Training contractor party in interest determination

P/OPINION 76-103




                                                3(5)
                                                3(14) ✓


                       September 13, 1976



  Dear             :

 This is in response to your letter to           of our
 Los Angeles office regarding the Employee Retirement
 Income Security Act of 1974 (ERISA).

 According to your letter, the (named) Council of (city)
 (the Council) was formed to negotiate a labor agreement
 with the Local Executive Board of (city), which is
 comprised of two local unions. The Council retained
 Mr. (x) to conduct negotiations on behalf of the Council
 and gave him the title of Executive Director of the
 Council. A training trust fund was negotiated and the
 employers and the unions agree that Mr. (x) is a logical
 choice to conduct the training on a contract basis with
 the training trust. However, the attorney for the trust
 feels that Mr. (x) might be considered a party in interest
 because he negotiates for the employers, even though he is
 not an employer and does not own or operate any
 restaurants or hotels. You ask whether Mr. (x) would be
 considered to be a party in interest under ERISA and, if
 he is a party in interest, whether it would be lawful for
 the trust to contract with him to conduct training under
 the "other services necessary" exception in section
 408(b)(2) of ERISA. Also, you assume that if Mr. (x) is
 not a party in interest, he may contract with the trust.

 The term "party in interest" is defined in section 3(14)
 of ERISA to include, among others, an employer any of
 whose employees are covered by an employee benefit plan
 [section 3(14)(C)], and an employee, officer or director
 (or an individual having powers or responsibilities
 similar to those of officers or directors) of such an
 employer (section 3(14)(H)). Under section 3(5) of ERISA,
 the term "employer" is defined to include any person
 acting directly as an employer, or indirectly in the
 interest of an employer, in relation to an employee
 benefit plan, including a group or association of
 employers acting for an employer in such capacity. From
P/OPINION 76-103




 the information set forth in your letter, it appears that
 the Council, by acting in the interest of its member
 employers in negotiating the establishment of the training
 trust fund (the Plan), is a group or association of
 employers and, therefore, an "employer" within the meaning
 of section 3(5) of ERISA. Accordingly, under section
 3(14)(C) of ERISA, the Council is a "party in interest"
 with respect to the Plan, and, in view of Mr. (x)'s
 position with the Council as described in your letter, he
 is also a party in interest with respect to the Plan under
 section 3(14)(H) of ERISA.

 Section 406(a)(l)(C) of ERISA generally prohibits the
 furnishing of services between a plan and a party in
 interest. Section 408(b)(2) of ERISA, however, provides
 an exemption from such prohibition for the provision of
 services to a plan by a party in interest if certain
 conditions are met. The Department has recently published
 proposed regulations designed to clarify the scope of, and
 the conditions for, the availability of this exemption (29
 CFR 2550.408b-2, 41 FR 31874, July 30, 1976). A copy of
 the proposed regulation is enclosed.

 Under proposed §2550.408b-2, a party in interest may
 provide services to an employee benefit plan, provided
 that (i) such services are necessary for the establishment
 or operation of the plan, (ii) such services are furnished
 under a contract or arrangement which is reasonable, and
 (iii) no more than reasonable compensation is paid for the
 furnishing of the services. A service is deemed to be
 necessary for the establishment or operation of a plan
 within the meaning of the proposed regulation and section
 408(b)(2) of ERISA if it is of a type which is customarily
 furnished to employee benefit plans of the kind in
 question in the ordinary course of the establishment or
 operation of such plans [§2550.408b-2(b)(2)]. No contract
 for the furnishing of such services is deemed to be
 reasonable for purposes of the proposed regulation and
 section 408(b)(2) of ERISA unless it permits the plan to
 terminate it without penalty to the plan on reasonably
 short notice under the circumstances [§2550.408b-2(b)(3)].
 Whether the compensation paid for the furnishing of the
 above described services is not in excess of reasonable
 compensation for such services for purposes of the
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 proposed regulation and section 408(b)(2) of ERISA
 generally depends on the particular facts and
 circumstances of each case [§§2550.408b-2(b)(4) and
 2550.408c-2(b)(l)].

 Whether the contract or arrangement for services to be
 provided by Mr. (x) to the Plan satisfies the conditions
 described above is a determination that must be made by
 the fiduciaries with respect to the Plan. Further, the
 provisions of the proposed regulation have only recently
 been published and may be modified as a result of the
 submission of public comments with respect thereto.

 In addition, you may wish to note that section 414(c)(4)
 of ERISA provides a transitional exemption from the
 prohibitions of section 406 of ERISA until June 30, 1977,
 for the provision of services to plans by parties in
 interest if certain conditions are met. The Department
 has recently published a proposed regulation designed to
 clarify the scope of, and the conditions for, the
 availability of this transitional exemption (29 CFR
 2550.414c-4, 41 FR 31874, July 30, 1976. This proposed
 regulation was issued in conjunction with the proposed
 regulation under section 408(b)(2) of ERISA discussed
 earlier and is included in the enclosure.

 Proposed §2550.414c-4 provides that section 406 of ERISA
 shall not apply before June 30, 1977, to the provision of
 services between a plan and a party in interest if the
 three requirements of section 414(c)(4) of ERISA are met.

 The first requirement is that such services must be
 provided either (1) under a binding contract in effect on
 July 1, 1974 (or pursuant to renewals of such contract),
 or (2) by a party in interest who ordinarily and
 customarily furnished such services on June 30, 1974. The
 second requirement is that the services be provided on
 terms that remain at least as favorable to the plan as an
 arms-length transaction with an unrelated party would be.
 The third requirement is that the provision of services
 must not be or have been, at the time of such provision, a
 prohibited transaction within the meaning of section
 503(b) of the Internal Revenue Code of 1954 or the
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 corresponding provisions of prior internal revenue law.
 If these three requirements of section 414(c)(4) of ERISA
 are met, section 406 of ERISA will apply neither to
 services provided before June 30, 1977 (both to customers
 to whom such services were being provided on June 30,
 1974, and to new customers) nor to the receipt of
 compensation therefor.

 The facts and circumstances described in your letter are
 insufficient to enable us to determine whether the
 transitional exemption of section 414(c)(4) of ERISA would
 be available to Mr. (x). In any case, we wish to
 emphasize that the transitional relief provided by section
 414(c)(4) of ERISA extends only until June 30, 1977.

 Finally, you should be aware that our consideration of the
 questions raised in your letter does not relate to any
 provisions of ERISA not discussed herein. Thus, for
 example, we have not considered the prudence of the
 proposed arrangements under section 404(a) of ERISA.

 Sincerely,