[Federal Register Volume 68, Number 68 (Wednesday, April 9, 2003)]
[Rules and Regulations]
[Pages 17472-17484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8113]



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Part III





Department of Labor





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Employee Benefits Security Administration



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29 CFR Part 2510 and 2570



Employee Retirement Income Security Act of 1974; Procedures for 
Administrative Hearings Regarding Plans Established or Maintained Under 
or Pursuant to Collective Bargaining Agreements Under Section 3(40)(A) 
of ERISA; Final Rule

  Federal Register / Vol. 68, No. 68 / Wednesday, April 9, 2003 / Rules 
and Regulations  

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2510

RIN 1210-AA48


Employee Retirement Income Security Act of 1974; Plans 
Established or Maintained Under or Pursuant to Collective Bargaining 
Agreements Under Section 3(40)(A) of ERISA

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Final rule.

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SUMMARY: This document contains a regulation under the Employee 
Retirement Income Security Act of 1974, as amended, (ERISA or the Act) 
setting forth specific criteria that, if met and if certain other 
factors set forth in the regulation are not present, constitute a 
finding by the Secretary of Labor (the Secretary) that a plan is 
established or maintained under or pursuant to one or more collective 
bargaining agreements for purposes of section 3(40) of ERISA. Employee 
welfare benefit plans, such as health care plans, that meet the 
requirements of the 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. Regulations 
published elsewhere in this issue of the Federal Register set forth a 
procedure for obtaining a determination by the Secretary as to whether 
a particular employee welfare benefit plan is established or maintained 
under or pursuant to one or more agreements that are collective 
bargaining agreements for purposes of section 3(40) of ERISA. The 
procedure is available only in situations where the jurisdiction or law 
of a state has been asserted against an entity that contends it meets 
the exception for plans established or maintained under or pursuant to 
one or more collective bargaining agreements. This regulation is 
intended to assist labor organizations, plan sponsors and state 
insurance departments in determining whether a plan is a ``multiple 
employer welfare arrangement'' within the meaning of section 3(40) of 
ERISA.

EFFECTIVE DATE: June 9, 2003.

FOR FURTHER INFORMATION CONTACT: Elizabeth A. Goodman, Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Room N-5669, Washington, DC 20210, (202) 693-8510. This is not a toll-
free number.

SUPPLEMENTARY INFORMATION: 

A. Background

The Statute

    Section 3(40) of ERISA defines the term multiple employer welfare 
arrangement (MEWA), in pertinent part, as 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 under or pursuant to one or more agreements 
which the Secretary finds to be collective bargaining agreements.
    This definition 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)) (the MEWA amendments), which also amended 
section 514(b) of ERISA to narrow the scope of federal preemption of 
state laws applicable to MEWAs. The purpose of the MEWA amendments 
generally was to permit states to regulate employee welfare benefit 
plans that are MEWAs; the extent of the states' jurisdiction over such 
entities under the MEWA amendments depends 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)).
    The Multiple Employer Welfare Arrangement Act of 1983, which was 
introduced to counter what the Congressional drafters termed abuse by 
the ``operators of bogus `insurance' trusts,'' see 128 Cong. Rec. E2407 
(1982) (Statement of Congressman Erlenborn), significantly enhanced the 
states' ability to regulate MEWAs. Nevertheless, problems in this area 
persist. Among other things, the exception for collectively bargained 
plans contained in section 3(40) has been 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. Another problem in this area involves the use of 
collectively bargained plans as vehicles for marketing health care 
coverage to individuals and employers with no relationship to the 
bargaining process or the underlying bargaining agreement. The 
definition of a MEWA in section 3(40) was drafted to exclude certain 
types of plans. As pertains to this rulemaking, section 3(40)(A)(i) of 
ERISA provides that employee welfare benefit plans that are found by 
the Secretary of Labor (the Secretary) to be established or maintained 
under or pursuant to one or more collective bargaining agreements are 
not MEWAs for purposes of ERISA. Such collectively bargained plans, as 
a result, were not made subject to the regulatory jurisdiction of the 
states pursuant to the MEWA amendments.
    The Department of Labor (the Department) notes that also appearing 
in today's Federal Register are final regulations relating to filing 
the Form M-1 and Civil Monetary Penalties for failure or refusal to 
file the Form M-1. For information on the Form M-1 and related civil 
monetary penalties, contact Deborah S. Hobbs or Amy J. Turner, Employee 
Benefits Security Administration, U.S. Department of Labor, Room C-
5331, 200 Constitution Ave., NW., Washington, DC 20210 (telephone (202) 
693-8335) (this is not a toll-free number).

The Proposed Regulations

    On October 27, 2000, the Department published a notice in the 
Federal Register (65 FR 64482) containing a proposed regulation (the 
criteria regulation) setting forth specific criteria that, if met in 
the case of a specific plan, and provided that certain other factors 
set forth in the proposed regulation are not present, would constitute 
a finding by the Secretary pursuant to section 3(40)(A)(i) of ERISA 
that a plan is established or maintained under or pursuant to one or 
more collective bargaining agreements for purposes of section 3(40) of 
ERISA. The Department also simultaneously published in the Federal 
Register (65 FR 64498) proposed regulations (the procedural 
regulations) that set forth an administrative procedure for obtaining, 
under certain limited circumstances, an individualized determination by 
the Secretary as to whether a particular employee welfare benefit plan 
is established or maintained under or pursuant to one or more 
agreements that are collective bargaining agreements for purposes of 
section 3(40) of ERISA.
    The proposed regulations followed the recommendations of the ERISA 
section 3(40) Negotiated Rulemaking Advisory Committee (the Committee). 
The Committee was convened under the Negotiated Rulemaking Act (the 
NRA)

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and the Federal Advisory Committee Act (the FACA), 5 U.S.C. App. 2, to 
assist the Department in developing proposed regulations to implement 
section 3(40)(A)(i) of ERISA, 29 U.S.C. 1002(40)(A)(i).
    The criteria regulation set forth standards that, if satisfied, 
would constitute a finding by the Secretary that a plan is established 
or maintained under or pursuant to one or more collective bargaining 
agreements for purposes of section 3(40).
    The proposed regulation established four general criteria for a 
finding that a plan was established or maintained under or pursuant to 
collective bargaining for purposes of section 3(40)(A)(i). First, the 
entity in question had to be an employee welfare benefit plan within 
the meaning of ERISA section 3(1). Second, the preponderance of those 
participants covered by the plan (at least 80%) had to have a nexus to 
the bargaining relationships under or pursuant to which the plan was 
established or maintained (referred to as the ``nexus'' group or test). 
Third, the agreements under or pursuant to which the plan is 
established or maintained had to have certain characteristics that 
indicate that they were, for purposes of section 3(40) of ERISA only, 
collective bargaining agreements, including that the agreements were 
the product of a ``bona fide collective bargaining relationship.'' 
Fourth, the proposed regulation listed eight specific ``factors'' 
deemed to indicate the existence, for purposes of section 3(40) only, 
of a bona fide collective bargaining relationship. If at least four of 
those specified factors were present, the regulation indicated that a 
bona fide collective bargaining relationship underlying the agreements 
under or pursuant to which the plan is established or maintained could 
be presumed to exist.
    The proposed criteria regulation included a ninth non-specific 
``factor'' in the list. The ninth factor indicated that the Secretary 
would consider, in making a finding, whether ``other objective or 
subjective indicia of actual collective bargaining and representation'' 
were present. The inclusion of this ``catch-all'' factor recognized 
that, in any particular case, other facts might need to be taken into 
account to determine whether a bona fide collective bargaining 
relationship existed, especially where the entity did not meet at least 
four of the eight specific factors, or where, despite meeting four of 
the eight factors, there were other facts indicating that a bona fide 
collective bargaining relationship did not exist.
    The proposed criteria regulation also specified circumstances that, 
if present, would lead to a conclusion that an employee welfare benefit 
plan is not established or maintained under or pursuant to one or more 
agreements that the Secretary finds to be collective bargaining 
agreements. The regulation stated that, for any plan year in which the 
specified circumstances were present, a plan that otherwise met the 
criteria of the regulation should not be deemed to be excluded from the 
MEWA definition by virtue of section 3(40)(A)(i).
    The proposed regulation provided that, under certain limited 
circumstances, an entity would be permitted to petition the Secretary 
for an individual finding. The ability to petition, however, would 
arise under the proposed regulation only if a state's law or 
jurisdiction had been asserted against the entity in an administrative 
or judicial proceeding. The procedural regulations set forth specific 
processes for petitioning for an individual finding.

