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Apprenticeship Fund Trustees’ Duties Under ERISA, the Taft-Hartley Act

& the Internal Revenue Code

Apprenticeship Fund Trustees’ Duties Under ERISA, the Taft-Hartley Act

& the Internal Revenue Code

Jim Cole

Groom Law Group, Chartered

jcole@groom.com

(202) 861-0175

electrical training ALLIANCENational Training Institute

August 2, 2016

© 2016

Jim Cole

Groom Law Group, Chartered

jcole@groom.com

(202) 861-0175

electrical training ALLIANCENational Training Institute

August 2, 2016

© 2016

© 2016

Federal Laws CoveredFederal Laws Covered

• Taft-Hartley Act• Taft-Hartley Act

EmployerEmployer JATCJATC

JATCJATC IRSIRS

• Federal Tax Laws• Federal Tax Laws

JATCJATC Apprentices andJourneymen

Apprentices andJourneymen

• Employee Retirement Income Security Act (ERISA)

• Employee Retirement Income Security Act (ERISA)

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Taft-Hartley ActTaft-Hartley Act

EmployerEmployer JATCJATC

• Focus on prohibition of payments to employees and their representatives

• Focus on prohibition of payments to employees and their representatives

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Taft-Hartley ActTaft-Hartley Act

EmployerEmployer JATCJATC

• Exception for payments to apprenticeship plans if . . .– Trust

– Written Agreement

– Equal Representation

– Deadlock Resolution Procedure

– Annual Audit

• Exception for payments to apprenticeship plans if . . .– Trust

– Written Agreement

– Equal Representation

– Deadlock Resolution Procedure

– Annual Audit

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Federal Tax LawsFederal Tax Laws

• Tax Exempt Status

• Intermediate Sanctions (4958 excise tax)

• Tax Exempt Status

• Intermediate Sanctions (4958 excise tax)

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Tax Exempt StatusTax Exempt Status

JATC’s are generally tax exempt as:

501(c)(5) labor organizationsor

501(c)(3) educational organizations

JATC’s are generally tax exempt as:

501(c)(5) labor organizationsor

501(c)(3) educational organizations

JATCJATC IRSIRS

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Form 5500 / LM-2 / T-1/LM-10Form 5500 / LM-2 / T-1/LM-10

• LM-2 filing requirement on union

• Form 5500 – one time filing with DOL for exemption

• Separate presentation on trustee expenses and new Form LM-10 & Form LM-30 reporting requirements

• LM-2 filing requirement on union

• Form 5500 – one time filing with DOL for exemption

• Separate presentation on trustee expenses and new Form LM-10 & Form LM-30 reporting requirements

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Intermediate SanctionsIntermediate Sanctions

• Section 4958 Excise Taxes (vs. revocation of tax exemption)

• Only Apply to Apprenticeship Plans that are tax exempt under IRC Section 501(c)(3)

• Section 4958 Excise Taxes (vs. revocation of tax exemption)

• Only Apply to Apprenticeship Plans that are tax exempt under IRC Section 501(c)(3)

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What Are Intermediate Sanctions?What Are Intermediate Sanctions?

• Imposes excise taxes on Disqualified Persons who participate in Excess Benefit Transactions with 501(c)(3) tax exempt apprenticeship plans

• Imposes excise taxes on Organizational Managers who knowingly and willfully participate in an Excess Benefit Transaction

• Imposes excise taxes on Disqualified Persons who participate in Excess Benefit Transactions with 501(c)(3) tax exempt apprenticeship plans

• Imposes excise taxes on Organizational Managers who knowingly and willfully participate in an Excess Benefit Transaction

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What Is An Excess Benefit Transaction?What Is An Excess Benefit Transaction?

• When the Section 501(c)(3) Apprenticeship Plan gave “better than it got”

• “The amount by which the value of the economic benefit provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person exceeds the value of the consideration (including the performance of services) received for providing such benefit.”

• When the Section 501(c)(3) Apprenticeship Plan gave “better than it got”

• “The amount by which the value of the economic benefit provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person exceeds the value of the consideration (including the performance of services) received for providing such benefit.”

So What? So What?

• Organizational Managers Are Personally Liable for Tax (Joint & Several)

• 10% of the Excess Benefit up to $10,000

• Organizational Managers Are Personally Liable for Tax (Joint & Several)

• 10% of the Excess Benefit up to $10,000

• Disqualified Persons Are Personally Liable for Tax (Joint & Several)

• First Tier, 25% of Excess Benefit

• Return Excess Benefit to Apprenticeship Plan

• Second Tier, If Not “Undone,” 200% of Excess Benefit

• Disqualified Persons Are Personally Liable for Tax (Joint & Several)

• First Tier, 25% of Excess Benefit

• Return Excess Benefit to Apprenticeship Plan

• Second Tier, If Not “Undone,” 200% of Excess Benefit

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Am I An Organizational Manager?Am I An Organizational Manager?

