As noted in my blog of October 17, 2011, the Employee Benefits Security Administration (the “EBSA”) has issued F&Qs which provide guidance to fiduciaries of multiemployer plans on violations of ERISA’s prohibited transaction rules which may arise in leasing or service provider arrangements. A “multiemployer plan” is an employee benefit plan maintained pursuant to a collective bargaining agreement between a labor union and more than one employer. In particular, the F&Qs say the following on a lease of office space between a multiemployer plan and a union whose members participate in the plan.
A. The Prohibited Transaction
Section 406(a)(1)(A) of ERISA prohibits a trustee of a multiemployer plan from causing the plan to engage in, among others, the leasing of office space between the plan and a party in interest. Similarly, section 406(a)(1)(D) of ERISA prohibits the trustee from causing the plan to engage in a transaction constituting a transfer to, or use by or for the benefit of, the plan’s office space by a party in interest. The union is a party in interest, since its members participate in the multiemployer plan. Thus, a prohibited transaction will arise under section 406(a) of ERISA whenever the multiemployer plan leases office space in a building it owns to the union, or the union leases office space in a building it owns to the multiemployer plan.
Section 406(b)(1) of ERISA prohibits a trustee of the multiemployer plan from dealing with the plan’s assets in his own interest or for his own account (i.e., self-dealing). ERISA section 406(b)(2) prohibits the trustee from acting on behalf of a party whose interests are adverse to the plan’s interests. Accordingly, the lease of office space between a multiemployer plan and a union violates ERISA section 406(b)(1) when a trustee of the multiemployer plan has interests in the lease that may lead the trustee to structure the lease in a manner that benefits the union. The lease of office space also violates ERISA section 406(b)(2) when the trustee has divided interests because he or she acting on behalf of another party to the transaction as well as the plan.
As an example, assume that the trustees of a multiemployer plan who are officers of the union participate in a decision to lease office space in a building owned by the union to the plan. The participation by these trustees in this decision would raise self-dealing issues under ERISA section 406(b)(1). In addition, as lessor and lessee, the union and the plan have interests that are adverse to each other. The trustees, in acting on behalf of both the union and the plan in the transaction, would violate ERISA section 406(b)(2). The same results would obtain if those trustees participated in a decision to have the plan lease office space to the union.
B. Relief Provided by Statutory and Administrative Exemptions
Under ERISA, statutory and administrative exemptions provide relief from penalties and other adverse consequences for certain transactions that, although prohibited under sections 406(a) or (b), are beneficial to multiemployer plans. These exemptions are described below. Keep in mind that each of the exemptions has conditions that must be complied with in order to obtain the relief.
Statutory exemption under section 408(b)(2) of ERISA: This statutory exemption and the regulations thereunder allow a multiemployer plan to, among other things, contract or make reasonable arrangements with the union for office space. This exemption would allow the plan to lease office space from the union, but would not allow the union to lease office space from the plan. Further, relief is provided from ERISA section 406(a)(1)(A) and (D), but not from ERISA section 406(b)(1) or (2).
Prohibited Transaction Exemption (PTE) 76-1: This administrative class exemption allows a union to, among other things, lease office space from the multiemployer plan. It does not allow the plan to lease office space from the union. As above, relief is provided from ERISA section 406(a)(1)(A) and (D), but not from ERISA section 406(b)(1) or (2).
C. Steps To Avoid Non-Exempt Prohibited Transactions
Depending on the particular facts of each case, fiduciaries may avoid the penalties and adverse consequences of non-exempt prohibited transactions involving leases between multiemployer plans and union as follows.
–For leases of office space from a union to a multiemployer plan, where there is no trustee conflict of interest ( e.g., the trustees are not officers of the union), the trustees should comply with the statutory exemption in ERISA section 408(b)(2).
–For leases of office space from a multiemployer plan to a union, where there is no trustee conflict of interest, the trustees should comply with the conditions of PTE 76-1, Part C.
–For leases of office space between a multiemployer plan and a union that also involve a trustee conflict of interest which could lead to a violation of ERISA sections 406(b)(1) and/ or (2), the trustees should comply with the applicable exemption described above. In addition, any trustee with a conflict of interest should either recuse himself or herself from any involvement in the decision-making process, or the parties should seek an individual prohibited transaction exemption from EBSA’s Office of Exemption Determinations.
D. Problems Found By The EBSA In Connection With Leases
The EBSA has found the following issues in connection with leases between multiemployer plans and unions:
• Failure to meet the “reasonableness” requirements in the applicable exemptions, e.g., the failure to establish that the rent paid or that the terms of the lease was reasonable. The use of an out-of-date appraisal for the building in which the leased office space is located could lead to an unreasonable amount of rent being paid.
• The absence of a formal, written lease at the time the lease commences, even if the lease is subsequently formalized two years later. This makes it difficult for the plan trustees to establish that the lease was always in compliance with PTEs 76-1 (and PTE 78-6), if applicable.
• Failure of trustees with conflicts of interest to recuse themselves from the decision making process. The applicable statutory or class exemptions cited above do not provide relief from ERISA sections 406(b)(1) and (2).