[Federal Register Volume 60, Number 147 (Tuesday, August 1, 1995)]
[Proposed Rules]
[Pages 39208-39214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18749]




[[Page 39207]]

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Part II





Department of Labor





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Pension and Welfare Benefits Administration



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29 CFR Part 2510



Plans Established or Maintained Pursuant to Collective Bargaining 
Agreements; Proposed Rule

  Federal Register / Vol. 60, No. 147 / Tuesday, August 1, 1995 / 
Proposed Rules  

[[Page 39208]]


DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2510

RIN 1210-AA48


Proposed Regulation for Plans Established or Maintained Pursuant 
to Collective Bargaining Agreements Under Section 3(40) (A)

AGENCY: Pension and Welfare Benefits Administration, Department of 
Labor.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains a proposed regulation under the 
Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. 
1001-1461 (ERISA or the Act), setting forth specific criteria that must 
be met in order for the Secretary of Labor (the Secretary) to find that 
an agreement is a collective bargaining agreement for purposes of this 
section. The proposed regulation also sets forth criteria for 
determining when an employee benefit plan is established or maintained 
under or pursuant to such an agreement. Employee benefit plans that 
meet the requirements of the proposed regulation are excluded from the 
definition of ``multiple employer welfare arrangements'' under section 
3(40) of ERISA and consequently are not subject to state regulation of 
multiple employer welfare arrangements as provided for by the Act. If 
adopted, the proposed regulation would affect employee welfare benefit 
plans, their sponsors, participants, and beneficiaries as well as 
service providers to plans.

DATES: Written comments concerning this proposed rule must be received 
by October 2, 1995.

ADDRESSES: Interested persons are invited to submit written comments 
(preferably three copies) concerning the proposals herein to: Pension 
and Welfare Benefits Administration, Room N-5669, U.S. Department of 
Labor, 200 Constitution Ave., N.W., Washington, DC 20210. Attention: 
Proposed Regulation Under Section 3(40). All submissions will be open 
to public inspection at the Public Documents Room, Pension and Welfare 
Benefits Administration, U.S. Department of Labor, Room N-5638, 200 
Constitution Ave., N.W., Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT:
Mark Connor, Office of Regulations and Interpretations, Pension and 
Welfare Benefits Administration, U.S. Department of Labor, Rm N-5669, 
200 Constitution Ave., N.W., Washington, DC 20210 (telephone (202) 219-
8671) or Cynthia Caldwell Weglicki, Office of the Solicitor, Plan 
Benefits Security Division, U.S. Department of Labor, Rm N-4611, 200 
Constitution Ave., N.W., Washington, DC 20210 (telephone (202) 219-
4592). These are not toll-free numbers.
SUPPLEMENTARY INFORMATION:

A. Background

    Notice is hereby given of a proposed regulation under section 3(40) 
of ERISA, 29 U.S.C. 1002(40). Section 3(40)(A) defines the term 
multiple employer welfare arrangement (MEWA) in pertinent part as 
follows:

    The term ``multiple employer welfare arrangement'' means an 
employee welfare benefit plan, or any other arrangement (other than 
an employee welfare benefit plan), which is established or 
maintained for the purpose of offering or providing any benefit 
described in paragraph (1) [of section 3 of the Act] to the 
employees of two or more employers (including one or more self-
employed individuals), or to their beneficiaries, except that such 
term does not include any such plan or other arrangement which is 
established or maintained--
    (i) under or pursuant to one or more agreements which the 
Secretary finds to be collective bargaining agreements * * *.

    This provision was added to ERISA by the Multiple Employer Welfare 
Arrangement Act of 1983, Sec. 302(b), Pub. L. 97-473, 96 Stat. 2611, 
2612 (29 U.S.C. 1002(40)), which also amended section 514(b) of ERISA. 
Section 514(a) of the Act provides that state laws which relate to 
employee benefit plans are generally preempted by ERISA. Section 514(b) 
sets forth exceptions to the general rule of section 514(a) and 
subjects employee benefit plans that are MEWAs to various levels of 
state regulation depending on whether or not the MEWA is fully insured. 
Sec. 302(b), Pub. L. 97-473, 96 Stat. 2611, 2613 (29 U.S.C. 
1144(b)(6)).\1\

    \1\The Multiple Employer Welfare Arrangement Act of 1983 added 
section 514(b)(6) which provides a limited exception to ERISA's 
preemption of state insurance laws that allows states to exercise 
regulatory authority over employee welfare benefit plans that are 
MEWAs. Section 514(b) provides, in relevant part, that:
    (6)(A) Notwithstanding any other provision of this section--(i) 
in the case of an employee welfare benefit plan which is a multiple 
employer welfare arrangement and is fully insured (or which is a 
multiple employer welfare arrangement subject to an exemption under 
subparagraph (B)), any law of any State which regulates insurance 
may apply to such arrangement to the extent that such law provides--
    (I) standards, requiring the maintenance of specified levels of 
reserves and specified levels of contributions, which any such plan, 
or any trust established under such a plan, must meet in order to be 
considered under such law able to pay benefits in full when due, and
    (II) provisions to enforce such standards, and
    (ii) in the case of any other employee welfare benefit plan 
which is a multiple employer welfare arrangement, in addition to 
this title, any law of any State which regulates insurance may apply 
to the extent not inconsistent with the preceding sections of this 
title.
    Thus an employee welfare benefit plan that is a MEWA remains 
subject to state regulation to the extent provided in section 
514(b)(6)(A). MEWAs which are not employee benefit plans are 
unconditionally subject to state law.
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    The Multiple Employer Welfare Arrangement Act legislation was 
introduced to counter what the Congressional drafters termed abuse by 
the ``operators of bogus `insurance' trusts.'' 128 Cong. Rec. E2407 
(1982) (Statement of Congressman Erlenborn). In his comments, 
Congressman Erlenborn noted that certain MEWA operators had been 
successful in thwarting timely investigations and enforcement 
activities of state agencies by asserting that such entities were ERISA 
plans exempt from state regulation by the terms of section 514 of 
ERISA. The goal of the bill, according to Congressman Erlenborn, was to 
remove ``any potential obstacle that might exist under current law 
which could hinder the ability of the States to regulate multiple 
employer welfare arrangements to assure the financial soundness and 
timely payment of benefits under such arrangements.'' Id. This concern 
was also expressed by the Committee on Education and Labor in the 
Activity Report of the Pension Task Force (94th Congress, 2d Session, 
1977) cited by Congressman Erlenborn:

