[Federal Register Volume 61, Number 228 (Monday, November 25, 1996)]
[Proposed Rules]
[Pages 59845-59848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30030]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2510


Clarification of Application of ERISA to Insurance Company 
General Accounts

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Request for information.

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SUMMARY: This document requests information from the public concerning 
issues which the Department has under consideration in developing 
regulations to clarify the application of the Employee Retirement 
Income Security Act of 1974 as amended (ERISA), to insurance company 
general accounts. Pursuant to section 1460 of the Small Business Job 
Protection Act of 1996 (Pub. L. 104-188), section 401 of ERISA has been 
amended. Section 401 now provides that no later than June 30, 1997, the 
Department must issue proposed regulations to: Provide guidance for the 
purpose of determining, where an insurer issues one or more policies to 
or for the benefit of an employee benefit plan (and such policies are 
supported by assets of the insurer's general account), which assets 
held by the insurer (other than plan assets held in its separate 
accounts) constitute assets of the plan for purposes of part 4 of Title 
I of ERISA and section 4975 of the Internal Revenue Code of 1986; and 
provide

[[Page 59846]]

guidance with respect to the application of Title I to the general 
account assets of insurers. The information provided to the Department 
in response to this document will assist the Department in developing 
the proposed regulations.

DATES: Comments must be received on or before January 24, 1997.

ADDRESSES: Comments (preferably, at least three copies) should be 
addressed to: Pension and Welfare Benefits Administration, Office of 
Exemption Determinations, Room N-5649, 200 Constitution Ave., N.W., 
Washington, D.C. 20210. Attention: ``General Account Contracts''.

FOR FURTHER INFORMATION CONTACT:
Lyssa E. Hall, Office of Exemption Determinations, Pension and Welfare 
Benefits Administration, U.S. Department of Labor, 200 Constitution 
Avenue, N.W., Washington, D.C. 20210, (202) 219-8971 (not a toll-free 
number) or Timothy Hauser, Plan Benefits Security Division, Office of 
the Solicitor, (202) 219-8637 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

A. Background

    Life insurance companies issue a variety of group contracts for use 
in connection with employee pension benefit plans, some of which 
provide benefits the amount of which is guaranteed, some of which 
provide benefits that may fluctuate with the investment performance of 
the insurance company, and some of which offer elements of both. Under 
section 401(b)(2) of ERISA, if an insurance company issues a 
``guaranteed benefit policy'' to a plan, the assets of the plan are 
deemed to include the policy, but do not solely by reason of the 
issuance of the policy, include any of the assets of the insurance 
company. Section 401(b)(2)(B) defines the term ``guaranteed benefit 
policy'' to mean an insurance policy or contract to the extent that 
such policy or contract provides for benefits the amount of which is 
guaranteed by the insurer. In addition, in paragraph (b) of ERISA 
Interpretive Bulletin 75-2, 29 CFR 2509.75-2 (1975), the Department 
stated that if an insurance company issues a contract or policy of 
insurance to a plan and places the consideration for such contract or 
policy in its general asset account, the assets in such account shall 
not be considered to be plan assets.\1\
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    \1\ Paragraph (b) of 29 CFR 2509.75-2 was removed effective July 
1, 1996. 61 FR 33847, 33849 (July 1, 1996).
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    On December 13, 1993, the Supreme Court rendered its decision in 
John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings Bank, 
114 S. Ct. 517 (1993) (Harris Trust) which interpreted the meaning of 
``guaranteed benefit policy''. In its decision, the Court held that a 
contract qualifies as a guaranteed benefit policy only to the extent it 
allocates investment risk to the insurer:

[w]e hold that to determine whether a contract qualifies as a 
guaranteed benefit policy, each component of the contract bears 
examination. A component fits within the guaranteed benefit policy 
exclusion only if it allocates investment risk to the insurer. Such 
an allocation is present when the insurer provides a genuine 
guarantee of an aggregate amount of benefits payable to retirement 
plan participants and their beneficiaries.

