Notice2023-24401
Proposed Exemption for Certain Prohibited Transaction Restrictions: Fedeli Group, Inc. Employee Benefits Plan Located in Cleveland, OH
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 6, 2023
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document provides notice of the pendency before the Department of Labor (the Department) of a proposed individual exemption from certain of the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (ERISA or the Act). This proposed exemption would permit the Fedeli Group, Inc. Employee Benefits Plan (the Benefit Plan) sponsored by Fedeli Group, Inc. (Fedeli Group or the Applicant) to enter into an insurance contract with THP Insurance Company, Inc. (THP), an unrelated insurance company, and THP will, in turn, enter a reinsurance arrangement with Risk Specialists LLC (Risk Specialists), a captive reinsurance company affiliated with Fedeli Group.
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 213 (Monday, November 6, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 213 (Monday, November 6, 2023)]
[Notices]
[Pages 76253-76259]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-24401]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Exemption Application No. L-11954]
Proposed Exemption for Certain Prohibited Transaction
Restrictions: Fedeli Group, Inc. Employee Benefits Plan Located in
Cleveland, OH
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemption.
-----------------------------------------------------------------------
SUMMARY: This document provides notice of the pendency before the
Department of Labor (the Department) of a proposed individual exemption
from certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act). This
proposed exemption would permit the Fedeli Group, Inc. Employee
Benefits Plan (the Benefit Plan) sponsored by Fedeli Group, Inc.
(Fedeli Group or the Applicant) to enter into an insurance contract
with THP Insurance Company, Inc. (THP), an unrelated insurance company,
and THP will, in turn, enter a reinsurance arrangement with Risk
Specialists LLC (Risk Specialists), a captive reinsurance company
affiliated with Fedeli Group.
DATES:
Comments due: Written comments and requests for a public hearing on
the proposed exemption should be submitted to the Department by
December 21, 2023.
Exemption date: If granted, this proposed exemption will be in
effect on the date that the grant notice is published in the Federal
Register.
ADDRESSES: All written comments and requests for a hearing should be
submitted to the Employee Benefits Security Administration (EBSA),
Office of Exemption Determinations, Attention: Application No. L-11954
via email to <a href="/cdn-cgi/l/email-protection#1f7a32505a5b5f7b707331787069"><span class="__cf_email__" data-cfemail="284d05676d6c684c4744064f475e">[email protected]</span></a> or online through <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Any such comments or requests should be sent by
the end of the scheduled comment period. The application for exemption
and the comments received will be available for public inspection in
the Public Disclosure Room of the Employee Benefits Security
Administration, U.S. Department of Labor, Room N-1515, 200 Constitution
Avenue NW, Washington, DC 20210. See SUPPLEMENTARY INFORMATION below
for additional information regarding comments.
FOR FURTHER INFORMATION CONTACT: Blessed Chuksorji-Keefe of the
Department, telephone (202) 693-8567. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION:
Comments: Persons are encouraged to submit all comments
electronically and not to follow with paper copies. Comments should
state the nature of the person's interest in the proposed exemption and
how the person would be adversely affected by the exemption, if
granted. Any person who may be adversely affected by an exemption can
request a hearing on the exemption. A request for a hearing must state:
(1) the name, address, telephone number, and email address of the
person making the request; (2) the nature of the person's interest in
the exemption, and the manner in which the person would be adversely
affected by the exemption; and (3) a statement of the issues to be
addressed and a general description of the evidence to be presented at
the hearing. The Department will grant a request for a hearing made in
accordance with the requirements above where a hearing is necessary to
fully explore material factual issues identified by the person
requesting the hearing. A notice of such hearing shall be published by
the Department in the Federal Register. The Department may decline to
hold a hearing if: (1) the request for the hearing does not meet the
requirements above; (2) the only issues identified for exploration at
the hearing are matters of law; or (3) the factual issues identified
can be fully explored through the submission of evidence in written
(including electronic) form.
Warning: All comments received will be included in the public
record without change and may be made available online at <a href="https://www.regulations.gov">https://www.regulations.gov</a>, including any personal information provided,
unless the comment includes information claimed to be confidential or
other information whose disclosure is restricted by statute. If you
submit a comment, EBSA recommends that you include your name and other
contact information in the body of your comment, but DO NOT submit
information that you consider to be confidential, or otherwise
protected (such as a Social Security number or an unlisted phone
number) or confidential business information that you do not want
publicly disclosed. However, if EBSA cannot read your comment due to
technical difficulties and cannot contact you for clarification, EBSA
might not be able to consider your comment.
Additionally, the <a href="https://www.regulations.gov">https://www.regulations.gov</a> website is an
``anonymous access'' system, which means EBSA will not know your
identity or contact information unless you provide it in the body of
your comment. If you send an email directly to EBSA without going
through <a href="https://www.regulations.gov">https://www.regulations.gov</a>, your email address will be
automatically captured and included as part of the comment that is
placed in the public record and made available on the internet.