    It has come to our attention, through the good offices of the 
National Association of State Insurance Commissioners, that certain 
entrepreneurs have undertaken to market insurance products to 
employers and employees at large, claiming these products to be 
ERISA covered plans. For instance, persons whose primary interest is 
in the profiting from the provision of administrative services are 
establishing insurance companies and related enterprises. The 
entrepreneur will then argue that his enterprise is an ERISA benefit 
plan which is protected under ERISA's preemption provision from 
state regulation.

    Id. As a result of the addition of section 514(b)(6), certain state 
laws regulating insurance apply to employee benefit plans that are 
MEWAs. However, the definition of a MEWA in section 3(40) provides that 
an employee benefit plan is not a MEWA if it is established or 
maintained pursuant to an agreement which the Secretary finds to be a 
collective bargaining agreement. Such a plan is therefore not subject 
to state insurance law regulation under section 514(b)(6). This 
exclusion is necessary to avoid disrupting the activities of legitimate 
Taft-Hartley plans.

[[Page 39209]]

    While the Multiple Employer Welfare Arrangement Act of 1983 
significantly enhanced the states' ability to regulate MEWAs, problems 
in this area continue to exist as the result of the exception for 
collectively bargained plans contained in the 1983 amendments. This 
exception is now being exploited by some MEWA operators who, through 
the use of sham unions and collective bargaining agreements, market 
fraudulent insurance schemes under the guise of collectively bargained 
welfare plans exempt from state insurance regulation.\2\ Another 
problem in this area involves the use of collectively bargained 
arrangements as vehicles for marketing health care coverage nationwide 
to employees and employers with no relationship to the bargaining 
process or the underlying agreement.

    \2\In addition, the Department has received requests to make 
individual determinations concerning the status of particular plans 
under section 3(40). See, e.g., Ocean Breeze Festival Park v. Reich, 
853 F. Supp. 906, 910 (1994) (denying motion for mandamus and 
granting leave to amend complaint), summary judgement granted sub 
nom. Virginia Beach Policemen's Benevolent Association, et al., v. 
Reich, 881 F. Supp. 1059 (E.D.Va. 1995); Amalgamated Local Union No. 
355 v. Gallagher, No. 91 CIV 0193(RR) (E.D.N.Y. April 15, 1991).
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    The Department believes that regulatory guidance in this area is 
necessary to ensure that (1) state insurance regulators have 
ascertainable guidelines to help identify and regulate MEWAs operating 
in their jurisdiction and (2) sponsors of employee health benefit 
programs will be able to determine independently whether their plans 
are established or maintained pursuant to collective bargaining 
agreements for purposes of section 3(40)(A) without imposing the 
additional burden of having to apply to the Secretary for an individual 
finding.\3\

    \3\It is the Department's position that the language of section 
3(40) of ERISA does not require the Secretary to make individual 
findings that specific agreements are collective bargaining 
agreements. Moreover, a district court recently found that the 
Secretary has no ``statutory responsibility'' to make individualized 
findings. Virginia Beach Policeman's Benevolent Association v. 
Reich, 881 F. Supp. 1059, 1069-70 (E.D.Va. 1995).
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    The proposed regulation first establishes specific criteria that 
the Secretary finds must be present in order for an agreement to be a 
collection bargaining agreement for purposes of section 3(40) and, 
second, establishes certain criteria applicable to determining when an 
employee benefit plan or other arrangement is established or maintained 
under or pursuant to such an agreement for purposes of section 3(40). 
In this regard, the Department notes that section 3(40) not only 
requires the existence of a bona fide collective bargaining agreement, 
but also requires that the plan be ``established or maintained'' 
pursuant to such an agreement. The Department believes that, in 
establishing the exception under section 3(40)(A)(i) of the Act, 
Congress intended to accommodate only those plans established or 
maintained to provide benefits to bargaining unit employees on whose 
behalf the plans where collectively bargained. For this reason, the 
Department believes that the exception under section 3(40)(A)(i) should 
be limited to plans providing coverage primarily to those individuals 
covered under collective bargaining agreements. Accordingly, the 
criteria in the proposed regulation relating to whether a plan or other 
arrangement qualifies as ``established or maintained'' is intended to 
ensure that the statutory exception is only available to plans whose 
participant base is predominately comprised of the bargaining unit 
employees on whose behalf such benefits were negotiated.
    The proposed regulation would, upon adoption, constitute the 
Secretary's finding for purposes of determining whether an agreement is 
a collective bargaining agreement pursuant to section (3(40) of the 
Act. The Department does not intend to make individual findings or 
determinations concerning an entity's compliance with the proposed 
regulation. The criteria contained in the proposed regulation are 
designed to enable entities and state insurance regulatory agencies to 
determine whether the requirements of the statute are met. Under the 
proposed regulation, entities seeking to comply with these criteria 
must, upon request, provide documentation of their compliance with the 
criteria to the state or state agency charged with investigating and 
enforcing state insurance laws.

