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[Federal Register Volume 90, Number 9 (Wednesday, January 15, 2025)]
[Notices]
[Pages 3947-3957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00813]

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EMPLOYEE BENEFITS SECURITY ADMINISTRATION

[Prohibited Transaction Exemption 2025-02; Exemption Application No. D-
12073]

Exemption From Certain Prohibited Transaction Restrictions 
Involving Memorial Sloan Kettering Cancer Center (MSKCC or the 
Applicant) Located in New York, New York

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of exemption.

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SUMMARY: This document contains a notice of exemption issued by the 
Department of Labor (the Department) from certain prohibited 
transaction restrictions of the Employee Retirement Income Security Act 
of 1974 (ERISA or the Act) and/or the Internal Revenue Code of 1986 
(the Code). This exemption permits the reinsurance of risks and the 
receipt of a premium by MSK Employee Benefits IC (MSK EB or the 
Captive), a captive insurance and reinsurance subsidiary that is 
wholly-owned by MSKCC, in connection with a single premium group 
insurance contract sold by an unrelated fronting insurer (the Fronting 
Insurer or the Fronter) to provide pension annuities to participants 
and beneficiaries in the Memorial Sloan Kettering Cancer Center Pension 
Plan (the Plan). The relief provided in the exemption will only be 
available if the conditions in Section III are met in conformance with 
the definitions in Section I.

DATES: The exemption will be in effect on January 15, 2025.

FOR FURTHER INFORMATION CONTACT: Mr. Joseph Brennan of the Department 
at (202) 693-8456. (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION: The Applicant submitted an exemption 
application requesting an individual exemption pursuant to ERISA 
section 408(a) in accordance with the Department's exemption procedures 
set forth in 29 CFR part 2570, subpart B.\1\ On July 9, 2024, the 
Department published a notice of proposed exemption in the Federal 
Register.\2\ Based on adherence to the conditions of this exemption by 
MSKCC, the Independent Fiduciary, and the IB 95-1 Independent Fiduciary 
(as defined below), the Department makes the requisite findings under 
ERISA section 408(a) that this exemption is: (1) administratively 
feasible for the Department, (2) in the interest of the participants 
and beneficiaries of the Plan, and (3) protective of the rights of the 
participants and beneficiaries of the Plan. Accordingly, affected 
parties should be aware that the conditions incorporated in this 
exemption are, individually and taken as a whole, necessary for the 
Department to grant the relief provided herein. The Department would 
not have granted this exemption without these conditions.
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    \1\ 76 FR 66637, 66644, (October 27, 2011).
    \2\ 89 FR 56422 (July 9, 2024).
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Background

Overview of the Exemption

    1. Under the exemption, the Plan will enter into a single premium 
group annuity insurance contract (the GAC) with an unrelated Fronting 
Insurer that will be selected by an IB 95-1 Fiduciary in compliance 
with the requirements of the Department's Interpretive Bulletin 95-
1.\3\ The Fronting Insurer will, in turn, enter into a reinsurance 
contract (the Reinsurance Arrangement) with the Captive. Under the 
Reinsurance Arrangement, the Captive will reinsure 100 percent of the 
Plan's risks under the GAC. Importantly, the Fronting Insurer will 
remain fully responsible for the benefits of participants and 
beneficiaries for the entire duration of the GAC and Reinsurance 
Arrangement if the Captive fails to fulfill its contractual obligations 
to the Fronting Insurer, without any caveats, contingencies, or 
conditions that would relieve or limit the Fronting Insurer's 
contractual obligation to pay benefits to the Plan's participants and 
beneficiaries.
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    \3\ 29 CFR 2509.95-1.
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    In connection with the Reinsurance Arrangement, all Plan 
participants and beneficiaries will receive an increase to their 
monthly pension benefit that is currently expected to be 5.55 
percent.\4\ The Applicant expects that this benefit increase will 
provide $66,408,000 in additional benefits to the Plan's participants 
and beneficiaries. Importantly, this increase will remain in place for 
the entirety of Plan participants' and beneficiaries' lives and, as a 
condition of this exemption,

[[Page 3948]]

MSKCC will not reduce any benefits that participants and beneficiaries 
receive from MSKCC, including benefits they receive from the Plan, as a 
result of the Reinsurance Arrangement. Absent this exemption, 
participants and beneficiaries would not receive this estimated 5.55 
percent benefit increase.
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    \4\ As discussed in more detail below, the exemption requires 
the Plan participants and beneficiaries to receive the majority of 
the benefits derived from the Reinsurance Arrangement. While, as 
noted above, it is ``currently expected'' that a 5.55% increase in 
Plan's participants' and beneficiaries' monthly pension benefits 
will achieve this objective, the exact percentage increase needed to 
ensure that Plan participants and beneficiaries receive the majority 
of the benefits derived from the proposed arrangement will not be 
known until the Plan actually enters into the GAC, which will occur 
after the Fronting Insurer is selected by the IB 95-1 Fiduciary. As 
described in further detail below, after the Plan enters into the 
GAC, Milliman, a second independent fiduciary acting solely on 
behalf of the Plan, must determine, based on objective data, that 
the Plan participants' and beneficiaries' monthly pension benefits 
have been increased by a percentage that ensures they will receive 
the majority of the benefits derived from the Reinsurance 
Arrangement. The methodology for making this calculation is 
discussed below. Milliman as independent fiduciary must, among other 
things, conclude, in a written report submitted to the Department, 
that Plan participants and beneficiaries received the appropriate 
percentage increase in their monthly pension benefits. The written 
report of the independent fiduciary will be available to the public 
by contacting EBSA's Public Disclosure Office and referencing 
Exemption Application D-12073.
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The Plan

    2. The Plan is a defined benefit pension plan that provides 
retirement and death benefits for eligible participants.\5\ The Plan 
administrator and named fiduciary is the MSK Executive Benefits 
Committee and the Plan trustee is JPMorgan Chase. In 2012, MSKCC 
amended the Plan to close enrollment to employees hired on or after 
December 16, 2012. In 2020, MSKCC amended the Plan to freeze future 
benefit accruals effective December 20, 2020. As of December 31, 2023, 
the Plan covered 8,089 participants and held $1,384,897,170 in total 
assets.
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    \5\ Under the Plan, the normal form of payment for an unmarried 
participant is a single-life annuity, and the normal form of payment 
for a married participant is a joint and 50% survivor annuity.
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The Captive

    3. MSK Insurance US, Inc. (MSK US) is MSKCC's wholly-owned captive 
insurance and reinsurance subsidiary. MSK US writes approximately $75 
million in premiums and insures the property and equipment of MSKCC. 
The Captive (MSK EB) is a segregated cell within MSK US that will be 
used to reinsure the risks related to the Reinsurance Arrangement and 
this exemption. While MSK US will contract with the Fronting Insurer as 
part of the Reinsurance Arrangement, MSK EB will hold the reserves that 
will be used to pay benefits to the Plan's participants and 
beneficiaries under the GAC.

The IB 95-1 Fiduciary and the Selection of the Fronting Insurer

    4. MSKCC has engaged Fiduciary Counselors Inc. (FCI) as the IB 95-1 
Fiduciary that is responsible for selecting a Fronting Insurer based on 
a competitive bidding process. The Applicant represents that FCI will 
send requests for proposals to potential Fronting Insurers and will 
then select a Fronting Insurer in compliance with the Department's 
Interpretive Bulletin (IB) 95-1, which provides several factors that 
fiduciaries must consider to ensure they select the safest annuity 
available for a plan.\6\ Within 30 days after the GAC has been 
executed, FCI must provide the Department with a written report that: 
(a) identifies the Fronting Insurer selected; (b) contains a detailed 
representation regarding the methodology used to make the selection and 
how that methodology determines that the selected Fronting Insurer and 
GAC met the requirements of IB 95-1; and (c) prudently concludes that 
it would have been consistent with IB 95-1 to select the Fronting 
Insurer as the insurer for a final termination buy-out annuity had 
MSKCC adopted that approach.
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    \6\ 29 CFR 2509-95-1. As stated in IB 95-1, when conducting a 
search, a fiduciary must evaluate a number of factors relating to a 
potential annuity provider's claims-paying ability and 
creditworthiness. Reliance solely on ratings provided by insurance 
rating services would not be sufficient to meet this requirement. In 
this regard, the types of factors a fiduciary should consider would 
include, among other things: (a) the quality and diversification of 
the annuity provider's investment portfolio; (b) the size of the 
insurer relative to the proposed contract; (c) the level of the 
insurer's capital and surplus; (d) the lines of business of the 
annuity provider and other indications of an insurer's exposure to 
liability; (e) the structure of the annuity contract and guarantees 
supporting the annuities, such as the use of separate accounts; and 
(f) the availability of additional protection through state guaranty 
associations and the extent of their guarantees.
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Mechanics of the Reinsurance Arrangement