Accordingly, under the Supreme Court's decision, an insurer's general 
account includes plan assets to the extent it contains funds which are 
attributable to any nonguaranteed components of contracts with employee 
benefit plans. Because John Hancock's contract provided for a return 
that varied with the insurer's investment performance, the Court 
concluded that John Hancock held plan assets, and was, therefore, a 
fiduciary with respect to the management and disposition of those 
assets. Under the reasoning of the Court's decision, a broad range of 
activities involving insurance company general accounts are subject to 
ERISA's fiduciary standards.
    Because of the retroactive effect of the Supreme Court decision, 
numerous transaction engaged in by insurance company general accounts 
may have violated ERISA's prohibited transaction and general fiduciary 
responsibility provisions. The insurance industry believed that, absent 
legislative or administrative action, it would be subject to 
significant additional litigation and potential liability with respect 
to the operation of its general accounts.
    If the underlying assets of a general account include plan assets, 
persons who have engaged in transactions with such general account may 
be viewed as parties in interest under section 3(14) of ERISA and 
disqualified persons under section 4975 of the Code, including 
fiduciaries with respect to plans which have interests as 
contractholders in the general account. For example, insurance 
companies are a source of loans for smaller and mid-sized companies. 
Many of these companies have party in interest relationships with plans 
that have purchased general account contracts. Application of the 
prohibited transaction rules to the general account of an insurance 
company as a result of the Harris Trust decision could call such loans 
into question under ERISA. Lastly, the underlying assets of an entity 
in which a general account acquired an equity interest may include plan 
assets as a result of the Harris Trust decision.
    On March 25, 1994, the American Council of Life Insurance (ACLI) 
submitted an application for a class exemption from certain of the 
restrictions of sections 406 and 407 of ERISA and from certain excise 
taxes imposed by section 4975 (a) and (b) of the Code. The ACLI 
requested broad exemptive relief for transactions which included the 
following: all internal operations of general accounts, all investment 
transactions involving general account assets, including transactions 
with parties in interest with respect to plans that have purchased 
general account contracts, and the purchase by the general account of 
securities issued by, and real property leased to, employers of 
employees covered by plans that have purchased general account 
contracts.
    On August 22, 1994, the Department published a notice of proposed 
Class Exemption for Certain Transactions Involving Insurance Company 
General Accounts. (59 FR 43134). Although the ACLI requested exemptive 
relief for activities in connection with the internal operation of 
general accounts, the Department determined that it did not have 
sufficient information regarding the operation of such accounts to make 
the findings required by section 408(a) of ERISA. Accordingly, the 
proposed class exemption did not provide relief for transactions 
involving the internal operation of an insurance company general 
account. The final exemption (Prohibited Transaction Exemption [PTE] 
95-60, 60 FR 35925) was published in the Federal Register on July 12, 
1995.

B. Public Law 104-188

    In response to the Supreme Court decision in Harris Trust, Congress 
amended section 401 of ERISA by adding a new subsection 401(c) which 
clarifies the application of ERISA to insurance company general 
accounts. Pub. L. 104-188, Sec. 1460. This statutory provision requires 
that the Department, not later than June 30, 1997, issue proposed 
regulations providing guidance for the purpose of determining, in cases 
where an insurer issues one or more policies (supported by the assets 
of the insurer's general account) to or for the benefit of an employee 
benefit plan, which assets held by the insurer (other than plan assets 
held in its separate accounts) constitute plan assets for purposes of 
part 4 of Title I and section 4975 of the

[[Page 59847]]

Code and to provide guidance with respect to the application of Title I 
to an insurer's general account assets. The proposed regulations must 
be subject to public notice and comment until September 30, 1997, and 
final regulations shall be issued not later than December 31, 1997.
    The regulations will only apply to those general account policies 
which are issued by an insurer on or before December 31, 1998. In the 
case of such policies, the regulations will take effect at the end of 
the 18 month period following the date the regulations become final. 
Pub. L. 104-188, however, authorizes the Secretary to issue additional 
regulations designed to prevent avoidance of the regulations described 
above. These additional regulations, if issued, may have an earlier 
effective date.
    The Department must ensure that the regulations issued under Pub. 
L. 104-188 are administratively feasible, and protect the interests and 
rights of the plan and of its participants and beneficiaries. In 
addition, the regulations must require, in connection with any policy 
(other than a guaranteed benefit policy) issued by an insurer to or for 
the benefit of an employee benefit plan, that: (1) an independent plan 
fiduciary authorize the purchase of the policy (unless the purchase is 
exempt under ERISA section 408(b)(5)); (2) the insurer provide 
information on an annual basis to policyholders (as prescribed in such 
regulations) disclosing the methods by which any income and expenses of 
the insurer's general account are allocated to be policy and the actual 
return to the plan under the policy and such other financial 
information as the Department determines is appropriate; (3) the 
insurer disclose to the plan fiduciary the extent to which alternative 
arrangements supported by the assets of the insurer's separate accounts 
are available, whether there is a right under the policy to transfer 
funds to a separate account and the terms governing any such right, and 
the extent to which support by assets of the insurer's general account 
and support by assets of the insurer's separate accounts might pose 
differing risks to the plan; and (4) the insurer must manage general 
account assets prudently, taking into account all obligations supported 
by such general account.
    Compliance with the regulations issued by the Department will be 
deemed compliance by such insurer with sections 404, 406 and 407 of 
ERISA. In addition, under this statutory provision, no person will be 
liable under part 4 of Title I or Code section 4975 for conduct which 
occurred before the date which is 18 months following the issuance of 
the final regulation on the basis of a claim that the assets of an 
insurer (other than plan assets held in a separate account) constitute 
plan assets. The limitation on liability is subject to three 
exceptions: (1) the Department may circumscribe this limitation on 
liability in regulations intended to prevent avoidance of the 
regulations which it is required to issue under the statutory 
amendment; (2) the Department may bring actions pursuant to paragraph 
(2) or (5) of section 502(a) for breaches of fiduciary responsibilities 
which also constitute violations of Federal or State criminal law; and 
(3) civil actions commenced before November 7, 1995 are exempt from the 
amendment's coverage.

