[Federal Register Volume 60, Number 147 (Tuesday, August 1, 1995)]
[Proposed Rules]
[Pages 39208-39214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18749]
[[Page 39207]]
_______________________________________________________________________
Part II
Department of Labor
_______________________________________________________________________
Pension and Welfare Benefits Administration
_______________________________________________________________________
29 CFR Part 2510
Plans Established or Maintained Pursuant to Collective Bargaining
Agreements; Proposed Rule
Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 /
Proposed Rules
[[Page 39208]]
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
29 CFR Part 2510
RIN 1210-AA48
Proposed Regulation for Plans Established or Maintained Pursuant
to Collective Bargaining Agreements Under Section 3(40) (A)
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains a proposed regulation under the
Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C.
1001-1461 (ERISA or the Act), setting forth specific criteria that must
be met in order for the Secretary of Labor (the Secretary) to find that
an agreement is a collective bargaining agreement for purposes of this
section. The proposed regulation also sets forth criteria for
determining when an employee benefit plan is established or maintained
under or pursuant to such an agreement. Employee 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.
DATES: Written comments concerning this proposed rule must be received
by October 2, 1995.
ADDRESSES: Interested persons are invited to submit written comments
(preferably three copies) concerning the proposals herein to: Pension
and Welfare Benefits Administration, Room N-5669, U.S. Department of
Labor, 200 Constitution Ave., N.W., 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, U.S. Department of Labor, Room N-5638, 200
Constitution Ave., N.W., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT:
Mark Connor, Office of Regulations and Interpretations, Pension and
Welfare Benefits Administration, U.S. Department of Labor, Rm N-5669,
200 Constitution Ave., N.W., Washington, DC 20210 (telephone (202) 219-
8671) or Cynthia Caldwell Weglicki, Office of the Solicitor, Plan
Benefits Security Division, U.S. Department of Labor, Rm N-4611, 200
Constitution Ave., N.W., Washington, DC 20210 (telephone (202) 219-
4592). These are not toll-free numbers.
SUPPLEMENTARY INFORMATION:
A. Background
Notice is hereby given of a proposed regulation under 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 benefit plans are generally preempted by ERISA. Section 514(b)
sets forth exceptions to the general rule of section 514(a) and
subjects employee 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 insurance laws that allows states to exercise
regulatory authority over employee welfare benefit plans that are
MEWAs. 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). MEWAs which are not employee benefit plans are
unconditionally subject to state law.
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The Multiple Employer Welfare Arrangement Act legislation 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.
Id. As a result of the addition of section 514(b)(6), certain state
laws regulating insurance apply to employee benefit plans that are
MEWAs. However, the definition of a MEWA in section 3(40) provides that
an employee benefit plan is not a MEWA if it is established or
maintained pursuant to an agreement which the Secretary finds to be a
collective bargaining agreement. Such a plan is therefore not subject
to state insurance law regulation under section 514(b)(6). This
exclusion is necessary to avoid disrupting the activities of legitimate
Taft-Hartley plans.
[[Page 39209]]
While the Multiple Employer Welfare Arrangement Act of 1983
significantly enhanced the states' ability to regulate MEWAs, problems
in this area continue to exist as the result of the exception for
collectively bargained plans contained in the 1983 amendments. This
exception 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
arrangements as vehicles for marketing health care coverage nationwide
to employees and employers with no relationship to the bargaining
process or the underlying 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, 910 (1994) (denying motion for mandamus and
granting leave to amend complaint), summary judgement granted sub
nom. Virginia Beach Policemen's Benevolent Association, et al., v.
Reich, 881 F. Supp. 1059 (E.D.Va. 1995); Amalgamated Local Union No.
355 v. Gallagher, No. 91 CIV 0193(RR) (E.D.N.Y. April 15, 1991).
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The Department believes that regulatory guidance in this area is
necessary to ensure that (1) state insurance regulators have
ascertainable guidelines to help identify and regulate MEWAs operating
in their jurisdiction and (2) sponsors of employee health benefit
programs will be able to determine independently whether their plans
are established or maintained pursuant to collective bargaining
agreements for purposes of section 3(40)(A) without imposing the
additional burden of having to apply to the Secretary for an individual
finding.\3\
\3\It is the Department's position that the language of section
3(40) of ERISA does not require the Secretary to make individual
findings that specific agreements are collective bargaining
agreements. Moreover, a district court recently found that the
Secretary has no ``statutory responsibility'' to make individualized
findings. Virginia Beach Policeman's Benevolent Association v.
Reich, 881 F. Supp. 1059, 1069-70 (E.D.Va. 1995).
