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Why 99% of Plans Should Have a Formal Trust

These are informal inside-the-SPBA-family comments from SPBA Active Past President Fred Hunt. Nothing in writing or spoken from SPBA should ever be considered legal advice. Only an attorney with competence in the specific issues and with full access to all the facts & circumstances...and adequate time to review them... can render such advice.

Remember that employee benefits cross several categories of legal practice law, labor law, personnel law, etc. What might be fine in tax law could send you to jail under ERISA labor law. SPBA only acts as a clearinghouse of information & experiences from SPBA members & government policy-shapers. Remember, most laws have no final comprehensive regulations how to comply. We're getting panicky calls from SPBA members whose clients are going out of business or not able to pay....leaving some unpaid claims, sometimes mega-bucks. Knowing that DOL will wring the unpaid claims & IBNR from someone's pocket (including from a TPA's personal pocket, because the TPA had reason to guess the funding was shaky, and didn't do anything), this truly can be a panic situation.

So, here are some frequent questions we hear:

Should each plan have a separate trust for the plan assets?
In 99% of situations, YES. It's not in the text of ERISA. It's in DOL's regulations, such as defining "plan assets". To avoid having a trust, a plan would have to absolutely positively never have any employee contribution money, never have the possibility of a COBRA person's contribution, never have the chance of a provider delaying cashing a check, never have the chance of a refund or money coming back to the plan, etc. Lots of TPAs & clients try to rationalize and apply wishful-thinking...but many of the current panicky calls are from people who previously assured us nothing could go wrong.

What do you mean by "trust"?
A trust is a whole separate financial entity with specific rules for its distribution. It is overseen by trustees. It is NOT just a separate checking account or budget category. The whole point of a trust is that it is stand-alone and thus protected from fates which could befall other types of accounts, such as being seized by creditors.

Does it have to be a 501(c)(9) VEBA trust?
NO. 501(c)(9) VEBA is simply an IRS classification designating tax exemption for the interest earned by the trust. It has no relevance to DOL. Most trusts today are taxable, sometimes called "simple" trusts.  For more detail see the related article in this category of the website:  "Why VEBA Tax Exemption is Obsolete these Days"

Does a segregated account of the employer qualify as a trust?
NO. A segregated account may have the best intentions of being separate & sacred for use for the plan. However, it is technically still assets of the employer/sponsor. Therefore, the employer could legally use the money for something else...or the employer could go bankrupt or be sued and the creditors would grab the segregated account money along with other corporate accounts. There have been cases where an employer was sold, and the buyer immediately snatched the big chunk of money (in the segregated account) as now being his to do with as he wished. The old owner/trustee is still on the hook for the money the plan needs.

What about TPA-owned claims-paying accounts?
It can be dangerous for the TPA in several ways.

>> First, like the segregated account of an employer, the money is technically in the name/control, for that brief time, by the TPA, so it faces the same risks of buyers & creditors of TPAs trying to snatch it.

>> Second, IRS agents have occasionally considered it income to the TPA (because the TPA has "constructive receipt") and thus subject to income & other taxes to be paid by the TPA.
>> Third, you have to have "firewalls" to be sure that there is no chance in any situation of a penny of Client X's money in the TPA claims account ending up paying part of Client Y's bills (such as if Client Y's check is slow to arrive or bounces, but the claim check clears because X's money is in the claims-paying account). DOL calls this "co-mingling" of plan assts, which is a no no.
>> Fourth, there have been rumbles over the years in DOL about viewing TPAs holding plan assets in a TPA account as a gross breach of fiduciary duty and self-dealing (which can quickly slip into criminal charges if DOL feels you did anything selfish). So, the net is that SPBA members over the years have convinced DOL of the practical option of a TPA-owned claims-paying accounts in some rare sets of situations. However, the money should pass through with maximum speed (and thus not be earning interest which the TPA should not get to keep anyway, since it is plan assets)...and there must be absolute assurances that no money-mixing could ever take place under any circumstance. Remember, the rule of thumb is that plan assets and things generated because of plan assets (such as interest on "float") should only benefit plan participants.

Do trusts require audits?
YES...if the plan has over 100 participants (not including dependents). It is reported on each plan's Form 5500.

Why are CPA audits for trusts often prohibitively expensive?
SPBA has an outreach to the American Institute of Certified Public Accountants (AICPA = CPA's association), much as SPBA has done over the years to the American Medical Association and with Stop-Loss Service Partners. If the cost of CPA audits are leading clients not to have needed trusts, then it is in the interest of AICPA, SPBA, and clients to make audits as cost-effective as possible. (Both SPBA & AICPA must be cautious, because there are limitations associations face from strict anti-trust laws and any appearance of price-fixing).

May other plan expenses be paid from a trust, such as TPA fees?
YES. Any legitimate plan expense to directly benefit plan participants...including TPA, legal & CPA fees, printing costs for SPDs, etc.... may be paid from a plan trust. This is yet another reason TPAs should like trusts. Since trusts are less apt to suddenly find their funding or ownership in flux, the TPA has a better chance of getting paid for TPA services from a trust than from an employer who's suddenly bankrupt or doesn't exist anymore.

Warning: avoid wishful thinking & rationalization that helping the employer/sponsor stay solvent is a legitimate plan expense. Only things that directly help the plan particpant for the designated purposes of the plan are legitimate uses of plan assets.