Public Comments

    Subsequent to publication of the proposed regulations, the 
Department received seven public comments. The Department reconvened 
the Committee and held a public meeting on March 1, 2002, to obtain the 
Committee's views on the public comments. Minutes of this meeting, as 
well as other meetings, of the Committee are available for inspection 
by the public in the Department's Public Disclosure Room, 200 
Constitution Avenue, NW., N1513, Washington, DC 20210.
    The following discussion summarizes the issues raised by the public 
comments, the Committee's discussion of those issues at the public 
meeting, and the Department's decisions, which are reflected in the 
final regulations.
1. Whether the Factors Set Forth in the Proposed Criteria Regulation as 
Presumptive of Bona Fide Collective Bargaining Should Be Expanded or 
Modified
    Two commenters suggested that the Department should expand the list 
of factors indicative of a bona fide collective bargaining 
relationship. One commenter argued that such an expansion is necessary 
to make sure that small employers and employers in manufacturing, 
warehousing, service and other non-construction related industries 
could easily meet this criterion. The commenter further suggested that 
government certification of a union, as a collective bargaining agent 
should be a stand-alone safe harbor factor. The other commenter noted 
that newly established unions, particularly those organizing in the 
health care field, might have difficulty meeting four of the eight 
factors. That commenter suggested that an additional factor--that the 
welfare plan was being administered along sound actuarial principles--
be added to the list of factors. The commenter also suggested that the 
examples set out as part of the non-specific ninth factor be listed 
individually as separate factors that could be counted towards meeting 
the ``safe harbor.''
    In discussing these comments, the Committee noted that these issues 
were not new and had been considered by the Committee in its initial 
deliberations. It was noted that the language of the proposed 
regulation went as far as possible to be inclusive of various types of 
collective bargaining relationships. The purpose of the ninth ``catch-
all'' factor is to take into account that the eight specific factors 
may not encompass all bona fide collective bargaining relationships. 
Concerns were also expressed about lowering the threshold for what 
constitutes a bona fide collective bargaining relationship. Bona fide 
collectively bargained arrangements are not likely to be challenged 
under the regulation by the states. The consensus of the Committee was 
that the eight factors should not be expanded or modified.
    After consideration of the comments and the Committee's discussion, 
the Department has decided not to expand or modify the factors 
presumptive of a bona fide collective bargaining relationship. The 
final regulation therefore retains, in section 2510.3-40(b)(4)(i)-
(viii), the factors as originally proposed. In the view of the 
Department, the regulation carefully distinguishes between the specific 
factors that generally evidence a bona fide collective bargaining 
relationship and the types of activities and fact patterns that are 
common to sham MEWA operators. Expanding or modifying the factors to 
include less well-established or less common situations, or making any 
single factor a stand-alone safe-harbor, may make it easier for sham 
MEWA operators to mimic the regulation's factors presumptive of a bona 
fide collective bargaining relationship.
    The Department also declines to add to the factors, as suggested by 
one commenter, the fact that the plan is maintained on sound actuarial 
principles. Although maintaining a plan on sound actuarial principles 
is important in other regards, that a plan is actuarially sound does 
not necessarily

[[Page 17474]]

evidence the existence of a bona fide collective bargaining 
relationship.
    The Department notes, however, that the final regulations are 
structured to take into account the possibility that a bona fide 
collective bargaining relationship might, in some case, fail to meet 
the ``safe harbor'' factors. In addition to including the ninth catch-
all factor, the regulations permit entities that assert they are in 
fact established or maintained under or pursuant to bona fide 
collective bargaining, and against which state law or jurisdiction is 
asserted, to petition for an individualized finding from the Department 
as to their status.
2. Whether the Definition of Collective Bargaining Agreement Should Be 
Modified
    The Department received one comment suggesting that the definition 
of collective bargaining agreement in section 2510.3-(40)(b)(3) needed 
to be modified to correct a technical defect. As proposed, the 
regulation required that a plan be ``incorporated or referenced in a 
written agreement between two or more employers and one or more 
employee organizations.'' The commenter argued that the requirement of 
a minimum of two employers, rather than one, was unnecessarily narrow, 
since there may be situations where a plan that originally was 
established or maintained under or pursuant to a collective bargaining 
agreement signed by two or more employers, is now maintained only by 
one due to a dwindling number of participating employers, although the 
plan still covers the employees of more than one employer.
    The Committee, in discussing this issue, considered whether, in 
addition to the reasons articulated by the commenter, the language of 
paragraph 2510.3-40(b)(3) should be changed to make clear that the 
regulation applies to plans established or maintained under or pursuant 
to collective bargaining by a single employer but covering the 
employees of other employers who do not bind themselves to the 
collective bargaining agreement. It was noted that such entities are 
MEWAs. The Committee's discussion focused on the fact that it is 
important for the regulation to make clear that such entities are 
subject to evaluation under the regulation to see whether in fact they 
meet the exception under section 3(40) for plans established or 
maintained under or pursuant to collective bargaining.
    On the basis of the public comment and the Committee's discussion, 
the Department has determined to amend 2510.3-40 to provide that the 
conditions of (b)(3) will be met if the written agreement referencing 
the plan is between one or more employers, rather than two or more 
employers, and one or more employee organizations.
3. Whether the Nexus Group Categories Should Be Expanded or Modified
    As part of the process for determining whether a preponderance of 
the participants covered by the plan have a nexus to the bargaining 
relationships under or pursuant to which the plan is established or 
maintained, the proposed criteria regulation defined a ``nexus group'' 
of categories of participants who could be counted towards the 80% 
coverage level set in the proposed regulation as demonstrating such a 
preponderance. One commenter requested that the nexus group categories 
be expanded to include employees of an employer trade association that 
has negotiated any of the multiemployer agreements under or pursuant to 
which a plan is established or maintained. The commenter noted that the 
proposed regulation included, as part of the nexus group, employees of 
employee organizations that sponsor or jointly sponsor a plan, or are 
represented on the committee, joint board of trustees, or other similar 
group of representatives of the parties who sponsor the plan. The 
commenter noted that employees of employer associations might have a 
similar connection to the collective bargaining process. The commenter 
asserted that employer trade associations often are involved in 
negotiating collective bargaining agreements on behalf of many 
employers, and that such employers routinely become signatories to, or 
otherwise adopt, agreements that have been negotiated by their employer 
associations. The multiemployer plans that result from such bargaining 
often cover the employees of the employer association as well as the 
employees of the employers represented by the association.
    The Committee concluded that, as a matter of parity, employees of 
an authorized representative of employers in collective bargaining 
should be included in the nexus group, just as are employees of the 
employee organization.
    Based on its consideration of the comment and the Committee's 
discussion, the Department has determined to amend 2530.3-40(b)(2)(vi) 
to include, as a separate category, the employees of an authorized 
employer representative that actually engaged in the collective 
bargaining that led to the agreement that references the plan as 
described in 2510.3-40(b)(3)(i).
4. Whether the Regulation Should Be Expanded To Include Entities That 
Are Not Collectively Bargained, i.e., Long-Established MEWAs, Union-
Only Sponsored Public Sector Benefit Plans
    The Department received two comments suggesting that the regulation 
should be expanded to include certain types of entities that 
technically are not established or maintained under or pursuant to 
collective bargaining. The commenters were concerned that issuance of 
regulations providing clear guidance addressing what the Secretary 
finds to be collective bargaining for the purposes of the collective 
bargaining exception in 3(40) of ERISA might result in more state 
regulation of entities that are not established pursuant to collective 
bargaining than there had been in the absence of regulations.
    The first commenter was a long-established MEWA that contended that 
it should be excluded from the scope of the MEWA definition pursuant to 
a ``grandfather'' provision in the regulation, allowing it to operate 
free of state regulation even though it is not a plan established or 
maintained under or pursuant to collective bargaining, because it had 
been operating on a financially sound basis for many years. A similar 
comment had been previously submitted to the Committee for 
consideration prior to the issuance of its Report to the Secretary. 
Another commenter requested that the preamble to the regulation discuss 
the nature of legal defense funds for peace officers, which are 
established by employee organizations for the employees of more than 
one employer, but are not actually the subject of collective 
bargaining.
    The Committee reiterated its belief, as noted in the preamble to 
the proposed criteria regulation, that the regulation should serve only 
to define what constitutes a plan that is established or maintained 
under or pursuant to collective bargaining. The Department believes 
that the issues raised by these commenters go beyond the scope of the 
regulation and, therefore, has determined not to modify the final 
regulation in response to these comments.
5. Whether and How the Procedural Regulation Should Be Modified in 
Order To Obviate the Possibility That It May Hinder or Impede Timely 
State Enforcement Actions
    One commenter expressed concern that the availability of 
administrative proceedings for an individualized section 3(40) finding 
in cases where the

[[Page 17475]]

jurisdiction or law of a state has been asserted may result in delays 
in state enforcement that could substantially hinder a state's ability 
to take timely enforcement actions against sham MEWA operators. The 
commenter stated that time is often of the essence in such 
circumstances and that a delay of even a few days in a state's taking 
effective action against a MEWA may seriously increase the harm to the 
participants in the MEWA by permitting the amount of unpaid medical 
benefit claims to increase, allowing the plan to collect additional 
illegal premiums, and impinging or eliminating the states' ability to 
preserve assets by giving the plan operators and opportunity to 
transfer and hide funds. The commenter specifically identified the need 
to be able to obtain preliminary and permanent injunctive relief and 
cease and desist orders where sham union plans are continuing to 
collect premiums or failing to pay claims. The commenter asserted that, 
unless the Department made clear that the availability of 
administrative proceedings was not meant to provide a basis for a stay 
or delay of state enforcement actions, the regulations should not be 
implemented.
    Recognizing the need to ensure that the regulations assist, rather 
than hinder, state enforcement efforts against sham MEWA operators and 
that there are situations where time is of the essence for effective 
enforcement by the states, the Committee recommended that the 
regulatory language be clarified to emphasize that the section 3(40) 
ALJ proceedings are not a basis in themselves for a stay-of-state 
administrative or judicial proceedings against a putative MEWA.
    As proposed, paragraph 2510.3-40(g)(2) of the criteria regulation 
provided that ``nothing in this section or in part 2570, subpart H of 
this chapter is intended to have any effect on applicable law relating 
to stay or delay of a state administrative or court proceeding or 
enforcement subpoena.'' In response to the commenter and the concerns 
of the Committee, the Department has amended that paragraph to state 
that ``nothing in this section or in part 2570, subpart H of this 
chapter is intended to provide the basis for a stay or delay of a state 
administrative or court proceeding or enforcement of a subpoena.''