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The proposed regulation first establishes specific criteria that
the Secretary finds must be present in order for an agreement to be a
collection bargaining agreement for purposes of section 3(40) and,
second, establishes certain criteria applicable to determining when an
employee benefit plan or other arrangement is established or maintained
under or pursuant to such an agreement for purposes of section 3(40).
In this regard, the Department notes that section 3(40) not only
requires the existence of a bona fide collective bargaining agreement,
but also requires that the plan be ``established or maintained''
pursuant to such an agreement. The Department believes that, in
establishing the exception under section 3(40)(A)(i) of the Act,
Congress intended to accommodate only those plans established or
maintained to provide benefits to bargaining unit employees on whose
behalf the plans where collectively bargained. For this reason, the
Department believes that the exception under section 3(40)(A)(i) should
be limited to plans providing coverage primarily to those individuals
covered under collective bargaining agreements. Accordingly, the
criteria in the proposed regulation relating to whether a plan or other
arrangement qualifies as ``established or maintained'' is intended to
ensure that the statutory exception is only available to plans whose
participant base is predominately comprised of the bargaining unit
employees on whose behalf such benefits were negotiated.
The proposed regulation would, upon adoption, constitute the
Secretary's finding for purposes of determining whether an agreement is
a collective bargaining agreement pursuant to section (3(40) of the
Act. The Department does not intend to make individual findings or
determinations concerning an entity's compliance with the proposed
regulation. The criteria contained in the proposed regulation are
designed to enable entities and state insurance regulatory agencies to
determine whether the requirements of the statute are met. Under the
proposed regulation, entities seeking to comply with these criteria
must, upon request, provide documentation of their compliance with the
criteria to the state or state agency charged with investigating and
enforcing state insurance laws.
B. Description of the Proposal
Proposed Sec. 2510.3-40(a) follows the language of section 3(40)(A)
of the Act and states that the term multiple employer welfare
arrangement does not include an employee welfare benefit plan which is
established or maintained under or pursuant to one or more agreements
which the Secretary finds to be collective bargaining agreements.
Proposed Sec. 2510.3-40(b) provides criteria which the Secretary finds
to be essential for an agreement to be collectively bargained for
purposes of section 3(40)(A) of the Act. Proposed Sec. 2510.3-40(c)
sets forth requirements concerning individuals covered by the employee
welfare benefit plan that must be satisfied in order for an employee
welfare benefit plan to be considered established or maintained under
or pursuant to a collective bargaining agreement as defined in
Sec. 2510.3-40(b). Proposed Sec. 2510.3-40(d) provides definitions of
the terms ``employee labor organization'' and ``supervisors and
managers'' for purposes of this section. Proposed Sec. 2510.3-40(e)
explains that a plan does not satisfy the requirements of this section
if the plan or any entity associated with the plan (such as the
employee labor organization or the employer) fails or refuses to comply
with the requests of a state or state agency with respect to any
documents or other evidence in its possession or control that are
necessary to make a determination concerning the extent to which the
plan is subject to state insurance law. Proposed Sec. 2510.3-40(f)
provides that, in a proceeding brought by a state or state agency to
enforce the insurance laws of the state, nothing in the proposed
regulation shall be construed to prohibit allocation of the burden of
proving the existence of all the criteria required by this section to
the entity seeking to be treated as other than a MEWA.
Under the proposed regulation, a plan that fails to meet the
applicable criteria would be a MEWA and thus subject to state insurance
laws as provided in section 514(b)(6) of ERISA.
Each subsection of the proposed regulation is described in detail
below.
1. General Rule and Scope
Proposed regulation 29 CFR 2510.3-40 establishes criteria which
must be met for a plan to be established or maintained under or
pursuant to one or more agreements which the Secretary finds to be
collective bargaining agreements for purposes of section 3(40) of the
Act. The proposed regulation is not intended to apply to or affect any
other provision of federal law.\4\
\4\The Department notes that section 3(40) of ERISA is not the
only provision that provides special rules to be applied to
agreements that the Secretary finds to be collectively bargained.
For example, sections 404(a)(1) (B) and (C) of the Internal Revenue
Code (Code) provide special rules to determine the maximum amount of
deductible contributions in the case of amendments to plans that the
Secretary of Labor finds to be collectively bargained. In addition,
Code sections 410(b)(3) and 413(a) exclude from minimum coverage
requirements certain employees covered by an agreement that the
Secretary finds to be a collective bargaining agreement.
