facts, except that on January 1, 1999, 
International Union MG merged with International Union RE to form 
International Union MRGE. MRGE and its Locals now represent the 
active participants in the National MG Health and Welfare Plan and 
in the National RE Health and Welfare Plan which, for 45 years, had 
been maintained under collective bargaining agreements negotiated by 
International Union

[[Page 64497]]

RE and its Locals. Since International Union MRGE is the 
continuation of, and successor to, the MG and RE unions, the two 
plans continue to meet the factors in paragraphs (b)(4)(iii) and 
(iv) of this section. This also would be true if the two plans were 
merged.
    Example 3. Assume the same facts as in paragraph (2) of Example 
2 with respect to International Union MG. However, in 1997, one of 
its Locals and the employers with which it negotiates agree to set 
up a new multiemployer health and welfare plan that only covers the 
individuals represented by that Local Union. That plan would not 
meet the factor in paragraph (b)(4)(iii) of this section, as it has 
not been incorporated or referenced in collective bargaining 
agreements, dating back to before January 1, 1983.
    Example 4. (1) Pursuant to a collective bargaining agreement 
between various employers and Local 2000, the employers contribute 
$2 per hour to the Fund for every hour that a covered employee works 
under the agreement. The covered employees are automatically 
entitled to health and disability coverage from the Fund for every 
calendar quarter the employees have 300 hours of additional covered 
service in the preceding quarter. The employees do not need to make 
any additional contributions for their own coverage, but must pay 
$250 per month if they want health coverage for their dependent 
spouse and children. Because the employer payments cover 100% of the 
required contributions for the employees' own coverage, the Local 
2000 Employers Health and Welfare Fund meets the ``75% employer 
payment'' factor under paragraph (b)(3)(vi) of this section.
    (2) Assume, however, that the negotiated employer contribution 
rate was $1 per hour, and the employees could only obtain health 
coverage for themselves if they also elected to contribute $1 per 
hour, paid on a pre-tax basis through salary reduction. The Fund 
would not meet the 75% employer payment factor, even though the 
employees' contributions are treated as employer contributions for 
tax purposes. Under ERISA, and therefore under this section, 
elective salary reduction contributions are treated as employee 
contributions. The outcome would be the same if a uniform employee 
contribution rate applied to all employees, whether they had 
individual or family coverage, so that the $1 per hour employee 
contribution qualified an employee for his or her own coverage and, 
if he or she had dependents, dependent coverage as well.
    Example 5. Arthur is a licensed insurance broker, one of whose 
clients is Multiemployer Fund M, a partially self-funded plan. 
Arthur takes bids from insurance companies on behalf of Fund M for 
the insured portion of its coverage, helps the trustees to evaluate 
the bids, and places the Fund's health insurance coverage with the 
carrier that is selected. Arthur also assists the trustees of Fund M 
in preparing material to explain the plan and its benefits to the 
participants, as well as in monitoring the insurance company's 
performance under the contract. At the Trustees' request, Arthur 
meets with a group of employers with which the union is negotiating 
for their employees' coverage under Fund M, and he explains the cost 
structure and benefits that Fund M provides. Arthur is not engaged 
in marketing within the meaning of paragraph (c)(1) of this section, 
so the fact that he provides these administrative services and sells 
insurance to the Fund itself does not affect the plan's status as a 
plan established or maintained under or pursuant to a collective 
bargaining agreement. This is the case, whether or how he is 
compensated.
    Example 6. Assume the same facts as Example 5, except that 
Arthur has a group of clients unrelated to the employees covered by 
or the employers bound to the collective bargaining agreement, whose 
insurance carrier has withdrawn from the market in their locality. 
He persuades them to retain him to find them other coverage. The 
group of clients has no relationship with the labor union that 
represents the participants in Fund M. However, Arthur offers them 
coverage under Fund M, and persuades the Fund's Trustees to allow 
the client group to join Fund M in order to broaden Fund M's 
contribution base. Arthur's activities in obtaining coverage for the 
unrelated group under Fund M constitutes marketing through an 
insurance producer, which makes Fund M a MEWA under paragraph (c)(1) 
of this section.
