DOL Issues FAQs on Multiemployer Plan Leasing Arrangements
On October 14, 2011, the Department of Labor’s Employee Benefits Security Administration (“EBSA”) issued a set of Frequently Asked Questions (“FAQs”) to assist multiemployer plan trustees in avoiding common prohibited transactions when structuring leasing arrangements between plans and parties-in-interest. Unless a statutory or administrative exemption applies, a prohibited transaction generally occurs under Section 406(a)(1) of ERISA whenever there is an exchange of value between a plan and a party-in-interest to such plan. Parties-in-Interest include, but are not limited to, the Union sponsoring the plan, the trustees or other fiduciaries of the plan, and plan service providers. The FAQs provide examples of common leasing arrangements that would give rise to prohibited transactions in the multiemployer plan context, and explanations of the statutory and administrative exemptions that could apply to exempt such transactions from ERISA’s prohibited transactions rules. The FAQs also describe the following common problems encountered by the EBSA in their review of multiemployer plan leasing arrangements:
● Failure to meet the “reasonable compensation” requirements in the applicable exemptions. For example, the use of out-of-date appraisals to determine the fair market value of plan-owned office space that is leased to parties-in-interest.
● Failure to demonstrate that the terms of the lease were at least as favorable to the plan as an arm’s length transaction with an unrelated party, or are reasonable, as required by the relevant exemptions.
● The absence of a formal, written lease at the time the lease commences, even if the lease is subsequently formalized.
● Failure of trustees with conflicts of interest to recuse themselves from the decision making process.
● Certain compensation arrangements between an apprenticeship plan and its trustees, which raise issues as to whether the trustees have received more than reasonable compensation, or questionable compensation to the trustees for serving as trainers of the plan participants.
The FAQs make clear that plan fiduciaries and parties-in-interest must strictly adhere to the requirements of any applicable statutory or administrative exemption in order to avoid liability for participating in a prohibited transaction under ERISA.