Issues Under Consideration

    The Department is publishing this notice to provide interested 
persons with an opportunity to submit information and comments which 
will be considered by the Department in developing the regulations 
mandated by Pub. L. 104-188.\2\
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    \2\ Section 1460 of Pub. L. 104-188 does not distinguish between 
welfare plans and pension plans that purchase general account 
contracts from insurers. Accordingly, the Department urges 
interested persons to submit information and comments which are 
relevant to welfare plans that have purchased general account 
contracts.
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    In order to assist interested parties in responding, this notice 
contains a list of specific questions designed to elicit information 
that the Department believes would be especially helpful in developing 
a notice of proposed rulemaking. The questions developed by the 
Department may not address all issues relevant to the development of 
the regulation. Therefore, the Department further invites interested 
parties to submit comments on other matters that they believe are 
pertinent to the Department's consideration of the regulation.

Annual Disclosures

    (1) What information relating to the financial soundness of an 
insurer do plan fiduciaries currently rely upon in selecting an 
insurer?
    (2) Should additional information be required to be disclosed to 
plan fiduciaries prior to selecting an insurer? What would be the cost 
of supplying this information? To what extent would these costs be 
passed on to the contractholders?
    (3) What annual information would plan fiduciaries find helpful in 
evaluating the appropriateness of an existing general account contract?
    (4) Is there any information which should be disclosed more 
frequently than annually? Should this information be provided or 
available upon request?
    (5) Do insurers currently disclose to potential contractholders the 
availability of alternative insurance arrangements supported by 
separate accounts, the right to transfer funds under a general account 
contract to a separate account, and the terms governing any such right?
    (6) In general, what are the comparative risks and benefits of 
general account contracts vis-a-vis separate account contracts?
    (7) To what extent, and in what format, should insurers be required 
to disclose information concerning the following:
    (a) The expenses allocated to the contract and the basis for the 
allocation;
    (b) The investment income allocated to the contract and the basis 
for the allocation;
    (c) The mortality or morbidity experience attributed to the 
contract and the basis for the attribution;
    (d) The allocation of any other aspect of the insurance company's 
financial performance which has an impact on the contract's return, and 
the basis for the allocation;
    (e) The timing of the allocation of expenses, investment income, 
mortality or morbidity experience, and of any other factors affecting 
the contract's return;
    (f) Any charges or provisions attributable to the contract for 
risks or profits, and the basis for the charges or provisions;
    (g) Comparative data concerning the return, expenses, investment 
income, profit and risk charges attributable to other contracts, and an 
explanation of any disparities;
    (h) The particular investment income allocation methodology or 
methodologies employed by the insurer, and any departures from the 
general methodologies in the actual allocation of investment income to 
the contract;
    (i) Financial or familial relationships or transactions between (1) 
the insurer, its officers, or directors, and (2) the plan, the plan 
sponsor, or plan fiduciaries;
    (j) Financial transactions between the insurer and any person or 
entity in which the insurer, its officers, or directors have a 
financial interest or familial relationship.
    Do different formats have different cost implications? Which items 
are costly to produce, or involve confidential or proprietary 
information? What professional skills are required to prepare the 
required information?

[[Page 59848]]

    (8) Should the insurer be required to retain documentation 
supporting the required disclosures, and to make the supporting 
documentation available to the Secretary of Labor, plan sponsors, plan 
fiduciaries, or plan participants and beneficiaries? To what extent are 
these documents retained as part of current business practice? What are 
the estimated costs of retaining and producing these documents to the 
appropriate parties?
    (9) How should the insurer calculate the actual return to the plan 
for purposes of any disclosure requirement? In particular,
    (a) Should the insurer be required to take into account any market 
value adjustments, termination expense adjustments, withdrawal charges, 
or surrender charges in stating the contract's return?
    (b) Should the regulations permit different approaches for 
calculating the rate of return for contracts requiring the issuance of 
annuities as opposed to those in which benefit payments are made 
without the issuance of an annuity?
    (c) Should the regulations require that dividends that are 
anticipated or declared buy not yet paid, be included in determining 
the contract's return?
    (d) To what extent should the regulations permit the return to be 
reported on a gross basis (i.e., before expenses or charges)?
    (10) Under what circumstances would regulations requiring 
disclosure of the contractholder's return apply to general account 
contracts before the end of the 18 month period following the issuance 
of the final regulations?