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In the Department's view, the exclusion of collectively bargained
plans or other arrangements from the definition of a MEWA in section
3(40)(A) is an exception to the general statutory rule. Thus the entity
asserting the applicability of the provisions concerning collectively
bargained plans
[[Page 39210]]
in section 3(40) has the burden of providing evidence of compliance
with the conditions of the statutory exception and the criteria set
forth in the proposed regulation.\5\ Accordingly, if an entity's status
as established or maintained pursuant to one or more agreements which
satisfy the criteria of the proposed regulation is challenged by a
state or state agency, the entity seeking to be treated as other than a
MEWA must produce sufficient evidence to establish that all of the
requirements of the proposed regulation have been met.\6\
\5\2A Sutherland Statutory Construction Sec. 47.11 (Norman J.
Singer ed. 5th ed. 1992); United States v. First City National Bank
of Houston, 386 U.S. 361, 366 (1967) (burden of establishing
applicability of statutory exception is on entity that asserts it);
Federal Trade Commission v. Morton Salt Co., 334 U.S. 37, 44-45
(1948) (``First, the general rule of statutory construction [is]
that the burden of proving justification or exemption under a
special exception to the prohibitions of a statute generally rests
on one who claims its benefits * * *.'')
\6\See Donovan v. Cunningham, 716 F. 2d 1455, 1467-68 n.27 (5th
Cir. 1983) (citing Securities and Exchange Commission v. Ralston
Purina Co., 346 U.S. 119, 126 (1953), ``As the Supreme Court has
observed in a different context, it seems `fair and reasonable' to
place the burden of proof upon a party who seeks to bring his
conduct within a statutory exception to a broad remedial scheme.'')
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2. Definition of a Collective Bargaining Agreement
Proposed Sec. 2510.3-40(b) establishes criteria that an agreement
must meet in order to be a collective bargaining agreement for purposes
of this section. An agreement constitutes a collective bargaining
agreement only if the agreement is in writing and is executed by or on
behalf of an employer of employees described in Sec. 2510.3-40(c)(1)
and by representatives of an employee labor organization meeting the
requirements of Sec. 2510.3-40(d)(1). In addition, the agreement must
also be the result of good faith, arms-length bargaining binding
signatory employers and the employee labor organization to the terms of
the agreement for a specified project or period of time, and the
agreement must be one which cannot be unilaterally amended or
terminated. The Department notes that agreements in which an employer
adopts all provisions of an existing agreement binding an employer and
an employee labor organization to the terms and conditions of a
collective bargaining agreement, such as a pattern agreement, will not
fail to satisfy the requirements of proposed Sec. 2510.3-40(b) if the
original agreement as initially adopted satisfied the requirements of
this section. The Department has also determined that collective
bargaining agreements containing an agreement not to strike and
providing that the collective bargaining agreement will terminate upon
the initiation of a strike, often called ``no strike'' provisions, will
not fail to satisfy the proposed regulation solely by reason of such
provisions.
Proposed Sec. 2510.3-40(b)(6) requires that a collective bargaining
agreement may not provide for termination of the agreement solely as a
result of the failure to make contributions to the plan. Proposed
Sec. 2510.3-40(b)(7) provides that an agreement will not constitute a
collective bargaining agreement under this section if, in addition to
the provision of health coverage, the agreement encompasses only the
minimum requirements mandated by law with respect to the terms and
conditions of employment (e.g., minimum wage and workers'
compensation). The phrase ``terms and conditions of employment'' as
used in the proposed regulation is intended to have the same meaning
and application as in case law decided under the National Labor
Relations Act, 29 U.S.C. Sec. 151 et seq. (NLRA), and would include
wages, hours of work and other matters of employment such as grievance
procedures and seniority rights. For purposes of this section, the
expiration of a collective bargaining agreement will not in and of
itself prevent the agreement from satisfying the requirements under the
proposed regulation if the agreement, although expired, continues in
force.
3. Plans Established or Maintained
The proposed regulation also establishes certain criteria to
determine when a plan is established or maintained under or pursuant to
one or more collective bargaining agreements for purposes of section
3(40). Proposed Sec. 2510.3-40(c) provides that in situations where a
plan covers both individuals who are members of a group or bargaining
unit represented by an employee labor organization as defined in
proposed Sec. 2510.3-40(d)(1) as well as other individuals, the plan
will not be considered to be established or maintained pursuant to one
or more collective bargaining agreements unless no less than 85% of the
individuals covered by the plan are present or certain former employees
and their beneficiaries, excluding supervisors and managers as defined
in paragraph (d)(2), who are currently or who were previously covered
by a collective bargaining agreement.\7\ In addition, three groups of
individuals may participate in the plan but are not counted in
determining the total number of individuals covered by the plan for
purposes of calculating the 85% limitation: (1) Present or former
employees of the plan or of a related plan established or maintained
pursuant to the same collective bargaining agreement; (2) present or
former employees of the employee labor organization as defined in
paragraph (d)(1) that is a signatory to the collective bargaining
agreement pursuant to which the plan is maintained, and (3)
beneficiaries of individuals in groups (1) and (2).
