EBSA Issues FAQs on Avoiding Prohibited Multiemployer Plan Leasing Arrangements under ERISA | Practical Law

EBSA Issues FAQs on Avoiding Prohibited Multiemployer Plan Leasing Arrangements under ERISA | Practical Law

On October 14, 2011, the Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) issued questions and answers to help trustees of multiemployer benefit plans avoid certain transactions that are prohibited under the Employee Retirement Income Security Act of 1974 (ERISA), and that can arise in common leasing arrangements between multiemployer plans and parties in interest to those plans. 

EBSA Issues FAQs on Avoiding Prohibited Multiemployer Plan Leasing Arrangements under ERISA

by PLC Employee Benefits and Executive Compensation
Published on 17 Oct 2011 • USA (National/Federal)
On October 14, 2011, the Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) issued questions and answers to help trustees of multiemployer benefit plans avoid certain transactions that are prohibited under the Employee Retirement Income Security Act of 1974 (ERISA), and that can arise in common leasing arrangements between multiemployer plans and parties in interest to those plans.
On October 14, 2011, the Employee Benefits Security Administration (EBSA) issued questions and answers (Q&As) to help trustees of multiemployer benefit plans avoid certain transactions that:
  • Are prohibited under ERISA.
  • Can arise in common leasing arrangements between multiemployer plans and parties in interest to those plans.
The Q&As provide the following guidance:
  • Helpful examples of the two common types of multiemployer plan leasing arrangements, including:
    • the leasing of office space between a multiemployer plan and a party in interest; and
    • leases involving self-dealing or conflicts of interest with multiemployer plan trustees.
  • Descriptions of the relevant prohibited transaction exemptions (PTEs) under ERISA. These exemptions permit leasing arrangements between multiemployer plans and parties in interest as long as certain conditions are satisfied.
  • A description of common prohibited transactions regarding the leasing of classroom space and the related exemptions that are available under ERISA.
  • Steps that plan fiduciaries can take to avoid non-exempt prohibited transactions.
  • A list of common problems encountered by EBSA when examining exemption requests involving multiemployer leasing arrangements.
  • A description of the potential liability for a fiduciary involved in a transaction prohibited under Section 406 of ERISA if that transaction does not qualify for a statutory or administrative exemption.
In Question 3 of the Q&As, EBSA offers advice to fiduciaries on how to avoid non-exempt prohibited transactions involving leases between multiemployer plans and parties in interest. The DOL suggests the following steps a fiduciary should take depending on the type of lease involved:
  • For leases of office space from a party in interest to a multiemployer plan where there is no trustee conflict of interest, plan fiduciaries should comply with the statutory exemption in Section 408(b)(2) of ERISA. If the party in interest is a service provider who is not a fiduciary, relief may be available under Section 408(b)(17) of ERISA.
  • For leases of office space from a multiemployer plan to a party in interest where there is no trustee conflict of interest, plan fiduciaries should comply with the conditions of PTE 76-1, Part C. If the party in interest is a service provider who is not a fiduciary, relief may be available under Section 408(b)(17) of ERISA.
  • For leases that involve trustee conflicts of interest, plan fiduciaries should comply with any applicable exemption and additionally with PTE 77-10.
  • For leases that involve trustee conflicts of interest prohibited by both Section 406(b)(1) and (b)(2) of ERISA, plan fiduciaries should comply with any applicable exemption and either:
    • any trustee who faces the conflict of interest should recuse himself from any involvement in the decision making process; or
    • the parties should seek an individual PTE from EBSA's Office of Exemption Determinations.
Question 7 of the Q&As identifies the following common problems identified by EBSA in its examination of exemption requests involving multiemployer plan leasing arrangements with parties in interest:
  • Failure to meet the reasonable compensation requirements in the applicable exemptions. EBSA noted that the use of out-of-date appraisals to determine the fair market value of plan-owned office space leased to parties in interest is problematic as it could result in the underpayment of rent to the plan.
  • Failure to demonstrate that the terms of the lease were either:
    • at least as favorable to the plan as an arm's length transaction with an unrelated party; or
    • reasonable, as required by the relevant exemptions.
  • Absence of a formal, written lease at the time the lease starts, even if it is later formalized. The absence of a lease makes it difficult for plan trustees to prove that the lease was always in compliance with the relevant PTEs.
  • Failure of trustees with conflicts of interest to recluse themselves from the decision-making process. EBSA noted that none of the applicable statutory or administrative exemptions provide relief from Section 406(b)(1) of ERISA.
  • Questionable compensation arrangements between an apprenticeship plan and its trustees.
For an overview of the duties imposed by ERISA on fiduciaries of employee benefit plans subject to ERISA, as well as a summary of possible penalties for violating the duties, see Practice Note, ERISA Fiduciary Duties: Overview.

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