    5. The Plan will purchase the GAC from the Fronting Insurer by 
using current Plan assets to pay a one-time premium to the Fronting 
Insurer. The Fronting Insurer will enter into an indemnity reinsurance 
contract with the Captive and will transfer the premium amount paid by 
the Plan to the Captive where it will be held in reserve. The GAC will 
cover all of the Plan's liabilities and have two phases that are 
described below.
    Buy-In Phase: During the Buy-in Phase, the Plan will hold the GAC 
as a plan asset and the Plan will remain active. During this phase, the 
Fronting Insurer will send funds to the Plan Trustee (JPMorgan Chase) 
to make benefit payments to participants and beneficiaries and, every 
three months, the Fronting Insurer will submit payment requests to the 
Captive requesting reimbursement to cover participant and beneficiary 
distributions paid by the Fronting Insurer during the preceding three 
months. If the Fronting Insurer and Captive fail to pay benefits during 
the Buy-In Phase, MSKCC will still be required to fund the Plan, and 
the Plan will still be required to pay all benefits due to participants 
and beneficiaries.
    Following the purchase of the GAC, and while the Plan is still 
active, the Plan's fiduciaries will be obligated to manage all Plan 
assets, including those assets not used to purchase the GAC, solely in 
the interest of participants and beneficiaries and exclusively for 
their benefit. Any payments for Plan expenses that do not clearly and 
exclusively benefit participants and beneficiaries will be subject to 
additional scrutiny.
    Buy-Out Phase: The GAC will contain a ``conversion option'' (the 
Conversion Option) that MSKCC can exercise (at any time) if and when it 
decides to terminate the Plan.\7\ If exercised, the Conversion Option 
would transition the GAC from the Buy-in Phase to the Buy-Out Phase,\8\ 
and the following events would occur: (a) the GAC will no longer be 
held by the Plan as a Plan asset; (b) MSKCC will replace the Plan as 
the holder of the GAC; (c) the Fronting Insurer will issue annuity 
certificates to all Plan participants and beneficiaries; and (d) the 
Fronting Insurer will take complete control of the administration of 
the GAC and make benefit payments directly to the former Plan 
participants and beneficiaries that have become annuitants.\9\ During 
the Buy-Out Phase the Captive will continue to hold the reserves and 
the Fronting Insurer will continue to remit quarterly reimbursement 
payment requests to the Captive.
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    \7\ This exemption would not relieve the Plan's fiduciaries from 
their express ERISA duties to manage the assets of the plan solely 
in the interest of the plan and its participants and beneficiaries, 
including when the fiduciaries are contemplating terminating the 
plan.
    \8\ The effective date of the conversion would be aligned with 
the Plan's termination (i.e., the Conversion Option will be 
exercised only if and when the Plan terminates).
    \9\ As a condition of this exemption, after the Buy-In phase for 
the Reinsurance Arrangement is completed and MSKCC exercises the 
Conversion Option, MSKCC will terminate the Plan in compliance with 
all applicable Code and ERISA requirements.
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    The relationship between the Fronting Insurer and Captive will 
remain the same during both the Buy-In and Buy-Out Phases; therefore, 
the Fronting Insurer will assume full responsibility for benefit 
obligations to participants and beneficiaries, without conditions or 
caveats, and the Captive will assume the reinsurance risk. During both 
phases, the Captive is fully obligated to make payments to the Fronting 
Insurer under the Reinsurance Arrangement. This means that the Captive 
is fully obligated to satisfy the benefit obligations, but the 
mechanism of that obligation flows through the Fronting Insurer rather 
than directly to the Plan or to participants and beneficiaries.
    As a condition of this exemption, the Fronting Insurer must have a 
direct contractual relationship with the Plan during the Buy-In phase 
of the GAC and with the Plan's participants and

[[Page 3949]]

beneficiaries during the Buy-Out phase, without any caveats, 
contingencies, or conditions that would relieve or limit the Fronting 
Insurer's contractual obligation to pay benefits to the Plan's 
participants and beneficiaries.

Collateral Under the Reinsurance Agreement

    6. As part of the Reinsurance Arrangement, the Captive will be 
collateralized by MSKCC. The Captive is expected to use the assets 
received as the reinsurance premium to collateralize its obligations 
under the Reinsurance Arrangement, in each case with such modifications 
as the Fronting Insurer's regulatory, accounting, or commercial 
considerations may require.\10\ MSKCC will capitalize the Captive in 
accordance with the requirements of the State of Vermont and will 
provide a parental guarantee for the benefit of the Fronting Insurer 
with respect to the Captive's obligations. Parental guarantee assets 
will be separate and apart from the Plan assets used to purchase the 
GAC.
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    \10\ The Fronting Insurer will be required to carry statutory 
reserves on its financial statements in such amounts as the 
insurance law in its state of domicile may require, and the 
collateral requirements will be based on those reserve requirements. 
The Fronting Insurer will have the right to access the collateral 
assets in accordance with the Reinsurance Arrangement. Collateral 
assets will back the Captive's reserves but will not be distinct 
from them.
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Oversight by the Vermont DFR

    7. Before MSKCC submitted its exemption request, the Captive 
requested and received formal approval from the Vermont Department of 
Financial Regulation (Vermont DFR) to enter into the Reinsurance 
Arrangement and operate the Captive to reinsure the Plan's pension 
benefits. The Vermont DFR issued formal approval after reviewing the 
Captive's Feasibility Report, which included, among other things, 
actuarial projections, an investment policy statement, and a business 
plan. The Captive will be required to submit independent audit and 
actuarial reports to the Vermont DFR annually and, at least once every 
five years, the Vermont DFR will conduct a thorough review of the 
Captive and issue an Exam Report.
    This exemption requires the Independent Fiduciary to obtain and 
review all independent audit and actuarial reports submitted by the 
Captive to the Vermont DFR as well as all Exam Reports issued to the 
Captive by the Vermont DFR, as long as the plan remains active. 
Further, the Independent Fiduciary must provide the Department with a 
detailed summary of each Exam Report in its annual Independent 
Fiduciary Report covering the year the Exam Report is issued. This 
exemption also requires the Captive to request a Certificate of Good 
Standing from the Vermont DFR every year and provide the Department 
with any Exam Reports it receives no later than 30 days after MSKCC 
receives such report.

Financial Benefit to MSKCC

    8. The Applicant represents that purchasing the GAC in conjunction 
with the Reinsurance Arrangement will result in an estimated ten 
percent cost savings. For instance, if the single premium cost to 
purchase the GAC from the Fronting Insurer without the Captive would be 
$1.2 billion, the cost to purchase it with the Captive would be $1.08 
billion. Since the financial benefit of this cost reduction would inure 
to MSKCC, this exemption requires MSKCC to provide the majority of the 
derived financial benefit to the Plan's participants and beneficiaries 
in the form of a permanent monthly annuity payment increase, as 
described below.\11\
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    \11\ The Applicant represents that because MSKCC is a non-profit 
entity, there will be no associated tax advantages flowing to MSKCC 
from the Reinsurance Arrangement.
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The Primary Benefits Test

    9. This exemption requires the Plan to receive the majority of the 
financial benefits flowing from the Reinsurance Arrangement (the 
Primary Benefits Test). Under this exemption, the Independent Fiduciary 
must quantify all benefits derived from the Reinsurance Arrangement, 
including all benefits directly and indirectly received by MSKCC and 
any entity affiliated with MSKCC, and confirm that participants and 
beneficiaries receive at least 51 percent of all benefits derived from 
the arrangement. Throughout the Reinsurance Arrangement, while the Plan 
remains active, the Independent Fiduciary must continuously review and 
confirm that the Primary Benefits Test is being met.

