Proposed Regulation for Plans Established or Maintained Pursuant to Collective Bargaining Agreements Under Section 3(40) (A)

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.

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(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