In Fiduciary Litigation, VEBA Trust Assets Were ERISA Plan Assets

Practical Law Legal Update w-001-9377 (Approx. 5 pages)

In Fiduciary Litigation, VEBA Trust Assets Were ERISA Plan Assets

by Practical Law Employee Benefits & Executive Compensation

Background

The defendant in this case managed an association of employers that offered employee welfare benefits, including death benefits, to the employers through a voluntary employees' beneficiary association (VEBA) trust. The benefits were administered by a company with close ties to the manager, who served as the company's president and CEO.

Employers that joined the association agreed to be bound by a master trust agreement, plan document, and individual adoption agreement. The trust consisted of:

Employer contributions.
Life insurance policies taken out on the lives of participating employees to fund the benefits.

When a participating employee died, the life insurance proceeds were paid to the trustee and deposited into the trust account. Benefits were to be paid according to the employer's individual adoption agreement and the trust's governing documents.

According to the district court decision in this case, the manager and related defendants engaged in a scheme in which life insurance policies were taken out on the lives of participating employees. Following the deaths of these employees, proceeds from the insurance policies were paid to the VEBA's trustee, who transferred the funds into a money market account held by the manager. The plan's administrator then paid some benefits to the intended beneficiary and most of the rest of the proceeds were transferred to an account in the name of the manager's law firm (884 F.Supp.2d 261 (E.D. Pa. 2012)).

The Department of Labor (DOL) brought suit against the manager, several companies he owned, the trust, and the trustees, alleging a breach of ERISA fiduciary duties regarding certain individual welfare plans under the association. The district court ruled in the DOL's favor regarding three of the association's plans and therefore:

Removed the manager from his position of authority regarding the trust.
Appointed a temporary independent fiduciary to administer the plans and trust.

A bench trial followed regarding other association plans, which the district court found to be ERISA plans. The court therefore ordered that:

The fiduciaries be permanently removed.
The manager pay restitution and restore diverted assets.

The district court also issued an order appointing a permanent independent fiduciary and requiring the manager to bear the costs of the appointment. The manager appealed, arguing that the district court's conclusions were in error, including its finding that the trust assets were plan assets for ERISA purposes.

Outcome

The Third Circuit rejected the manager's arguments on appeal and affirmed the district court.

Trust Assets Were ERISA Plan Assets

The Third Circuit first addressed the district court's conclusions that:

The master VEBA plan was not an ERISA plan.
The individual employer-level plans under the master plan were subject to ERISA (from which it followed that the manager owed fiduciary duties to the plans).

The Third Circuit determined that the manager was a fiduciary and owed fiduciary duties to the employer-level ERISA plans because the plans had a beneficial interest in the trust and therefore the trust assets were ERISA plan assets.

VEBA Manager Was an ERISA Fiduciary

Under ERISA, a person who exercises any authority or control over the management or disposition of plan assets is a fiduciary (29 U.S.C. § 1002(21)(A)(i)) (see Practice Note, ERISA Fiduciary Duties: Overview). The Third Circuit agreed with the district court that the manager exercised control over the disposition of the assets of the individual employer-level plans and therefore was a fiduciary.

Employer-Level Plans Had a Beneficial Interest in the Trust

The Third Circuit also agreed that the individual employer-level plans had a beneficial interest in the trust and so the trusts' assets were plan assets under ERISA. Applying ordinary notions of property law, the court reasoned that welfare plan assets include any property in which the plan has a beneficial ownership interest. Although the governing plan documents and adoption agreements did not confer legal title in the trust assets to the plans, the court determined that the documents showed an intent to confer a beneficial interest in the trust property to the participating plans. According to DOL guidance, a plan obtains a beneficial interest in particular property if the property is held in trust for the benefit of the plan or its participants and beneficiaries (DOL Adv. Op. 99-08A).

Citing DOL regulations, the Third Circuit also concluded that if a trust provides benefits to plan participants and beneficiaries:

Individuals with discretionary authority and control over trust assets are plan fiduciaries.
The addition of a multi-employer trust with legal title held by the trustee would not divest the manager of his fiduciary responsibilities to trust beneficiaries.

(29 C.F.R. § 2510.3-101(j) and (h).)

Plan Amendment Eliminating Benefits to Non-Owner Employees Was Invalid

The Third Circuit also rejected the manager's argument that a plan amendment eliminating benefits to non-owner employees resulted in the employer-level plans no longer being subject to ERISA. Affirming the district court, the Third Circuit held that the amendment was invalid because:

The amendment discriminated in favor of highly compensated employees and therefore directly conflicted with the plan's nondiscrimination provision.
The manager and the corporation that administered the trust benefits lacked authority to amend the plans because the governing documents did not authorize them to do so.

The court noted that the role of plan administrator does not automatically include authority to amend the plan.

Damages

ERISA imposes personal liability on a fiduciary who breaches the statute's fiduciary standards and provides that the fiduciary:

Must restore to the plan any profits made through the use of plan assets.
Is subject to other equitable or remedial relief that the court deems appropriate (including removal of the fiduciary).

(29 U.S.C. § 1109(a).)

The Third Circuit affirmed the district court's damages analysis, noting that:

The manager was required to return profits to the trust because the plans have a beneficial interest in the trust assets.
Disgorgement of profits is a permitted equitable remedy under ERISA's duty of loyalty, which bars a fiduciary from profiting even if no loss to the plan occurs.

Practical Impact

We don't often see circuit court decisions addressing the meaning of plan assets in the welfare plan context, and this case is a good reminder of how those rules apply. The outcome in this case, affirming the district court's decision requiring the manager to return profits to the trust, reflects the reach of ERISA fiduciary status and the severity of remedies that may result if ERISA's fiduciary standards are violated.

In Fiduciary Litigation, VEBA Trust Assets Were ERISA Plan Assets | Practical Law