MSKCC-Provided Benefit Enhancement

    10. MSKCC will implement a one-time benefit increase sufficient to 
pass the Primary Benefits Test (the Benefit Enhancement). If the 
savings generated from using the Captive, as determined by the 
Independent Fiduciary, equals 10 percent, MSKCC will implement a 
Benefit Enhancement in the form of a permanent 5.37 percent \12\ 
increase to the monthly benefits of all participants and beneficiaries 
that will continue without reduction for the remainder of their lives. 
In addition, and as discussed below, MSKCC will add a second layer 
benefit enhancement of .18% for participants and beneficiaries--which 
is derived from the present value of the Independent Fiduciary's fees 
over the expected life of the GAC, post-plan termination.\13\ Thus, if 
the savings from the Captive equals 10 percent, all plan participants 
and beneficiaries will receive a permanent pension benefit increase of 
5.55 percent. Collectively, Plan participants and beneficiaries would 
receive increased pension benefit payments with a present value of 
$66,408,000 and, therefore, will receive the majority of the financial 
benefit derived from the Reinsurance Arrangement plus the present value 
of the Independent Fiduciary's fees over the expected life of the GAC.
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    \12\ The formula underlying the 5.37 percent calculation is 
based on the actual percentage of savings in the annuity purchase, 
including the value of the pension benefit enhancement. All details 
regarding the formula used to calculate the Benefit Enhancement are 
included in the exemption application file and available to the 
public upon request.
    \13\ The Independent Fiduciary confirmed that the present value 
of its fees over the expected life of the GAC would be $1,968,000. 
As a condition of this exemption, MSKCC will add this entire amount 
into the GAC as a second-layer benefit enhancement which will result 
in an additional .18 percent permanent monthly pension increase for 
all participants and beneficiaries. Thus, the total benefit 
enhancement under this exemption is expected to be 5.55 percent.
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    As noted in the proposed exemption, MSKCC represents that: (a) 
apart from the conditions of this exemption, MSKCC otherwise had no 
preexisting obligation to provide a benefit increase to participants 
and beneficiaries; and (b) before its formal submission for exemptive 
relief, MSKCC had not considered or offered any increase to the current 
value of the benefits of the Plan's participants and beneficiaries.
    Department's Note: The Department notes that the ratio of the 
benefit enhancement to MSKCC savings described in this exemption should 
not be relied upon as a precedent for future exemption applicants. If 
the Department receives applications for similar reinsurance exemptions 
in the future, it may require a higher ratio of participant and 
beneficiary benefit enhancements to plan sponsor savings, based upon 
the specific design of the transaction and financial circumstances of 
the plan and plan sponsor. In this regard, the Department's exemption 
procedure regulation provides that ``[t]he existence of previously 
issued administrative exemptions is not determinative of whether the 
Department will propose future exemptions for applications with the 
same or similar facts, or whether a proposed exemption will contain the 
same conditions as a similar previously

[[Page 3950]]

issued administrative exemption.'' \14\ As the Department stated in the 
preamble to that regulation, ``. . . this language reinforces the 
Department's existing policy that it has the sole discretionary 
authority to issues exemptions and is not bound by the facts or 
conditions of prior exemptions in making determinations with respect to 
an exemption application.''
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    \14\ 29 CFR 2570.30(g).
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Independent Fiduciary

    11. Milliman will serve as the Plan's Independent Fiduciary with 
respect to the Reinsurance Arrangement and Kathleen E. Ely of Milliman 
will perform the functions required of the independent fiduciary on 
behalf of Milliman with respect to the requirements of this exemption. 
As the Plan's Independent Fiduciary, Milliman must represent the Plan 
in accordance with the obligations of prudence and loyalty under ERISA 
sections 404(a)(1)(A) and (B) and determine whether the Reinsurance 
Arrangement is in the interests of the Plan's participants and 
beneficiaries. In this regard, before the Plan purchases the GAC, 
Milliman must prudently and loyally confirm that the Benefit 
Enhancement is sufficient to meet the Primary Benefits Test.
    Further, not later than 30 days after the purchase of the GAC and 
consummation of the Reinsurance Arrangement, Milliman must confirm to 
the Department in writing that all terms and conditions of the 
exemption have been met. This confirmation must include copies of each 
document relied upon and the steps taken to make this determination. In 
this written determination, the Independent Fiduciary must confirm the 
actual cost savings associated with the Reinsurance Arrangement by 
obtaining documentation from the Fronting Insurer that compares the 
cost to purchase the GAC without the Captive in place to the cost to 
purchase the GAC with the Captive in place. The Independent Fiduciary 
must include this documentation from the Fronting Insurer with its 
written determination to the Department.
    The Independent Fiduciary must also monitor and ensure that any 
assets that remain in the Plan during the Buy-In phase of the 
Reinsurance Arrangement are managed and used exclusively to provide 
benefits to Plan participants and beneficiaries and to defray 
reasonable expenses of administering the Plan in compliance with ERISA 
sections 403(c)(1) and 404(a)(1)(A).
    Ms. Ely and Milliman represent that they are independent of all 
parties associated with the Reinsurance Arrangement, including the 
Plan, MSKCC, and the Captive. Milliman also represents that its gross 
income received from parties in interest to the Plan in connection with 
the Reinsurance Arrangement represents less than 0.1 percent of 
Milliman's gross annual income from all sources.
    Milliman will be required to continue monitoring, enforcing, and 
ensuring compliance with all conditions of this exemption until the 
plan is terminated, and report any instance of non-compliance 
immediately to the Department. As long as the plan is active, Milliman 
must submit written annual Independent Fiduciary Reports to the 
Department certifying under penalty of perjury whether each term and 
condition of the exemption has been met over the applicable period. In 
this regard, Milliman's final Independent Fiduciary Report will be due 
to the Department no later than six months after the Plan's termination 
date. Please see below for a discussion regarding the removal of the 
Independent Fiduciary after plan termination.
    In its final independent fiduciary report, Milliman must determine 
that the plan termination, transfer of assets, and new contractual 
arrangements accord with all conditions of this exemption at the time 
of termination, and that it remains the case that the primary benefits 
of this arrangement are expected to inure to the plan for the entire 
duration of the arrangement. The Independent Fiduciary must also 
represent that MSKCC has not managed plan assets in a way that results 
in MSKCC receiving a greater benefit from this arrangement than plan 
participants and beneficiaries.

Written Comments

    In the proposed exemption, the Department invited all interested 
persons to submit written comments and/or requests for a public hearing 
with respect to the notice of proposed exemption by August 23, 2024. 
The Department received written comments from the Applicant and Plan 
participants and beneficiaries and no requests for a public hearing.

I. Comments From the Applicant

1. Removal of the Independent Fiduciary After Plan Termination
    The proposed exemption requires an Independent Fiduciary to act on 
behalf of the Plan's participants and beneficiaries and provide 
oversight through the end of the Reinsurance Arrangement. Section 
III(h)(4) of the proposed exemption would require the Independent 
Fiduciary to: ``Represent and protect the interests of the participants 
and beneficiaries of the Plan during both the Buy-In and Buy-Out Phases 
to ensure they receive everything that they are entitled to receive 
under this exemption, the terms of the Plan, and the GAC.'' Further, 
Section III(i)(1) of the proposed exemption would require the 
Independent Fiduciary to submit annual Independent Fiduciary Reports to 
the Department until the end of the Reinsurance Arrangement. The 
proposed exemption also provides that the Independent Fiduciary must 
prudently and loyally confirm that the Primary Benefits Test is met 
throughout the Reinsurance Arrangement and continue to monitor, 
enforce, and ensure compliance with all conditions of the exemption 
throughout the Reinsurance Arrangement.
    MSKCC requests the Department remove the independent fiduciary 
requirement following the Plan's termination. MSKCC states that the 
phrases ``throughout the Reinsurance Arrangement'' and ``throughout the 
duration of the Reinsurance Arrangement'' should be modified, as they 
suggest that there is a Plan fiduciary obligation that extends beyond 
the termination of the Plan. MSKCC asserts that the Plan will terminate 
in connection with the Buy-Out conversion of the GAC and cease to 
exist, and once the Plan terminates, there will be no ongoing fiduciary 
obligations with respect to the Plan. MSKCC further asserts that at the 
time of the Plan's termination, Plan fiduciaries must ensure that the 
Plan's obligations are discharged, and that determination would include 
ensuring that the structure of the Reinsurance Arrangement complies 
with the exemption's conditions.
    Accordingly, MSKCC requests the Department to revise Section 
III(h)(4) of the proposed exemption to read as follows: ``The 
Independent Fiduciary must . . . Represent and protect the interests of 
the participants and beneficiaries of the Plan unless and until the 
Plan is terminated to ensure they receive everything that they are 
entitled to receive under this exemption, the terms of the Plan, and 
the GAC.''
    Department's Response: After considering this comment, the 
Department has determined to remove the requirement that the 
Independent Fiduciary perform duties beyond the date of a plan 
termination if the