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Employee Retirement Income Security
Act of 1974, as amended (ERISA). If the exemption is granted, the
Fedeli Group, Inc. Employee Benefits Plan (the Benefit Plan) sponsored
by Fedeli Group, Inc. (Fedeli Group or the Applicant) will enter into
an insurance contract with THP Insurance Company, Inc. (THP), an
unrelated insurance company, and THP will, in turn, enter a reinsurance
arrangement with Risk Specialists LLC (Risk Specialists), a captive
reinsurance company affiliated with Fedeli Group. Under the reinsurance
arrangement, Risk Specialists will reinsure the insurance risks
associated with the Benefit Plan. The reinsurance arrangement would
result in an indirect transfer of premium payments from the Benefit
Plan to Risk Specialists, LLC. This exemption requires, among other
things, annual reports to be prepared by a qualified, independent
fiduciary and submitted to the Department of Labor confirming whether
Fedeli and its
[[Page 76254]]
affiliates have met the exemption's terms and conditions.\1\
---------------------------------------------------------------------------
\1\ The Department notes that the independent fiduciary's annual
written report is essential to the Department's tentative finding
that this proposed exemption is and will continue to be, in the
interest and protective of the Plan and its participants and
beneficiaries. Each report must demonstrate that the independent
fiduciary has clearly, prudently, and loyally determined whether
Fedeli and its affiliates have complied with each term and condition
of the exemption. The exemption's relief is conditioned on the
independent fiduciary's compliance with this requirement.
---------------------------------------------------------------------------
Summary of Facts and Representations \2\
---------------------------------------------------------------------------
\2\ The Department notes that availability of this exemption is
subject to the express condition that the material facts and
representations contained in Application L-11954 are true and
complete, and accurately describe all material terms of the
transactions covered by the exemption. If there is any material
change in a transaction covered by the exemption, or in a material
fact or representation described in the application, the exemption
will cease to apply to the covered transactions as of the date of
such change.
---------------------------------------------------------------------------
1. The Plan Sponsor. Fedeli Group is an S corporation based in
Cleveland, Ohio. Fedeli Group provides insurance products and risk
management services. Fedeli Group is 51% owned by the Umberto P. Fedeli
Amended and Restated Revocable Trust (dated July 16, 2016), 29% by the
Umberto P. Fedeli 2012 Discretionary Trust (dated November 28, 2012)
and 20% by the Umberto P. Fedeli 2009 Discretionary Trust (dated
December 23, 2009).
2. The Plan. The Fedeli Group sponsors and administers the Benefit
Plan, which is a self-funded employee welfare benefit plan covering
medical and hospital expenses for eligible Fedeli Group employees. The
Benefit Plan currently covers approximately 64 participants.
3. The Captive Reinsurer. Risk Specialists is a licensed property
and casualty captive insurance company that operates under applicable
Tennessee law. Risk Specialists is 100% owned by Risk Specialists
Captive Holdings, LLC (Risk Specialists Captive Holdings LLC), a
limited liability company formed in Ohio on the same date as Risk
Specialists. Risk Specialists Captive Holdings is 51% owned by the
Fedeli Revocable Trust, 29% owned by the Fedeli 2012 Trust, and 20%
owned by the Fedeli 2009 Trust. Risk Specialists serves as the
reinsurer with respect to 13 different lines of insurance coverages
provided to Fedeli Group and unrelated third parties.
4. The Third-Party Insurer. THP Insurance Company, Inc. (THP) is a
domestic stock insurance company domiciled in West Virginia and
licensed in both Ohio and West Virginia. THP is unrelated to all Fedeli
Group-related entities and is currently rated ``A+'' by A.M. Best
Company.
5. Transitioning the Benefit Plan to the Third-Party Insurer Using
the Captive Reinsurer. Fedeli Group seeks to use its captive insurance
company, Risk Specialists, to reinsure the Benefit Plan's claims. If
this proposed exemption is granted, the Plan will enter into a Master
Group Policy with THP, pursuant to which THP will provide group health
insurance coverage to eligible participants under the Benefit Plan. THP
will enter into a reinsurance agreement (the Reinsurance Agreement)
with Risk Specialists. Under this arrangement, Risk Specialists will be
responsible for the Benefit Plan's insurance claims under the Master
Group Policy with THP, and Risk Specialists will indirectly receive the
Benefit Plan's premium payments to THP. The Reinsurance Agreement
between THP and Risk Specialists will be ``indemnity only,'' which
means that THP will be responsible for Benefit Plan claims under the
Master Group Policy to the extent Risk Specialists does not satisfy
those claims under the Reinsurance Agreement.