B. Description of the Proposal

    Proposed Sec. 2510.3-40(a) follows the language of section 3(40)(A) 
of the Act and states that the term multiple employer welfare 
arrangement does not include an employee welfare benefit plan which is 
established or maintained under or pursuant to one or more agreements 
which the Secretary finds to be collective bargaining agreements. 
Proposed Sec. 2510.3-40(b) provides criteria which the Secretary finds 
to be essential for an agreement to be collectively bargained for 
purposes of section 3(40)(A) of the Act. Proposed Sec. 2510.3-40(c) 
sets forth requirements concerning individuals covered by the employee 
welfare benefit plan that must be satisfied in order for an employee 
welfare benefit plan to be considered established or maintained under 
or pursuant to a collective bargaining agreement as defined in 
Sec. 2510.3-40(b). Proposed Sec. 2510.3-40(d) provides definitions of 
the terms ``employee labor organization'' and ``supervisors and 
managers'' for purposes of this section. Proposed Sec. 2510.3-40(e) 
explains that a plan does not satisfy the requirements of this section 
if the plan or any entity associated with the plan (such as the 
employee labor organization or the employer) fails or refuses to comply 
with the requests of a state or state agency with respect to any 
documents or other evidence in its possession or control that are 
necessary to make a determination concerning the extent to which the 
plan is subject to state insurance law. Proposed Sec. 2510.3-40(f) 
provides that, in a proceeding brought by a state or state agency to 
enforce the insurance laws of the state, nothing in the proposed 
regulation shall be construed to prohibit allocation of the burden of 
proving the existence of all the criteria required by this section to 
the entity seeking to be treated as other than a MEWA.
    Under the proposed regulation, a plan that fails to meet the 
applicable criteria would be a MEWA and thus subject to state insurance 
laws as provided in section 514(b)(6) of ERISA.
    Each subsection of the proposed regulation is described in detail 
below.

1. General Rule and Scope

    Proposed regulation 29 CFR 2510.3-40 establishes criteria which 
must be met for a plan to be established or maintained under or 
pursuant to one or more agreements which the Secretary finds to be 
collective bargaining agreements for purposes of section 3(40) of the 
Act. The proposed regulation is not intended to apply to or affect any 
other provision of federal law.\4\

    \4\The Department notes that section 3(40) of ERISA is not the 
only provision that provides special rules to be applied to 
agreements that the Secretary finds to be collectively bargained. 
For example, sections 404(a)(1) (B) and (C) of the Internal Revenue 
Code (Code) provide special rules to determine the maximum amount of 
deductible contributions in the case of amendments to plans that the 
Secretary of Labor finds to be collectively bargained. In addition, 
Code sections 410(b)(3) and 413(a) exclude from minimum coverage 
requirements certain employees covered by an agreement that the 
Secretary finds to be a collective bargaining agreement.
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    In the Department's view, the exclusion of collectively bargained 
plans or other arrangements from the definition of a MEWA in section 
3(40)(A) is an exception to the general statutory rule. Thus the entity 
asserting the applicability of the provisions concerning collectively 
bargained plans 

[[Page 39210]]
in section 3(40) has the burden of providing evidence of compliance 
with the conditions of the statutory exception and the criteria set 
forth in the proposed regulation.\5\ Accordingly, if an entity's status 
as established or maintained pursuant to one or more agreements which 
satisfy the criteria of the proposed regulation is challenged by a 
state or state agency, the entity seeking to be treated as other than a 
MEWA must produce sufficient evidence to establish that all of the 
requirements of the proposed regulation have been met.\6\

    \5\2A Sutherland Statutory Construction Sec. 47.11 (Norman J. 
Singer ed. 5th ed. 1992); United States v. First City National Bank 
of Houston, 386 U.S. 361, 366 (1967) (burden of establishing 
applicability of statutory exception is on entity that asserts it); 
Federal Trade Commission v. Morton Salt Co., 334 U.S. 37, 44-45 
(1948) (``First, the general rule of statutory construction [is] 
that the burden of proving justification or exemption under a 
special exception to the prohibitions of a statute generally rests 
on one who claims its benefits * * *.'')
    \6\See Donovan v. Cunningham, 716 F. 2d 1455, 1467-68 n.27 (5th 
Cir. 1983) (citing Securities and Exchange Commission v. Ralston 
Purina Co., 346 U.S. 119, 126 (1953), ``As the Supreme Court has 
observed in a different context, it seems `fair and reasonable' to 
place the burden of proof upon a party who seeks to bring his 
conduct within a statutory exception to a broad remedial scheme.'')
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2. Definition of a Collective Bargaining Agreement

