In Barboza v. California Professional Association of Firefighters, Nos. 11-15472, 11-16024, 11-16081, and 11-16082 (9th Cir. 2015), the Ninth Circuit Court of Appeals (the “Court”) was required to interpret, among others, the requirement in section 403(a) of ERISA that all assets of an employee benefit plan shall be held in trust by one or more trustees (sometimes called the “hold in trust” requirement).
At issue is a long-term disability plan (the “Plan”), which is an employee welfare benefit plan governed by ERISA, and which receives its funding exclusively from participants and pays all benefits solely from its assets. The Plan functions as follows. First, each participant makes a monthly contribution to the Plan. These contributions are deposited into a Wells Fargo Bank checking account. The benefits are paid in the form of a check drawn on the Wells Fargo account for the appropriate amount. Plan expenses, including administrative service fees, are paid from the assets in the Wells Fargo account. The question: are the Plan assets being held in trust?
In analyzing the case, the Court said that ERISA requires, under section 403(a), that generally all assets of an employee benefit plan must be held in trust by one or more trustees. 29 U.S.C. § 1103(a). Further, such trustee or trustees must be either named in the trust instrument or in the plan instrument or appointed by a person who is a named fiduciary. The Court said further that, to meet these requirements, a person (legal or natural) must hold legal title to the assets of an employee benefit plan with the intent to deal with these 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 a plan’s assets is a “trust” for purposes of section 403(a). The Court noted that Barboza, and the Department of Labor (as amicus curiae), argue, in effect, that compliance with section 403(a) requires a party to record its responsibilities with respect to the assets of an employee benefit plan in a document that is entitled “trust instrument,” uses the terms “trust” and “trustee,” and expressly states that the party is holding the assets “in trust.” Further, the Department appears to interpret its regulation at 29 C.F.R. § 2550.403a-1 as requiring parties to use express words of trust to comply with section 403(a).
However, the Court said that it rejects the argument, and concluded that the Plan assets held in the Wells Fargo account here satisfies the held in trust requirement. The Plan instrument (i.e., the official plan document which sets forth the Plan’s terms) requires the California Association of Professional Firefighters (“CAPF”), the Plan’s manager, 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 holds these assets for the Plan on behalf of the participants. The Plan instrument thus establishes a fiduciary relationship between CAPF, as the trustee, and the participants, as beneficiaries, with respect to the property contributed to the Plan (the trust res); this constitutes a trust according to its common law definition. Because the Plan instrument here is a written instrument that establishes a trust relationship, it is a written trust instrument for purposes of section 403(a).