[[Page 3951]]

Independent Fiduciary calculates the present value of its expected fees 
over the expected life of the GAC and MSKCC adds that amount into the 
GAC as an additional benefit enhancement for participants and 
beneficiaries. Also, as noted above, the Independent Fiduciary has 
confirmed that the present value of its expected fees is $1,968,000. 
Therefore, as a condition of this exemption, MSK must add an additional 
$1,968,000 as a second-layer benefit increase into the GAC to 
permanently increase the pension benefits for participants and 
beneficiaries. This $1,968,000 second-layer benefit increase will add 
an additional .18 percent increase to the monthly annuity payable to 
participants and beneficiaries and thus increase the total monthly 
annuity payable to participants and beneficiaries from 5.37 percent to 
5.55 percent.
    The Department's determination to allow the Independent Fiduciary 
to step aside after plan termination is based upon an understanding 
that the Vermont DFR will be performing substantial oversight over the 
Captive after the plan is terminated, and that this oversight is 
similar to the duties the Independent Fiduciary would have had to 
perform under the proposed exemption. The Department notes that under 
this exemption, the Captive must request a Certificate of Good Standing 
from the Vermont DFR every year, and that before issuing a Certificate, 
Vermont DFR will review the Captive, its reserves, and investments. If 
Vermont finds anything concerning, including risk, solvency, 
investments, or compliance issues, they will not issue the Certificate 
to the Captive. Also, during this review, the Vermont DFR will look 
into the financial health of MSKCC and the unrelated Fronting Insurer.
    Additionally, at least once every five years, the Vermont DFR will 
conduct a more thorough examination of the Captive and produce an Exam 
Report. Through its Exam Report process, the Vermont DFR will determine 
compliance with state insurance laws and regulations and evaluate the 
Captive's solvency. As part of this report, a team of examiners from 
Vermont DFR will conduct an in-depth review of the Captive's operations 
and balance sheet, and if they find something concerning, they will 
issue a Company Action Letter or a Regulatory Action Letter to the 
Captive. The Department notes that this exemption requires MSK to 
submit all Exam Reports to the Department.
    Moreover, the Fronting Insurer will have a strong interest in 
ensuring the Captive has sufficient reserves to pay benefit liabilities 
because the Fronter pays pension benefits to participants and 
beneficiaries from its own account. The Fronter's obligation to 
participants and beneficiaries is unconditional and will continue even 
if the Captive becomes insolvent, because the Fronter's arrangement 
with the Captive is an indemnity reinsurance arrangement. This means 
that the Captive reimburses the Fronter every three months for pension 
payments that the Fronter has already paid to participants and 
beneficiaries over the preceding three months. Under the reinsurance 
contract between the Fronter and the Captive, the Fronter monitors the 
investment of the Captive's reserves and also has the contractual right 
to draw on a collateral account that is funded by the Captive.
    Finally, the Department notes that after plan termination, all 
participants and beneficiaries become individual annuitants with the 
Fronter, and those annuities are regulated by the state in which the 
Fronter is domiciled. Under state insurance law, the Fronter is 
required to submit to an annual independent audit and file that report 
with their state regulator.
    Based on the foregoing, the Department has determined to remove the 
requirement that the Independent Fiduciary perform duties beyond the 
date of a plan termination because there will be sufficient oversight 
of the Captive after the plan terminates to ensure that participants 
and beneficiaries are protected and their benefits remain secure. 
Moreover, the second-layer benefit enhancement that will result from 
adding the additional $1,968,000 into the GAC is a meaningful 
additional benefit for participants and beneficiaries that will provide 
a more secure retirement for all participants and beneficiaries covered 
by the Plan.
2. Timing of Identifying the Fronting Insurer
    In paragraph 5 of the proposed exemption, the Department states 
that ``given the importance of a highly rated Fronting Insurer to the 
security of the pension benefits provided to the Plan's participants 
and beneficiaries, Fiduciary Counselors must provide the Department 
with a written submission that identifies the Fronting Insurer selected 
along with a written representation detailing the methodology that it 
used to select the Fronting Insurer and how that methodology, and the 
Fronting Insurer selected, met the requirements of IB 95-1.'' Section 
III(e)(1) of the proposed exemption states that this report must be 
provided to the Department ``before this proposed exemption is 
granted.''
    MSKCC maintains in its comment letter, that it will not be 
practicable for the IB 95-1 Fiduciary to select the Fronting Insurer 
and provide the IB 95-1 Report to the Department before the exemption 
is granted. According to MSKCC, FCI would not be able to negotiate 
every term of the annuity purchase with the Fronter--including final 
pricing--until the terms of the final exemption are known and the 
timing of the annuity purchase is certain and imminent. And further, if 
the final exemption is conditioned upon the selection of a particular 
Fronting Insurer, MKSCC would lose leverage to negotiate final annuity 
purchase terms favorable to the Plan's participants and beneficiaries.
    Instead, MSK requests that the Department revise the exemption to 
require the IB 95-1 Fiduciary to provide its written IB 95-1 Report and 
identify the Fronting Insurer after the exemption is granted. However, 
in their comment letter, MSKCC offers to provide the Department with a 
list of Fronting Insurers that FCI has determined should be considered 
and approached as part of the request for proposal (RFP) process before 
the Department issues the final exemption, but on a confidential basis 
to preserve the integrity of the RFP process. Further, if FCI 
subsequently decides not to select a Fronter from the list, they would 
provide the Department with 30 days advance notice before selecting the 
Fronter to provide the Department with an opportunity to comment or 
discuss with MSKCC before the Fronter is engaged.
    Department's Response: After considering the applicant's request 
and rationale, the Department accepts the Applicant's request to remove 
the condition requiring Fiduciary Counselors to provide a written 
submission that identifies the Fronting Insurer selected along with 
detail on the methodology it used to select the Fronter and how that 
methodology, and the Fronter selected, met the requirements of IB 95-1 
before the exemption is granted. The Department, instead, has revised 
the exemption to remove this requirement entirely. Therefore, Fiduciary 
Counselors will not be required to submit anything to the Department 
before the exemption is granted. In making this change, the Department 
emphasizes that Fiduciary Counselors must follow IB 95-1 and prudently 
and loyally select the safest available annuity for the plan 
participants and beneficiaries and submit a detailed written report to 
the Department regarding the methodology

[[Page 3952]]