    Proposed Sec. 2510.3-40(b) establishes criteria that an agreement 
must meet in order to be a collective bargaining agreement for purposes 
of this section. An agreement constitutes a collective bargaining 
agreement only if the agreement is in writing and is executed by or on 
behalf of an employer of employees described in Sec. 2510.3-40(c)(1) 
and by representatives of an employee labor organization meeting the 
requirements of Sec. 2510.3-40(d)(1). In addition, the agreement must 
also be the result of good faith, arms-length bargaining binding 
signatory employers and the employee labor organization to the terms of 
the agreement for a specified project or period of time, and the 
agreement must be one which cannot be unilaterally amended or 
terminated. The Department notes that agreements in which an employer 
adopts all provisions of an existing agreement binding an employer and 
an employee labor organization to the terms and conditions of a 
collective bargaining agreement, such as a pattern agreement, will not 
fail to satisfy the requirements of proposed Sec. 2510.3-40(b) if the 
original agreement as initially adopted satisfied the requirements of 
this section. The Department has also determined that collective 
bargaining agreements containing an agreement not to strike and 
providing that the collective bargaining agreement will terminate upon 
the initiation of a strike, often called ``no strike'' provisions, will 
not fail to satisfy the proposed regulation solely by reason of such 
provisions.
    Proposed Sec. 2510.3-40(b)(6) requires that a collective bargaining 
agreement may not provide for termination of the agreement solely as a 
result of the failure to make contributions to the plan. Proposed 
Sec. 2510.3-40(b)(7) provides that an agreement will not constitute a 
collective bargaining agreement under this section if, in addition to 
the provision of health coverage, the agreement encompasses only the 
minimum requirements mandated by law with respect to the terms and 
conditions of employment (e.g., minimum wage and workers' 
compensation). The phrase ``terms and conditions of employment'' as 
used in the proposed regulation is intended to have the same meaning 
and application as in case law decided under the National Labor 
Relations Act, 29 U.S.C. Sec. 151 et seq. (NLRA), and would include 
wages, hours of work and other matters of employment such as grievance 
procedures and seniority rights. For purposes of this section, the 
expiration of a collective bargaining agreement will not in and of 
itself prevent the agreement from satisfying the requirements under the 
proposed regulation if the agreement, although expired, continues in 
force.
3. Plans Established or Maintained

    The proposed regulation also establishes certain criteria to 
determine when a plan is established or maintained under or pursuant to 
one or more collective bargaining agreements for purposes of section 
3(40). Proposed Sec. 2510.3-40(c) provides that in situations where a 
plan covers both individuals who are members of a group or bargaining 
unit represented by an employee labor organization as defined in 
proposed Sec. 2510.3-40(d)(1) as well as other individuals, the plan 
will not be considered to be established or maintained pursuant to one 
or more collective bargaining agreements unless no less than 85% of the 
individuals covered by the plan are present or certain former employees 
and their beneficiaries, excluding supervisors and managers as defined 
in paragraph (d)(2), who are currently or who were previously covered 
by a collective bargaining agreement.\7\ In addition, three groups of 
individuals may participate in the plan but are not counted in 
determining the total number of individuals covered by the plan for 
purposes of calculating the 85% limitation: (1) Present or former 
employees of the plan or of a related plan established or maintained 
pursuant to the same collective bargaining agreement; (2) present or 
former employees of the employee labor organization as defined in 
paragraph (d)(1) that is a signatory to the collective bargaining 
agreement pursuant to which the plan is maintained, and (3) 
beneficiaries of individuals in groups (1) and (2).

    \7\Although the proposed regulation itself does not impose any 
specific restrictions concerning individuals who may be included in 
the 15%, the entity as a whole must comply with the requirements of 
section 3(1) of ERISA in order to be an employee welfare benefit 
plan covered by the Act. Section 3(1) provides that status as an 
ERISA covered plan is dependent on the composition and attributes of 
the participant base as well as the characteristics of the employer 
and employee organization. See, e.g., Bell v. Employee Security 
Benefits Association, 437 F. Supp. 382 (1977); Advisory Opinion 93-
32 (letter to Mr. Kevin Long, December 16, 1993); Advisory Opinion 
85-03A (letter to Mr. James Ray, January 15, 1985); Advisory Opinion 
77-59 (letter to Mr. William Hager, August 26, 1977).
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    For purposes of the proposed regulation, the term ``former 
employee'' is limited to individuals who are receiving workers' 
compensation or disability benefits, continuation coverage pursuant to 
the Consolidated Omnibus Budget Reconciliation Act (COBRA) (Part 6 of 
title I of ERISA, 29 U.S.C. Secs. 1161-1168), or who have retired or 
separated from employment after working for more than 1000 hours a year 
for at least three years for a signatory employer or employee 
organization, or the plan or related plan. For purposes of paragraph 
(c)(4), to be considered an employee of the plan, a related plan, or 
the signatory employee labor organization, an individual must work a 
least (A) 15 hours a week or 60 hours a month during the period of 
coverage under the plan, or (B) have worked at least 1000 hours in the 
last year and currently be on bona fide leave based on sickness or 
disability of the individual or the individual's family or on earned 
vacation time.
    The proposed regulation requires that the plan satisfy the 85% 
limitation on the last day of each of the previous five calendar 
quarters unless the plan has not been in existence for five calendar 
quarters. If the plan or other arrangement has been in existence for a 
shorter period of time, it must satisfy the 85% limitation on the last 
day of each calendar quarter during which it has been in existence.
    Through the requirement that no less than 85% of individuals 
covered by the plan be present or former bargaining 

[[Page 39211]]
unit members, the proposed regulation intends to treat as MEWAs 
arrangements that permit individuals to participate in an employee 
welfare benefit plan solely as a result of membership or affiliation 
with an entity and not as a result of the individuals being 
legitimately represented in collective bargaining by a bona fide 
employee labor organization.\8\ The Department believes that the 85% 
limitation in the proposed regulation is consistent with the purpose of 
the statutory exception in section 3(40)(A)(i) of ERISA for employee 
welfare benefit plans which are established or maintained as the result 
of collective bargaining on behalf of employees concerning the terms 
and conditions of their employment. To the extent that the Department's 
position as indicated in Advisory Opinion 9106A (January 15, 1991) to 
Gerald Grimes, Oklahoma Insurance Commissioner (concerning a trust that 
provided health care and other benefits to ``associate members'' of a 
labor organization who were not represented by the organization in 
collective bargaining), appears to express a different position, it 
would be superseded by the adoption of a final regulation that 
incorporates this requirement.