• Any officer, director, or trustee of such organization, or any individual having powers or responsibilities similar to those of officers, directors, or trustees of the organization, regardless of title.

• Likely Includes “Board of Trustees”

• Training Directors?

• Committee Members?

• Function over Form

• Any officer, director, or trustee of such organization, or any individual having powers or responsibilities similar to those of officers, directors, or trustees of the organization, regardless of title.

• Likely Includes “Board of Trustees”

• Training Directors?

• Committee Members?

• Function over Form

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Am I a Disqualified Person?Am I a Disqualified Person?

• Any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization at any time during the prior five-year period

• Includes families of Disqualified Persons

• Includes controlled entities of Disqualified Persons (35%)

• Any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization at any time during the prior five-year period

• Includes families of Disqualified Persons

• Includes controlled entities of Disqualified Persons (35%)

What Sorts of Transactions Are We Talking About?What Sorts of Transactions Are We Talking About?

• Compensation to the Training Director and other employees?

• Any other transactions with “insiders”?

• Compensation to the Training Director and other employees?

• Any other transactions with “insiders”?

• Transactions with major contributing employers?

• Transactions with the IBEW or NECA?

• Only limited by your imagination

• Transactions with major contributing employers?

• Transactions with the IBEW or NECA?

• Only limited by your imagination

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How Can I Protect Myself From Intermediate Sanctions?How Can I Protect Myself From Intermediate Sanctions?

• Taxes not generally covered under fiduciary policy – on your own

• Get endorsement for Intermediate Sanctions

• Indemnification (plan and sponsoring organizations)– Involve Counsel

• Taxes not generally covered under fiduciary policy – on your own

• Get endorsement for Intermediate Sanctions

• Indemnification (plan and sponsoring organizations)– Involve Counsel

• Opinions of counsel or accountants can offer shield

• Presumption of reasonableness established by non-conflicted board with comparable data

• Opinions of counsel or accountants can offer shield

• Presumption of reasonableness established by non-conflicted board with comparable data

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Employee Retirement Income Security Act (ERISA)Employee Retirement Income Security Act (ERISA)

• Mandatory Plan or Trust Provisions

• Reporting and Disclosure Requirements

• Fiduciary Duty Requirements– Affirmative Duties – “Thou shalt”

– Negative Prohibitions – “Thou shalt not”

– Liability and Penalties

• Mandatory Plan or Trust Provisions

• Reporting and Disclosure Requirements

• Fiduciary Duty Requirements– Affirmative Duties – “Thou shalt”

– Negative Prohibitions – “Thou shalt not”

– Liability and Penalties

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Mandatory Plan or Trust ProvisionsMandatory Plan or Trust Provisions

• ERISA requires plan or trust documents to set forth:

– Funding policy

– Allocation of responsibilities

– Procedure for plan amendments

– Basis for contributions

• ERISA requires plan or trust documents to set forth:

– Funding policy

– Allocation of responsibilities

– Procedure for plan amendments

– Basis for contributions

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Fiduciary Duty RequirementsFiduciary Duty Requirements• Who is a fiduciary?

• What are the affirmative duties of a fiduciary (the “Thou Shalts”)?

• What is a fiduciary prohibited from doing (the “Thou Shalt Nots”)?

• What are the exceptions to the “Thou Shalt Nots”?

• What are the consequences of a breach of fiduciary duty?

• Who is a fiduciary?

• What are the affirmative duties of a fiduciary (the “Thou Shalts”)?

• What is a fiduciary prohibited from doing (the “Thou Shalt Nots”)?

• What are the exceptions to the “Thou Shalt Nots”?

• What are the consequences of a breach of fiduciary duty?

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Who Is a Fiduciary?Who Is a Fiduciary?

Section 3(21)(A) of ERISA states that “a person is afiduciary with respect to a plan to the extent (i) heexercises any discretionary authority ordiscretionary control respecting management ofsuch plan or exercises any authority or controlrespecting management or disposition of its assets,(ii) he renders investment advice for a fee or othercompensation, direct or indirect, with respect to anymoneys or other property of such plan, or has anyauthority or responsibility to do so, or (iii) he hasany discretionary responsibility in theadministration of such plan.”