    Example 7. (1) Union A represents thousands of construction 
workers in a three-state geographic region. For many years, Union A 
has maintained a standard written collective bargaining agreement 
with several hundred large and small building contractors, covering 
wages, hours, and other terms and conditions of employment for all 
work performed in Union A's geographic territory. The terms of those 
agreements are negotiated every three years between Union A and a 
multiemployer Association, which signs on behalf of those employers 
who have delegated their bargaining authority to the Association. 
Hundreds of other employers--including both local and traveling 
contractors--have chosen to become bound to the terms of Union A's 
standard area agreement for various periods of time and in various 
ways, such as by signing short-form binders or ``me too'' 
agreements, executing a single job or project labor agreement, or 
entering into a subcontracting arrangement with a signatory 
employer. All of these employ individuals represented by Union A and 
contribute to Plan A, a self-insured multiemployer health and 
welfare plan established and maintained under Union A's standard 
area agreement. During the past year, the trustees of Plan A have 
brought lawsuits against several signatory employers seeking 
contributions allegedly owed, but not paid to the trust. In 
defending that litigation, a number of employers have sworn that 
they never intended to operate as union contractors, that their 
employees want nothing to do with Union A, that Union A procured 
their assent to the collective bargaining agreement solely by 
threats and fraudulent misrepresentations, and that Union A has 
failed to file certain reports required by the Labor Management 
Reporting and Disclosure Act. In at least one instance, a petition 
for a decertification election has been filed with the National 
Labor Relations Board.
    (2) In this example, Plan A qualifies for the regulatory finding 
that it is a multiemployer plan established and maintained under or 
pursuant to one or more collective bargaining agreements, assuming 
that its participant population satisfies the 80% test of paragraph 
(b)(2) of this section and that none of the disqualifying factors in 
paragraph (c) of this section is present. Plan A's status for the 
purpose of this section is not affected by the fact that some of the 
employers who deal with Union A have challenged Union A's conduct, 
or have disputed under labor statutes and legal doctrines other than 
ERISA section 3(40) the validity and enforceability of their 
putative contract with Union A, regardless of the outcome of those 
disputes.
    Example 8. (1) Assume the same facts as Example 7. Plan A's 
benefits consultant recently entered into an arrangement with the 
Medical Consortium, a newly formed organization of health care 
providers, which allows the Plan to offer a broader range of health 
services to Plan A's participants while achieving cost savings to 
the Plan and to participants. Union A, Plan A, and Plan A's 
consultant each have added a page to their websites publicizing the 
new arrangement with the Medical Consortium. Concurrently, Medical 
Consortium's website prominently publicizes its recent affiliation 
with Plan A and the innovative services it makes available to the 
Plan's participants. Union A has mailed out informational packets to 
its members describing the benefit enhancements and encouraging 
election of family coverage. Union A has also begun distributing 
similar material to workers on hundreds of non-union construction 
job sites within its geographic territory.
    (2) In this example, Plan A remains a plan established and 
maintained under or pursuant to one or more collective bargaining 
agreements under section 3(40) of ERISA. Neither Plan A's 
relationship with a new organization of health care providers, nor 
the use of various media to publicize Plan A's attractive benefits 
throughout the area served by Union A, alters Plan A's status for 
purpose of this section.
    Example 9. (1) Assume the same facts as in Example 7. Union A 
undertakes an area-wide organizing campaign among the employees of 
all the health care providers who belong to the Medical Consortium. 
When soliciting individual employees to sign up as union members, 
Union A distributes Plan A's information materials and promises to 
bargain for the same coverage. At the same time, when appealing to 
the employers in the Medical Consortium for voluntary recognition, 
Union A promises to publicize the Consortium's status as a group of 
unionized health care service providers. Union A eventually succeeds 
in obtaining recognition based on its majority status among the 
employees working for Medical Consortium employers. The Consortium, 
acting on behalf of its employer members, negotiates a collective 
bargaining agreement with Union A that provides terms and