    \8\A number of instances have been brought to the Department's 
attention where entities have attempted to utilize purported 
collective bargaining agreements as a basis for marketing insurance 
coverage, generally under the guise of ``associate membership,'' to 
non-bargaining unit individuals and unrelated employers. See, e.g., 
Empire Blue Cross and Blue Shield v. Consolidated Welfare, 830 F. 
Supp. 170 (E.D.N.Y. 1993).
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4. Definition of Employee Labor Organization

    Proposed Sec. 2510.3-40(d)(1) defines the term ``employee labor 
organization'' for purposes of this section. Proposed Sec. 2510.3-
40(d)(1)(i) provides that, with respect to a particular collective 
bargaining agreement, an employee labor organization must represent the 
employees of each signatory employer in one of two ways. All of a 
signatory employer's bargaining units covered by the collective 
bargaining agreement must either be certified by the National Labor 
Relations Board, or the employee labor organization must be lawfully 
recognized by the signatory employer as the exclusive representative 
for the employer's bargaining unit employees covered by the collective 
bargaining agreement. Such representation must take place without 
employer interference or domination. For purposes of the proposed 
regulation, employer interference or domination in the formation, 
administration, or operation of the employee labor organization 
includes taking an active part in organizing an employee organization 
or committee to represent employees; bringing pressure upon employees 
to join an employee organization; improperly favoring one of two or 
more employee organizations that are competing to represent employees; 
or otherwise unlawfully promoting or assisting in the formation or 
operation of the employee organization.
    Under proposed Sec. 2510.3-40(d)(1)(ii), an employee labor 
organization must operate for a substantial purpose other than that of 
offering or providing health coverage. Proposed Sec. 2510.3-
40(d)(1)(iii) states that an employee labor organization may not pay 
commissions, fees, or bonuses to individuals other than full-time 
employees of the employee labor organization in connection with the 
solicitation of employers or participants with regard to a collectively 
bargained plan. In addition, under subsection (d)(1)(iv), the term 
``employee labor organization'' does not include an organization that 
utilizes the services of licensed insurance agents or brokers for 
soliciting employers or participants in connection with a collectively 
bargained plan. Proposed Sec. 2510.3-40(d)(1)(v) requires an employee 
labor organization to be a ``labor organization'' as defined in section 
3(i) of the Labor-Management Reporting and Disclosure Act, 29 U.S.C. 
402(i). Proposed Sec. 2510.3-40(d)(1)(vi) also requires an employee 
labor organization to qualify as a tax-exempt labor organization under 
section 501(c)(5) of the Internal Revenue Code of 1986. It is the view 
of the Department that these criteria are necessary to distinguish 
organizations that provide benefits through legitimate employee 
representation from organizations that are primarily in the business of 
marketing commercial insurance products.

5. Supervisors and Managers

    Proposed Sec. 2510.3-40(d)(2) defines the terms ``supervisors and 
managers'' for purposes of this section. Proposed Sec. 2510.3-40(d)(2) 
defines as ``supervisors and managers'' those employees of a signatory 
employer to a collective bargaining agreement who, acting on behalf of 
the employer, have the authority to hire, transfer, suspend, layoff, 
recall, promote, discharge, assign, reward, or discipline other 
employees, or who have responsibility to direct other employees or to 
adjust their grievances, or who have power to make effective 
recommendations concerning any of the actions described above. In order 
to be considered a supervisor or manager, an individual must be able to 
use independent judgment in the exercise of authority, responsibility, 
and power, and that exercise must be more than a routine or clerical 
function.

6. Failure To Provide Documents

    The proposed regulation provides that even if a plan meets the 
requirements of subsections 2510.3-40 (b) and (c) of this section, it 
will not be considered to be established or maintained pursuant to an 
agreement that the Secretary finds to be a collective bargaining 
agreement if an entity, plan, employee labor organization or employer 
which is a party to the agreement fails or refuses to provide documents 
or evidence in its possession or control to a state or state agency 
which reasonably requests documents or evidence in order to determine 
the status of any entity either under the proposed regulation or under 
state insurance laws. While the proposed regulation enumerates criteria 
designed to enable entities to determine whether the requirements of 
the statute are met, the Department intends that, when requested to do 
so, entities will provide documentation of their compliance with the 
criteria to the state or state agency charged with investigating and 
enforcing state insurance laws. An entity seeking to be treated as 
other than a MEWA under the provisions of the proposed regulation has 
the burden of producing sufficient documents and other evidence to 
prove that it meets the criteria of the proposed regulation and is 
therefore entitled to application of the statutory exemption from the 
definition of a MEWA.
    The Department anticipates that states or state agencies, including 
any commission, board or committee charged with investigating and 
enforcing state insurance laws, will utilize existing jurisdiction 
under state laws to require the production of documents and other 
evidence. Where the entity's compliance with the criteria of the 
proposed regulation is disputed by a state or state agency, the 
Department expects that the state or state agency will use its existing 
authority under state law to bring the matter before the appropriate 
state adjudicatory body to determine the facts. The proposed regulation 
does not restrict the authority of the state or state agency to 
reinvestigate the entity at any time if it believes the entity is not 
in compliance with the proposed regulation or with state laws.