the IB 95-1 Fiduciary used to determine that the selected Fronting 
Insurer and GAC met the requirements of IB 95-1 no later than 30 days 
after the execution of the GAC.
3. Use of Participant Data
    Section III(j) of the proposed exemption states that ``neither 
MSKCC nor any related entity may use participant or beneficiary-related 
data, or information generated by or derived from the Reinsurance 
Arrangement in a manner that benefits MSKCC or a related entity.'' 
MSKCC contends that this condition is too broad and requests that it be 
changed to only prohibit MSKCC from using participant data ``for 
purposes unrelated to the administration, funding, or security of 
retirement benefits (including obligations under the GAC and the 
Reinsurance Arrangement).'' MSKCC states that the proposed condition is 
too broad because MSKCC benefits by providing retirement benefits to 
its employees and retirees and ensuring that benefits are secure and 
appropriately administered.
    Department's Response: After considering this comment, the 
Department accepts MSKCC's requested revision with some modifications 
that narrow the scope of MSKCC's requested change. The Department is 
limiting the expanded permitted uses of participant data under this 
exemption to purposes related to the administration, funding, or 
security of the GAC, Reinsurance Arrangement, or Plan. Expanding the 
scope of permissible data use to administration, funding, and security 
of the GAC, Reinsurance Arrangement, or Plan is appropriate, but 
expanding permitted uses to purposes related to the administration, 
funding, or security of retirement benefits generally, as requested by 
MSKCC, is too broad. Therefore, Section III(j) of this exemption 
provides that ``neither MSKCC nor any related entity may use 
participant or beneficiary-related data, or information generated by or 
derived from the Reinsurance Arrangement for purposes unrelated to the 
administration, funding, or security of the GAC, Reinsurance 
Arrangement, or Plan.''
    The Department notes that this exemption does not permit the use of 
participant and beneficiary data in a way that primarily benefits 
MSKCC, the Captive, or the Fronting Insurer. Under this exemption, 
prohibited uses of participant and beneficiary data include, but are 
not limited to, selling the data to third parties, using the data to 
cross-sell services, or using the data to target participants and 
beneficiaries to attempt to sell them new products or services. MSKCC 
did not explain why they would need to use information derived from the 
Reinsurance Arrangement for more general purposes. Because the security 
of participant data is critically important to the Department, the Plan 
and participants and beneficiaries, the Department has construed its 
permitted uses as narrowly as possible.
4. Allow MSKCC To Take Dividends From the Captive
    Section III(p) of the proposed exemption states that ``MSKCC may 
not receive a dividend or any other form of distribution from the 
Captive at any point during the Reinsurance Arrangement.'' In its 
comment letter, MSKCC requests a revision that would allow it to 
receive dividends and distributions from the Captive, provided that 
MSKCC would contribute the majority of each such dividend or 
distribution as a benefit enhancement to another MSKCC-sponsored 
employee benefit plan under the Primary Benefits Test.
    Department's Response: The Department declines to make this 
requested change because there is no compelling reason to allow MSKCC 
to take distributions from the Captive. An essential purpose of this 
exemption is to ensure that Plan participants' and beneficiaries' 
pension benefits are as secure as possible. This objective is best 
achieved by ensuring that the assets formerly held in the Plan's trust 
that will be transferred to the Captive as part of the Reinsurance 
Arrangement remain in the Captive's reserves where they can be used to 
pay the retirement benefits of the participants and beneficiaries of 
this Plan. The Department notes that MSKCC does not provide any detail 
on the risk impact associated with allowing MSKCC to receive future 
distributions from the Captive. Furthermore, it is inappropriate for 
participants in another MSKCC-sponsored employee benefit plan to 
receive a portion of a dividend taken from the Captive before the 
Captive has satisfied all liabilities under the GAC.
    The Department also notes that MSKCC has consistently represented 
that the Captive will be funded on a break-even basis and that no 
excess assets are anticipated at the end of the Reinsurance 
Arrangement. If this is the case, then all Plan assets used to fund 
participant and beneficiary liabilities should remain in the Captive 
where they can be used to pay benefits to the participants and 
beneficiaries of this Plan--rather than as distributions to MSKCC and 
contributions to another plan.
5. Factual Accuracy
    Condition (k) of the proposed exemption provides that ``all the 
facts and representations set forth in the Summary of Facts and 
Representations must be true and accurate at all times.'' The Applicant 
requests that section (k) be modified to state, ``All the material 
facts and representations set forth in the Summary of Facts and 
Representations (as modified by the clarifications set forth in the 
comment letter submitted by the Applicant) must be true and accurate at 
all times;''
    The Department accepts the Applicant's request to modify Section 
(k) in part. Instead of expanding section (k) to incorporate all 
modifications noted in the Applicant's comment letter, the Department 
will expand Section (k) to incorporate all modifications from the 
proposed exemption, as detailed in this final exemption. Section (k) 
now states: ``All the material facts and representations set forth in 
the Background section of this exemption, including all modifications 
from the proposed exemption as detailed in this final exemption, must 
be true and accurate at all times[.]''
6. Factual Clarifications
    Paragraph 6 of the proposed exemption's Summary of Facts and 
Representations states, ``the Plan would purchase the GAC from the 
Fronting Insurer by using current Plan assets (including an in-kind 
transfer) to pay a one-time premium amount to the Fronting Insurer... 
Subsequently, the Fronting Insurer would transfer the premium amount 
paid by the Plan to the Captive where it would be held in reserve 
within the captive cell (MSK EB) throughout the duration of the 
Reinsurance Arrangement.''
    MSKCC requests a clarification that the insurance premium and the 
reinsurance premium may be paid concurrently and that the Captive is 
expected to use the assets received as reinsurance premium to 
collateralize its obligations under the Reinsurance Arrangement, in 
each case with such modifications as the Fronting Insurer's regulatory, 
accounting or commercial considerations may require.
    The Department accepts MSKCC's requested clarification but notes 
that in its application MSKCC stated that: ``The Fronter will purchase 
the reinsurance contract from MSK Insurance through a transfer from the 
Fronter to MSK Insurance of cash and, through an in-kind transfer, 
assets previously transferred from the Pension Plan.''

[[Page 3953]]

    Paragraph 8 of the proposed exemption's Summary of Facts and 
Representations states that ``as part of the Reinsurance Arrangement, 
the Captive would be collateralized by MSKCC, and all collateral will 
be separate and apart from the Plan assets used to purchase the GAC.'' 
Further, the second sentence of paragraph 8 states that ``collateral 
would be distinct from the reserves'' and that ``pursuant to the GAC, 
MSKCC would establish a collateral account that the Fronting Insurer 
can access: (1) in the event the Captive fails to make a required 
quarterly payment to the Fronting Insurer; or (2) to reduce the 
financial risk that would arise if, for example, the Captive is holding 
too large a portion of the reserves in illiquid investments.'' Finally, 
the fourth sentence of paragraph 8 states that ``the collateral 
requirements will be determined by the Fronting Insurer and will be 
based on the reserve requirements mandated by the State of Vermont.''
    MSKCC requests the following clarifications. First, to further 
support the Captive, MSKCC will capitalize the Captive in accordance 
with the requirements of the State of Vermont and will provide a 
guarantee for the benefit of the Fronting Insurer with respect to the 
Captive's obligations, and those assets will be separate and apart from 
the Plan assets used to purchase the GAC. Second, the Fronter will be 
required to carry statutory reserves on its financial statements in 
such amounts as the insurance law in its state of domicile may require, 
and the collateral requirements will be based on those reserve 
requirements. Third, the Fronting Insurer will have the right to access 
the collateral assets in accordance with the Reinsurance Arrangement. 
Collateral assets will back the Captive's reserves but will not be 
distinct from them. In addition, other assets of the Captive will 
support the Reinsurance Arrangement.
    Paragraph 6 of the proposed exemption states, ``[t]he Fronting 
Insurer would assume full responsibility for benefit obligations to 
participants and beneficiaries, without conditions or caveats, and the 
Captive would assume the reinsurance risk.'' However, paragraph 6 also 
states that ``. . . both the Fronting Insurer and the Captive would 
assume full responsibility for making pension benefit payments to 
participants and beneficiaries . . . the Fronting Insurer and the 
Captive would remain 100 percent liable for making benefit payments to 
participants and beneficiaries.''
    The Applicant states that, while it is correct that both the 
Fronting Insurer and the Captive are fully obligated to satisfy the 
benefit obligations, paragraph 6 of the Summary requires a technical 
modification in its description of the mechanism of those obligations. 
In this regard, (a) during the Buy-In Phase, the Fronting Insurer makes 
payments to the Plan; and (b) during the Buy-Out Phase, the Fronting 
Insurer makes benefit payments directly to participants and 
beneficiaries. During both phases, the Captive is fully obligated to 
make payments to the Fronting Insurer under the Reinsurance 
Arrangement. The Captive, thus, is fully obligated to satisfy the 
benefit obligations, but the mechanism of that obligation flows through 
the Fronting Insurer, rather than directly to participants and 
beneficiaries of the Plan.
    Department's Response: The Department accepts MSKCC's factual 
clarifications.
7. Scope of Exemptive Relief
    Section II of the proposed exemption would grant relief only under 
ERISA sections 406(a)(1)(D) and 406(b)(1), (2), and (3) and the 
parallel provisions in Code section 4975(c)(1)(D), (E), and (F). MSKCC 
states that it is plausible that certain aspects of the Reinsurance 
Arrangement could constitute a prohibited transaction under ERISA 
sections 406(a)(1)(A), (B), and (C) (and the parallel provisions under 
Code Sec. 4975). MSKCC requests that either (1) the exemption be 
expanded to provide relief under 406(a)(1)(A), (B), and (C), or (2) 
include an explanation from the Department that, in its view, the 
Reinsurance Arrangement (including the additional aspects to such 
arrangement described above) would not result in prohibited 
transactions under ERISA sections 406(a)(1)(A), (B), and (C) (and the 
parallel provisions under Code Sec. 4975), and thus no relief is needed 
for those sections.
    Department's Response: The Department agrees with the Applicant's 
request to expand the scope of relief under the exemption. The 
exemption now provides relief under ERISA sections 406(a)(1)(A), (B), 
and (D) and 406(b)(1), (2), and (3) and the parallel provisions of the 
Code. However, with respect to ERISA section 406(a)(1)(C), the 
Department expects MSKCC and the Captive to comply with the statutory 
exemption codified in ERISA section 408(b)(2) (and the regulations 
thereunder) for the provision of services to the Plan.\15\
---------------------------------------------------------------------------