Section 3(21)(A) of ERISA states that “a person is afiduciary with respect to a plan to the extent (i) heexercises any discretionary authority ordiscretionary control respecting management ofsuch plan or exercises any authority or controlrespecting management or disposition of its assets,(ii) he renders investment advice for a fee or othercompensation, direct or indirect, with respect to anymoneys or other property of such plan, or has anyauthority or responsibility to do so, or (iii) he hasany discretionary responsibility in theadministration of such plan.”

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JATC FiduciariesJATC Fiduciaries

• Trustees?

• Committee members?

• Training director?

• Local Union?

• Local Employer Association?

• Trustees?

• Committee members?

• Training director?

• Local Union?

• Local Employer Association?

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“Thou Shalts”“Thou Shalts”

Section 404 of ERISA:

• Exclusive Benefit Rule

• Prudence Rule

• Diversification Rule

• In Accordance with Plan Documents Rule

Section 404 of ERISA:

• Exclusive Benefit Rule

• Prudence Rule

• Diversification Rule

• In Accordance with Plan Documents Rule

JATCJATC Apprentices andJourneymen

Apprentices andJourneymen

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“Thou Shalt Nots”“Thou Shalt Nots”• Section 406(a) per se prohibited transactions• Section 406(a) per se prohibited transactions

Hey, if it’s prohibited, it’s prohibited -- Who cares?Hey, if it’s prohibited, it’s prohibited -- Who cares?

Party in InterestParty in InterestJATCJATC

JATCJATC FiduciaryFiduciary

• Section 406(b) conflict of interest transactions• Section 406(b) conflict of interest transactions

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406(a) Per Se Prohibited Transactions406(a) Per Se Prohibited Transactions

• Sale, exchange, or lease of property

• Lending of money or extension of credit

• Furnishing of goods, services or facilities

• Transfer of plan assets to a party in interest

• Use by or for the benefit of a party in interest of any plan assets

• Acquisition by plan of any employer securities or employer real property

• Sale, exchange, or lease of property

• Lending of money or extension of credit

• Furnishing of goods, services or facilities

• Transfer of plan assets to a party in interest

• Use by or for the benefit of a party in interest of any plan assets

• Acquisition by plan of any employer securities or employer real property

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General Parties In InterestGeneral Parties In Interest

• Fiduciary, counsel or employee

• Service providers

• Covered employers

• Unions which represent covered employees

• Owners, officers, shareholders, partners, joint venturers, relatives or employees of the above

• Fiduciary, counsel or employee

• Service providers

• Covered employers

• Unions which represent covered employees

• Owners, officers, shareholders, partners, joint venturers, relatives or employees of the above

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JATC Parties In InterestJATC Parties In Interest

• Trustees• Committee Members• Training Director• Employees• Attorneys

• Trustees• Committee Members• Training Director• Employees• Attorneys

• Other Service Providers

• Contributing Employers

• Employer Associations

• Local Union

• Employees and Family Members of the above

• Other Service Providers

• Contributing Employers

• Employer Associations

• Local Union

• Employees and Family Members of the above

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406(b) Conflict of Interest Transactions406(b) Conflict of Interest Transactions

• Self Dealing – Example – Cannot use assets to buy a boat

• Acting on Behalf of Adverse Party – Example – A management trustee cannot negotiate the

sale of office equipment on behalf of the JATC and the NECA Chapter that appointed him

• Kickbacks – Example – A trustee cannot receive season football

tickets as a gift from the JATC’s counsel

• Self Dealing – Example – Cannot use assets to buy a boat

• Acting on Behalf of Adverse Party – Example – A management trustee cannot negotiate the

sale of office equipment on behalf of the JATC and the NECA Chapter that appointed him

• Kickbacks – Example – A trustee cannot receive season football

tickets as a gift from the JATC’s counsel

Is the transaction directlybetween the Plan

and a Party-in-Interest (PII)?

Analyze for direct 406(a) transactions. Does the transaction involve:• A sale, exchange or lease of property;• A loan or extension of credit (including a guarantee);• The furnishing of goods, services or facilities;• A transfer of plan assets to a PII;• A use of plan assets by a PII; or • A use of plan assets for the benefit of a PII

No

Chart I: Overview of Prohibited Transaction Analysis

Yes

Yes

No

Does the transaction involvethe assets of a Plan?

Yes

No PT

Analyze for indirect 406(a) transactions:• Would the transaction be a transaction between aplan and a PII but for the insertion of an intermediate party? (e.g., a sale of property between a PII and a third party, followed by a sale of the same property to the plan);• Is a transaction involving the plan either a logical consequence of or a prerequisite for asecond transaction involving a PII?•Is the plan entering into a transaction with a non PII with the understanding that it will then engage in a transaction with a PII?