6. Exemptive Relief Requested. The proposed reinsurance arrangement
would violate certain prohibited transaction provisions of ERISA for
the following reasons:
<bullet> Fedeli Group is a party in interest with respect to the
Benefit Plan pursuant to ERISA section 3(14)(C), because it is an
employer whose employees are covered by the Benefit Plan;
<bullet> The Trusts are parties in interest with respect to the
Benefit Plan under ERISA section 3(14)(E) because they collectively own
100% of Fedeli Group, the Benefit Plan sponsor.
<bullet> Risk Specialists, the captive reinsurer, is a party in
interest with respect to the Benefit Plan under ERISA section 3(14)(G)
because it is 100% owned by the Trusts.
7. ERISA section 406(a) prohibits a wide range of transactions
between plans and parties in interest with respect to those plans. As
relevant here, ERISA section 406(a)(l)(D) prohibits a plan fiduciary
from engaging in a transaction if the fiduciary knows or should know
the transaction constitutes a direct or indirect transfer any plan
assets for the use or benefit of a party in interest. The reinsurance
arrangement would result in an indirect transfer of Benefit Plan
premium payments to Risk Specialists, which is a party in interest with
respect to the Benefit Plan.
8. ERISA section 406(b)(1) of ERISA prohibits a fiduciary from
dealing with plan assets for the fiduciary's own interest or own
account. The fiduciaries of the Benefit Plan would violate ERISA
section 406(b)(1) by causing the Benefit Plan to pay premiums to THP,
with the knowledge that the premiums will ultimately be directed to
Risk Specialists, the captive reinsurer.
9. Benefits to the ERISA-Covered Plan. The Department has the
authority under ERISA section 408(a) to exempt transactions from the
prohibitions of ERISA section 406. Specifically, ERISA section 408(a)
provides that the Department may not grant an exemption unless it finds
that the exemption is administratively feasible, in the interests of
the plan and the plan's participants and beneficiaries, and protective
of the rights of the plan's participants and beneficiaries.
10. The Department has tentatively determined that the proposed
reinsurance arrangement would be in the interest of the Benefit Plan
and its participants and beneficiaries. As described in further detail
below, a qualified, independent fiduciary has concluded that the
reinsurance arrangement will reduce each Benefit Plan participant's
share of the Benefit Plan premium paid to THP by at least $2,023.20 \3\
per participant per year for the duration of the exemption relative to
the contribution the participant would otherwise have made under a non-
captive arrangement with a competitive third party insurer receiving no
more than reasonable compensation within the meaning of ERISA section
408(b)(2). Historically, Benefit Plan participants contributed
approximately 25% towards the cost of the Benefit Plan. Under the
proposal, all the savings from the Captive Approach will be used to
reduce Benefit Plan participants' share of the Benefit Plan's premiums,
and Benefit Plan participants will contribute no more than 17.38% of
the Benefit Plan's costs throughout the duration of the exemption.
---------------------------------------------------------------------------
\3\ The independent fiduciary's determination of the $2,023.20
amount is described below in more detail.
---------------------------------------------------------------------------
11. The Department requested that the Applicant provide a complete
and accurate accounting of all benefits the Fedeli Group expects to
derive from the captive reinsurance arrangement, including tax and non-
tax benefits. In addition, the Department requested that the Applicant
provide a full explanation of the ``economic substance of the proposed
transaction,'' that is, the economic impact or outcome that the
exemption would have on the Fedeli Group, Fedeli-related parties and
the Benefit Plan's participants and beneficiaries. Both the accounting
of
[[Page 76255]]
expected benefits and the explanation of the expected economic
substance of the proposed transaction were reviewed and confirmed by
the independent fiduciary.
Applicant's Response: The Applicant represents that the only
benefits Fedeli Group expects to receive from the proposed Captive
Approach relative to the Plan's current self-funding arrangement are
the incidental benefits that would result from more predictability and
better control over its benefit funding obligations. Under Fedeli
Group's current self-funded arrangement, Fedeli's benefit funding
obligations are dependent on the timing and amount of participant
claims. In contrast, under the Captive Approach, the Fedeli Group will
only make one annual premium payment. According to the Applicant, this
initial funding obligation will represent an estimate of the
anticipated claims Benefit Plan participants and beneficiaries will
incur during the year. The ability to budget for one up-front annual
premium payment instead of multiple weekly or monthly claims payments
would provide Fedeli Group with predictability for Fedeli Group's
benefit obligations.\4\
---------------------------------------------------------------------------
\4\ Under the current arrangement, the funding obligation is
less predictable because benefits are paid out as claims are
incurred.
---------------------------------------------------------------------------
In addition, the Applicant represents that the Captive Approach
grants financial control to the Fedeli Group over insurance spending by
managing risks and underwriting ``Fedeli specific'' risks rather than
paying risk premiums to third-party insurers or self-insuring. By
underwriting its own risks, the Fedeli Group gains greater transparency
and improved data on its actual benefit claims cost and utilization.
Fedeli also benefits from flexibility in underwriting and funding
depending on the Fedeli Group's specific employee demographics and plan
design that it could not receive by purchasing commercial insurance.