7. Allocation of Burden of Proof

    The proposed regulation provides that, in a proceeding brought by a 
state 

[[Page 39212]]
or a state agency to enforce the insurance laws of the state, nothing 
in the proposed regulation shall be read or construed to prohibit the 
allocation of the burden of proving the existence of all criteria 
required by this section to the entity seeking to be treated as other 
than a MEWA. The proposed regulation enumerates criteria designed to 
enable entities to determine whether the requirements of the statute 
are met. However, as discussed in paragraph 1. General Rule and Scope, 
supra, the Department believes that when challenged, the entity 
asserting the applicability of an exception has the burden of providing 
evidence of compliance with each of the terms of the proposed 
regulation.
Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980 requires each Federal agency 
to perform a Regulatory Flexibility Analysis for all rules that are 
likely to have a significant economic impact on a substantial number of 
small entities. Small entities include small businesses, organizations, 
and governmental jurisdictions. The Pension and Welfare Benefits 
Administration has determined that, if adopted, this proposed rule may 
have a significant economic impact on a substantial number of small 
entities. Accordingly, as provided in section 603 of the Regulatory 
Flexibility Act (5 U.S.C. Sec. 601, et seq.), the following initial 
regulatory flexibility analysis is provided:
    (1) PWBA is considering the proposed regulation because it believes 
that regulatory guidance in this area is necessary to ensure (a) that 
state insurance regulators have ascertainable guidelines to help 
identify and regulate MEWAs operating in their jurisdictions, and (b) 
that sponsors of employee welfare benefit plans will be able to 
determine independently whether their plans are expected plans under 
section 3(40)(A) of ERISA. A more detailed discussion of the agency's 
reasoning for issuing the proposed regulation is found in the 
Background section, above.
    (2) The objective of the proposed regulation is to provide guidance 
on the application of an exception to the definition of the term 
``multiple employer welfare arrangement'' (MEWA) which is found in 
section 3(40) of ERISA and applies to certain employee welfare benefit 
plans. The legal basis for the proposed regulation is found at ERISA 
section 3(40) (23 U.S.C. 1002(40)); an extensive list of authority may 
be found in the Statutory Authority section, below.
    (3) No accurate estimate of the number of small entities affected 
by the proposed regulation is available. No small governmental 
jurisdictions will be affected. It is estimated that a substantial 
number of small businesses and organizations will be affected, due to 
the fact that it is precisely those entities, seeking group health care 
coverage, that are most harmed by unscrupulous entrepreneurs who 
purport to provide employee health benefits. In a report entitled 
``Employee Benefits: States Need Labor's Help Regulating Multiple 
Employer Welfare Arrangements,'' the United States General Accounting 
Office (GAO) calculated that between January 1988 and June 1991, 
fraudulent MEWAs left at least 398,000 participants and their 
beneficiaries with $123 million in unpaid medical claims and left many 
other participants without the health insurance they had paid for.\9\ 
By restricting fraudulent and financially unsound MEWAs, the proposed 
regulation may limit the sources of health care coverage offered to 
small businesses. On the other hand, MEWAs that either meet the section 
3(40) criteria or meet state regulatory standards are less likely to 
demonstrate the type of fraudulent or imprudent activity that prompted 
Congressional action. The GAO Report indicated that, during the January 
1988 and June 1991 period, more than 600 MEWAs failed to comply with 
state insurance laws and some violated criminal statutes.\10\ 
Consequently, small entities will receive a benefit from the reduced 
incidence of fraud and insolvency among the pool of MEWAs in the 
marketplace. To the extent that MEWAs themselves are small entities, 
they too will be affected by the proposed regulation.

    \9\GAO/HRD-92-40 (March 1992) at 2.
    \10\Id.
---------------------------------------------------------------------------

    (4) No identical reporting or recordkeeping is required under the 
proposed rule. However, this regulation clarifies the information that 
must be provided upon request to state authorities by those MEWAs 
wishing to take advantage of the exception under section 3(40)(A) of 
ERISA. The information to be provided will vary depending upon the 
entity involved but will include a written collective bargaining 
agreement and records on the individual covered by the plan for at 
least the last five calendar quarters. Such information is routinely 
prepared and held in the ordinary course of business under current law 
by most small entities. It is anticipated that the preparation of some 
of these documents would require the professional skills of an 
attorney, accountant, or other health benefit plan professional; 
however, the majority of the recordkeeping may be handled by clerical 
staff.
    (5) No federal rules have been identified that duplicate overlap or 
conflict with the proposed rule.
    (6) No significant alternatives which would minimize the impact on 
small entities have been identified. The proposed regulation is less 
costly in comparison with the alternative methods of determining 
compliance with section 3(40), such as case-by-case analysis by PWBA of 
each employee welfare benefit plan, or litigation. The costs of such 
alternatives would be unduly burdensome on small entities. No federal 
reporting is required. Instead, the proposed regulation would create 
standards by which the MEWAs may be reviewed by the states. It would be 
inappropriate to create an alternative with lower compliance criteria, 
or an exemption under the proposed regulation, for small MEWAs because 
those are the entities which pose a higher degree of risk of non-
performance due to their increased likelihood of being under-funded or 
otherwise having inadequate reserves to meet the benefits claims 
submitted for payment.
Executive Order 12866 Statement