\7\Although the proposed regulation itself does not impose any
specific restrictions concerning individuals who may be included in
the 15%, the entity as a whole must comply with the requirements of
section 3(1) of ERISA in order to be an employee welfare benefit
plan covered by the Act. Section 3(1) provides that status as an
ERISA covered plan is dependent on the composition and attributes of
the participant base as well as the characteristics of the employer
and employee organization. See, e.g., Bell v. Employee Security
Benefits Association, 437 F. Supp. 382 (1977); Advisory Opinion 93-
32 (letter to Mr. Kevin Long, December 16, 1993); Advisory Opinion
85-03A (letter to Mr. James Ray, January 15, 1985); Advisory Opinion
77-59 (letter to Mr. William Hager, August 26, 1977).
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For purposes of the proposed regulation, the term ``former
employee'' is limited to individuals who are receiving workers'
compensation or disability benefits, continuation coverage pursuant to
the Consolidated Omnibus Budget Reconciliation Act (COBRA) (Part 6 of
title I of ERISA, 29 U.S.C. Secs. 1161-1168), or who have retired or
separated from employment after working for more than 1000 hours a year
for at least three years for a signatory employer or employee
organization, or the plan or related plan. For purposes of paragraph
(c)(4), to be considered an employee of the plan, a related plan, or
the signatory employee labor organization, an individual must work a
least (A) 15 hours a week or 60 hours a month during the period of
coverage under the plan, or (B) have worked at least 1000 hours in the
last year and currently be on bona fide leave based on sickness or
disability of the individual or the individual's family or on earned
vacation time.
The proposed regulation requires that the plan satisfy the 85%
limitation on the last day of each of the previous five calendar
quarters unless the plan has not been in existence for five calendar
quarters. If the plan or other arrangement has been in existence for a
shorter period of time, it must satisfy the 85% limitation on the last
day of each calendar quarter during which it has been in existence.
Through the requirement that no less than 85% of individuals
covered by the plan be present or former bargaining
[[Page 39211]]
unit members, the proposed regulation intends to treat as MEWAs
arrangements that permit individuals to participate in an employee
welfare benefit plan solely as a result of membership or affiliation
with an entity and not as a result of the individuals being
legitimately represented in collective bargaining by a bona fide
employee labor organization.\8\ The Department believes that the 85%
limitation in the proposed regulation is consistent with the purpose of
the statutory exception in section 3(40)(A)(i) of ERISA for employee
welfare benefit plans which are established or maintained as the result
of collective bargaining on behalf of employees concerning the terms
and conditions of their employment. To the extent that the Department's
position as indicated in Advisory Opinion 9106A (January 15, 1991) to
Gerald Grimes, Oklahoma Insurance Commissioner (concerning a trust that
provided health care and other benefits to ``associate members'' of a
labor organization who were not represented by the organization in
collective bargaining), appears to express a different position, it
would be superseded by the adoption of a final regulation that
incorporates this requirement.
\8\A number of instances have been brought to the Department's
attention where entities have attempted to utilize purported
collective bargaining agreements as a basis for marketing insurance
coverage, generally under the guise of ``associate membership,'' to
non-bargaining unit individuals and unrelated employers. See, e.g.,
Empire Blue Cross and Blue Shield v. Consolidated Welfare, 830 F.
Supp. 170 (E.D.N.Y. 1993).
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4. Definition of Employee Labor Organization
Proposed Sec. 2510.3-40(d)(1) defines the term ``employee labor
organization'' for purposes of this section. Proposed Sec. 2510.3-
40(d)(1)(i) provides that, with respect to a particular collective
bargaining agreement, an employee labor organization must represent the
employees of each signatory employer in one of two ways. All of a
signatory employer's bargaining units covered by the collective
bargaining agreement must either be certified by the National Labor
Relations Board, or the employee labor organization must be lawfully
recognized by the signatory employer as the exclusive representative
for the employer's bargaining unit employees covered by the collective
bargaining agreement. Such representation must take place without
employer interference or domination. For purposes of the proposed
regulation, employer interference or domination in the formation,
administration, or operation of the employee labor organization
includes taking an active part in organizing an employee organization
or committee to represent employees; bringing pressure upon employees
to join an employee organization; improperly favoring one of two or
more employee organizations that are competing to represent employees;
or otherwise unlawfully promoting or assisting in the formation or
operation of the employee organization.
