fiduciary issues in a training trust - ifebp · 2016. 10. 19. · fiduciary issues in a training...

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Fiduciary Issues in a Training Trust

Paul O. CatenacciPartnerNovara Tesija, P.L.L.C.Southfield, Michigan

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Topics for Discussion

• Key documents• Prohibited transactions: leasing

arrangements and employee sharing• Monitoring expenses/cash management• Best practices: policies and procedures• Identifying areas at risk for fraud• Recent case law and lessons learned

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Key Documents

• Agreement and declaration of trust• Apprenticeship standards• Acceptance of trust (for new trustees)• Letters of appointment• Determination letter• Notice of compliance with DOL Regulation

2520.104-22• Insurance/bonds

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Trust Agreement

• Basic components– Board composition– Quorum rules– Deadlock rules– Trustee discretion/powers/duties– Officers (Chairman/Secretary rotation)– Successorship of sponsors

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Apprenticeship Standards

• Content will vary by industry and trade• Department of Labor has specific content

and registration requirements• Clarity is key! Especially when it comes to

requirements for graduation• Affirmative action/minority participation

targets

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Acceptances/Appointments

• When a new trustee is seated, best practices are to:– Have the new trustee execute an acceptance

of trust– Attain a letter of appointment from the

appointing body (union/employer/employer association)

– Record in the minutes a motion to accept and seat the new trustee

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IRS Determination Letter

• The trust should have a determination letter certifying tax exempt status from the Internal Revenue Service

• This letter should be kept with other pertinent plan documents

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DOL Regulation 2520.104-22

• By filing a statement of compliancepertaining to this regulation with the DOL,a training fund is exempted from thefollowing disclosure requirements underTitle I of ERISA:– Filing of the Form 5500– Summary plan description– Summaries of material modifications

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DOL Regulation 2520.104-22

• The statement technically has to be filedonly once, but best practice is to re-file itaround once per decade

• Also, its advisable to be file it again in theevent your trust fund undergoes asignificant organizational event, such as amerger

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Fiduciary Liability Insurance

• Not required by ERISA, but highly recommended!

• Covers losses from breaches of fiduciary duties

• The purchase of this insurance is itself a fiduciary act, so cost/benefit analysis must be performed

• Coverage amounts should be reasonable in light of plan size/risk

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Fidelity Bonds

• ERISA 412 requires a fidelity bond covering all persons who handle assets

• Protects against crimes of theft/dishonesty• Reimburses the fund for any losses• Exemptions:

– Plans not subject to ERISA– Most banks and insurance companies– Registered brokers/dealers

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Fidelity Bonds

• Bond amount must be at least 10% of assets handled, with a minimum of $1k and a maximum of $500k for most plans

• Bond forms vary—schedule bonds generally cost more, but provide a greater recovery than blanket bonds

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Fidelity Bonds

• Provisions that transfer risk to the trust(such as a deductible) are prohibited– Deductible is ok for coverage in excess of the

maximum ERISA requires

• Many bonds exclude persons with a pastcriminal history, check the terms and besure your employees qualify to be bonded

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Fidelity Bonds

• Bond should cover all persons who “handle” assets of the trust

• “Handling” includes anyone with authority:– To sign checks/transfer/access funds– To authorize benefit payments– To access bank accounts/petty cash– To negotiate for, or power over, fund assets

• Also includes anyone with supervisory authority over these activities

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Fidelity Bonds

• “Assets” are not limited to cash on hand or in bank accounts, assets of the trust also include:– Checks/negotiable instruments– Bank accounts– Land/mortgages/buildings– Securities/investments

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Fidelity Bonds: Example

Example from DOL FA Bulletin 2008-04• Two fund employees combine to steal $300k from

plan with $1M in assets, plan has 9 employees• ERISA requires each person be bonded for at least

10% of assets handled• Blanket bonds usually pay per occurrence, so this

would be treated as one occurrence, so only a $100k recovery

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Fidelity Bonds: Example

Example from DOL FA Bulletin 2008-04• A schedule bond, however, generally provides

separate coverage for each individual• Recovery would then be $200k • Schedule bonds generally cost more, but ERISA

permits either• Trustees must decide on appropriate form for their

trust

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Other Insurance

• General liability for physical assets such as buildings

• Workers compensation policies for employees

• Auto insurance for fund vehicles• Builders risk if property is undergoing

construction

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Prohibited Transactions

• Transactions between training trusts andparties in interest (i.e., union, employers,employer associations, service providers,and other plans) are prohibited underSection 406 of ERISA unless they fallwithin a specific exemption

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Sections of ERISA Implicated• 406(a)(1)(A): bans the sale, exchange or

leasing of property between the plan and a party in interest

• 406(a)(1)(D): bans any transaction causing plan assets to be transferred to, used by, or for the benefit of, a party in interest