Miscellaneous Changes

    In its consideration of a final regulation, the Committee 
questioned whether consideration should be given to the effect of plan 
mergers on counting years of service for purposes of the determining 
the ``nexus'' group. In this regard, the Committee noted that the nexus 
group in section 2510.3-40(b)(2) includes retirees who either 
participated in the welfare benefit plan for at least five of the last 
10 years preceding their retirement or are receiving benefits as 
participants under a multiemployer pension benefit plan that is 
maintained under the same agreement referred to in paragraph (b)(2)(i), 
and have at least five years of service or the equivalent under that 
pension plan. The Committee suggested that participation in the pre-
merger multiemployer plans should also be considered in determining 
whether employees meet the requirements of these categories of the 
nexus group. The Committee also raised the issue of whether employment 
in the bargaining unit under the pre-merger plan should be considered 
for determining whether an individual is a bargaining unit alumnus 
under 2510.3-40(b)(2)(vii) where the merger was based on a merger of 
unions. The Committee noted that Example 2 of the proposed regulation 
addresses how a merger affects the evaluation of the factors in 
(b)(4)(iii) and (iv) and suggested that another example could be added 
to the final regulation to address the effect of merging unions and 
multiemployer plans on the nexus group analysis. After considering the 
issues raised by the Committee, the Department has determined that it 
is appropriate to clarify the examples at 2510.3-40(e) to make clear 
that, in the case of a merger of multiemployer plans, participation in 
a predecessor plan or employment with a predecessor union may be 
considered for purposes of determining the nexus group individuals in 
section 2510.3-40(b)(2)(ii) and (vii). In this regard, a new paragraph 
(3) was added to Example 2 to clarify that the merger of two unions and 
the related pension and health and welfare plans will not affect the 
determinations of who is a ``retiree'' or a ``bargaining unit alumni'' 
for purposes of determining the nexus group under the regulation.
    In reviewing the 75% test in paragraph (b)(4)(vi) of 2510.3-40, the 
Department decided that the regulation should be modified to make clear 
that in determining the amount of premiums or contributions to which 
the 75% test applies does not include any amount that a participant or 
beneficiary might be required to pay as a co-pay or deductible under 
the provided coverage. Accordingly, the Department has modified 
paragraph 2510.3-40(b)(4)(iv) to make clear that, in addition to dental 
or vision care and coverage for excepted benefits under 29 CFR 
2590.732(b), amounts payable by participants and beneficiaries as co-
payments or deductibles are disregarded for purposes of the 75% test. 
In so clarifying this provision, however, the Department notes that if 
an entity were to establish a co-payment or deductible schedule 
designed solely to satisfy the criteria of paragraph 2510.3-
40(b)(4)(vi), without actually requiring substantial employer 
contributions, evidence of such a design may be considered in 
evaluating whether for purposes of 2510.3-40(c)(3) there is fraud, 
forgery, or willful misrepresentation as to the factors relied on to 
demonstrate that the plan satisfies the criteria set forth in paragraph 
(b) of this section. The Department further notes that the collective 
bargaining history appropriately may be examined in a 3(40) proceeding, 
including a review of those factors in section 2510.3-40(b)(4).
    Independent of the Committee's review of the regulations, the 
Department considered whether the proposed 80% minimum coverage 
requirement for the ``nexus'' test is too low. In the August 1, 1995, 
proposed regulation, the Department proposed that no less than 85% of 
the individuals covered by a plan must be within the ``nexus'' group. A 
number of commenters on that regulation expressed concern that the 
percentage was too high. In developing a new proposal, the Committee 
recommended, and the Department proposed, an 80% test. In this regard, 
the preamble to the proposal indicated that ``[t]he Committee 
recommended a 20% margin for coverage of non-nexus people, even though 
it understood that the percentage of participants in collectively 
bargained plans who are not within one of the nexus categories is 
rarely likely to be that high.'' 65 FR 64485 (Oct. 27, 2000). While 
comments were specifically invited on the 80% test, no comments were 
received on that provision. Moreover, the Department received no 
comments suggesting that changing the 80% test to an 85% test would 
present a problem for affected plans. The Department further notes that 
H.R. 2563 of the 107th Congress, the ``Bipartisan Patients Protection 
Act,'' as passed by the U.S. House of Representatives, among other 
things, amends ERISA section 3(40)(A)(i) to clarify the standards 
applicable to determining whether a plan is established or maintained 
pursuant to collective bargaining agreements. See section 423 of H.R. 
2563. Although similar in many respects to the regulatory standards 
proposed by the Department, H.R. 2563

[[Page 17476]]

limits the percentage of non-nexus group individuals to 15 percent.
    On the basis of the comments, as well as the discussions of the 
Committee, the Department does not believe that, in the absence of any 
data to the contrary, requiring 85% of the covered individuals to be 
within the ``nexus'' group, rather than 80%, will have any significant 
effect on the status of otherwise bona fide collectively bargained 
plans. Increasing the ``nexus'' group percentage to 85% should enhance 
the regulation's deterrent effect on sham MEWA operators who attempt to 
masquerade as collectively bargained plans in order to avoid state 
insurance regulation and oversight. In an environment where problems 
with sham MEWA operators are growing, the Department believes that any 
action it can take to reduce the likelihood of health insurance fraud 
against workers and their families is action that should be taken. 
Accordingly, the Department determined it appropriate to modify 
paragraph (b)(2) of 2510.3-40 to require that at least 85% of the 
participants in the plan be within the ``nexus'' group (described in 
subparagraphs (i) through (x) of 2510.3-40(b)(2)).

B. Economic Analysis Under Executive Order 12866

    Under Executive Order 12866, the Department must determine whether 
a regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). 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 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, it has been 
determined that this action is ``significant'' within the meaning of 
3(f)(4), and therefore subject to review by the Office of Management 
and Budget (OMB). Consistent with the Executive Order, the Department 
has undertaken an assessment of the costs and benefits of this 
regulatory action. This analysis is detailed below.

Summary

    Although neither the benefits nor costs have been fully quantified, 
the Department believes that the benefits of this final regulation more 
than justify its costs. The final regulation yields positive benefits 
by reducing uncertainty over which welfare benefit plans are excepted 
from the definition of a multiple employer welfare arrangement under 
section 3(40) and are therefore not subject to state regulation. The 
Department sought comments from the public concerning its analysis of 
benefits and costs of the proposed regulation. Having received no 
comments, the Department has relied on its initial analysis in 
concluding that the benefits of the final regulation justify its costs.
    The regulation's elements for distinguishing collectively bargained 
plans from MEWAs are verifiable through documentation that plans or 
their agents generally maintain as part of usual business practices. 
The regulation also incorporates elements of flexibility, allowing 
entities to demonstrate the existence of a bona fide collective 
bargaining agreement, one of the regulatory factors, by satisfying any 
four of eight specified factors. Finally, the regulation is both 
sufficiently broad to include all plans established or maintained under 
or pursuant to one or more collective bargaining agreements, yet is 
discriminating enough to ensure that state law will apply to entities 
not meeting the criteria. Only a very small number of entities are 
likely to be treated differently as a result of promulgation of this 
criteria regulation. In the case of the few entities that will be 
determined to be not collectively bargained plans, the additional cost 
attributable to state regulation is outweighed by the benefit that such 
state regulation will provide by way of additional protections for 
participants and beneficiaries.

Background

    It is the view of the Department that the uncertainty created by 
the lack of clear criteria for distinguishing collectively bargained 
plans from MEWAs has encouraged unscrupulous operators of sham MEWAs in 
attempts to escape or delay state regulatory efforts by asserting that 
states lack jurisdiction to regulate such entities because they are 
excluded from the definition of MEWA by reason of the exception for 
collectively bargained plans. In order to establish their authority to 
regulate, states have had to take additional steps, such as initiating 
administrative or legal proceedings contesting the defendant's status 
as a collectively bargained plan, and have been the subject of actions 
initiated by sham MEWA operators, such as suits for federal declaratory 
judgment or removal actions.
    Confusion about whether a plan was established or maintained under 
or pursuant to an agreement which the Secretary finds to be a 
collective bargaining agreement has made it difficult for the states to 
enforce appropriate laws. The criteria regulation will reduce or 
eliminate this uncertainty. It will provide greater clarity for 
entities and states and reduce the time and expense attributable to 
court actions or requests to the Department for guidance.

Benefits of the Regulation--Reducing Uncertainty

    Plans and arrangements will benefit from greater assurance 
concerning their actual legal status. States, through an enhanced 
ability to regulate based on the greater certainty offered by the 
regulation, will be better able to protect employers, participants, and 
beneficiaries from unscrupulous MEWA operators. Further, the majority 
of plans established or maintained under or pursuant to collective 
bargaining agreements currently operate in a manner that is consistent 
with the regulation. Most entities will therefore not perceive any need 
to undertake a systematic reassessment of their status under the 
regulation. It is possible, however, that some will choose to undertake 
such an assessment by ``comparison testing'' the plan's operations 
against the ``safe harbor'' criteria established in the final 
regulation. The Department has estimated below the number of entities 
likely to undertake a status assessment and the costs likely to be 
associated with those activities.

Costs of the Regulation

    Entities Potentially Affected. To estimate the number of entities 
potentially affected by the final rule, the Department examined 
available data on multiemployer welfare plans established or maintained 
under or pursuant to collective bargaining agreements, and the number 
of entities self-reporting as MEWAs. Under ERISA, multiemployer 
collectively bargained plans are required to file an annual financial 
report, the Form 5500. MEWAs are required to file the Form M-1 
annually. The 1998 Form 5500 filings by

[[Page 17477]]

multiemployer collectively bargained plans numbered about 2,000 (with 
about 6 million participants). The MEWAs that filed Form M-1 for the 
year 2000, pursuant to section 101 of ERISA and related interim final 
rules (65 FR 7152, February 11, 2000) numbered about 600 (with about 2 
million participants).\1\ The total number of MEWAs and collectively 
bargained plans, which represents the total universe of arrangements 
that might have questions about their legal status and ``comparison 
test'' under this regulation, is estimated at about 2,600 (8 million 
participants).
---------------------------------------------------------------------------

    \1\ This represents a smaller number of plans and fewer 
participants than the numbers projected at the time of the proposal. 
Because the Form M-1 requirement had not been fully implemented at 
the time of the proposal, actual information on its use was not 
available, and the Department relied on survey data regarded as the 
most comparable at the time.
---------------------------------------------------------------------------