Under proposed Sec. 2510.3-40(d)(1)(ii), an employee labor
organization must operate for a substantial purpose other than that of
offering or providing health coverage. Proposed Sec. 2510.3-
40(d)(1)(iii) states that an employee labor organization may not pay
commissions, fees, or bonuses to individuals other than full-time
employees of the employee labor organization in connection with the
solicitation of employers or participants with regard to a collectively
bargained plan. In addition, under subsection (d)(1)(iv), the term
``employee labor organization'' does not include an organization that
utilizes the services of licensed insurance agents or brokers for
soliciting employers or participants in connection with a collectively
bargained plan. Proposed Sec. 2510.3-40(d)(1)(v) requires an employee
labor organization to be a ``labor organization'' as defined in section
3(i) of the Labor-Management Reporting and Disclosure Act, 29 U.S.C.
402(i). Proposed Sec. 2510.3-40(d)(1)(vi) also requires an employee
labor organization to qualify as a tax-exempt labor organization under
section 501(c)(5) of the Internal Revenue Code of 1986. It is the view
of the Department that these criteria are necessary to distinguish
organizations that provide benefits through legitimate employee
representation from organizations that are primarily in the business of
marketing commercial insurance products.
5. Supervisors and Managers
Proposed Sec. 2510.3-40(d)(2) defines the terms ``supervisors and
managers'' for purposes of this section. Proposed Sec. 2510.3-40(d)(2)
defines as ``supervisors and managers'' those employees of a signatory
employer to a collective bargaining agreement who, acting on behalf of
the employer, have the authority to hire, transfer, suspend, layoff,
recall, promote, discharge, assign, reward, or discipline other
employees, or who have responsibility to direct other employees or to
adjust their grievances, or who have power to make effective
recommendations concerning any of the actions described above. In order
to be considered a supervisor or manager, an individual must be able to
use independent judgment in the exercise of authority, responsibility,
and power, and that exercise must be more than a routine or clerical
function.
6. Failure To Provide Documents
The proposed regulation provides that even if a plan meets the
requirements of subsections 2510.3-40 (b) and (c) of this section, it
will not be considered to be established or maintained pursuant to an
agreement that the Secretary finds to be a collective bargaining
agreement if an entity, plan, employee labor organization or employer
which is a party to the agreement fails or refuses to provide documents
or evidence in its possession or control to a state or state agency
which reasonably requests documents or evidence in order to determine
the status of any entity either under the proposed regulation or under
state insurance laws. While the proposed regulation enumerates criteria
designed to enable entities to determine whether the requirements of
the statute are met, the Department intends that, when requested to do
so, entities will provide documentation of their compliance with the
criteria to the state or state agency charged with investigating and
enforcing state insurance laws. An entity seeking to be treated as
other than a MEWA under the provisions of the proposed regulation has
the burden of producing sufficient documents and other evidence to
prove that it meets the criteria of the proposed regulation and is
therefore entitled to application of the statutory exemption from the
definition of a MEWA.
The Department anticipates that states or state agencies, including
any commission, board or committee charged with investigating and
enforcing state insurance laws, will utilize existing jurisdiction
under state laws to require the production of documents and other
evidence. Where the entity's compliance with the criteria of the
proposed regulation is disputed by a state or state agency, the
Department expects that the state or state agency will use its existing
authority under state law to bring the matter before the appropriate
state adjudicatory body to determine the facts. The proposed regulation
does not restrict the authority of the state or state agency to
reinvestigate the entity at any time if it believes the entity is not
in compliance with the proposed regulation or with state laws.
7. Allocation of Burden of Proof
The proposed regulation provides that, in a proceeding brought by a
state
[[Page 39212]]
or a state agency to enforce the insurance laws of the state, nothing
in the proposed regulation shall be read or construed to prohibit the
allocation of the burden of proving the existence of all criteria
required by this section to the entity seeking to be treated as other
than a MEWA. The proposed regulation enumerates criteria designed to
enable entities to determine whether the requirements of the statute
are met. However, as discussed in paragraph 1. General Rule and Scope,
supra, the Department believes that when challenged, the entity
asserting the applicability of an exception has the burden of providing
evidence of compliance with each of the terms of the proposed
regulation.