Market Value Adjustments Upon Termination of General Account Contracts

    (1) In what ways is discretion exercised by insurers under general 
account contracts in imposing market value adjustments or in 
determining the amount of such adjustments?
    (2) What standards should the Department adopt to assure that 
market value adjustments reflect market conditions at the time of 
contract termination?
    (3) Should the Department require general account contracts to set 
forth in ``plain English'' the method for calculating market value 
adjustments that can be objectively verified by the contractholder 
pursuant to standards set forth in the contract? In this regard, should 
the Department require that the method used for calculating market 
value adjustments only use parameters that can be independently 
verified by the contractholder?
    (4) Should the Department limit or forbid the imposition of 
termination expense adjustments, withdrawal charges, or surrender 
charges pursuant to general account contracts?
    (5) Under what circumstances should regulations regarding market 
value adjustments and other termination charges be applicable to 
general account contracts prior to the end of the 18 month period 
following the issuance of the final regulations?

State Regulatory Requirements

    (1) To what extent do State regulatory requirements parallel or 
conflict with some or all of the requirements imposed by section 1460 
of Pub. L. 104-188?
    (2) Should the Department of Labor regulation take into account any 
State regulatory requirements that serve as a protection to 
contractholders? If so, please describe the nature of such requirements 
and the state's enforcement mechanism to assure compliance with such 
requirements.

Impact on Small Entities

    (1) In responding to the questions above, please address the 
anticipated annual impact of any regulatory proposals on small 
insurers, (insurers with annual receipts of less than $5 million, see 
Small Business Administration Size Standards, 61 FR 3280, Jan. 31, 
1996) and small plans, (plans with fewer than 100 participants).
    (2) Statistically, what are the sizes of the plans using insurance 
company general accounts? What is the volume of assets held in these 
accounts, and what percent is held by small plans? Is there an estimate 
of how many small plans may be affected by the regulations?
    (3) How many small insurance companies offer products that may be 
subject to the regulations? Is there an anticipated effect on those 
small companies' competitiveness due to such a regulation?
    (4) What would be the most economical and efficient method of 
compliance with the requirements imposed by the amendment for small 
insurance companies?
    (5) In responding to the questions above, please state whether the 
insurance companies' costs of complying with any regulatory proposals 
are likely to be passed on to the contractholders. If so, what are the 
projected costs? Are large insurance companies more likely to absorb 
the costs, leaving their contractholders in better positions? If costs 
are passed on, will small plans be able to absorb the increase?
    (6) How can the disclosed materials be provided in formats useful 
to small plans? How can these materials be structured in ``plain 
English,'' or must they require the assistance of professional service 
providers to be valuable?

Miscellaneous

    (1) The regulations will apply only to ``policies which are issued 
by an insurer on or before December 31, 1998.'' To what extent should 
the regulations treat pre-existing policies which are amended after 
December 31, 1998 as policies issued on or before December 31, 1998?
    (2) To what extent should the Department regulate transactions 
between the insurer and its subsidiaries; between the insurer and 
entities in which the insurer's officers or directors have a financial 
interest?
    (3) To what extent can insurers exercise discretion to the 
detriment of plan contractholders in the allocation of income, 
expenses, dividends, and other financial costs and benefits? How should 
a limitation on that discretion be formulated? For example, should the 
Department require that income, expenses and surplus be allocated in a 
manner directly proportionate to the plan's actual contribution to each 
of these categories?
    (4) What constraints, if any, should be placed on insurers' ability 
to unilaterally amend contract terms which affect the value of the 
plan's policy (e.g., terms concerning minimum interest rate guarantees, 
expense charges, and annuity purchase rates)?
    (5) Do insurance companies and persons engaging in transactions 
with such companies believe that guidance is necessary regarding which 
general account contracts constitute ``guaranteed benefit policies'' 
within the meaning of section 401(b)(2) of ERISA in light of the Harris 
Trust decision? In this regard, what types of policies raise 
significant issues post Harris?
    All submitted responses and comments will be made a part of the 
record of the proceeding referred to herein and will be available for 
public inspection.

    Signed at Washington, DC this 20th day of November, 1996.
Olena Berg,
Assistant Secretary, Pension and Welfare Benefits Administration, U.S. 
Department of Labor.
[FR Doc. 96-30030 Filed 11-22-96; 8:45 am]
BILLING CODE 4510-29-M