Furthermore, the Captive Approach will result in reduced overall
plan costs because benefit expenses are paid based on actual
experience, as opposed to a third-party insurance carrier (the Third-
Party Approach) requiring a fixed payment at a premium charged by an
insurance carrier where the premium amount does not change regardless
of the amount of claims that are incurred. Moreover, the Fedeli Group
will not bear the sole payment obligation that it does under its
current self-insurance arrangement. These reduced costs will redound to
the Benefit Plan in the form of lower cost of health care coverage.
The Department's Note: This exemption is being proposed based on
the Applicant's representations and the exemption's requirement, that
no Fedeli Group-related entity will receive a direct or indirect
profit, tax benefit, investment gain or other remunerative benefit
through the Captive Approach. The Department notes that if a Fedeli
Group-related entity ultimately receives such a profit, benefit or
gain, the Fedeli Group must further enhance the Benefit Plan in an
amount greater than the $2,023.20 per participant per year contribution
reduction in a manner consistent with the terms and conditions of this
proposed exemption. Additionally, the Department notes that this
proposed exemption prohibits Fedeli Group or a related entity from
using any participant-related data or information generated by, or
derived from, the Captive Approach in a manner that benefits the Fedeli
Group or related entity.
As described below, this exemption, if granted, requires a
qualified, independent fiduciary to review all relevant financial
information of Risk Specialists and any other Fedeli-related entity as
is necessary to ensure that this and the other terms and conditions
described in this proposal are met and to annually certify in a written
report submitted to the Department that all requirements of the
proposed exemption have been met.
Applicant's Analyses
12. The Applicant represents to the Department that it evaluated
two different insurance-based approaches to provide the benefits
payable under the Benefit Plan and the effects on the costs from each,
based on the 2023 plan year information for the Benefit Plan. The
Applicant's first insurance-based approach contemplates a Third-Party
Approach, while the second insurance-based approach takes into account
Risk Specialists as the captive reinsurer (the Captive Approach).
13. The Applicant states that, based on actual values from the
Benefit Plan's 2023 financial statement, the annual premium under the
Third-Party Approach would have been $2,254,314, compared to the
$2,124,829 annual premium under the Captive Approach. Therefore, the
Applicant calculated the total annual cost savings under the Captive
Approach would be $129,485 for the 2023 Plan Year.
14. The cost savings under the Captive Approach will be passed on
to Benefit Plan participants on a pro-rata basis, by reducing
employees' Benefit Plan contribution obligations. As of September 19,
2023, the Benefit Plan covered 64 participants, the $129,485 in total
annual cost savings under the Captive Approach will be directly applied
to Benefit Plan participants as a reduction in their contribution
obligations.
15. The Applicant calculated the monthly $161.60 contribution
reduction per Benefit Plan participant ($129,485.00/12 months =
$10,790.42/64 participants = $168.60). The Applicant states that this
monthly reduction in contribution obligations will result in annual
savings per participant of $2,023.20 ($168.60 x 12 months) with no
reduction in medical, health, or other plan benefits. Further, the
Applicant states that these cost savings for Benefit Plan participants
will be implemented simultaneously with the establishment of the
Captive Approach.
16. The Applicant represents that, historically, contributions to
the Benefit Plan by Benefit Plan participants have been targeted at 25%
of Benefit Plan costs. By implementing the proposed Captive Approach
and lowering annual Benefit Plan costs by $129,485, there will be a
cost savings to the Benefit Plan of 7.62% per year. Based on the
Applicant's assertions that the Captive Approach will result in
participants' savings of 7.62% per year, the Department is including an
exemption condition that requires participant contributions to comprise
no more than 17.38% (i.e., 25%-7.62%) of the Benefit Plan's premiums on
a going-forward annual basis.
The Independent Fiduciary
17. George J. Stadtlander, President and majority owner of
Consoliplex L.L.C. (Consoliplex), a health plan service organization
located in Cleveland, Ohio, will serve as the Benefit Plan's qualified
independent fiduciary (the Independent Fiduciary) with respect to the
proposed transactions. Mr. Stadtlander states that he is qualified to
serve as the Independent Fiduciary for the Benefit Plan because he: (a)
is not employed by Fedeli Group or its affiliates; (b) has more than
thirty years of experience in the field of health benefits, including
serving as an officer and executive vice president for Medical Mutual,
a local health insurance company with over $2 billion in annual
premiums; (c) currently owns an organization that serves as a plan
manager for five multiple employer welfare arrangements; and (d) has
managed the actuarial department, the underwriting department, network
contracting, utilization management and sales departments, in his
capacity with the local health local health insurance company, which
has provided him with
[[Page 76256]]
the experience and background for forming the opinions expressed in his
Independent Fiduciary report. Mr. Stadtlander was chosen to act as
Independent Fiduciary by David M. Deroma, the plan fiduciary
responsible for selecting the independent fiduciary. Mr. Deroma
represents that Mr. Standtlander's selection was based solely on his
qualifications to serve as an independent fiduciary after a prudent
process without regard to whether Mr. Standtlander's views were likely
to favor the interests of the Fedeli Group or related parties.
