Insurance funded Keogh plans covering common law employees

P/OPINION 77-10

3(3)

June 2, 1977

Dear              :

This is in response to your letters of January 30, and
September 2, 1976, requesting an opinion as to whether
(named) Insurance Company's Flexible Series Prototype
Self-Employed Individual's Retirement Plan is covered by
Title I of the Employee Retirement Income Security Act of
1974 (ERISA). I regret the delay in answering, but the
press of issuing necessary regulations and other documents
of general applicability has unavoidably delayed our
response to many inquiries.

According to the facts stated in your letter, (named)
Insurance Company, an insurance company licensed to do
business in (State) and nine other western states, sponsors
an H.R. 10 prototype, adopted by approximately 400 owner-employees, which provides for contributions on either money-purchase or profit-sharing formulas. These plans may cover
both owner-employees and common law employees. At the time
an owner-employee sets up the plan, your company issues
insurance or annuity contracts to each participant which
specifically provide his or her retirement benefit. All
benefits, current and future, are fully guaranteed by your
company under the terms of the contract issued. Each
contract, which contains a nontransferable endorsement, is
issued in the name of the employee, and the employee is the
owner of the contract.

At the time of issue of each contract, you furnish certain
other descriptive material, such as a ledger statement and a
(State) disclosure statement to further explain the costs,
limitations, and values in the contract. On each policy
anniversary, your company furnishes the employee with a
current summary of the policy to inform the employee of the
amount in his or her account.

On the basis of your interpretation of 29 CFR 2510.3-3(d)(2)(ii), it is your belief that the individuals covered
under these prototypes are not "participant(s) covered under
an employee pension plan," and, therefore, that these plans
are not subject to the reporting and disclosure requirements
of Title I of ERISA.

Under Department regulations (29 CFR 2510.3-3(b)), the term
"employee benefit plan" does not include, for purposes of
Title I, any plan in which no employees are participants
covered under the plan, as defined in §2510.3-3(d). Thus,
H.R. 10 or Keogh plans in which only partners or only a sole
proprietor and his or her spouse are participants covered
under the plan are not plans covered under Title I of the
Act. (See 29 CFR 2510.3-3(c)). However, a Keogh plan in
which one or more common law employees are participants
covered under the plan is covered under Title I.

§2510.3-3(d)(2)(ii) states, inter alia, that an individual
is not a participant covered under an employee pension plan
if the "entire benefit rights" of the individual (1) are
fully guaranteed by an insurance company licensed to do
business in a state, and are legally enforceable by the sole
choice of the individual against the insurance company; and
(2) a contract, policy, or certificate describing the
benefits to which the individual is entitled under the plan
has been issued to the individual.

The phrase "entire benefit rights" in §2510.3-3(d)(2)(ii)
is not satisfied if the employee is continuing to accrue
benefits. This section of the regulation covers situations
where employment has been severed, where the employee is
fully vested and changes into employment not covered by the
plan, or where the employee has earned the maximum benefit
he can earn under the plan. In such circumstances, a
participant with an insurance contract in hand covering all
of his or her benefits and providing a right of action
against the insurance company would no longer look to the
plan for his or her benefits. To require the plan to
furnish these participants with plan documents would not
serve the purposes of the Act.

On the other hand, participants who continue to accrue
benefits and for whom the employer continues to make contributions obviously have a present interest in the plan which
Title I of ERISA was designed to protect. Such is the case
in your plans. Although the benefit rights for past years
under your plans meet the tests of §2510.3-3(d)(2)(ii),
these are not the entire benefit rights. Benefits continue
to accrue during subsequent years as the employer makes
contributions under section VI of the plans. Moreover,
section V provides for the continuing application of policy
dividends either to increase benefits or reduce the employer
contribution.

Therefore, if an employer adopts your prototype and includes
common law employees in its coverage, the plan will be
covered under Title I.

Sincerely,