    \15\ 29 CFR 2550.408(b)(2).
---------------------------------------------------------------------------

II. Comments From Participants

1. Why are participants and beneficiaries not receiving more?
    In their comment letters, several participants asked why they would 
not receive more than 51 percent of the savings MSKCC would realize 
through the Reinsurance Arrangement. One participant asked, ``how was 
this number arrived at? Why couldn't or shouldn't the plan participants 
receive a higher percentage? Would MSKCC still pursue this plan if 
participants were to receive 90% of the benefit?''
    Department's Response: The Department has crafted this exemption to 
ensure that: (1) plan participants and beneficiaries receive a greater 
financial benefit from the transaction than any financial savings or 
benefits accruing to MSKCC; and (2) the participants and beneficiaries 
are financially better off than they would have been in the absence of 
an exemption. The Department is granting this exemption, in large part, 
because the exemption meets these criteria. Moreover, the Department 
has no basis for believing that MSKCC would have agreed to give even 
greater benefits to the plan, its participants, and beneficiaries, much 
less 90 percent of all the cost savings associated with the captive 
arrangement.
    The Department continually requested that MSKCC increase the 
benefit enhancement provided under the exemption and the estimated 5.55 
percent benefit increase represents a substantial benefit enhancement 
for the Plan's participants and beneficiaries that will provide an 
estimated 5.55 percent increase in their monthly retirement annuity for 
the rest of their lives. As noted above, this benefit increase will 
result in an estimated $66,408,000 of additional benefits for 
participants and beneficiaries which will strengthen retirement 
security for these individuals. The Department also notes that this 
estimated 5.55 percent increase is consistent with the Primary Benefits 
Test used by the Department in its welfare benefit plan captive 
reinsurance cases.
    Moreover, the permanent 5.55 percent benefit increase is 
substantially more than MSKCC proposed to provide participants and 
beneficiaries when it submitted its exemption application to the 
Department. MSKCC initially proposed no benefit enhancements at all, 
arguing that the entirety of the financial benefit derived from using 
the Captive would inure to the Plan. The Department, however, pushed 
back on this position and argued that a discount on the purchase price 
of the GAC would

[[Page 3954]]

financially benefit MSKCC, as the plan sponsor, and not the Plan 
because the participants' and beneficiaries,' whose monthly pension 
benefits are set according to the Plan's benefit formula and would not 
be increased as a result of a discount to the group annuity purchase 
price.
    MSKCC subsequently amended its application to provide for the 
following two benefit enhancements: (1) a retirement planning program 
available upon election for participants and beneficiaries that would 
cost MSKCC $300 per election; and (2) an additional $2,000 incidental 
death benefit under the plan. The Department told MSKCC that these 
enhancements were insufficient for the Department to make its finding 
under ERISA section 408(a) and that it would not move forward with the 
exemption application unless MSKCC agreed to provide participants and 
beneficiaries with the majority of the financial benefits derived from 
using the Captive.
    Finally, the Department notes that absent this exemption, 
participants and beneficiaries would not receive any benefit increase 
when MSKCC terminates the plan and purchases a group annuity.
2. Can the Fronting Insurer sell the GAC to another insurer?
    One participant asked whether the Fronting Insurer would be able to 
transfer or sell the GAC after the exemption is granted. The Department 
posed this question to MSKCC and received the following response: ``The 
Fronting Insurer will commit irrevocably to provide the benefits under 
the terms of the contract and cannot sell the annuity to another 
insurance company. If the fronting insurer is itself bought by another 
insurance company or merges with another insurance company, the 
successor insurance company would also be bound by the contract's 
obligations.''
    As a new condition of this exemption, the group annuity contract 
between the Fronting Insurer and the Plan must include language that 
unequivocally prohibits the Fronting Insurer from selling or otherwise 
transferring the GAC to another insurer. The Department notes that the 
appointment of an independent IB 95-1 Fiduciary to prudently select the 
Fronting Insurer and GAC is an essential part of this exemption and 
allowing the Fronter to sell the GAC to another insurer after the 
Plan's acquisition of the GAC would not be protective of the 
participants and beneficiaries because the acquiring insurer might not 
meet the standards of IB 95-1.
3. Will a lump sum distribution option be provided under the GAC?
    Two participants asked whether MSKCC will retain the lump sum 
distribution option currently provided under the Plan in the GAC. The 
Department referred this question to MKSCC, and they confirmed that the 
lump sum distribution option will be retained in the GAC. To ensure 
this is the case, the Department has added a new condition to the 
exemption that requires the GAC to include a lump sum distribution 
option for all participants and beneficiaries who have the right to 
receive a lump sum distribution under the terms of the Plan.

III. Final Independent Fiduciary Report

    The Department has added a new Section III(i)(4) to provide 
specific requirements for the final Independent Fiduciary Report. In 
its final Independent Fiduciary Report, the Independent Fiduciary must 
determine that the plan termination, transfer of assets, and new 
contractual arrangements accord with all conditions of this exemption 
at the time of termination, and that it remains the case that the 
primary benefits of this arrangement are expected to go to the Plan's 
participants and beneficiaries for the entire duration of the 
arrangement. The Independent Fiduciary must also represent that MSKCC 
has not managed plan assets in a way that results in MSKCC receiving a 
greater benefit from this arrangement than plan participants and 
beneficiaries.
    The complete application file (D-12073) is available for public 
inspection in the Public Disclosure Room of the Employee Benefits 
Security Administration, Room N-1515, U.S. Department of Labor, 200 
Constitution Avenue NW, Washington, DC 20210. For a more complete 
statement of the facts and representations supporting the Department's 
decision to grant this exemption, please refer to the notice of 
proposed exemption published on July 9, 2024, at 89 FR 56422.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under ERISA section 408(a) does not relieve a fiduciary or other party 
in interest from certain requirements of other ERISA provisions, 
including but not limited to any prohibited transaction provisions to 
which the exemption does not apply and the general fiduciary 
responsibility provisions of ERISA section 404, which, among other 
things, require a fiduciary to discharge their duties respecting the 
plan solely in the interest of the plan's participants and 
beneficiaries and in a prudent fashion in accordance with ERISA section 
404(a)(1)(B).
    (2) As required by ERISA section 408(a), the Department hereby 
finds that the exemption is: (a) administratively feasible for the 
Department; (b) in the interests of the Plan and the Plan's 
participants and beneficiaries; and (c) protective of the rights of the 
Plan and the Plan's participants and beneficiaries.
    (3) This exemption is supplemental to, and not in derogation of, 
any other ERISA provisions, including statutory or administrative 
exemptions and transitional rules. Furthermore, the fact that a 
transaction is subject to an administrative or statutory exemption is 
not dispositive for determining whether the transaction is in fact a 
prohibited transaction.
    (4) The availability of this exemption is subject to the express 
condition that the material facts and representations contained in the 
application accurately describe all material terms of the transactions 
that are the subject of the exemption and are true at all times.
    Accordingly, after considering the entire record developed in 
connection with the Applicant's exemption application, the Department 
has determined to grant the following exemption under the authority of 
ERISA section 408(a) in accordance with the Department's exemption 
procedures set forth in 29 CFR part 2570, subpart B: \16\
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    \16\ 76 FR 66637, 66644 (October 27, 2011).
---------------------------------------------------------------------------

Exemption

Section I. Definitions

    (a) An ``affiliate'' of MSKCC, MSK US, or MSK EB includes: (1) any 
person or entity who controls MSKCC, MSK US, or MSK EB or is controlled 
by or under common control with MSKCC, MSK US, or MSK EB; (2) any 
officer, director, employee, relative, or partner with respect to 
MSKCC, MSK US, or MSK EB; and (3) any corporation or partnership of 
which a person described in (2) above in this paragraph is an officer, 
director, partner, or employee;
    (b) The term ``Benefit Enhancement'' means the benefit increase, as 
determined by the Independent Fiduciary based upon the Primary Benefits 
Test, that will be applied equally to all participants and 
beneficiaries across the Plan and last throughout the duration of the 
group annuity contract (the GAC) and Reinsurance Arrangement with no 
corresponding offsets or reductions;