Regulatory Flexibility Act
The Regulatory Flexibility Act of 1980 requires each Federal agency
to perform a Regulatory Flexibility Analysis for all rules that are
likely to have a significant economic impact on a substantial number of
small entities. Small entities include small businesses, organizations,
and governmental jurisdictions. The Pension and Welfare Benefits
Administration has determined that, if adopted, this proposed rule may
have a significant economic impact on a substantial number of small
entities. Accordingly, as provided in section 603 of the Regulatory
Flexibility Act (5 U.S.C. Sec. 601, et seq.), the following initial
regulatory flexibility analysis is provided:
(1) PWBA is considering the proposed regulation because it believes
that regulatory guidance in this area is necessary to ensure (a) that
state insurance regulators have ascertainable guidelines to help
identify and 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 expected plans under
section 3(40)(A) of ERISA. A more detailed discussion of the agency's
reasoning for issuing the proposed regulation is found in the
Background section, above.
(2) The objective of the proposed regulation is to provide guidance
on the application of an exception to the definition of the term
``multiple employer welfare arrangement'' (MEWA) which is found in
section 3(40) of ERISA and applies to certain employee welfare benefit
plans. The legal basis for the proposed regulation is found at ERISA
section 3(40) (23 U.S.C. 1002(40)); an extensive list of authority may
be found in the Statutory Authority section, below.
(3) No accurate estimate of the number of small entities affected
by the proposed regulation is available. No small governmental
jurisdictions will be affected. It is estimated that a substantial
number of small businesses and organizations will be affected, due to
the fact that it is precisely those entities, seeking group health care
coverage, that are most harmed by unscrupulous entrepreneurs who
purport to provide employee health benefits. In a report entitled
``Employee Benefits: States Need Labor's Help Regulating Multiple
Employer Welfare Arrangements,'' the United States General Accounting
Office (GAO) calculated that between January 1988 and June 1991,
fraudulent MEWAs left at least 398,000 participants and their
beneficiaries with $123 million in unpaid medical claims and left many
other participants without the health insurance they had paid for.\9\
By restricting fraudulent and financially unsound MEWAs, the proposed
regulation may limit the sources of health care coverage offered to
small businesses. On the other hand, MEWAs that either meet the section
3(40) criteria or meet state regulatory standards are less likely to
demonstrate the type of fraudulent or imprudent activity that prompted
Congressional action. The GAO Report indicated that, during the January
1988 and June 1991 period, more than 600 MEWAs failed to comply with
state insurance laws and some violated criminal statutes.\10\
Consequently, small entities will receive a benefit from the reduced
incidence of fraud and insolvency among the pool of MEWAs in the
marketplace. To the extent that MEWAs themselves are small entities,
they too will be affected by the proposed regulation.
\9\GAO/HRD-92-40 (March 1992) at 2.
\10\Id.
---------------------------------------------------------------------------
(4) No identical reporting or recordkeeping is required under the
proposed rule. However, this regulation clarifies the information that
must be provided upon request to state authorities by those MEWAs
wishing to take advantage of the exception under section 3(40)(A) of
ERISA. The information to be provided will vary depending upon the
entity involved but will include a written collective bargaining
agreement and records on the individual covered by the plan for at
least the last five calendar quarters. Such information is routinely
prepared and held in the ordinary course of business under current law
by most small entities. It is anticipated that the preparation of some
of these documents would require the professional skills of an
attorney, accountant, or other health benefit plan professional;
however, the majority of the recordkeeping may be handled by clerical
staff.
(5) No federal rules have been identified that duplicate overlap or
conflict with the proposed rule.
(6) No significant alternatives which would minimize the impact on
small entities have been identified. The proposed regulation is less
costly in comparison with the alternative methods of determining
compliance with section 3(40), such as case-by-case analysis by PWBA of
each employee welfare benefit plan, or litigation. The costs of such
alternatives would be unduly burdensome on small entities. No federal
reporting is required. Instead, the proposed regulation would create
standards by which the MEWAs may be reviewed by the states. It would be
inappropriate to create an alternative with lower compliance criteria,
or an exemption under the proposed regulation, for small MEWAs because
those are the entities which pose a higher degree of risk of non-
performance due to their increased likelihood of being under-funded or
otherwise having inadequate reserves to meet the benefits claims
submitted for payment.
Executive Order 12866 Statement
Under Executive Order 12866 (58 FR 51735, Oct. 4, 1993), the
Department must determine whether the regulatory action is
``significant'' and therefore subject to review by the Office of
Management and Budget (OMB) and the requirements of the Executive
Order. 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 a 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, the Department has
determined that this program creates a improved method for statutory
compliance that will reduce paperwork and regulatory compliance burdens
on state
[[Page 39213]]
governments, businesses, including small businesses and organizations,
and make better use of scarce federal resources, in accord with the
mandates of the Paperwork Reduction Act, the Regulatory Flexibility
Act, and the President's priorities. The Department believes this
notice is ``significant'' under category (4), supra, and subject to OMB
review on that basis.
