The ERISA Need to Have a Trust
ERISA was created as the ultimate consumer protection law to protect plan assets and assure funding to fulfill the promised benefits to plan participants. It is important to remember that is the goal of ERISA and the role of the regulators.
For years, SPBA has said 99% of plans should have a formal separate trust. There is not a formal ERISA rule saying that there must always be a trust. However, if you were to describe 100 scenarios to the Department of Labor (DOL), they would say it would be fiduciary duty to have a separate formal trust. DOL judges things on a facts & circumstances basis.
Why a separate formal trust? If the money is not in a separate trust, it is at risk. Even with the best intentions of the employer and TPA, if it is held in an employer's general assets or even designated checking account (or in claims-paying accounts of the TPA), the money could be spent, allocated, frozen in a lawsuit, etc. We used to tell DOL that such things never happen... but they do happen, and with surprising frequency. Then it is a BIG fiduciary problem (think jail time). A significant amount of the money is now composed of withholdings from employees' paychecks and COBRA & dependent contributions, so some or all is not the employer's or TPA's money to be holding. DOL would view it as if you took money out of the employee's wallet and put it into yours for "safekeeping," and they would probably prosecute that as a criminal (jail) offense.
When are plan assets created? Generally, DOL feels the money becomes plan assets, and thus should be in a trust as soon as possible. When is that? The DOL's 1988 Plan Asset final regulation provided that the assets of a plan included amounts that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his or her wages by an employer, for contribution to a plan, as of the earliest date on which such contributions can reasonably be segregated from the employer's general assets, but in no event to exceed 90 days from the date on which such amounts are received or withheld by the employer.
Note: For plans with fewer than 100 participants, DOL recently proposed a revision to the Plan Asset regulations which would establish a safe harbor period of 7 business days during which amounts that an employer has received from employees or withheld from wages for contribution to benefit plans would not constitute plan assets.
ERISA & DOL are reasonable. If money is just passing through quickly (such as money from a trust to the TPA claims paying account to the provider), that's OK as a transition process. However, if the money is not moving expeditiously, DOL would see it as a failure. So, don't sit on the money for a couple of weeks, and you are also supposed to be able to show that no money from plan X could possibly end up being used by plan Y. No need to be fancy. Banks tend to hear the word Trust and want to steer you to some expensive services. That is not necessary. You simply need a simple trust as a firewall to protect and insulate the funds.
Cafeteria Plan Very-Limited-Loophole While the Department of Labor would never refer to the special treatment of plans set up in a salary reduction cafeteria plan format as a loophole, the net effect of this type of arrangement is to provide broad relief from the trust requirement. The DOL in Technical Release 92-01 (issued on June 8, 1992) provided a "non-enforcement" policy of the trust requirement for self-funded plans where ALL employee contributions (excluding COBRA contributions) are contributed on a pre-tax salary reduction basis. If ONLY ONE plan participant declined the option to contribute on a pre-tax salary reduction basis, then the plan would lose the protection of the "non-enforcement" policy and all employee contributions, whether pre-tax or after-tax, would need to comply with the trust requirements.
Historical note: We believe the DOL intended the "non-enforcement" policy to only apply to flexible spending accounts. But DOL drafted Technical Release 92-01 very loosely and swept in all plans funded through a cafeteria plan. Technical Release 92-01 is designed "to provide interim relief to plan sponsors and fiduciaries of certain contributory welfare plans pending consideration of these issues by the Department."
Reality Check – As noted, the non-enforcement policy is not guaranteed permanent. It is like the assumption that police won't give you a speeding ticket if you're only 10 mph over the speed limit. However, the police (or DOL) could change or become very strict on their enforcement policy at any time. So, do not fool yourself into thinking this exception is a legal guarantee. The standard to use for plans is what we said at the start: 99% of plans should have a formal separate trust.
Reminder - What is "allowed" by fiduciary duty? Because SPBA is preeminent in issues of ERISA fiduciary duty education for SPBA members and their clients, we are often asked to send out "the list with what is allowed and not allowed." There is no such list! What is allowed is what would be deemed to be "prudent" action or decision or caution. In other words, was the action of precautions prudent at the time and with the known circumstances at the time, and was everything done in the best interests of the plan (no laziness or self-interest on the part of anyone with any degree of fiduciary duty). That may seem vague, but there is a very good self-test. Assume that some investigative TV show barges into your office and goes through every action and reports it in the worst possible interpretation. If this were about to be broadcast on TV and anything being reported makes you squirm, then that is a wonderful alarm that there is an ERISA fiduciary concern. So, for example, if the client or TPA feel it would be "too hard" to bother to have a trust, how would that excuse sound on the investigative TV show if it meant that people lost their health coverage funds or pensions? That would be an excuse to make you squirm.