[[Page 64498]]

conditions of employment, including coverage under Plan A.
    (2) In this example, Plan A still meets the criteria for a 
regulatory finding that it is collectively bargained under section 
3(40) of ERISA. Union A's recruitment and representation of a new 
occupational category of workers unrelated to the construction 
trade, its promotion of attractive health benefits to achieve 
organizing success, and the Plan's resultant growth, do not take 
Plan A outside the regulatory finding.
    Example 10. (1) Assume the same facts as in Example 7. The 
Medical Consortium, a newly formed organization, approaches Plan A 
with a proposal to make money for Plan A and Union A by enrolling a 
large group of employers, their employees, and self-employed 
individuals affiliated with the Medical Consortium. The Medical 
Consortium obtains employers' signatures on a generic document 
bearing Union A's name, labeled ``collective bargaining agreement,'' 
which provides for health coverage under Plan A and compliance with 
wage and hour statutes, as well as other employment laws. Employees 
of signatory employers sign enrollment documents for Plan A and are 
issued membership cards in Union A; their membership dues are 
regularly checked off along with their monthly payments for health 
coverage. Self-employed individuals similarly receive union 
membership cards and make monthly payments, which are divided 
between Plan A and the Union. Aside from health coverage matters, 
these new participants have little or no contact with Union A. The 
new participants enrolled through the Consortium amount to 23% of 
the population of Plan A during the current Plan Year.
    (2) In this example, Plan A now fails to meet the criteria in 
paragraphs (b)(2) and (b)(3) of this section, because more than 20% 
of its participants are individuals who are not employed under 
agreements that are the product of bona fide collective bargaining 
relationship and who do not fall within any of the other nexus 
categories set forth in paragraph (b)(2). Moreover, even if the 
number of additional participants enrolled through the Medical 
Consortium, together with any other participants that did not fall 
within any of the nexus categories, did not exceed 20% of the total 
participant population under the plan, the circumstances in this 
example would trigger the disqualification of paragraph (c)(2) of 
this section, because Plan A now is being maintained under a 
substantial number of agreements that are a ``scheme, plan, 
stratagem or artifice of evasion'' intended primarily to evade 
compliance with state laws and regulations pertaining to insurance. 
In either case, the consequence of adding the participants through 
the Medical Consortium is that Plan A is now a MEWA for purposes of 
section 3(40) of ERISA and is not exempt from state regulation by 
virtue of ERISA.

    (f) Cross-reference. See part 2570, subpart G of this chapter for 
procedural rules relating to proceedings seeking an Administrative Law 
Judge finding by the Secretary under Section 3(40) of ERISA.
    (g) Effect of proceeding seeking Administrative Law Judge Section 
3(40) finding.
    (1) An Administrative Law Judge finding issued pursuant to the 
procedures in part 2570, subpart G of this chapter, will constitute a 
finding that the employee welfare benefit plan at issue in that 
proceeding is established or maintained under or pursuant to an 
agreement that the Secretary finds to be a collective bargaining 
agreement for purposes of Section 3(40) of ERISA.
    (2) Nothing in this section or in part 2570, subpart G of this 
chapter is intended to have any effect on applicable law relating to 
stay or delay of a state administrative or court proceeding or 
enforcement of a subpoena.
    (h) Effective date. This regulation is effective December 26, 2000.

    Signed this 16th day of October 2000.
Leslie B. Kramerich,
Acting Assistant Secretary, Pension and Welfare Benefits 
Administration.
[FR Doc. 00-27044 Filed 10-26-00; 8:45 am]
BILLING CODE 4510-29-P