LTD Plan Complied With ERISA’s ‘Hold In Trust’ Requirement

 

Neither the manager nor the administrator of a long-term disability plan breached its duty under ERISA to hold plan assets in trust, the Ninth Circuit U.S. Court of Appeals has ruled in Barboza v. California Association of Professional Firefighters (No. 11-15472). Applying the common law of trusts, the court concluded that, under the “hold in trust” requirement, a person (legal or natural) must hold legal title to the assets of an employee benefit plan with the intent to deal with those assets solely for the benefit of the members of that plan. That person is the “trustee,” and the resulting relationship between the trustee and the plan participants with respect to a plan’s assets is a “trust” for purposes of ERISA. In this case, the plan complied with the requirement that “all assets of an employee benefit plan shall be held in trust by one or more trustees.”

The court also held that the plan administrator’s practice of paying its own fees and expenses from the plan’s assets constituted a per se violation of ERISA’s prohibition against self-dealing. Finally, the manager and the administrator of the plan did not breach their fiduciary duties by failing to distribute a summary annual report to plan participants because the plan met the definition of a “totally unfunded welfare plan.”

Background. David Barboza, a retired firefighter, was a participant in a long-term disability plan (Plan) managed by the California Association of Professional Firefighters (CAPF). The Plan was an employee welfare benefit plan governed by the Employee Retirement Income Security Act and received its funding exclusively from Plan participants. It paid all benefits solely from Plan assets. The Plan was established by a document entitled the “CAPF Long Term Disability Plan” (Plan Instrument) and was administered by the California Administration Insurance Services, Inc. (CAISI).

Under the Plan, participants’ monthly contributions were deposited into a Wells Fargo Bank checking account, for which CAISI officers were the signatories. From that account, CAISI paid LTD benefits as well as Plan expenses, including its own administrative service fees.

In 2008, Barboza filed suit against CAPF and other defendants alleging wrongful withholding of disability benefits. While that action was ongoing, Barboza filed the instant suit, alleging that CAPF, CAISI, and their individual board members (collectively, the defendants) violated ERISA by failing to hold Plan assets in trust and by allowing CAISI to pay its own fees from the Wells Fargo account. Barboza also alleged that the defendants breached their fiduciary duty by failing to distribute a summary annual report to Plan participants.

“Hold in trust” requirement. ERISA requires that “all assets of an employee benefit plan shall be held in trust by one or more trustees,” and that “[s]uch trustee or trustees shall be either named in the trust instrument or in the plan instrument … or appointed by a person who is a named fiduciary.” The trustee or trustees “shall have exclusive authority and discretion to manage and control the assets of the plan.” The applicable regulations echo the statute. However, neither ERISA nor the regulations define the terms “trust,” “trustee,” or “trust instrument.”

At common law, “trust” referred to a legal relationship by which one party, the “trustee,” agreed to hold and administer property (the trust “res”) for the benefit of another. Consistent with this traditional common law doctrine, scholars and courts have defined “trust” and “trustee” as legal relationships. For example, the Restatement (Third) of Trusts defines “trust” as “a fiduciary relationship with respect to property, arising from a manifestation of intention to create that relationship and subjecting the person who holds title to the property to duties to deal with it for the benefit of charity or for one or more persons, at least one of whom is not the sole trustee.” The Restatement defines “trustee” simply as the person, including a corporation or unincorporated association, “who holds property in trust.”

Applying these common law definitions, the court concluded that, under ERISA’s “hold in trust” requirement, a person (legal or natural) must hold legal title to the assets of an employee benefit plan with the intent to deal with those assets solely for the benefit of the members of that plan. Such a person is the “trustee,” and the resulting relationship between the trustee and the participants in the plan with respect to the plan’s assets is a “trust” for purposes of ERISA.

Contrary to Barboza’s assertion, the “hold in trust” requirement does not require the creation of a document including express words of trust. In this case, the Plan Instrument required CAPF to hold legal title to “all property, monies and contract rights” as well as all of the funds maintained in connection with the Plan. CAPF held those assets for the Plan on behalf of the participants. Accordingly, the Plan Instrument established a fiduciary relationship between CAPF, as the trustee, and the participants, as beneficiaries, with respect to the property contributed to the Plan. In the court’s view, this constituted a trust under the common law definition of that term. Because the Plan Instrument was a written instrument that established a trust relationship, it was a written trust instrument for purposes of ERISA and the applicable regulations. As such, it complied with the “hold in trust” requirement.

Fiduciary self-dealing. The court also found that CAISI’s practice of paying its own fees and expenses from the Plan’s assets held in the Wells Fargo account constituted a per se violation of ERISA’s prohibition against self-dealing. Although a plan may pay a fiduciary “reasonable compensation for services rendered” under ERISA, the fiduciary may not engage in self-dealing by paying itself from plan funds. Because CAISI was a fiduciary that paid its own fees from Plan assets and thereby engaged in a prohibited transaction, ERISA’s safe harbor for fiduciary compensation was not applicable.

“Summary annual report” requirement. Finally, the court determined that the defendants did not breach their fiduciary duties by failing to distribute a summary annual report. The Plan was “a totally unfunded welfare plan” and, thus, was exempt from the regulations that require administrators of employee benefit plans to provide a summary annual report to each plan member annually.

The Plan in this case was an employee welfare benefit plan because it was a plan established “for the purpose of providing for its participants or their beneficiaries” long-term disability benefits. In addition, CAPF was an “employee organization” as defined in ERISA because, according to its bylaws, it was incorporated specifically for the purpose of establishing and maintaining a long-term disability benefits plan. Finally, under the terms of the Plan Instrument, benefits were paid solely from the general assets of CAPF, which was the employee organization that maintained the Plan. Therefore, the Plan met the definition of “a totally unfunded welfare plan.”

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