    The Department was unable to identify any direct measure of the 
number of entities whose status is uncertain or whose status would 
remain uncertain under the regulation. Therefore, in order to assess 
the economic impact of reduced uncertainty under the regulation, the 
Department examined proxies for the number of entities that might be 
subject to such uncertainty. After estimating the total number of MEWAs 
and collectively bargained plans at 2,600, the Department then tallied 
the number of inquiries to the Department concerning MEWAs and the 
number of MEWA-related lawsuits to which the Department has been party, 
taking this to represent a reasonable indicator of the number of 
entities that have been subject to uncertainty in the past.
    Department data indicate that in recent years, the Department has 
received an average of about nine MEWA-related requests for information 
each year from state and federal agencies and the private sector. The 
Department also considered the number of MEWA-related lawsuits that 
were filed by the Department in recent years. An average of about 45 
actions have been brought each year. For purposes of this analysis, it 
has been assumed that each case involved a different MEWA. Accordingly, 
the Department has estimated for purposes of this economic analysis 
that approximately 54 entities (45 + 9) annually may have reason to be 
uncertain about their legal status with respect to section 3(40) of 
ERISA, or about two percent of the estimated total number of 2,600 
MEWAs and collectively bargained plans.
    The Department views this approximate number of 54 entities per 
year as a conservatively high estimate of the number of entities whose 
status could be made more certain by issuance of this regulation. On 
one hand, because some number of entities may confront uncertainty 
without becoming either the subject of an inquiry addressed to the 
Department or a lawsuit to which the Department is party, this estimate 
may represent only a subset of the entities that face uncertainty over 
their status. On the other hand, this estimate may overstate the number 
of entities that face uncertainty because it is known that not all 
requests to the Department or court actions actually raised issues 
related directly to the collective bargaining exception under section 
3(40).
    Assessment of Status. The Department estimates the cost to the 54 
entities of conducting an assessment of their status under the 
regulation to be small. Such cost would be largely generated by 
reviewing records kept by third parties or by the entity in the 
ordinary course of business. The Department assumes that such a review 
requires 16 hours of an attorney's or comparable professional's time, 
plus 5 hours of clerical staff time. At $72 per hour and $21 per hour 
respectively, the total cost would be $1,173 per entity, or about 
$63,342 on aggregate per year for 54 entities. This cost would be 
incurred only once for a given entity unless its circumstances changed 
substantially relative to the standard. The Department believes that 
the cost is more than justified by savings to entities that, by 
conducting this assessment, avoid the need to engage in litigation or 
seek guidance from the Department in order to determine their status. 
These net savings represent a net benefit of this regulation.
    Following a self-assessment of status, some fraction of these 54 
entities might nonetheless find themselves in a situation leading them 
to seek an administrative determination from the Secretary under the 
procedural regulations, incurring attendant costs, perhaps because a 
state's jurisdiction or laws are asserted against the entity. The 
administrative process under the procedural regulations is, in the 
Department's view, an efficient and less costly process for resolving 
such disputes than would be available in the absence of the procedural 
regulations. The Department has elected to attribute the net benefit 
from these savings not to this regulation, but to the accompanying 
procedural regulations.
    Reclassifying Incorrectly Classified Entities. Some number of 
entities, generally a subset of the 54 estimated annually to face 
uncertainty over status, will be reclassified as a result of comparison 
testing against the regulation's criteria. Entities that formerly 
considered themselves to be excluded from the MEWAs definition as 
collectively bargained plans may be required under the criteria 
regulation to classify themselves as MEWAs. These MEWAs will likely 
incur costs to comply with newly applicable state requirements. Such 
requirements vary from state to state, making it difficult to estimate 
the cost of compliance, but it is likely that costs might include those 
attributable to audits, funding and reserves, reporting, premium taxes 
and assessments, provision of state-mandated benefits, underwriting and 
rating rules, market conduct standards, and managed care patient 
protection rules, among other costs. These costs may be higher for 
those MEWAs that conduct business in more than one state.
    Relevant literature suggests these costs can amount to ten percent 
of premium.\2\ The cost may be substantially more if a state regulates 
premium rates and the entity otherwise would have benefited from 
insuring a population whose health costs are far lower than average. 
However, these added costs are transfers and not true economic costs 
because they serve as cross-subsidies that reduce costs for populations 
that are costlier than average.
---------------------------------------------------------------------------

    \2\ Data from the Health Insurance Association of America 
(Source Book of Health Insurance Data, 1999-2000) suggests that 
insurance companies' loss ratios for group health insurance policies 
historically ranged from about 85 percent to 90 percent. The inverse 
of the loss ratio, or about 10 percent to 15 percent, generally 
would include all of these costs except those associated with 
benefit mandates and some managed care protections, as well as 
insurance company profits, income taxes, and normal administrative 
overhead. Loss ratios tend to be higher (and these costs lower) for 
larger group policies, and MEWAs are likely to be large. The cost of 
benefit mandates and managed care protection will very across states 
depending on their extent and across MEWAs depending largely on the 
degree to which they otherwise are included voluntarily in the 
insurance products they provide. One study estimated that mandates 
raise premiums by between 4 percent and 13 percent (Gail A. Jensen 
and Michael A. Morrisey, Mandated Benefit Laws and Employer-
Sponsored Health Insurance (Washington, DC: HIAA 1999)).
---------------------------------------------------------------------------

    As noted above, the universe of 2,600 entities that includes those 
potentially subject to uncertainty covers 8 million participants, or 
about 3,100 participants per entity on average. Industry surveys put 
the cost of health coverage at about $4,500 per employee and retiree 
per year. Applying these figures to 54 entities that might face 
uncertainty over status--an upper bound on the number likely to be 
reclassified--produces an

[[Page 17478]]

upper-bound estimated cost of about $75 million.\3\
---------------------------------------------------------------------------

    \3\ Recent data from actual Form M-1 filings results in a higher 
estimated number of participants per entity than was indicated in 
the proposal; therefore, the estimated cost for the final regulation 
exceeds the $58 million cost estimate for the proposal.
---------------------------------------------------------------------------

    The Department has concluded that actual costs will be far lower 
than this and will be outweighed by the benefit of the associated 
protections that will flow from clarifying the state's authority to 
regulate. As noted above, it is likely that the true number of entities 
that are reclassified as MEWAs will be a fraction of the estimated 54 
that annually might face uncertainty over status. Among those that are 
reclassified, certain entities likely would already have elected 
voluntarily to comply with some of the state regulatory requirements 
and therefore would not incur any cost from the application of state 
law. For those that would not have complied with relevant state law, 
operation of the regulation may impose additional costs, such as 
meeting solvency requirements or providing mandated benefits. The 
additional costs are offset and justified by increased security for 
plans and improved coverage for participants. Thus, the added cost from 
state regulation would be offset by the benefits derived from the 
protections that state regulations provide. GAO, in 1992, identified 
$124 million in unpaid claims owed by sham MEWAs. Department 
enforcement actions involving MEWAs in recent years have identified 
monetary violations of approximately $121.6 million. With state 
licensing and solvency requirements in place, at least some incidences 
of the $124 million in unpaid claims cited in the GAO study or the 
$121.6 million in violations would most likely not have occurred.
    It is also possible that some entities considered to be MEWAs 
because they are not collectively bargained will be reclassified under 
the criteria regulation as collectively bargained plans. However, this 
number seems likely to be very small because entities that can 
legitimately be treated as collectively bargained have an economic 
incentive to do so. Any entities that are so classified benefit from 
the savings of having no obligation to comply with state regulatory 
requirements. There is no meaningful loss of benefits from the absence 
of state protections in such cases because the combination of a 
legitimate collective bargaining agreement and the application of ERISA 
provides adequate protections.

C. Paperwork Reduction Act

    This Notice of Final Rulemaking is not subject to the requirements 
of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) because 
it does not contain a ``collection of information'' as defined in 44 
U.S.C. 3502(3).

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency certifies that a rule will not have a 
significant economic impact on a substantial number of small entities, 
section 604 of the RFA requires that the agency present a regulatory 
flexibility analysis at the time of the publication of the notice of 
final rulemaking describing the impact of the rule on small entities. 
Small entities include small businesses, organizations and governmental 
jurisdictions.
    For purposes of analysis under the RFA, the Employee Benefits 
Security Administration (EBSA) continues to consider a small entity to 
be an employee benefit plan with fewer than 100 participants. The basis 
of this definition is found in section 104(a)(2) of ERISA, which 
permits the Secretary of Labor to prescribe simplified annual reports 
for pension plans that cover fewer than 100 participants. Under section 
104(a)(3), the Secretary may also provide for exemptions or simplified 
annual reporting and disclosure for welfare benefit plans. Pursuant to 
the authority of section 104(a)(3), the Department has previously 
issued at 29 CFR 2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46, 
and 2520.104b-10, certain simplified reporting provisions and limited 
exemptions from reporting and disclosure requirements for small plans, 
including unfunded or insured welfare benefit plans covering fewer than 
100 participants and that satisfy certain other requirements.
    Further, while some large employers may have small plans, 
generally, most small plans are maintained by small employers. Thus, 
EBSA believes that assessing the impact of this rule on small plans is 
an appropriate substitute for evaluating the effect on small entities. 
The definition of small entity considered appropriate for this purpose 
differs, however, from a definition of small business that is based on 
size standards promulgated by the Small Business Administration (SBA) 
(13 CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 631 et 
seq.). At the time of the proposed rule, EBSA requested comments on the 
appropriateness of the size standard used in evaluating the impact of 
this rule on small entities; no comments were received that would cause 
the Department to reevaluate its size standard.
    On this basis, however, EBSA has determined that this rule will not 
have a significant economic impact on a substantial number of small 
entities. In support of this determination, and in an effort to provide 
a sound basis for this conclusion, EBSA has prepared the following 
final regulatory flexibility analysis.
    (1) Reasons for Action. EBSA is proposing this regulation because 
it believes that regulatory guidance concerning the definition of a 
``plan or arrangement which is established or maintained under or 
pursuant to one or more agreements which the Secretary finds to be 
collective bargaining agreements'' (ERISA 3(40)(A)(1)) is necessary to 
ensure that state insurance regulators have ascertainable guidelines to 
help regulate MEWAs operating in their jurisdictions. The guidance will 
also allow sponsors of employee welfare benefit plans to determine 
independently whether their entities are excepted under section 3(40) 
of ERISA. A more detailed discussion of the agency's reasoning for 
issuing the regulation is found above.
    (2) Objective. The objective of the regulation is to provide 
criteria for the application of an exception to the definition 
``multiple employer welfare arrangement'' (MEWA) found in section 3(40) 
of ERISA for a ``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.'' An extensive 
list of authority may be found in the Statutory Authority section, 
below.
    (3) Estimate of Small Entities Affected. Form 5500 filings and Form 
M-1 filings indicate that there are about 2,600 entities that could be 
classified as collectively bargained plans or MEWAs and that could be 
affected by the new criteria for defining collectively bargained plans. 
It is expected, however, that a very small number of these entities 
will have fewer than 100 participants. By their nature, the affected 
entities must involve at least two employers, which decreases the 
likelihood of their covering fewer than 100 participants. Also, the 
underlying goals behind the formation of these