18. Mr. Stadtlander represents that he understands his duties,
responsibilities, and liabilities under ERISA as the Independent
Fiduciary on behalf of the Benefit Plan participants and their
beneficiaries, and that, as Independent Fiduciary of the Benefit Plan,
he does not act on behalf of the Benefit Plan sponsor or take its
interests into account. Mr. Stadtlander also represents that neither he
nor Consoliplex have received, nor will they receive, more than 1% of
their annual income from Fedeli Group and its related parties. In
addition, Mr. Stadtlander represents that neither he nor any related
parties, including Consoliplex: have performed any work in connection
with the Captive Approach on behalf of the Fedeli Group or its related
parties; have any financial interest with respect to his work as an
independent fiduciary or the Captive Approach apart from his express
fees for his work as an independent fiduciary for the Benefit Plan; or
have received any other compensation or entered into any financial or
compensation arrangements with the Fedeli Group and related parties.
Fedeli Group and its related parties have not, and will not, indemnify
the Independent Fiduciary, in whole or in part, for any violations of
state or federal law that may be attributable to the Independent
Fiduciary in performing its duties under the captive reinsurance
arrangement. In addition, no contract or instrument purports to waive
any liability under state or federal law for any such violations.
19. As the Independent Fiduciary, Mr. Stadtlander prepared an
initial report dated February 26, 2018 (the February 2018 Independent
Fiduciary Report), which he has updated with supplemental reports on
July 30, 2019 (the July 2019 Independent Fiduciary Report), and
December 5, 2019 (the December 2019 Independent Fiduciary Report), at
the Department's request.
20. February 2018 Independent Fiduciary Report. Mr. Stadtlander
represents that he reviewed the Applicant's rationale as to why the
Captive Approach would directly Benefit Plan participants and
beneficiaries. Mr. Stadtlander represents that the Applicant's factual
assumptions and related analysis were accurate and reasonable, and that
his access to the Fedeli Group's books and records will allow him to
ensure that the use of the Benefit Plan's assets comply with the
requirements of ERISA.
21. Mr. Stadtlander represents that he is authorized to take all
appropriate actions to safeguard the interests of the Benefit Plan and
its participants and beneficiaries, including but not limited to
monitoring the proposed transactions to ensure the transactions remain
in the interests of the Benefit Plan and its participants and
beneficiaries, and that he can take appropriate actions available under
the circumstances with respect to the proposed transactions, including
but not limited to enforcing compliance with all contractual conditions
and obligations imposed on any party dealing with the Benefit Plan.
22. July 2019 Independent Fiduciary Report. In the July 30, 2019
Independent Fiduciary Report, Mr. Stadtlander certified that the
proposed captive reinsurance arrangement would: (a) primarily Benefit
Plan participants and beneficiaries and only provide non-monetary
benefits to the Fedeli Group; (b) create real and substantial
additional benefits for the Plan and Plan participants; (c) not be
offset by reduction in benefits/salaries elsewhere; and (d) otherwise
be consistent with ERISA (including the prudence and loyalty
provisions) and the law.
23. December 2019 Independent Fiduciary Report. At the Department's
request, Mr. Stadtlander provided additional responses and
clarifications related to the proposed transactions. Mr. Stadtlander:
(a) reviewed the Applicant's representations that the Fedeli Group and/
or its related parties would not receive a monetary benefit (tax or
non-tax, including a profit) from the proposed captive reinsurance
arrangement, and certified that the Applicant's representations were
accurate; \5\ (b) determined that the proposed captive reinsurance
arrangement would: (i) primarily Benefit Plan participants inasmuch as
the financial benefits to Benefit Plan participants would exceed the
amount of any non-monetary incidental benefit to the Fedeli Group and
related parties; \6\ (ii) create real and substantial additional
benefits for the Benefit Plan and for Benefit Plan participants; (iii)
not be offset by reduction in benefits/salaries elsewhere; and (iv) be
otherwise consistent with ERISA (including prudence/loyalty provisions)
and the law; (d) certified, within the context of the captive, that the
savings from the Captive Approach would inure to the benefit of the
participants through a combination of some or all improved benefits or
reduced contributions; (e) confirmed that, as the Independent
Fiduciary, he had the requisite knowledge regarding captive reinsurance
arrangements to fulfill his duties under ERISA section 404 as a prudent
plan fiduciary; (f) confirmed that he, as the Independent Fiduciary,
would monitor the reinsurance arrangement throughout the duration of
the exemption, if granted by the Department; (g) confirmed that the
proposed captive reinsurance arrangement is consistent with the
prudence and loyalty provisions of ERISA section 40 and other
applicable laws; and (h) provided analyses to support all
representations it made to the Department.