Paperwork Reduction Act
The proposed regulation does not contain any information collection
or recordkeeping requirements as those terms are defined under the
Paperwork Reduction Act because the information to be provided on
request to state authorities will vary in each instance depending on
the entity involved. Consequently, there is no requirement that the
entities comply with identical reporting or recordkeeping requirements.
5 CFR 1320.7(c). Thus, the proposed regulation imposes no additional
federal paperwork burden and the Paperwork Reduction Act does not
apply.
Statutory Authority
This regulation is proposed pursuant to section 3(40) of ERISA
(Pub. L. 97-473, 96 Stat. 2611, 2612, 29 U.S.C. 1002(40)) and section
505 (Pub. L. 93-406, 88 Stat. 892, 894, 29 U.S.C. 1135) of ERISA and
under Secretary of Labor's Order No. 1-87, 52 FR 13139, April 21, 1987.
List of Subjects in 29 CFR Part 2510
Employee benefit plans, Employee Retirement Income Security Act,
Pension and Welfare Benefit Administration.
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 for Part 2510 is revised to read:
Authority: Secs. 3(2), 111(c), 505, Pub. L. 93-406, 88 Stat.
852, 894 (29 U.S.C. 1002(2), 1031, 1135); Secretary of Labor's Order
No. 27-74, 1-86 (51 FR 3521, January 28, 1986), 1-87 (52 FR 13139,
April 21, 1987), and Labor Management Services Administration Order
No. 2-6.
Section 2510.3-40 is also issued under sec. 3(40), Pub. L. 97-
473, 96 Stat. 2611, 2612 (29 U.S.C. 1002(40)).
Section 2510.3-101 is also issued under sec. 102 of
Reorganization Plan No. 4 of 1978, 43 FR 47713, 3 CFR 1978 Comp., p.
332, effective under E.O. 12108, 44 FR 1065, 3 CFR 1978 Comp. p. 275
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, 3 CFR 1978 Comp., p.
332, effective under E.O. 12108, 44 FR 1065, 3 CFR comp., p. 275.
2. Part 2510 is amended by adding new Sec. 2510.3-40 to read:
Sec. 2510.3-40 Plans established or maintained pursuant to one or more
collective bargaining agreements.
(a) General. Section 3(40)(A) of the Employee Retirement Income
Security Act of 1974 (the Act) provides that the term ``multiple
employer welfare arrangement'' (MEWA) does not include an employee
welfare benefit plan or other arrangement which is established or
maintained under or pursuant to one or more agreements which the
Secretary of Labor (the Secretary) finds to be a collective bargaining
agreement(s). The purposes of the proposed regulation are to establish
specific criteria that the Secretary finds must be met for an agreement
to be a collective bargaining agreement and to establish criteria for
determining when an employee benefit plan is established or maintained
pursuant to such an agreement.
(b) Collective Bargaining Agreement. The Secretary finds, for
purposes of section 3(40)(A) of the Act, that an agreement constitutes
a collective bargaining agreement only if the agreement--
(1) is in writing;
(2) is executed by, or on behalf of, an employer of employees
represented by an employee labor organization;
(3) is executed by an employee labor organization;
(4) is the product of good faith, arms-length bargaining between
one or more employers and an employee labor organization or uniformly
incorporates and binds one or more employers and an employee labor
organization to the terms and conditions of another agreement which as
originally negotiated and adopted satisfies the requirements of this
section;
(5) binds signatory employers and the employee labor organization
to the terms of the agreement for a specified project or period of
time, cannot be unilaterally amended or terminated and contains
procedures for amending the terms and conditions of the agreement;
(6) does not terminate solely as a result of failure to make
contributions to the plan; and
(7) in addition to the provision of health coverage, provides more
than the minimum requirements mandated by law with respect to the terms
and conditions of employment (e.g., provides for more than minimum wage
and workers' compensation).
(c) Established or Maintained. An employee benefit plan is not
established or maintained under or pursuant to one or more collective
bargaining agreements for purposes of section 3(40)(A) of the Act
unless not less than 85 percent of the individuals covered by the plan
are--
(1) employees, excluding supervisors and managers, currently
included in one or more groups or bargaining units of employees covered
by one or more collective bargaining agreements as defined in paragraph
(b) of this section which expressly refer to the plan and provide for
contributions thereto; or
(2) persons who were formerly employees described in paragraph
(c)(1) of this section who are receiving workers' compensation or
disability benefits, COBRA continuation coverage pursuant to Part 6 of
title I of ERISA, 29 U.S.C. 1161-1168, or who have retired or separated
from employment after working more than 1,000 hours a year for at least
three years; or
(3) beneficiaries of individuals included in paragraphs (c) (1) and
(2) of this section.