[[Page 17479]]

entities, such as gaining purchasing and negotiating power through 
economies of scale, improving administrative efficiencies, and gaining 
access to additional benefit design features, are not readily 
accomplished if the group of covered lives remains small.
    Available data indicate that about 200 or eight percent of the 
2,600 entities have fewer than 100 participants. Based on the health 
coverage reported in the Employee Benefits Supplement to the 1993 
Current Population Survey and a 1993 Small Business Administration 
survey of retirement and other benefit coverages in small firms, the 
Department estimates that there are more than 2.5 million private group 
health plans with fewer than 100 participants. Thus, the number of 
small plans and MEWAs potentially affected is very small in light of 
this large number of small plans. Even if every one of the 2,600 
entities at issue had fewer than 100 participants, the number of 
entities affected would represent approximately one-tenth of one 
percent of all small group health plans. Accordingly, the Department 
has determined that this regulation will not have a significant 
economic impact on a substantial number of small entities.
    Although relatively few small plans and other entities are expected 
to be affected by this proposal, it is known that the employers 
typically involved in these entities are often small (that is, they 
have fewer than 500 employees, which is generally consistent with the 
definition of small entity found in regulations issued by the Small 
Business Administration (13 CFR 121.201)). At the time of the proposed 
regulation, the Department sought comments and data with respect to the 
number of small employers potentially impacted by the establishment of 
a standard for determining whether a welfare benefit plan is 
established or maintained under or pursuant to one or more collective 
bargaining agreements. No comments or data were received in response to 
this request; the Department therefore continues to believe that, 
because these plans and arrangements involve at least two employers, 
and assuming that each is small, it can be estimated that at least 
5,200 small employers may be affected.
    It is possible that a small employer participating in what it 
thinks is a legitimate MEWA may find that it has unknowingly 
participated in a sham MEWA and will need to change its method of 
providing welfare benefits to its employees. By enabling states to 
regulate fraudulent and financially unsound MEWAs, therefore, the 
regulation may limit the sources of welfare benefits available to some 
small businesses, requiring them to seek alternative coverage for their 
employees. The greater benefit for employers, however, is an increased 
certainty that the MEWAs that remain in business will meet state 
regulatory standards and will be more certain to provide promised 
health, life, disability or other welfare benefits to employees. 
Consequently, employers will receive a net benefit from the reduced 
incidence of fraud and insolvency among the pool of MEWAs in the 
marketplace.
    (4) Reporting and Recordkeeping. In most cases, the records used to 
determine if a welfare benefit plan is established or maintained under 
or pursuant to a collective bargaining agreement are routinely prepared 
and held by a collectively bargained multiemployer plan in the ordinary 
course of business. For any entities that are newly determined to be 
MEWAs under the regulation, there will be an economic impact related to 
the start-up costs of compliance with state regulations. These costs 
arise from state requirements, however, and not the requirements of 
this regulation. Start-up costs under state regulations may include 
expenses of registration, licensing, financial reporting, auditing, and 
any other requirement of state insurance law. Reporting and filing this 
information with the state would require the professional skills of an 
attorney, accountant, or other health benefit plan professional; 
however, post start-up, the majority of the recordkeeping and reporting 
could be handled by clerical staff.
    (5) Duplication. No federal rules have been identified that 
duplicate, overlap, or conflict with the final rule.
    (6) Alternatives. The regulation adopts generally the views of the 
consensus report of the Committee that was established to provide an 
alternative to the Department's earlier Notice of Proposed Rulemaking 
on Plans Established or Maintained Under or Pursuant to Collective 
Bargaining Agreements, published in the Federal Register (60 FR 39209, 
Aug. 1, 1995). At that time, recognizing that guidance was needed to 
clarify the collective bargaining exception to the MEWA regulation, the 
Department had proposed certain criteria describing the collective 
bargaining agreement. Commenters on the first proposed regulation 
expressed concerns related to plan compliance and the issue of state 
regulation.
    Based on the comments received, the Department subsequently turned 
to negotiated rulemaking, establishing the Committee to assist the 
Department in developing acceptable criteria. The Committee included 
representatives from labor unions, multiemployer plans, state 
governments, employer/management associations, Railway Labor Act plans, 
third-party administrators, independent agents and brokers of health 
care products, insurance carriers and the federal government. Because 
this rule takes into account the Committee's consensus views, and 
because the Committee represented a full cross-section of the parties 
affected by the rule, including state, federal, association, and 
private sector health care organizations, the Department believes that, 
as an alternative to the 1995 NPRM, this regulation accomplishes the 
stated objectives of the Secretary and will have a beneficial effect on 
small employer participation in MEWAs.
    The Department has concluded that the implementation of the 
regulation will be less costly than alternative methods of determining 
compliance with section 3(40), such as through case-by-case analysis by 
EBSA of each employee welfare benefit plan or litigation. In addition, 
if the Department elected not to define specific guidelines for the 
application of section 3(40), thereby enabling sham MEWAs to continue 
to evade state regulation, costs for small businesses would rise in 
terms of loss of coverage and unpaid claims. No other significant 
alternatives that would minimize economic impact on small entities were 
identified.
    Further, the Department has concluded that it would be 
inappropriate to create a specific exemption under the regulation for 
small MEWAs because small MEWAs are just as likely as large MEWAs to be 
underfunded or otherwise have inadequate reserves to meet the benefit 
claims submitted for payment.

E. Small Business Regulatory Enforcement Fairness Act

    The rule being issued here is subject to the Congressional Review 
Act provisions of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (5 U.S.C. 801 et seq.) and has been transmitted to Congress 
and the Comptroller General for review. The rule is not a ``major 
rule'' as that term is defined in 5 U.S.C. 804, because it is not 
likely to result in (1) An annual effect on the economy of $100 million 
or more; (2) a major increase in costs or prices for consumers, 
individual industries, or federal, state, or local government agencies, 
or geographic regions; or (3) significant adverse effects on 
competition, employment, investment, productivity, innovation, or

[[Page 17480]]

on the ability of United States-based enterprises to compete with 
foreign-based enterprises in domestic or export markets.

F. Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1501 et seq.), as well as Executive Order 12875, this rule does not 
include any Federal mandate that may result in expenditures by State, 
local, or tribal governments, or the private sector, which may impose 
an annual burden of $100 million.

G. Executive Order 13132

    When an agency promulgates a regulation that has federalism 
implications, Executive Order 13132 (64 FR 43255, August 10, 1999), 
requires the Agency to provide a federalism summary impact statement. 
Pursuant to section 6(c) of the Order, such a statement must include a 
description of the extent of the agency's consultation with State and 
local officials, a summary of the nature of their concerns and the 
agency's position supporting the need to issue the regulation, and a 
statement of the extent to which the concerns of the State have been 
met.
    This regulation has federalism implications because it sets forth 
standards and procedures for determining whether certain entities may 
be regulated under certain state laws or whether such state laws are 
preempted with respect to such entities. The state laws at issue are 
those that regulate the business of insurance.
    From the inception of the Committee through final deliberations on 
comments received on the proposed regulation, a representative from the 
National Association of Insurance Commissioners (NAIC), representing 
the interests of state governments in the regulation of insurance, 
participated in the rulemaking. NAIC raised the following concerns at 
Committee meetings: (1) That the rule should allow MEWAs to be easily 
distinguishable from collectively bargained plans so that MEWAs 
properly may be subjected to state jurisdiction and regulation; (2) 
that the rule should prevent the unlicensed sale of health insurance; 
and (3) that losses to individuals in the form of unreimbursed and 
denied medical claims should be eliminated.
    The Department's position is that there is a substantial need for 
this regulation. Unscrupulous individuals have been able to exploit the 
lack of clear guidance regarding the criteria for determining whether 
an entity is established or maintained pursuant to collective 
bargaining agreements to create entities that falsely promise benefits 
they are unable to provide. These operators, free of state solvency and 
reserve requirements, have marketed unlicensed health insurance to 
small employers, often offering health insurance at significantly lower 
rates than state-licensed insurance companies. Ultimately, these 
operations have often gone bankrupt, leaving individuals with 
significant unpaid health claims and without health insurance. The lack 
of clear guidance has hampered states in their efforts to regulate 
these entities, and appropriate state regulation would reduce or 
eliminate the risk of losses to employers, employees and their 
families.
    This regulation provides objective criteria for distinguishing 
collectively bargained plans from arrangements subject to state 
insurance law. The regulation will facilitate state enforcement efforts 
against arrangements attempting to misuse the collectively bargained 
exception in section 3(40) of ERISA. In that regard, the regulation 
will reduce the incidence of sale of unlicensed insurance under the 
guise of collectively bargained plans and will limit the losses to 
individuals in the form of unreimbursed medical and other welfare 
benefit insurance claims.
    The Department notes further, as discussed more fully above, that 
one commenter expressed concern that the availability of administrative 
proceedings for an individualized section 3(40) finding in cases where 
the jurisdiction or law of a state has been asserted may result in 
delays in state enforcement that could substantially hinder a state's 
ability to take timely enforcement actions against sham MEWA operators. 
Recognizing the need to ensure that the regulations assist, rather than 
hinder, state enforcement efforts against sham MEWA operators, and 
taking into account the input of the Committee, including the NAIC 
representative, the Department has amended the regulation to make clear 
that it is not intended to provide the basis for a stay or delay of any 
state actions, including administrative or court proceedings and 
enforcement subpoenas, where immediate state enforcement action is 
warranted.