    Under Executive Order 12866 (58 FR 51735, Oct. 4, 1993), the 
Department must determine whether the regulatory action is 
``significant'' and therefore subject to review by the Office of 
Management and Budget (OMB) and the requirements of the Executive 
Order. Under section 3(f), the order defines a ``significant regulatory 
action'' as an action that is likely to result in a rule (1) having an 
annual effect on the economy of $100 million or more, or adversely and 
materially affecting a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or State, 
local or tribal governments or communities (also referred to as 
``economically significant''); (2) creating a serious inconsistency or 
otherwise interfering with an action taken or planned by another 
agency; (3) materially altering the budgetary impacts of entitlement, 
grants, user fees, or loan programs or the rights and obligations of 
recipients thereof; or (4) raising novel legal or policy issues arising 
out of legal mandates, the President's priorities, or the principles 
set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, the Department has 
determined that this program creates a improved method for statutory 
compliance that will reduce paperwork and regulatory compliance burdens 
on state 

[[Page 39213]]
governments, businesses, including small businesses and organizations, 
and make better use of scarce federal resources, in accord with the 
mandates of the Paperwork Reduction Act, the Regulatory Flexibility 
Act, and the President's priorities. The Department believes this 
notice is ``significant'' under category (4), supra, and subject to OMB 
review on that basis.

Paperwork Reduction Act

    The proposed regulation does not contain any information collection 
or recordkeeping requirements as those terms are defined under the 
Paperwork Reduction Act because the information to be provided on 
request to state authorities will vary in each instance depending on 
the entity involved. Consequently, there is no requirement that the 
entities comply with identical reporting or recordkeeping requirements. 
5 CFR 1320.7(c). Thus, the proposed regulation imposes no additional 
federal paperwork burden and the Paperwork Reduction Act does not 
apply.

Statutory Authority

    This regulation is proposed pursuant to section 3(40) of ERISA 
(Pub. L. 97-473, 96 Stat. 2611, 2612, 29 U.S.C. 1002(40)) and section 
505 (Pub. L. 93-406, 88 Stat. 892, 894, 29 U.S.C. 1135) of ERISA and 
under Secretary of Labor's Order No. 1-87, 52 FR 13139, April 21, 1987.

List of Subjects in 29 CFR Part 2510

    Employee benefit plans, Employee Retirement Income Security Act, 
Pension and Welfare Benefit Administration.

Proposed Regulation

    For the reasons set out in the preamble, the Department proposes to 
amend Part 2510 of Chapter XXV of Title 29 of the Code of Federal 
Regulations as follows:

PART 2510--[AMENDED]

    1. The authority for Part 2510 is revised to read:

    Authority: Secs. 3(2), 111(c), 505, Pub. L. 93-406, 88 Stat. 
852, 894 (29 U.S.C. 1002(2), 1031, 1135); Secretary of Labor's Order 
No. 27-74, 1-86 (51 FR 3521, January 28, 1986), 1-87 (52 FR 13139, 
April 21, 1987), and Labor Management Services Administration Order 
No. 2-6.
    Section 2510.3-40 is also issued under sec. 3(40), Pub. L. 97-
473, 96 Stat. 2611, 2612 (29 U.S.C. 1002(40)).
    Section 2510.3-101 is also issued under sec. 102 of 
Reorganization Plan No. 4 of 1978, 43 FR 47713, 3 CFR 1978 Comp., p. 
332, effective under E.O. 12108, 44 FR 1065, 3 CFR 1978 Comp. p. 275 
and sec. 11018(d) of Pub. L. 99-272, 100 Stat. 82.
    Section 2510.3-102 is also issued under sec. 102 of 
Reorganization Plan No. 4 of 1978, 43 FR 47713, 3 CFR 1978 Comp., p. 
332, effective under E.O. 12108, 44 FR 1065, 3 CFR comp., p. 275.

    2. Part 2510 is amended by adding new Sec. 2510.3-40 to read:
Sec. 2510.3-40  Plans established or maintained pursuant to one or more 
collective bargaining agreements.