No

Yes

Yes

Possible PT

Is there an exemption available to cover the

transaction?

Yes

Is the transaction

part of an agreement, arrangement, or understanding

involving the Plan’s assets to benefit

a PII?

NoNo PT

YesNo

No PT/ Exempt PT(continue analysis in III,

IV and V, above, if necessary)

Does the Fiduciary causing

the transactionhave an “interest” in the

transaction?

No

Analyze for 406(b) transactions:• Is the Plan fiduciary self-dealing (actingin his own interest or for his own account)?• Is the Plan Fiduciary acting on both sidesof the transaction?• Is the Plan Fiduciary receiving consideration from a third party?

Yes

No

No PT / Exempt PT(continue analysis in

IV-V, above, if necessary)

No

NoYes

Does a fiduciary advisor

recommending thetransaction have an interest in the

transaction?

No

Yes

Are the conditions of the exemption

satisfied?

Does the exemption provide relief for all relevant violations (e.g.,

406(a) and 406(b)?

Yes

No

I II III IV V

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ExemptionsExemptions

• Statutory Exemptions

• Class Exemptions

• Individual Exemptions

• Statutory Exemptions

• Class Exemptions

• Individual Exemptions

Party in InterestParty in InterestJATCJATC

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Statutory Exemption for Services and Office SpaceStatutory Exemption for Services and Office Space

Section 408(b)(2) of ERISA permits a plan to“contract or

make reasonable arrangements with a party in interest

for office space, or legal, accounting, or other services

necessary for the establishment or operation of the plan,

if no more than reasonable compensation is paid therefor.”

Section 408(b)(2) of ERISA permits a plan to“contract or

make reasonable arrangements with a party in interest

for office space, or legal, accounting, or other services

necessary for the establishment or operation of the plan,

if no more than reasonable compensation is paid therefor.”

– Reasonable compensation– Reasonable compensation

– Reasonable contract or arrangement – Terminable on short notice w/o penalty

– Reasonable contract or arrangement – Terminable on short notice w/o penalty

– Necessary – Necessary

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Services and Office Space Exemption Not Applicable to 406(b)Services and Office Space Exemption Not Applicable to 406(b)

• The exemption does not apply to conflict of interest situations.

• To avoid conflict of interest situations– Pay no more than direct expenses.

– Fiduciary with conflict can recuse himself or herself from decision

• The exemption does not apply to conflict of interest situations.

• To avoid conflict of interest situations– Pay no more than direct expenses.

– Fiduciary with conflict can recuse himself or herself from decision

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JATCJATC

Fiduciary Pay Fiduciary Pay

A. The fiduciary should not be involved in the decision as to the amount or level of compensation paid.

A. The fiduciary should not be involved in the decision as to the amount or level of compensation paid.

FiduciaryFiduciary

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Fiduciary Pay Fiduciary Pay

B. If a fiduciary receives full-time pay from the union, a covered employer, or NECA, the fiduciary can only be reimbursed his direct expenses actually and properly incurred.1. Full-time pay – Fiduciary who is compensated on an hourly

basis and who loses wages when performing fiduciary dutiesmay not be considered to be receiving full-time pay.

2. Expense advances – JATC may advance expenses to a fiduciary if the amount of the advance is reasonable and if the fiduciary accounts for all expenses properly and actually incurred within a reasonable period of time (e.g., 30 days).

B. If a fiduciary receives full-time pay from the union, a covered employer, or NECA, the fiduciary can only be reimbursed his direct expenses actually and properly incurred.1. Full-time pay – Fiduciary who is compensated on an hourly

basis and who loses wages when performing fiduciary dutiesmay not be considered to be receiving full-time pay.

2. Expense advances – JATC may advance expenses to a fiduciary if the amount of the advance is reasonable and if the fiduciary accounts for all expenses properly and actually incurred within a reasonable period of time (e.g., 30 days).