List of Subjects in 29 CFR Part 2510

    Collective bargaining, Employee benefit plans, Pensions.

0
For the reasons set forth in the preamble, 29 CFR part 2510 is amended 
as follows:

PART 2510--[AMENDED] DEFINITION OF TERMS USED IN SUBCHAPTERS C, D, 
E, F, AND G OF THIS CHAPTER

0
1. The authority citation for part 2510 is revised to read as follows:

    Authority: 29 U.S.C. 1002(2), 1002(21), 1002(37), 1002(40), 
1031, and 1135; Secretary of Labor's Order 1-2003, 68 FR 5374; Sec. 
2510.3-101 also issued under sec. 102 of Reorganization Plan No. 4 
of 1978, 43 FR 47713, 3 CFR, 1978 Comp., p. 332 and E.O. 12108, 44 
FR 1065, 3 CFR, 1978 Comp., p. 275, and 29 U.S.C. 1135 note. Sec. 
2510.3-102 also issued under sec. 102 of Reorganization Plan No. 4 
of 1978, 43 FR 47713, 3 CFR, 1978 Comp., p. 332 and E.O. 12108, 44 
FR 1065, 3 CFR, 1978 Comp., p. 275.

0
2. Add new section 2510.3-40 to read as follows:


Sec.  2510.3-40  Plans Established or Maintained Under or Pursuant to 
Collective Bargaining Agreements Under Section 3(40)(A) of ERISA.

    (a) Scope and purpose. Section 3(40)(A) of the Employee Retirement 
Income Security Act of 1974 (ERISA) provides that the term ``multiple 
employer welfare arrangement'' (MEWA) does not include an employee 
welfare benefit plan that is established or maintained under or 
pursuant to one or more agreements that the Secretary of Labor (the 
Secretary) finds to be collective bargaining agreements. This section 
sets forth criteria that represent a finding by the Secretary whether 
an arrangement is an employee welfare benefit plan established or 
maintained under or pursuant to one or more collective bargaining 
agreements. A plan is established or maintained under or pursuant to 
collective bargaining if it meets the criteria in this section. 
However, even if an entity meets the criteria in this section, it will 
not be an employee welfare benefit plan established or maintained under 
or pursuant to a collective bargaining agreement if it comes within the 
exclusions in the section. Nothing in or pursuant to this section shall 
constitute a finding for any purpose other than the exception for plans 
established or maintained under or pursuant to one or more collective 
bargaining agreements under section 3(40) of ERISA. In a particular 
case where there is an attempt to assert state jurisdiction or the 
application of state law with respect to a plan or other arrangement 
that allegedly is covered under Title I of ERISA, the Secretary has set 
forth a procedure for obtaining individualized findings at 29 CFR part 
2570, subpart H.
    (b) General criteria. The Secretary finds, for purposes of section 
3(40) of ERISA, that an employee welfare benefit

[[Page 17481]]

plan is ``established or maintained under or pursuant to one or more 
agreements which the Secretary finds to be collective bargaining 
agreements'' for any plan year in which the plan meets the criteria set 
forth in paragraphs (b)(1), (2), (3), and (4) of this section, and is 
not excluded under paragraph (c) of this section.
    (1) The entity is an employee welfare benefit plan within the 
meaning of section 3(1) of ERISA.
    (2) At least 85% of the participants in the plan are:
    (i) Individuals employed under one or more agreements meeting the 
criteria of paragraph (b)(3) of this section, under which contributions 
are made to the plan, or pursuant to which coverage under the plan is 
provided;
    (ii) Retirees who either participated in the plan at least five of 
the last 10 years preceding their retirement, or
    (A) Are receiving benefits as participants under a multiemployer 
pension benefit plan that is maintained under the same agreements 
referred to in paragraph (b)(3) of this section, and
    (B) Have at least five years of service or the equivalent under 
that multiemployer pension benefit plan;
    (iii) Participants on extended coverage under the plan pursuant to 
the requirements of a statute or court or administrative agency 
decision, including but not limited to the continuation coverage 
requirements of the Consolidated Omnibus Budget Reconciliation Act of 
1985, sections 601-609, 29 U.S.C. 1169, the Family and Medical Leave 
Act, 29 U.S.C. 2601 et seq., the Uniformed Services Employment and 
Reemployment Rights Act of 1994, 38 U.S.C. 4301 et seq., or the 
National Labor Relations Act, 29 U.S.C. 158(a)(5);
    (iv) Participants who were active participants and whose coverage 
is otherwise extended under the terms of the plan, including but not 
limited to extension by reason of self-payment, hour bank, long or 
short-term disability, furlough, or temporary unemployment, provided 
that the charge to the individual for such extended coverage is no more 
than the applicable premium under section 604 of the Act;
    (v) Participants whose coverage under the plan is maintained 
pursuant to a reciprocal agreement with one or more other employee 
welfare benefit plans that are established or maintained under or 
pursuant to one or more collective bargaining agreements and that are 
multiemployer plans;
    (vi) Individuals employed by:
    (A) An employee organization that sponsors, jointly sponsors, or is 
represented on the association, committee, joint board of trustees, or 
other similar group of representatives of the parties who sponsor the 
plan;
    (B) The plan or associated trust fund;
    (C) Other employee benefit plans or trust funds to which 
contributions are made pursuant to the same agreement described in 
paragraph (b)(3) of this section; or
    (D) An employer association that is the authorized employer 
representative that actually engaged in the collective bargaining that 
led to the agreement that references the plan as described in paragraph 
(b)(3) of this section;
    (vii) Individuals who were employed under an agreement described in 
paragraph (b)(3) of this section, provided that they are employed by 
one or more employers that are parties to an agreement described in 
paragraph (b)(3) and are covered under the plan on terms that are 
generally no more favorable than those that apply to similarly situated 
individuals described in paragraph (b)(2)(i) of this section;
    (viii) Individuals (other than individuals described in paragraph 
(b)(2)(i) of this section) who are employed by employers that are bound 
by the terms of an agreement described in paragraph (b)(3) of this 
section and that employ personnel covered by such agreement, and who 
are covered under the plan on terms that are generally no more 
favorable than those that apply to such covered personnel. For this 
purpose, such individuals in excess of 10% of the total population of 
participants in the plan are disregarded;
    (ix) Individuals who are, or were for a period of at least three 
years, employed under one or more agreements between or among one or 
more ``carriers'' (including ``carriers by air'') and one or more 
``representatives'' of employees for collective bargaining purposes and 
as defined by the Railway Labor Act, 45 U.S.C. 151 et seq., providing 
for such individuals' current or subsequent participation in the plan, 
or providing for contributions to be made to the plan by such carriers; 
or
    (x) Individuals who are licensed marine pilots operating in United 
States ports as a state-regulated enterprise and are covered under an 
employee welfare benefit plan that meets the definition of a qualified 
merchant marine plan, as defined in section 415(b)(2)(F) of the 
Internal Revenue Code (26 U.S.C.).
    (3) The plan is incorporated or referenced in a written agreement 
between one or more employers and one or more employee organizations, 
which agreement, itself or together with other agreements among the 
same parties:
    (i) Is the product of a bona fide collective bargaining 
relationship between the employers and the employee organization(s);
    (ii) Identifies employers and employee organization(s) that are 
parties to and bound by the agreement;
    (iii) Identifies the personnel, job classifications, and/or work 
jurisdiction covered by the agreement;
    (iv) Provides for terms and conditions of employment in addition to 
coverage under, or contributions to, the plan; and
    (v) Is not unilaterally terminable or automatically terminated 
solely for non-payment of benefits under, or contributions to, the 
plan.
    (4) For purposes of paragraph (b)(3)(i) of this section, the 
following factors, among others, are to be considered in determining 
the existence of a bona fide collective bargaining relationship. In any 
proceeding initiated under 29 CFR part 2570 subpart H, the existence of 
a bona fide collective bargaining relationship under paragraph 
(b)(3)(i) shall be presumed where at least four of the factors set out 
in paragraphs (b)(4)(i) through (viii) of this section are established. 
In such a proceeding, the Secretary may also consider whether other 
objective or subjective indicia of actual collective bargaining and 
representation are present as set out in paragraph (b)(4)(ix) of this 
section.
    (i) The agreement referred to in paragraph (b)(3) of this section 
provides for contributions to a labor-management trust fund structured 
according to section 302(c)(5), (6), (7), (8), or (9) of the Taft-
Hartley Act, 29 U.S.C. 186(c)(5), (6), (7), (8) or (9), or to a plan 
lawfully negotiated under the Railway Labor Act;
    (ii) The agreement referred to in paragraph (b)(3) of this section 
requires contributions by substantially all of the participating 
employers to a multiemployer pension plan that is structured in 
accordance with section 401 of the Internal Revenue Code (26 U.S.C.) 
and is either structured in accordance with section 302(c)(5) of the 
Taft-Hartley Act, 29 U.S.C. 186(c)(5), or is lawfully negotiated under 
the Railway Labor Act, and substantially all of the active participants 
covered by the employee welfare benefit plan are also eligible to 
become participants in that pension plan;
    (iii) The predominant employee organization that is a party to the 
agreement referred to in paragraph (b)(3) of this section has 
maintained a series of agreements incorporating or referencing the plan 
since before January 1, 1983;
    (iv) The predominant employee organization that is a party to the 
agreement referred to in paragraph (b)(3) of this section has been a 
national or international union, or a federation of