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Sections of ERISA Implicated• 406(b)(1): prohibits fiduciary from dealing

with plan assets for his or her own interest, requires discretion

• 406(b)(2): prohibits fiduciary from acting in an individual or other capacity when dealing with assets of the plan, duty of loyalty

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• Actions common to training funds which are implicated:– Leasing of office and classroom space from or

to a party in interest– Leasing of real property from or to a party in

interest– Sharing of employees

• To be permitted under ERISA, these transactions require a statutory or administrative exemption

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Prohibited Transaction Exemptions

Two Types• Statutory = directly in the text of ERISA• Administrative = granted by the DOL

– Class exemptions apply to all who engage inthe transaction and meet its criteria

– Individual are granted on a case by casebasis, do not have applicability beyond thespecific applicant(s)

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Prohibited Transaction Exemptions

• Relief from the PT comes only by meeting thecriteria of the exemption

• Legal counsel should opine that the criteriafor the exemption has been met

• Penalties are significant! Personal liability,reversal of transaction

• Violations of 406(b)(1)—self dealing—arenever excused

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Common Trustees

Class Exemption 77-10• Allows otherwise prohibited transactions

between the training fund and a party ininterest where common trustees exist dueto positions held with the union, employer,or employer association

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Common Trustees

Class Exemption 77-10• Gets you out of the 406(b)(2) violation, but

remember self dealing is never excused• To avoid a 406(b)(1) violation, need to remove

discretion over plan assets via recusal• If a large number or all are common, either bring

in an independent fiduciary or seek an individual exemption from the DOL

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Leasing Office Space From a Party in Interest

Statutory Exemption 408(b)(2)• Lease agreement must evidence a reasonable

arrangement– Rent is no more and no less than fair market value– Supported by an independent appraisal or market

analysis – Written agreement is required at the time the

transaction is entered into

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Leasing Classroom Space From a Party in Interest

Statutory Exemption 408(b)(17)• The 408(b)(2) exemption applies to office

space only• In the past, it was unclear whether or not

leasing of different types of space—such as classroom space—was permitted at all

• The DoL later clarified that 408(b)(17) allows for classroom space to be leased

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Leasing Classroom Space From Party in Interest

Statutory Exemption 408(b)(17)• Lease agreement must evidence a reasonable

arrangement– Rent is no more and no less than fair market value– Supported by an independent appraisal or market

analysis – Written agreement is required at the time the

transaction is entered into

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Leasing of Space Example

• A training fund leases classroom and office space from the Union. Because the training fund’s finances are weak, the lease calls a rental rate that is less than the fair market value

• The training fund has 3 labor trustees, and 1 is an officer of the union, the union officer does recuse himself from the vote

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• This transaction involves the lease the office and classroom space by the training fund, from a party in interest, with a common trustee

• So on the table are potential violations of 406(a)(1)(A), 406(a)(1)(D), 406(b)(1), and 406(b)(2)

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• The recusal of the union officer relieves the training fund from a violation of 406(b)(1) and PTE 77-10 excuses the violation of 406(b)(2)

BUT . . .

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• The rental rate is less than what is fair market value, so the lease is notreasonable

• The transaction therefore fails to meet the requirements of 408(b)(2) and 408(b)(17), and as a result violates 406(a)(1)(A) and 406(a)(1)(D)

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Leasing Real Property

PTE 78-6• Allows any party in interest whose employee’s

work results in contributions to the training fund (i.e. union or contributing employers) to lease real property other than office space to a training fund

• Leas still must be at fair market value, supported by an independent assessment

• This exception does not excuse leasing to the plan from a service provider

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Leasing TO a Party in Interest

PTE 76-1 • The exemptions under 408(b)(2) and

408(b)(17) are one-way exemptions only• In other words, they only provided relief

when the training trust is leasing from a party interest, not when the training trust is leasing property it owns TO a party in interest

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Leasing TO a Party in Interest

PTE 76-1 • Allows a training trust to lease space, or sell

or lease goods/services to the union, employer association, or another plan

• Same requirements as other PTEs:– Independent appraisal if its real property related– Rent for property, or compensation for services,

must be no more and no less than what is reasonable

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Employee Sharing

• Training funds often share employees (instructors/coordinators) with neighboring funds, constituent funds, or the Union

• Should have a written sharing agreement, employee must track hours worked for each fund to substantiate hours worked

• Compensation and benefits paid must be reasonable, and documented in writing to meet requirements of PTE 76-1

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Prohibited Transactions—Final Thoughts