    (a) General. Section 3(40)(A) of the Employee Retirement Income 
Security Act of 1974 (the Act) provides that the term ``multiple 
employer welfare arrangement'' (MEWA) does not include an employee 
welfare benefit plan or other arrangement which is established or 
maintained under or pursuant to one or more agreements which the 
Secretary of Labor (the Secretary) finds to be a collective bargaining 
agreement(s). The purposes of the proposed regulation are to establish 
specific criteria that the Secretary finds must be met for an agreement 
to be a collective bargaining agreement and to establish criteria for 
determining when an employee benefit plan is established or maintained 
pursuant to such an agreement.
    (b) Collective Bargaining Agreement. The Secretary finds, for 
purposes of section 3(40)(A) of the Act, that an agreement constitutes 
a collective bargaining agreement only if the agreement--
    (1) is in writing;
    (2) is executed by, or on behalf of, an employer of employees 
represented by an employee labor organization;
    (3) is executed by an employee labor organization;
    (4) is the product of good faith, arms-length bargaining between 
one or more employers and an employee labor organization or uniformly 
incorporates and binds one or more employers and an employee labor 
organization to the terms and conditions of another agreement which as 
originally negotiated and adopted satisfies the requirements of this 
section;
    (5) binds signatory employers and the employee labor organization 
to the terms of the agreement for a specified project or period of 
time, cannot be unilaterally amended or terminated and contains 
procedures for amending the terms and conditions of the agreement;
    (6) does not terminate solely as a result of failure to make 
contributions to the plan; and
    (7) in addition to the provision of health coverage, provides more 
than the minimum requirements mandated by law with respect to the terms 
and conditions of employment (e.g., provides for more than minimum wage 
and workers' compensation).
    (c) Established or Maintained. An employee benefit plan is not 
established or maintained under or pursuant to one or more collective 
bargaining agreements for purposes of section 3(40)(A) of the Act 
unless not less than 85 percent of the individuals covered by the plan 
are--
    (1) employees, excluding supervisors and managers, currently 
included in one or more groups or bargaining units of employees covered 
by one or more collective bargaining agreements as defined in paragraph 
(b) of this section which expressly refer to the plan and provide for 
contributions thereto; or
    (2) persons who were formerly employees described in paragraph 
(c)(1) of this section who are receiving workers' compensation or 
disability benefits, COBRA continuation coverage pursuant to Part 6 of 
title I of ERISA, 29 U.S.C. 1161-1168, or who have retired or separated 
from employment after working more than 1,000 hours a year for at least 
three years; or
    (3) beneficiaries of individuals included in paragraphs (c) (1) and 
(2) of this section.
    (4) For purposes of this subsection, the following individuals 
covered by the plan or other arrangement shall not be counted in 
determining the total number of individuals covered by the plan--
    (i) employees of the plan or another plan established or maintained 
pursuant to the same collective bargaining agreement(s);
    (ii) employees of an employee labor organization that meets the 
requirements of paragraph (d)(1) of this section and that is a 
signatory to the collective bargaining agreement(s) pursuant to which 
the plan is maintained;
    (iii) persons who were formerly employees described in paragraphs 
(c)(4) (i) and (ii) of this section who are receiving workers' 
compensation or disability benefits, COBRA continuation coverage 
pursuant to part 6 of title I of ERISA, 29 U.S.C. 1161-1168, or who 
have retired or separated from employment after working more than 1,000 
hours a year for at least three years; or
    (iv) beneficiaries of individuals included in paragraphs (c)(4) 
(i), (ii) and (iii) of this section;
    (v) provided that, for purposes of paragraphs (c)(4) (i) and (ii) 
of this section, in order to be an employee, an individual must work at 
least:
    (A) 15 hours a week or 60 hours a month during the period of 
coverage under the plan, or

[[Page 39214]]

    (B) Have worked more than 1000 hours in the last year and currently 
be on bona fide leave based on sickness or disability of the individual 
or the individual's family or on earned vacation time.
    (5) For purposes of calculating whether the 85% limitation has been 
met, a plan or other arrangement must satisfy the requirements of 
paragraphs (c) (1) through (4) of this section on the last day of--
    (i) each of the previous five calendar quarters; or
    (ii) if the plan has been in existence for fewer than five calendar 
quarters, every calendar quarter during which the plan has been in 
existence.

Definitions

    (1) Employee Labor Organization. For purposes of this section, an 
``employee labor organization'' shall mean an organization that--
    (i) represents, with respect to a particular collective bargaining 
agreement, the employees of each signatory employer to the agreement 
where:
    (A) All of the employer's bargaining units covered by the agreement 
are certified by the National Labor Relations Board, or
    (B) The employee labor organization is lawfully recognized by the 
signatory employer (e.g., without employer interference or domination) 
as the exclusive bargaining representative for the employer's 
bargaining unit employees covered by the agreement;
    (ii) provides substantial representational services to employees 
regarding the terms and conditions of their employment in addition to 
health coverage;
    (iii) does not pay commissions, fees, or bonuses to individuals, 
other than full-time employees of the employee labor organization, in 
connection with the solicitation of employers or participants;
    (iv) does not utilize the services of licensed insurance agents or 
brokers for soliciting employers or participants;
    (v) is a ``labor organization'' as defined in section 3(i) of the 
Labor-Management Reporting and Disclosure Act, 29 U.S.C. section 
402(i); and
    (vi) qualifies as a tax-exempt labor organization under section 
501(c)(5) of the Internal Revenue Code of 1986.
    (2) Supervisors and Managers. For purposes of this section, 
``supervisors and managers'' shall mean any employees of a signatory 
employer to an agreement described in paragraph (b) of this section 
who, acting in the interest of the employer, have--
    (i) Authority to hire, transfer, suspend, layoff, recall, promote, 
discharge, assign, reward or discipline other employees; or
    (ii) Responsibility to direct other employees or to adjust their 
grievances; or
    (iii) Power to make effective recommendations concerning the 
actions described in paragraphs (d)(2) (i) and (ii) of this section;

as long as the exercise of the authority, responsibility and power in 
paragraphs (d)(2) (i), (ii) or (iii) of this section is not of a merely 
routine or clerical nature, but requires the use of independent 
judgment.
    (e) Failure to provide documents or other necessary evidence. This 
section shall not apply to any plan or other arrangement if, in 
conjunction with an investigation or proceeding by a state or state 
agency, the plan, arrangement, any employee labor organization or 
employer which is a party to the agreement(s) at issue fails or refuses 
to provide the state or state agency with any document or other 
evidence in its possession or control that is reasonably requested by 
the state or state agency for the purpose of determining the status of 
the plan or other arrangement under state insurance laws or under this 
section.
    (f) Allocation of burden of proof. In a proceeding brought to 
enforce state insurance laws, nothing in the proposed regulation shall 
be construed to prohibit a state or state agency from allocating the 
burden of proving the existence of all the criteria required by this 
section to the entity seeking to be treated as other than a MEWA.

    Signed at Washington, DC, this 26th day of July 1995.
Olena Berg,
Assistant Secretary, Pension and Welfare Benefits Administration.
[FR Doc. 95-18749 Filed 7-27-95; 11:12 am]
BILLING CODE 4510-29-M