[[Page 3955]]

    (c) The term ``Captive'' means MSK Employee Benefits IC, Inc., a 
segregated cell within MSK Insurance US, Inc., a captive insurance and 
reinsurance subsidiary that is wholly-owned by MSKCC and domiciled in 
the state of Vermont. MSK Employee Benefits IC, Inc. will be used to 
reinsure the risks related to the Reinsurance Arrangement;
    (d) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual; and
    (e) The term ``Independent Fiduciary'' means a person who:
    (1) Is not MSKCC or an affiliate of MSKCC, or the Captive and does 
not hold an ownership interest in MSKCC, the Captive, or their 
affiliates;
    (2) Was not a fiduciary with respect to the Plan before its 
appointment to serve as the Independent Fiduciary;
    (3) Has acknowledged in writing that:
    (i) It is a fiduciary and has agreed not to participate in any 
decision with respect to any transaction in which it has an interest 
that might affect its best judgment as a fiduciary; and
    (ii) Has appropriate technical training or experience to perform 
the services contemplated by this exemption;
    (4) For purposes of this definition, no organization or individual 
may serve as Independent Fiduciary for any fiscal year if the gross 
income received by such organization or individual from MSKCC, the 
Captive, or their affiliates for that fiscal year exceeds two percent 
of such organization's or individual's gross income from all sources 
for the prior fiscal year. This provision also applies to a partnership 
or corporation of which such organization or individual is an officer, 
director, or 10 percent or more partner or shareholder and includes as 
gross income amounts received as compensation for services provided as 
an independent fiduciary under any prohibited transaction exemption 
granted by the Department;
    (5) No organization or individual that is an Independent Fiduciary 
and no partnership or corporation of which such organization or 
individual is an officer, director, or ten percent or more partner or 
shareholder may acquire any property from, sell any property to, or 
borrow any funds from MSKCC, the Captive, or their affiliates while the 
individual serves as an Independent Fiduciary. This prohibition will 
continue for a period of six months after the party ceases to be an 
Independent Fiduciary and/or the Independent Fiduciary negotiates any 
transaction on behalf of the Plan during the period that the 
organization or individual serves as an Independent Fiduciary; and
    (6) In the event a successor Independent Fiduciary is appointed to 
represent the interests of the Plan with respect to the subject 
transaction, no time should elapse between the resignation or 
termination of the former Independent Fiduciary and the appointment of 
the successor Independent Fiduciary.

Section II. Covered Transactions

    This exemption provides relief from the prohibited transactions 
provisions of ERISA sections 406(a)(1)(A), (B), and (D), and 406(b)(1), 
(b)(2), and (b)(3), and the excise tax imposed by Code section 4975(a) 
and (b) (due to the operation of parallel prohibited transaction 
provisions contained in Code section 4975(c)(1) (A), (B), (D), (E), and 
(F)) with respect to: (1) the reinsurance of risks; and (2) the receipt 
of a premium by the Captive in connection with a single premium group 
insurance contract sold by an unrelated fronting insurer (the Fronting 
Insurer) to provide pension annuities to Plan participants and 
beneficiaries. To receive this relief, the conditions in Section III 
must be met in conformance with the definitions in Section I.

Section III. Conditions

    (a) MSKCC must amend the Plan document to provide a universal 
benefit increase to all participants and beneficiaries that will apply 
immediately once the GAC is purchased and will continue with no 
reduction or offsets for the remainder of the participants and 
beneficiaries' lives (the Benefit Enhancement). The additional benefit 
provided by the Benefit Enhancement to participants and beneficiaries 
must be greater than 51 percent of the total benefit, including cost 
savings, derived by MSKCC from the Reinsurance Arrangement (the Primary 
Benefits Test). In addition, MSKCC must include an additional 
$1,968,000 in the GAC as a second-layer benefit increase that will 
further permanently increase the monthly pension benefit of all 
participants and beneficiaries covered by the Plan. This second layer 
benefit enhancement represents the present value of the expected 
Independent Fiduciary's fees over the projected life of the GAC;
    (b) Following the Plan's purchase of the GAC from the Fronting 
Insurer and the consummation of the Reinsurance Arrangement between the 
Fronting Insurer and the Captive, the Independent Fiduciary must 
prudently and loyally determine the Primary Benefits Test has been met. 
The Independent Fiduciary must submit its determination in writing to 
the Department within 30 days after the GAC is entered into. In this 
written determination, the Independent Fiduciary must confirm the 
actual cost savings associated with the Reinsurance Arrangement by 
obtaining documentation from the Fronting Insurer that compares the 
cost to purchase the GAC without the Captive in place to the cost to 
purchase the GAC with the Captive in place. The Independent Fiduciary 
must include this documentation from the Fronting Insurer with its 
written determination to the Department;
    (c) The Captive or MSK US Insurance US, Inc. must:
    (1) Be a party in interest with respect to the Plan based on an 
affiliation with MSKCC that is described in ERISA section 3(14)(G);
    (2) Be licensed to sell insurance or conduct reinsurance operations 
in Vermont;
    (3) Have obtained a Certificate of Authority from the Insurance 
Commissioner of Vermont to transact business as a captive insurance 
company and such certificate must not have been revoked or suspended;
    (4) Have undergone a financial examination (within the meaning of 
the law of its domiciliary State, Vermont) by the Insurance 
Commissioner of Vermont within five years before the end of the year 
preceding the year in which the reinsurance transaction occurred;
    (5) Have undergone, and continue to undergo, an examination by an 
independent certified public accountant for its last completed taxable 
year immediately before the taxable year of the Reinsurance Arrangement 
covered by this exemption; and
    (6) Be licensed to conduct reinsurance transactions by a state 
whose law requires an actuarial review of reserves to be conducted 
annually by an independent firm of actuaries and reported to the 
appropriate regulatory authority;
    (d) The Plan must pay no commissions with respect to the purchase 
of the GAC or the Reinsurance Arrangement;
    (e)(1) The Fronting Insurer and GAC must be selected by Fiduciary 
Counselors, an independent fiduciary to the Plan, in compliance with 
the Department's Interpretive Bulletin 95-1 (29 CFR 2509-95-1). Within 
30 days after the GAC is entered into, Fiduciary Counselors must submit 
a written report to the Department that identifies the Fronting Insurer 
selected, details the methodology used to select the Fronting Insurer, 
and explains how Fiduciary Counselors determined that the selected 
Fronting Insurer and GAC meet the

[[Page 3956]]