---------------------------------------------------------------------------
\5\ In this regard, Mr. Stadtlander stated that he received full
disclosure of all benefits the Applicant expected to derive from the
proposed transactions. Among other things, Mr. Stadtlander reviewed
internal analyses of the economic benefits to the Applicant prepared
by consultants and the Applicant itself, and he received full access
to all data necessary to evaluate the transactions, including
submissions made by the Applicant to state insurance departments.
\6\ As described above, Fedeli Group represents that it would
benefit by an increased predictability and greater control over its
benefit funding obligations.
---------------------------------------------------------------------------
24. In addition, Mr. Stadtlander stated that he would annually
determine whether the terms and conditions of the exemption, if
granted, had been met in the prior year. Specifically, the terms of the
proposed exemption, if granted, provide that Mr. Stadtlander must file
annual certified reports with the Department that confirm whether all
terms and conditions of the exemption have been met under penalty of
perjury. Under the terms of the proposed exemption, each report must be
completed within six months from the end of the 12-month period to
which it relates (the first 12-month period beginning on the effective
date of the exemption, if granted, and submitted to the Department
within six months thereafter).
25. Finally, Mr. Stadtlander attached his supporting analysis to
the Independent Fiduciary Report. Stadtlander's analysis confirmed the
Fedeli Group's calculations of the final saving value and annual cost
savings. As stated above, the Applicant calculated a savings of $168.60
per Benefit Plan participant per month using the Captive Approach based
on an
[[Page 76257]]
overall annual cost savings to the Benefit Plan of $129,485.00.
The Department's Findings
26. The Department has the authority under ERISA section 408(a) to
grant an exemption from the prohibition transaction provisions of ERISA
section 406 if the Department finds that the transaction is in the
interest and protective of the rights of the affected plan and its
participants and beneficiaries, and is administratively feasible.\7\
The Department's findings required under ERISA section 408(a) with
respect to the proposed captive reinsurance arrangement are discussed
below.
---------------------------------------------------------------------------
\7\ ERISA section 408(a).
---------------------------------------------------------------------------
27. The Proposed Exemption is ``Administratively Feasible.'' The
Department has tentatively determined that the proposed exemption would
be administratively feasible, because the proposed captive reinsurance
arrangement is subject to robust annual reviews by Mr. Stadtlander and
included in a report he must file with the Department's Office of
Exemption Determinations.
28. The Proposed Exemption is ``Protective of the Plan.'' The
Department has tentatively determined that the proposed exemption is
protective of the rights of the Benefit Plan's participants and
beneficiaries because, among other things, a the exemption contains a
number of additional conditions in addition to the requirement
discussed above, including the following: (a) no commissions will be
paid by the Benefit Plan with respect to the direct sale of any third
party insurance contract and/or any reinsurance contract; and (b) the
Fedeli Group will only contract on behalf of the Benefit Plan with
insurers having a financial strength rating of ``A'' or better from
A.M. Best Company or the equivalent rating from another rating company.
In addition, for each taxable year of Risk Specialists, the gross
premiums received in that taxable year by Risk Specialists for benefit
insurance provided to Fedeli Group and its employees with respect to
which Risk Specialists is a party in interest by reason of the
relationship to Fedeli Group as described in ERISA section 3(14)(E) or
(G), will not exceed 50% of the gross premiums received for all lines
of insurance (i.e., benefit insurance and non-benefit insurance) in
that taxable year by Risk Specialists.
29. Further, the interests of the Benefit Plan and its participants
and beneficiaries are represented in the covered transactions by an
Independent Fiduciary that is obligated, among other things, to: (a)
monitor the transactions described in the exemption on behalf of the
Benefit Plan, on a continuing basis, to ensure the transactions remain
in the interest of the Benefit Plan; (b) take all appropriate actions
to safeguard the interests of the Benefit Plan; and (c) enforce
compliance with all conditions of the exemption and all conditions and
obligations imposed on any party dealing with the Benefit Plan. In
connection with the provision to participants in the Benefit Plan of
the insurance coverage provided by THP or its successor, which is
reinsured by the Risk Specialists, the Independent Fiduciary will
review all contracts (and any renewal of such contracts) of the
reinsurance of risks and the receipt of premiums therefrom and ensure
that the requirements of this exemption, and the terms of the increased
benefits continue to be satisfied.
30. The Proposed Exemption is ``In the Interests of the Plan.'' The
Department has tentatively determined that the proposed exemption would
be in the interest of the Benefit Plan because, among other things, all
of the cost savings from the Captive Approach (relative to the
reasonable cost the Benefit Plan would otherwise have paid for
comparable benefits pursuant to a non-captive arrangement with an
unrelated, third-party insurer) will be used to reduce the amount that
each Benefit Plan participant is required to contribute toward the
premium the Benefit Plan pays to THP or another fronting insurer.
Specifically, based on calculations confirmed by the Independent
Fiduciary, the captive reinsurance arrangement will reduce the monthly
contribution of each Benefit Plan participant by approximately $168.60.