• Meeting the PTE criteria is not the end of your fiduciary responsibilities

• Duties of loyalty and prudence still apply• Ongoing duty to monitor as well, you

need to revisit the arrangement from time to time to ensure it remains reasonable

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Best Practices: Policies and Procedures

• Employee contracts• Policies

– Trustee expenses and reimbursement– Conflicts/Ethics/Whistleblower– Document retention– Collections

• Apprentice and employee handbooks

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Employee Contracts• Good way to manage employment risk, and should

include:– Job description– Rate of pay and fringe benefits – Status i.e., At will? Or part of bargaining unit?– Separation provisions– Severance agreements and claims waivers

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Reimbursement/Expenses• DOL audits always involve a deep dive into trustee

expenses, keeping to a written policy is the key to compliance

• Policy should spell out process for reimbursement (i.e., submission to plan administrator review by legal counsel Board approval with proper abstentions which are noted in the minutes)

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Reimbursement/Expenses• Trustees can empower employees (training

coordinator/director) to approve expenses up to set amounts with ratification by Board

• But—this grant of authority must be in writing in the form of an enabling resolution

• Trustees must be presented with sufficient documentation to ratify expenses employee approves

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Trustee Ethics• IRS Form 990 asks if these policies exist• Should cover basics of conflicts of interest

with procedures for disclosure, reporting, and abstention when a conflict exists

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Whistleblower Policy• Will lay out procedure for reporting

suspected unlawful or unethical activity• Process should include safeguards to

avoid retaliation and encourage reporting (i.e., can report to person other than supervisor

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Document Retention• Should specify how long certain plan and trust

documents are kept• Trust and associated amendments should be

permanent, other documents may be set by statute, or guided by applicable statutes of limitations

• Consult your legal counsel for guidance

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Collection Procedures• All funds for which the collection committee

collects for should be included in a common fund collection policy

• The policy should set forth not only an allocation procedure, but also ensure all funds—including the training trust—pay a reasonable share of the collection program’s costs

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Handbooks• Narrowly tailored versions can be useful in

operating a training trust• Would typically include a few basic policies such

as:– Anti-discrimination/harassment– Use of computer equipment – Permitted uses of property/facilities

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Handbooks• For apprentices, may include a checklist of items

they receive such as:– Scholarship loan agreement– Copy of standards– Apprenticeship agreement– CBA– Other documents specific to your fund

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Handbooks• A word of caution on social media policies• NLRB is looking at such policies very closely• Can be implemented, but have to be drawn

narrowly• Have reviewed by legal counsel

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Identifying Areas at Risk for Fraud

• Easy one—anyone who handles money• Think employees or personnel of the sponsoring

unions, employers, or employer associations who:– Write checks– Have access to bank accounts– Have use of a credit card– Have access to fund property

(cars, equipment, etc.)

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Identifying Areas at Risk for Fraud: Safeguards

• Fidelity Bonds—required by ERISA 412, protects against acts of theft/dishonesty

• Annual audits—good auditors will most often catch financial irregularities

• Stay away from cash—cash is too easy lose track of and substantiate

• You! Trust your instincts, if something seems wrong, speak up!

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Recent Case Law and Lessons Learned

• In recent years, the DOL has focused mostly on expenses—graduation banquets, apprenticeship competitions

• But, training trusts are in many ways more complex than other traditional funds

• Running a school = lots of law that applies to you

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Recent Case Law and Lessons Learned

• Don’t forget about employment law and civil rights issues, especially when terminating apprentices or employees

• Keep your policies up to date and at appropriate limits

• Common sense will take you a long way

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Session #T01

Fiduciary Issues in a Training Trust

• Training trusts are often forgotten about, but are among the more complex plans to operate

• Lean on your plan professionals, they are there to guide you, don’t be penny wise but pound foolish when it comes to compliance

• A good lesson for all plans and all trustees is to use common sense

Website Resourceshttps://www.youtube.com/watch?v=d8HIyNGH3r4 https://www.ifebp.org/Resources/apprenticeships/Pages/default.aspx

62nd Annual Employee Benefits ConferenceNovember 13-16, 2016Orlando, Florida

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2017 Educational ProgramsApprenticeship, Training and Education

63rd Annual Employee Benefits Conference October 22-25, 2017 Las Vegas, Nevadawww.ifebp.org/usannual

Institute for Apprenticeship, Training and Education ProgramsJanuary 16-18, 2017 Coronado (San Diego), Californiawww.ifebp.org/apprenticeshipinstitute

Related ReadingVisit one of the on-site Bookstore locations or see www.ifebp.org/bookstore for more books.

Top Trends in Jointly Managed Apprenticeship Programs—2016 Survey Results (E-Book) Item #7679Ewww.ifebp.org/books.asp?7679E

816

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