requirements of IB 95-1. Fiduciary Counselors must also represent in 
writing to the Department that it would have been consistent with IB 
95-1 to select the Fronting Insurer as the insurer for a final 
termination buy-out annuity had MSKCC adopted that approach. To meet 
its fiduciary responsibility owed to the Plan's participants and 
beneficiaries to select and purchase the ``safest available annuity,'' 
before selecting the Fronting Insurer, Fiduciary Counselors must 
evaluate such insurer's claims-paying ability and creditworthiness in 
full compliance with guidance provided in the Department's Interpretive 
Bulletin 95-1;
    (f) (1) The Reinsurance Arrangement between MSK US and the Fronting 
Insurer must be indemnity insurance only and must not relieve the 
Fronting Insurer from any responsibility or liability to the Plan's 
participants and beneficiaries, including any liability that would 
result if MSK US fails to meet any of its contractual obligations to 
the Fronting Insurer or any successor Fronting Insurer under the 
Reinsurance Arrangement;
    (2) The Fronting Insurer must have a direct contractual 
relationship with the Plan during the Buy-In phase of the GAC and with 
the Plan's participants and beneficiaries after MSKCC exercises the 
Conversion Option under the GAC when it terminates the Plan, without 
any caveats, contingencies, or conditions that would relieve or limit 
the Fronting Insurer's contractual obligation to pay benefits to the 
Plan's participants and beneficiaries in accordance with the Plan and 
the terms of this exemption;
    (g) MSKCC must not offset or reduce any benefits provided to Plan 
participants and beneficiaries in relation to its implementation of the 
Benefit Enhancement at any time. In this regard, MSKCC must not 
implement any benefit cuts or offsets of any kind to the benefits the 
Plan provides to any Plan participant or beneficiary;
    (h) The Independent Fiduciary must:
    (1) In compliance with its fiduciary obligations of prudence and 
loyalty under ERISA sections 404(a)(1)(A) and (B): (i) review the 
Reinsurance Arrangement and the terms of the exemption; (ii) obtain and 
review all current objective, reliable, third-party documentation 
necessary to make the determinations required of the Independent 
Fiduciary by the exemption; and (iii) confirm in writing that all of 
the exemption's terms and conditions have been met (or, due to timing 
requirements, can reasonably be expected to be met consistent with the 
terms of the exemption) and send this confirmation to the Department's 
Office of Exemption Determinations not later than 30 days after the 
Captive enters into the Reinsurance Arrangement. In this written 
report, the Independent Fiduciary must also confirm that the Fronting 
Insurer and GAC selected, and the methodology used by Fiduciary 
Counselors to make the selection, meet the requirements of IB 95-1 and 
that it would have been consistent with IB 95-1 to select the Fronting 
Insurer as the insurer for a final termination buy-out annuity had 
MSKCC adopted that approach;
    (2) Approve the Reinsurance Arrangement in advance and ensure that 
the Reinsurance Arrangement is in the interest of the Plan's 
participants and beneficiaries and protective of the Plan's 
participants and beneficiaries;
    (3) As long as the Plan remains active, monitor, enforce, and 
ensure compliance with all conditions of this exemption in accordance 
with its obligations of prudence and loyalty under ERISA sections 
404(a)(1)(A) and (B), including all conditions and obligations imposed 
on any party dealing with the Plan, throughout the period during which 
the Captive's assets are directly or indirectly used in connection with 
a transaction covered by this exemption;
    (4) Represent and protect the interests of the participants and 
beneficiaries of the Plan when the plan is active during the Buy-In 
Phase to ensure they receive everything that they are entitled to 
receive under this exemption, the terms of the Plan, and the GAC;
    (5) Monitor and ensure that any assets that remain in the Plan 
during the Buy-In Phase of the Reinsurance Arrangement are managed and 
used exclusively to provide benefits to Plan participants and 
beneficiaries and to defray reasonable expenses of administering the 
Plan in compliance with ERISA sections 403(c)(1) and 404(a)(1)(A);
    (6) Report any instance of non-compliance immediately to the 
Department's Office of Exemption Determinations until the Plan is 
terminated;
    (7) Take all appropriate actions to safeguard the interests of the 
Plan and its participants and beneficiaries until the Plan is 
terminated; and
    (8) Review all contracts pertaining to the Reinsurance Arrangement, 
and any renewals of such contracts, to determine whether the 
requirements of this exemption and the terms of Benefit Enhancement 
continue to be satisfied until the Plan is terminated;
    (i)(1) The Independent Fiduciary must submit annual Independent 
Fiduciary Reports to the Department's Office of Exemption 
Determinations as long as the plan remains active, certifying under 
penalty of perjury whether each term and condition of the exemption has 
been met over the applicable period. Each Report must be completed 
within six months after the end of the twelve-month period to which it 
relates (the first twelve-month period would begin on the effective 
date of the exemption grant); and submitted to the Department's Office 
of Exemption Determinations within 60 days thereafter;
    (2) In preparing the Independent Fiduciary Report, the Independent 
Fiduciary must:
    (i) Review the Captive's annual audit and actuarial reports as 
submitted to the Vermont Department of Financial Regulation (Vermont 
DFR);
    (ii) Review any Certificate of Good Standing received by the 
Captive;
    (iii) Review any Exam Report completed by the Vermont DRF and 
include a detailed summary of the Exam Report;
    (iv) Confirm that MSKCC has not reduced or offset any benefits in 
relation to its implementation of the Benefit Enhancement; and
    (v) Confirm that MSKCC has not reduced the Benefit Enhancement 
amount at any point during the year covered.
    (3) The Independent Fiduciary must confirm in each Report that the 
Primary Benefits Test was met for the covered year. In this regard, the 
Independent Fiduciary must determine the value of the Benefit 
Enhancement and the total value of the Reinsurance Arrangement to 
MSKCC, including cost savings, and confirm that MSKCC has not received 
any additional financial benefit that the Independent Fiduciary did not 
account for when it previously used the Primary Benefits Test to derive 
the Benefit Enhancement amount;
    (4) In its final independent fiduciary report, the Independent 
Fiduciary must determine that the plan termination, transfer of assets, 
and new contractual arrangements accord with all conditions of this 
exemption at the time of termination, and that it remains the case that 
the primary benefits of this arrangement are expected to go to the plan 
for the entire duration of the arrangement. The Independent Fiduciary 
must also represent that MSKCC has not managed plan assets in a way 
that results in MSKCC receiving a greater benefit from this arrangement 
than plan participants and beneficiaries;
    (j) Neither MSKCC nor any related entity may use participant or 
beneficiary-related data or information

[[Page 3957]]

generated by or derived from the Reinsurance Arrangement for purposes 
unrelated to the administration, funding, or security of the GAC, 
Reinsurance Arrangement, or Plan;
    (k) All the material facts and representations set forth in the 
Background section of this exemption, including all modifications from 
the proposed exemption as detailed in this final exemption, must be 
true and accurate at all times;
    (l) No party related to this exemption request has or will 
indemnify the Independent Fiduciary or the IB 95-1 Independent 
Fiduciary, in whole or in part, for negligence and/or for any violation 
of state or federal law that may be attributable to the Independent 
Fiduciary's or IB 95-1 Independent Fiduciary's performance of its 
duties in connection with the Reinsurance Arrangement. In addition, no 
contract or instrument may purport to waive any liability under state 
or federal law for any such violations;
    (m) MSKCC must provide the Department's Office of Exemption 
Determinations with all Exam Reports issued by the State of Vermont 
throughout the duration of the Reinsurance Arrangement within 30 days 
after such Exam Report is received;
    (n) The Captive must request a Certificate of Good Standing from 
the State of Vermont on an annual basis;
    (o) MSKCC must notify the Department's Office of Exemption 
Determinations if there is any change in the Captive's business plan, 
auditor, or the composition of its board of directors;
    (p) MSKCC may not receive a dividend or any other form of 
distribution from the Captive at any point during the Reinsurance 
Arrangement;
    (q) MSKCC and the Captive must maintain all the records necessary 
to demonstrate that the conditions of this exemption have been met for 
a period of six years from the date of each record. MSKCC must provide 
these records to the Department's Office of Exemption Determinations 
within 30 days from the date of a request by the Department;
    (r) MSKCC must provide a Parental Guarantee to the Captive and 
provide cash as needed if the Captive's general and separate account 
asset balances have been extinguished;
    (s) The Captive must invest the reserves in accordance with the 
regulations and under the supervision of the State of Vermont;
    (t) MSKCC must amend the Plan document to memorialize the Benefit 
Enhancement and provide a copy of the amended plan document to the 
Department's Office of Exemption Determinations no later than 30 days 
after the date the Captive enters into the Reinsurance Arrangement;
    (u) After the Buy-In phase for the Reinsurance Arrangement is 
completed and MSKCC exercises the Conversion Option, MSKCC will 
terminate the Plan in compliance with all applicable Code and ERISA 
requirements;
    (v) MSKCC must notify the Department of any change in the 
Independent Fiduciary no later than 30 days after the engagement of a 
substitute or subsequent Independent Fiduciary and must explain the 
substitution or change, including a description of any material 
disputes between the terminated Independent Fiduciary and MSKCC;
    (w) Once the Benefit Enhancement percentage amount is set (in 
conformity with the Primary Benefits Test), MSKCC may not reduce that 
Benefit Enhancement percentage amount at any point;
    (x) The GAC between the Fronting Insurer and the Plan must include 
language that unequivocally prohibits the Fronting Insurer from selling 
or otherwise transferring the GAC to another insurer; and
    (y) The GAC must include a lump sum distribution option for all 
participants and beneficiaries who have the right to receive a lump sum 
distribution under the Plan.
    Effective Date: This exemption is in effect on January 15, 2025.

    Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
[FR Doc. 2025-00813 Filed 1-14-25; 8:45 am]
BILLING CODE 4510-29-P
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