This monthly reduction in contribution obligations will result in
annual savings per participant of $2,023.20 ($168.60 x 12 months).
Significantly, Benefit Plan participants will contribute no more than
17.38% of the premium paid by the Benefit Plan to THP or another
fronting insurer in any Benefit Plan year, which is less than the 25%
the participants previously contributed to Benefit Plan premiums.
In addition, the proposed exemption conditions require
contributions of Benefit Plan participants to be further reduced by any
net benefit received by any Fedeli Group entity, including Risk
Specialists, that is generated by the Captive Approach over each five-
year period, the first year of which would begin on the date this
exemption is granted. Net benefits may include, but are not limited to,
increased earned income, increased savings, a tax reduction or a profit
or any benefit arising from a further diversification of Risk
Specialist's risks in connection with adding Plan-related insurance
risks to Risk Specialist's other risks. Participants' contributions
will be reduced by the amount of the net benefit (plus interest) on a
pro rata basis in the year following the five-year period to which the
net benefit relates.
Summary
31. Based on Fedeli Group, Inc. satisfying the conditions described
above and the representations made in its exemption allocation and
communications with the Department, the Department has tentatively
determined that the relief sought by the Applicant satisfies the
statutory requirements for an exemption under ERISA section 408(a).
Notice to Interested Persons
Notice of the proposed exemption will be provided by the Applicant
to all Interested Persons within 15 days of the publication of the
notice of proposed exemption in the Federal Register, by first class
U.S. mail to the last known address of all such individuals. Such
notice will contain a copy of the notice of proposed exemption, as
published in the Federal Register, and a supplemental statement, as
required pursuant to 29 CFR 2570.43(a)(2). The supplemental statement
will inform interested persons of their right to comment on the pending
exemption. Written comments are due within 45 days of the publication
of the notice of proposed exemption in the Federal Register. All
comments will be made available to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the internet and can
be retrieved by most internet search engines.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under ERISA section 408(a) does not relieve a fiduciary or other party
in interest or disqualified person from certain other provisions of
ERISA and/or the Code, including any prohibited transaction
[[Page 76258]]
provisions to which the exemption does not apply and the general
fiduciary responsibility provisions of ERISA section 404, which, among
other things, require a fiduciary to discharge their duties respecting
the plan solely in the interest of the participants and beneficiaries
of the plan and in a prudent fashion in accordance with ERISA section
404(a)(1)(B); nor does it affect the requirement of Code Section 401(a)
that the plan must operate for the exclusive benefit of the employees
of the employer maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under ERISA section 408(a),
the Department must find that the exemption is administratively
feasible, in the interests of the plan and of its participants and
beneficiaries, and protective of the rights of participants and
beneficiaries of the plan;
(3) The proposed exemption would be supplemental to, and not in
derogation of, any other provisions of ERISA and/or the Code, including
statutory or administrative exemptions and transitional rules.
Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is, in fact, a prohibited transaction; and
(4) The proposed exemption would be subject to the express
condition that the material facts and representations contained in the
application are true and complete at all times and that the application
accurately describes all material terms of the transactions which are
the subject of the exemption.
Proposed Exemption
Section I. Proposed Transactions
If the proposed exemption is granted, the restrictions of ERISA
sections 406(a)(1)(D)and 406(b)(1) shall not apply to the reinsurance
of risks and the receipt of premiums therefrom by Risk Specialists
Insurance Company, Inc. (Risk Specialists), in connection with
insurance contracts sold by THP Insurance Company, Inc. (THP) or any
successor insurance company to THP, which is unrelated to the Fedeli
Group, Inc., including any entity related to Fedeli Group Inc.
(collectively, Fedeli Group), to provide medical and hospital coverage
to participants in the Fedeli Group Inc. Employee Benefit Plan (the
Benefit Plan) provided that the conditions set forth in Section II are
met.
Section II. Conditions
(a) All of the savings from the captive reinsurance arrangement
will be used to reduce the amount that each Benefit Plan participant is
required to contribute toward the premium the Benefit Plan pays to THP
or another fronting insurer. The cost savings must be determined
relative to the reasonable cost the Benefit Plan would otherwise have
paid for comparable benefits pursuant to a non-captive arrangement with
an unrelated, third-party insurer. In no year will the reduction in
Benefit Plan participant contributions be less than $2,023.20 per
participant per year. The premium reduction must benefit all Plan
participants equally and must be verified by the Independent Fiduciary
as described below.