JATCJATC FiduciaryFiduciary

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Party in Interest Leases Office Space to JATC

Party in Interest Leases Office Space to JATC

Union

§ 408(b)(2)*

§ 408(b)(2)*

PTCE 78-6*

NO

NO

Union

§ 408(b)(2)*

§ 408(b)(2)*

PTCE 78-6*

NO

NO

NECA Chapter

§ 408(b)(2)*

§ 408(b)(2)*

NO

NO

NO

NECA Chapter

§ 408(b)(2)*

§ 408(b)(2)*

NO

NO

NO

Employer

§408(b)(2)*

§ 408(b)(2)*

PTCE 78-6*

NO

PTCE 78-6*

Employer

§408(b)(2)*

§ 408(b)(2)*

PTCE 78-6*

NO

PTCE 78-6*

Party in Interest ProvidesServices to JATC

Party in Interest ProvidesServices to JATC

Party in Interest Sells/Leases Goods to JATCParty in Interest Sells/Leases Goods to JATC

Party in Interest SellsReal Estate to JATC

Party in Interest SellsReal Estate to JATC

Party in Interest LeasesReal Estate to JATC

Party in Interest LeasesReal Estate to JATC

Summary of ExemptionsSummary of Exemptions

*no relief from prohibition of section 406(b)(2) conflicts of interest*no relief from prohibition of section 406(b)(2) conflicts of interest

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Union

PTCE 76-1/77-10

PTCE 76-1/77-10

NO

NO

PTCE 76-1/77-10

Union

PTCE 76-1/77-10

PTCE 76-1/77-10

NO

NO

PTCE 76-1/77-10

NECA Chapter

PTCE 76-1/77-10

PTCE 76-1/77-10

NO

NO

PTCE 76-1/77-10

NECA Chapter

PTCE 76-1/77-10

PTCE 76-1/77-10

NO

NO

PTCE 76-1/77-10

Employer

PTCE 76-1/77-10

PTCE 76-1/77-10

NO

NO

PTCE 76-1/77-10

Employer

PTCE 76-1/77-10

PTCE 76-1/77-10

NO

NO

PTCE 76-1/77-10

JATC Leases Office Spaceto Party in Interest

JATC Leases Office Spaceto Party in Interest

JATC Provides Servicesto Party in Interest

JATC Provides Servicesto Party in Interest

JATC Sells/Leases Goodsto Party in Interest

JATC Sells/Leases Goodsto Party in Interest

JATC Sells Real Estateto Party in Interest

JATC Sells Real Estateto Party in Interest

JATC Leases Real Estateto Party in Interest

JATC Leases Real Estateto Party in Interest

Summary of ExemptionsSummary of Exemptions

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Individual ExemptionsIndividual Exemptions

The DOL is authorized to grant individual

exemptions upon application if such exemption is:

• Administratively feasible

• In the interests of the plan and its participants and beneficiaries, and

• Protective of the rights of participants and beneficiaries

The DOL is authorized to grant individual

exemptions upon application if such exemption is:

• Administratively feasible

• In the interests of the plan and its participants and beneficiaries, and

• Protective of the rights of participants and beneficiaries

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Consequences of a Fiduciary BreachConsequences of a Fiduciary Breach

Section 409(a) of ERISA.

• Liable for losses to plan

• Pay any profits earned

• Equitable or remedial relief, including removal

Section 409(a) of ERISA.

• Liable for losses to plan

• Pay any profits earned

• Equitable or remedial relief, including removal

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Consequences of a Fiduciary Breach Consequences of a Fiduciary Breach

Additional consequences:• Civil penalty under Section 502(l) equal to

20% of amount recovered• Liability for breach by a co-fiduciary

– Participate in or conceal breach– Failure to comply with own responsibilities led to breach

by another– Failure to correct

• Penalty under Section 502(i) on party in interest equal to 5% of amount involved or 100% of amount involved if not corrected

Additional consequences:• Civil penalty under Section 502(l) equal to

20% of amount recovered• Liability for breach by a co-fiduciary

– Participate in or conceal breach– Failure to comply with own responsibilities led to breach

by another– Failure to correct

• Penalty under Section 502(i) on party in interest equal to 5% of amount involved or 100% of amount involved if not corrected

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Protecting the FiduciaryProtecting the Fiduciary

• Avoid Fiduciary Breach

• Fiduciary Insurance – Read your insurance policy. Who is covered? What is covered? What exclusions apply? Is there enough coverage?

• Using Plan Assets – Have a procedure in place ahead of time to permit the use of plan assets .

• Avoid Fiduciary Breach

• Fiduciary Insurance – Read your insurance policy. Who is covered? What is covered? What exclusions apply? Is there enough coverage?

• Using Plan Assets – Have a procedure in place ahead of time to permit the use of plan assets .

Jim Cole

Groom Law Group, Chartered

jcole@groom.com

(202) 861-0175

www.groom.com

Jim Cole

Groom Law Group, Chartered

jcole@groom.com

(202) 861-0175

www.groom.com

Questions & AnswersQuestions & Answers

© 2016