In Field Assistance Bulletin No. 2012-01, the U.S. Department of Labor (the “DOL”) discussed whether the plan assets of a union’s apprenticeship and training plans may be used to pay for graduation ceremonies and marketing expenses, without violating ERISA’s exclusive purpose rule and fiduciary duty requirements. Here is what the DOL said.
A union’s apprenticeship and training plans are employee welfare benefit plans under section 3(1) of ERISA, subject to a few exceptions assumed not to apply here. As such, they are subject to ERISA, so that the plan fiduciaries must comply with the general fiduciary standards in Part 4 of ERISA. Such standards require that, among other things:
–the plan fiduciaries must discharge their duties solely in the interests of the plan’s participants and beneficiaries, and for the exclusive purpose of providing apprenticeship or training benefits to participants and defraying reasonable expenses of administering the plan (ERISA § 404(a)(1)(A)) (the “exclusive purpose rule”); and
–those duties must be performed with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims (ERISA § 404(a)(1)(B)) (the prudence rule”).
Are the exclusive purpose and prudence rules violated if apprenticeship and training plans make payments: (1) for meals, gifts, entertainment, or other expenses associated with graduation ceremonies or (2) to market, advertise or promote the plan? In answering this question, the unique characteristics, educational objectives and mission of training workers of apprenticeship and training plans must be taken into account.
As such, the plan’s payment of expenses associated with a modest graduation ceremony, which is attended by graduating apprentices, family, plan officials, and other persons connected with the program or an industry outreach, and which includes light refreshments, will not violate the exclusive purpose or prudence rule. This obtains only so long as: (a) the amount of the expenses is modest in relationship to the plan’s assets, (b) the expenses were approved in accordance with internal accounting, recordkeeping, and administrative controls designed to prevent inappropriate, excessive, or abusive expenditures of plan assets, and (c) the expenses were for costs of the ceremony. For example, a graduation dinner for all attendees, valet parking, or payments for travel or hotel accommodations for graduating apprentices or guests would not be treated as permissible plan asset expenses. On the other hand, a modest graduation ceremony offering light refreshments with diplomas or certificates for apprentices and token awards/gifts for non-apprentices (e.g., plan instructors or persons that supported the program) would be permissible.
Similarly, the payment of certain marketing expenses with plan assets will not violate the exclusive purpose or prudence rule. These expenses must be for marketing or promotion of the apprenticeship or training plan itself (e.g., not for industry advancement or for sponsoring employers or employee organizations) and the amount of the expenses must be consistent with the fiduciaries’ obligation to be prudent and economical in the use of plan assets. For example, t-shirts provided to apprentices bearing the logo of the apprenticeship or training plan may be appropriate plan expenses if the expenses are modest and the t-shirts are not purchased from parties in interest in prohibited transactions. Conversely, tickets to sporting and other entertainment events for apprentices, plan officials, trustees, and contributing employers would generally be unreasonable plan expenses.
Other important points:
— Donations by an apprenticeship and training plan to favored charities, non-profit organizations, scholarship and memorial funds and other similar causes would never be permissible.
–Other impermissible payments and practices for apprenticeship and training plans include: lack of oversight of plan vehicles, equipment, and other inventory; unreasonable instructor salaries and bonuses; employee meal stipends that are excessive or not reasonably related to the provision or promotion of the plan’s training program; and payments for staff holiday parties and flowers.
–Payments are not automatically permissible because they are consistent with the plan’s tax-exemption under the Internal Revenue Code.
–The plan should establish, and payments should be made in accordance with, written expense policies and internal controls (including accounting, recordkeeping, and administrative controls designed to prevent inappropriate, excessive, or abusive expenditures of plan assets).
–The plan cannot make payments which are not permitted by the plan documents (since such payments would violate the “written plan document requirement” of ERISA § 404(a)(1)(D)).
Note: the need for a payment to be permitted by plan documents, and to be made in accordance with written policies and internal controls, applies to all payments made by an apprenticeship or training plan, not just those for graduation ceremonies and marketing. Unions might consider reviewing the plan documents, policies and internal controls on this point.