(4) For purposes of this subsection, the following individuals
covered by the plan or other arrangement shall not be counted in
determining the total number of individuals covered by the plan--
(i) employees of the plan or another plan established or maintained
pursuant to the same collective bargaining agreement(s);
(ii) employees of an employee labor organization that meets the
requirements of paragraph (d)(1) of this section and that is a
signatory to the collective bargaining agreement(s) pursuant to which
the plan is maintained;
(iii) persons who were formerly employees described in paragraphs
(c)(4) (i) and (ii) of this section who are receiving workers'
compensation or disability benefits, COBRA continuation coverage
pursuant to part 6 of title I of ERISA, 29 U.S.C. 1161-1168, or who
have retired or separated from employment after working more than 1,000
hours a year for at least three years; or
(iv) beneficiaries of individuals included in paragraphs (c)(4)
(i), (ii) and (iii) of this section;
(v) provided that, for purposes of paragraphs (c)(4) (i) and (ii)
of this section, in order to be an employee, an individual must work at
least:
(A) 15 hours a week or 60 hours a month during the period of
coverage under the plan, or
[[Page 39214]]
(B) Have worked more than 1000 hours in the last year and currently
be on bona fide leave based on sickness or disability of the individual
or the individual's family or on earned vacation time.
(5) For purposes of calculating whether the 85% limitation has been
met, a plan or other arrangement must satisfy the requirements of
paragraphs (c) (1) through (4) of this section on the last day of--
(i) each of the previous five calendar quarters; or
(ii) if the plan has been in existence for fewer than five calendar
quarters, every calendar quarter during which the plan has been in
existence.
Definitions
(1) Employee Labor Organization. For purposes of this section, an
``employee labor organization'' shall mean an organization that--
(i) represents, with respect to a particular collective bargaining
agreement, the employees of each signatory employer to the agreement
where:
(A) All of the employer's bargaining units covered by the agreement
are certified by the National Labor Relations Board, or
(B) The employee labor organization is lawfully recognized by the
signatory employer (e.g., without employer interference or domination)
as the exclusive bargaining representative for the employer's
bargaining unit employees covered by the agreement;
(ii) provides substantial representational services to employees
regarding the terms and conditions of their employment in addition to
health coverage;
(iii) does not pay commissions, fees, or bonuses to individuals,
other than full-time employees of the employee labor organization, in
connection with the solicitation of employers or participants;
(iv) does not utilize the services of licensed insurance agents or
brokers for soliciting employers or participants;
(v) is a ``labor organization'' as defined in section 3(i) of the
Labor-Management Reporting and Disclosure Act, 29 U.S.C. section
402(i); and
(vi) qualifies as a tax-exempt labor organization under section
501(c)(5) of the Internal Revenue Code of 1986.
(2) Supervisors and Managers. For purposes of this section,
``supervisors and managers'' shall mean any employees of a signatory
employer to an agreement described in paragraph (b) of this section
who, acting in the interest of the employer, have--
(i) Authority to hire, transfer, suspend, layoff, recall, promote,
discharge, assign, reward or discipline other employees; or
(ii) Responsibility to direct other employees or to adjust their
grievances; or
(iii) Power to make effective recommendations concerning the
actions described in paragraphs (d)(2) (i) and (ii) of this section;
as long as the exercise of the authority, responsibility and power in
paragraphs (d)(2) (i), (ii) or (iii) of this section is not of a merely
routine or clerical nature, but requires the use of independent
judgment.
(e) Failure to provide documents or other necessary evidence. This
section shall not apply to any plan or other arrangement if, in
conjunction with an investigation or proceeding by a state or state
agency, the plan, arrangement, any employee labor organization or
employer which is a party to the agreement(s) at issue fails or refuses
to provide the state or state agency with any document or other
evidence in its possession or control that is reasonably requested by
the state or state agency for the purpose of determining the status of
the plan or other arrangement under state insurance laws or under this
section.
(f) Allocation of burden of proof. In a proceeding brought to
enforce state insurance laws, nothing in the proposed regulation shall
be construed to prohibit a state or state agency from allocating the
burden of proving the existence of all the criteria required by this
section to the entity seeking to be treated as other than a MEWA.
Signed at Washington, DC, this 26th day of July 1995.
Olena Berg,
Assistant Secretary, Pension and Welfare Benefits Administration.
[FR Doc. 95-18749 Filed 7-27-95; 11:12 am]
BILLING CODE 4510-29-M