[[Page 17482]]

national and international unions, or has been affiliated with such a 
union or federation, since before January 1, 1983;
    (v) A court, government agency, or other third-party adjudicatory 
tribunal has determined, in a contested or adversary proceeding, or in 
a government-supervised election, that the predominant employee 
organization that is a party to the agreement described in paragraph 
(b)(3) of this section is the lawfully recognized or designated 
collective bargaining representative with respect to one or more 
bargaining units of personnel covered by such agreement;
    (vi) Employers who are parties to the agreement described in 
paragraph (b)(3) of this section pay at least 75% of the premiums or 
contributions required for the coverage of active participants under 
the plan or, in the case of a retiree-only plan, the employers pay at 
least 75% of the premiums or contributions required for the coverage of 
the retirees. For this purpose, coverage under the plan for dental or 
vision care, coverage for excepted benefits under 29 CFR 2590.732(b), 
and amounts paid by participants and beneficiaries as co-payments or 
deductibles in accordance with the terms of the plan are disregarded;
    (vii) The predominant employee organization that is a party to the 
agreement described in paragraph (b)(3) of this section provides, 
sponsors, or jointly sponsors a hiring hall(s) and/or a state-certified 
apprenticeship program(s) that provides services that are available to 
substantially all active participants covered by the plan;
    (viii) The agreement described in paragraph (b)(3) of this section 
has been determined to be a bona fide collective bargaining agreement 
for purposes of establishing the prevailing practices with respect to 
wages and supplements in a locality, pursuant to a prevailing wage 
statute of any state or the District of Columbia.
    (ix) There are other objective or subjective indicia of actual 
collective bargaining and representation, such as that arm's-length 
negotiations occurred between the parties to the agreement described in 
paragraph (b)(3) of this section; that the predominant employee 
organization that is party to such agreement actively represents 
employees covered by such agreement with respect to grievances, 
disputes, or other matters involving employment terms and conditions 
other than coverage under, or contributions to, the employee welfare 
benefit plan; that there is a geographic, occupational, trade, 
organizing, or other rationale for the employers and bargaining units 
covered by such agreement; that there is a connection between such 
agreement and the participation, if any, of self-employed individuals 
in the employee welfare benefit plan established or maintained under or 
pursuant to such agreement.
    (c) Exclusions. An employee welfare benefit plan shall not be 
deemed to be ``established or maintained under or pursuant to one or 
more agreements which the Secretary finds to be collective bargaining 
agreements'' for any plan year in which:
    (1) The plan is self-funded or partially self-funded and is 
marketed to employers or sole proprietors
    (i) By one or more insurance producers as defined in paragraph (d) 
of this section;
    (ii) By an individual who is disqualified from, or ineligible for, 
or has failed to obtain, a license to serve as an insurance producer to 
the extent that the individual engages in an activity for which such 
license is required; or
    (iii) By individuals (other than individuals described in 
paragraphs (c)(1)(i) and (ii) of this section) who are paid on a 
commission-type basis to market the plan.
    (iv) For the purposes of this paragraph (c)(1):
    (A) ``Marketing'' does not include administering the plan, 
consulting with plan sponsors, counseling on benefit design or 
coverage, or explaining the terms of coverage available under the plan 
to employees or union members;
    (B) ``Marketing'' does include the marketing of union membership 
that carries with it plan participation by virtue of such membership, 
except for membership in unions representing insurance producers 
themselves;
    (2) The agreement under which the plan is established or maintained 
is a scheme, plan, stratagem, or artifice of evasion, a principal 
intent of which is to evade compliance with state law and regulations 
applicable to insurance; or
    (3) There is fraud, forgery, or willful misrepresentation as to the 
factors relied on to demonstrate that the plan satisfies the criteria 
set forth in paragraph (b) of this section.
    (d) Definitions. (1) Active participant means a participant who is 
not retired and who is not on extended coverage under paragraphs 
(b)(2)(iii) or (b)(2)(iv) of this section.
    (2) Agreement means the contract embodying the terms and conditions 
mutually agreed upon between or among the parties to such agreement. 
Where the singular is used in this section, the plural is automatically 
included.
    (3) Individual employed means any natural person who furnishes 
services to another person or entity in the capacity of an employee 
under common law, without regard to any specialized definitions or 
interpretations of the terms ``employee,'' ``employer,'' or 
``employed'' under federal or state statutes other than ERISA.
    (4) Insurance producer means an agent, broker, consultant, or 
producer who is an individual, entity, or sole proprietor that is 
licensed under the laws of the state to sell, solicit, or negotiate 
insurance.
    (5) Predominant employee organization means, where more than one 
employee organization is a party to an agreement, either the 
organization representing the plurality of individuals employed under 
such agreement, or organizations that in combination represent the 
majority of such individuals.
    (e) Examples. The operation of the provisions of this section may 
be illustrated by the following examples.

    Example 1. Plan A has 500 participants, in the following 4 
categories of participants under paragraph (b)(2) of this section:

----------------------------------------------------------------------------------------------------------------
                   Categories of participants                      Total number     Nexus group      Non-nexus
----------------------------------------------------------------------------------------------------------------
1. Individuals working under CBAs...............................       335 (67%)       335 (67%)               0
2. Retirees.....................................................        50 (10%)        50 (10%)               0
3. ``Special Class''--Non-CBA, non-CBA-alumni...................       100 (20%)        50 (10%)        50 (10%)
4. Non-nexus participants.......................................         15 (3%)               0         15 (3%)
                                                                 -----------------
      Total.....................................................      500 (100%)       435 (87%)        65 (13%)
----------------------------------------------------------------------------------------------------------------

    In determining whether at least 85% of Plan A's participant 
population is made up of individuals with the required nexus to the 
collective bargaining agreement as required by paragraph (b)(2) of 
this section, the Plan may count as part of the nexus group only

[[Page 17483]]

50 (10% of the total plan population) of the 100 individuals 
described in paragraph (b)(2)(viii) of this section. That is because 
the number of individuals meeting the category of individuals in 
paragraph (b)(2)(viii) exceeds 10% of the total participant 
population by 50 individuals. The paragraph specifies that of those 
individuals who would otherwise be deemed to be nexus individuals 
because they are the type of individuals described in paragraph 
(b)(2)(viii), the number in excess of 10% of the total plan 
population may not be counted in the nexus group. Here, 50 of the 
100 individuals employed by signatory employers, but not covered by 
the collective bargaining agreement, are counted as nexus 
individuals and 50 are not counted as nexus individuals. 
Nonetheless, the Plan satisfies the 85% criterion under paragraph 
(b)(2) because a total of 435 (335 individuals covered by the 
collective bargaining agreement, plus 50 retirees, plus 50 
individuals employed by signatory employers), or 87%, of the 500 
participants in Plan A are individuals who may be counted as nexus 
participants under paragraph (b)(2). Beneficiaries (e.g., spouses, 
dependent children, etc.) are not counted to determine whether the 
85% test has been met.
    Example 2. (i) International Union MG and its Local Unions have 
represented people working primarily in a particular industry for 
over 60 years. Since 1950, most of their collective bargaining 
agreements have called for those workers to be covered by the 
National MG Health and Welfare Plan. During that time, the number of 
union-represented workers in the industry, and the number of active 
participants in the National MG Health and Welfare Plan, first grew 
and then declined. New Locals were formed and later were shut down. 
Despite these fluctuations, the National MG Health and Welfare Plan 
meets the factors described in paragraphs (b)(4)(iii) and (iv) of 
this section, as the plan has been in existence pursuant to 
collective bargaining agreements to which the International Union 
and its affiliates have been parties since before January 1, 1983.
    (ii) Assume the same facts, except that on January 1, 1999, 
International Union MG merged with International Union RE to form 
International Union MRGE. MRGE and its Locals now represent the 
active participants in the National MG Health and Welfare Plan and 
in the National RE Health and Welfare Plan, which, for 45 years, had 
been maintained under collective bargaining agreements negotiated by 
International Union RE and its Locals. Since International Union 
MRGE is the continuation of, and successor to, the MG and RE unions, 
the two plans continue to meet the factors in paragraphs (b)(4)(iii) 
and (iv) of this section. This also would be true if the two plans 
were merged.
    (iii) Assume the same facts as in paragraphs (i) and (ii) of 
this Example. In addition to maintaining the health and welfare 
plans described in those paragraphs, International Union MG also 
maintained the National MG Pension Plan and International Union RE 
maintained the National RE Pension Plan. When the unions merged and 
the health and welfare plans were merged, National MG Pension Plan 
and National RE Pension Plan were merged to form National MRGE 
Pension Plan. When the unions merged, the employees and retirees 
covered under the pre-merger plans continued to be covered under the 
post-merger plans pursuant to the collective bargaining agreements 
and also were given credit in the post-merger plans for their years 
of service and coverage in the pre-merger plans. Retirees who 
originally were covered under the pre-merger plans and continue to 
be covered under the post-merger plans based on their past service 
and coverage would be considered to be ``retirees'' for purposes of 
2550.3-40(b)(2)(ii). Likewise, bargaining unit alumni who were 
covered under the pre-merger plans and continued to be covered under 
the post-merger plans based on their past service and coverage and 
their continued employment with employers that are parties to an 
agreement described in paragraph (b)(3) of this section would be 
considered to be bargaining unit alumni for purposes of 2550.3-
40(b)(2)(vii).
    Example 3. Assume the same facts as in paragraph (ii) of Example 
2 with respect to International Union MG. However, in 1997, one of 
its Locals and the employers with which it negotiates agree to set 
up a new multiemployer health and welfare plan that only covers the 
individuals represented by that Local Union. That plan would not 
meet the factor in paragraph (b)(4)(iii) of this section, as it has 
not been incorporated or referenced in collective bargaining 
agreements since before January 1, 1983.
    Example 4. (i) Pursuant to a collective bargaining agreement 
between various employers and Local 2000, the employers contribute 
$2 per hour to the Fund for every hour that a covered employee works 
under the agreement. The covered employees are automatically 
entitled to health and disability coverage from the Fund for every 
calendar quarter the employees have 300 hours of additional covered 
service in the preceding quarter. The employees do not need to make 
any additional contributions for their own coverage, but must pay 
$250 per month if they want health coverage for their dependent 
spouse and children. Because the employer payments cover 100% of the 
required contributions for the employees' own coverage, the Local 
2000 Employers Health and Welfare Fund meets the ``75% employer 
payment'' factor under paragraph (b)(4)(vi) of this section.
    (ii) Assume, however, that the negotiated employer contribution 
rate was $1 per hour, and the employees could only obtain health 
coverage for themselves if they also elected to contribute $1 per 
hour, paid on a pre-tax basis through salary reduction. The Fund 
would not meet the 75% employer payment factor, even though the 
employees' contributions are treated as employer contributions for 
tax purposes. Under ERISA, and therefore under this section, 
elective salary reduction contributions are treated as employee 
contributions. The outcome would be the same if a uniform employee 
contribution rate applied to all employees, whether they had 
individual or family coverage, so that the $1 per hour employee 
contribution qualified an employee for his or her own coverage and, 
if he or she had dependents, dependent coverage as well.
    Example 5. Arthur is a licensed insurance broker, one of whose 
clients is Multiemployer Fund M, a partially self-funded plan. 
Arthur takes bids from insurance companies on behalf of Fund M for 
the insured portion of its coverage, helps the trustees to evaluate 
the bids, and places the Fund's health insurance coverage with the 
carrier that is selected. Arthur also assists the trustees of Fund M 
in preparing material to explain the plan and its benefits to the 
participants, as well as in monitoring the insurance company's 
performance under the contract. At the Trustees' request, Arthur 
meets with a group of employers with which the union is negotiating 
for their employees' coverage under Fund M, and he explains the cost 
structure and benefits that Fund M provides. Arthur is not engaged 
in marketing within the meaning of paragraph (c)(1) of this section, 
so the fact that he provides these administrative services and sells 
insurance to the Fund itself does not affect the plan's status as a 
plan established or maintained under or pursuant to a collective 
bargaining agreement. This is the case whether or how he is 
compensated.
    Example 6. Assume the same facts as Example 5, except that 
Arthur has a group of clients who are unrelated to the employers 
bound by the collective bargaining agreement, whose employees would 
not be ``nexus group'' members, and whose insurance carrier has 
withdrawn from the market in their locality. He persuades the client 
group to retain him to find them other coverage. The client group 
has no relationship with the labor union that represents the 
participants in Fund M. However, Arthur offers them coverage under 
Fund M and persuades the Fund's Trustees to allow the client group 
to join Fund M in order to broaden Fund M's contribution base. 
Arthur's activities in obtaining coverage for the unrelated group 
under Fund M constitutes marketing through an insurance producer; 
Fund M is a MEWA under paragraph (c)(1) of this section.
    Example 7. Union A represents thousands of construction workers 
in a three-state geographic region. For many years, Union A has 
maintained a standard written collective bargaining agreement with 
several hundred large and small building contractors, covering 
wages, hours, and other terms and conditions of employment for all 
work performed in Union A's geographic territory. The terms of those 
agreements are negotiated every three years between Union A and a 
multiemployer Association, which signs on behalf of those employers 
who have delegated their bargaining authority to the Association. 
Hundreds of other employers--including both local and traveling 
contractors--have chosen to become bound to the terms of Union A's 
standard area agreement for various periods of time and in various 
ways, such as by signing short-form binders or ``me too'' 
agreements, executing a single job or project labor agreement, or 
entering into a subcontracting arrangement with a signatory 
employer. All of these employ individuals represented by Union A and 
contribute to Plan A, a self-insured multiemployer health and 
welfare plan established and maintained under Union A's

[[Page 17484]]

standard area agreement. During the past year, the trustees of Plan 
A have brought lawsuits against several signatory employers seeking 
contributions allegedly owed, but not paid to the trust. In 
defending that litigation, a number of employers have sworn that 
they never intended to operate as union contractors, that their 
employees want nothing to do with Union A, that Union A procured 
their assent to the collective bargaining agreement solely by 
threats and fraudulent misrepresentations, and that Union A has 
failed to file certain reports required by the Labor Management 
Reporting and Disclosure Act. In at least one instance, a petition 
for a decertification election has been filed with the National 
Labor Relations Board. In this example, Plan A meets the criteria 
for a regulatory finding under this section that it is a 
multiemployer plan established and maintained under or pursuant to 
one or more collective bargaining agreements, assuming that its 
participant population satisfies the 85% test of paragraph (b)(2) of 
this section and that none of the disqualifying factors in paragraph 
(c) of this section is present. Plan A's status for the purpose of 
this section is not affected by the fact that some of the employers 
who deal with Union A have challenged Union A's conduct, or have 
disputed under labor statutes and legal doctrines other than ERISA 
section 3(40) the validity and enforceability of their putative 
contract with Union A, regardless of the outcome of those disputes.
    Example 8. Assume the same facts as Example 7. Plan A's benefits 
consultant recently entered into an arrangement with the Medical 
Consortium, a newly formed organization of health care providers, 
which allows the Plan to offer a broader range of health services to 
Plan A's participants while achieving cost savings to the Plan and 
to participants. Union A, Plan A, and Plan A's consultant each have 
added a page to their Web sites publicizing the new arrangement with 
the Medical Consortium. Concurrently, Medical Consortium's Web site 
prominently publicizes its recent affiliation with Plan A and the 
innovative services it makes available to the Plan's participants. 
Union A has mailed out informational packets to its members 
describing the benefit enhancements and encouraging election of 
family coverage. Union A has also begun distributing similar 
material to workers on hundreds of non-union construction job sites 
within its geographic territory. In this example, Plan A remains a 
plan established and maintained under or pursuant to one or more 
collective bargaining agreements under section 3(40) of ERISA. 
Neither Plan A's relationship with a new organization of health care 
providers, nor the use of various media to publicize Plan A's 
attractive benefits throughout the area served by Union A, alters 
Plan A's status for purpose of this section.
    Example 9. Assume the same facts as in Example 7. Union A 
undertakes an area-wide organizing campaign among the employees of 
all the health care providers who belong to the Medical Consortium. 
When soliciting individual employees to sign up as union members, 
Union A distributes Plan A's information materials and promises to 
bargain for the same coverage. At the same time, when appealing to 
the employers in the Medical Consortium for voluntary recognition, 
Union A promises to publicize the Consortium's status as a group of 
unionized health care service providers. Union A eventually succeeds 
in obtaining recognition based on its majority status among the 
employees working for Medical Consortium employers. The Consortium, 
acting on behalf of its employer members, negotiates a collective 
bargaining agreement with Union A that provides terms and conditions 
of employment, including coverage under Plan A. In this example, 
Plan A still meets the criteria for a regulatory finding that it is 
collectively bargained under section 3(40) of ERISA. Union A's 
recruitment and representation of a new occupational category of 
workers unrelated to the construction trade, its promotion of 
attractive health benefits to achieve organizing success, and the 
Plan's resultant growth, do not take Plan A outside the regulatory 
finding.
    Example 10. Assume the same facts as in Example 7. The Medical 
Consortium, a newly formed organization, approaches Plan A with a 
proposal to make money for Plan A and Union A by enrolling a large 
group of employers, their employees, and self-employed individuals 
affiliated with the Medical Consortium. The Medical Consortium 
obtains employers' signatures on a generic document bearing Union 
A's name, labeled ``collective bargaining agreement,'' which 
provides for health coverage under Plan A and compliance with wage 
and hour statutes, as well as other employment laws. Employees of 
signatory employers sign enrollment documents for Plan A and are 
issued membership cards in Union A; their membership dues are 
regularly checked off along with their monthly payments for health 
coverage. Self-employed individuals similarly receive union 
membership cards and make monthly payments, which are divided 
between Plan A and the Union. Aside from health coverage matters, 
these new participants have little or no contact with Union A. The 
new participants enrolled through the Consortium amount to 18% of 
the population of Plan A during the current Plan Year. In this 
example, Plan A now fails to meet the criteria in paragraphs (b)(2) 
and (b)(3) of this section, because more than 15% of its 
participants are individuals who are not employed under agreements 
that are the product of a bona fide collective bargaining 
relationship and who do not fall within any of the other nexus 
categories set forth in paragraph (b)(2) of this section. Moreover, 
even if the number of additional participants enrolled through the 
Medical Consortium, together with any other participants who did not 
fall within any of the nexus categories, did not exceed 15% of the 
total participant population under the plan, the circumstances in 
this example would trigger the disqualification of paragraph (c)(2) 
of this section, because Plan A now is being maintained under a 
substantial number of agreements that are a ``scheme, plan, 
stratagem or artifice of evasion'' intended primarily to evade 
compliance with state laws and regulations pertaining to insurance. 
In either case, the consequence of adding the participants through 
the Medical Consortium is that Plan A is now a MEWA for purposes of 
section 3(40) of ERISA and is not exempt from state regulation by 
virtue of ERISA.

    (f) Cross-reference. See 29 CFR part 2570, subpart H for procedural 
rules relating to proceedings seeking an Administrative Law Judge 
finding by the Secretary under section 3(40) of ERISA.
    (g) Effect of proceeding seeking Administrative Law Judge Section 
3(40) Finding.
    (1) An Administrative Law Judge finding issued pursuant to the 
procedures in 29 CFR part 2570, subpart H will constitute a finding 
whether the entity in that proceeding is an employee welfare benefit 
plan established or maintained under or pursuant to an agreement that 
the Secretary finds to be a collective bargaining agreement for 
purposes of section 3(40) of ERISA.
    (2) Nothing in this section or in 29 CFR part 2570, subpart H is 
intended to provide the basis for a stay or delay of a state 
administrative or court proceeding or enforcement of a subpoena.

    Signed this 31st day of March 2003.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration.
[FR Doc. 03-8113 Filed 4-7-03; 8:45 am]
BILLING CODE 4510-29-P