(b) Benefit Plan participant contributions will be further reduced
by an amount equal to any net benefit (the Extra Benefit) any Fedeli
Group entity received that is directly or indirectly generated by the
Captive Approach over each five-year period, the first of which begins
on the grant date this exemption is granted. Extra Benefits include,
but are not limited to, increased earned income, increased savings, a
tax reduction or a profit or any benefit arising from a further
diversification of Risk Specialist's risks in connection with adding
Plan-related insurance risks to Risk Specialist's other risks. The
reduction must be received by Benefit Plan participants on a pro rata
basis in the year following the five-year period to which the Extra
Benefit relates; plus, an additional interest payment on the amount of
the Extra Benefit at the Internal Revenue Code's federal underpayment
rate established in Code section 6621(b). The interest on the Extra
Benefit must be calculated for the period from the end of the Benefit
Plan year the Extra Benefit was earned through the start of the Benefit
Plan year in which the Extra Benefit is applied to reduce Benefit Plan
participants' contributions.
(c) Benefit Plan participants contribute no more than 17.38% of the
premium paid by the Benefit Plan to THP or another fronting insurer;
(d) Risk Specialists:
(1) Is a party in interest with respect to the Benefit Plan by
reason of a stock affiliation with Fedeli Group that is described in
ERISA section 3(14)(E) or (G);
(2) Is licensed to sell insurance or conduct reinsurance operations
in the state of Tennessee;
(3) Has obtained a Certificate of Authority from the insurance
commissioner of the State of Tennessee to transact the business of a
captive insurance company, which has neither been revoked nor
suspended, and has undergone a financial examination (within the
meaning of the law of its domiciliary State, Tennessee) by the
Insurance Commissioner of the State of Tennessee within five years
before the end of the year preceding the year in which the reinsurance
transaction occurred;
(4) Has undergone and shall continue to undergo an examination by
an independent certified public accountant for its last completed
taxable year immediately prior to the taxable year of the reinsurance
transaction covered by this exemption; and
(5) Is licensed to conduct reinsurance transactions by a state
whose law requires that an actuarial review of reserves be conducted
annually by an independent firm of actuaries and reported to the
appropriate regulatory authority;
(e) The Benefit Plan pays no more than adequate consideration with
respect to insurance that is part of the captive reinsurance
arrangement covered by the exemption;
(f) No commissions are paid by the Benefit Plan with respect to the
direct sale of such contracts or the reinsurance thereof;
(g) In the initial year of any contract involving Risk Specialists
and THP or any successor insurer, the Benefit Plan's participants and
beneficiaries receive an immediate and objectively determined benefit
in the form of decreased participant contributions, and such benefits
will continue in all subsequent years of each contract and in every
renewal of each contract;
(h) In the initial year and in subsequent years of coverage
provided by THP or another fronting insurer (either, a Fronting
Insurer), the formulae used by the Fronting Insurer to calculate
premiums must be similar to formulae used by other insurers providing
comparable life insurance coverage under similar programs that are not
captive reinsured. Furthermore, the premium charges calculated in
accordance with the formulae must be reasonable and must be comparable
to the premiums charged by the Fronting Insurer and its competitors
with the same or a better financial strength rating providing the same
coverage under comparable programs that are not captive reinsured;
(i) Fedeli Group only contracts with insurers with a financial
strength rating of ``A'' or better from A.M. Best Company. The
reinsurance arrangement between any fronting insurer and Risk
Specialists will be indemnity insurance only, such that the fronting
insurer will not be relieved of any liability to the Benefit Plan
should Risk Specialists be unable or unwilling to cover any
[[Page 76259]]
liability arising from the reinsurance arrangement;
(j) Participants and beneficiaries in the Benefit Plan must receive
no less than the immediate and objectively determined increased
benefits the participant and beneficiary received in the initial year
of each such contract involving Risk Specialists and THP in subsequent
years of every contract of reinsurance involving Risk Specialists and
THP;
(k) For each taxable year of Risk Specialists, the gross premiums
received in that taxable year by Risk Specialists for benefit insurance
provided to Fedeli Group and its employees with respect to which Risk
Specialists is a party in interest by reason of the relationship to
Fedeli Group as described in ERISA section 3(14)(E) or (G), will not
exceed 50% of the gross premiums received for all lines of insurance
(i.e., benefit insurance and non-benefit insurance) in that taxable
year by Risk Specialists;
(l) The Benefit Plan retains a qualified independent fiduciary (the
Independent Fiduciary) to analyze the transactions covered by the
exemption and render an opinion that the terms and conditions of this
exemption have been satisfied;
(m) The Independent Fiduciary will:
(1) Monitor the transactions described here on behalf of the
Benefit Plan on a continuing basis to ensure such transactions remain
in the interest of the Benefit Plan;
(2) Take all appropriate actions to safeguard the interests of the
Benefit Plan; and
(3) Enforce compliance with all conditions of this exemption and
all conditions and obligations imposed on any party dealing with the
Benefit Plan;
(4) Review all contracts, and any renewals of such contracts,
pertaining to the captive reinsurance arrangement, to determine whether
the requirements of this exemption, and the terms of the increased
benefits continue to be satisfied; and
(5) Provide an annual, certified report to the Department, under
penalty of perjury, indicating whether the terms and conditions of the
exemption continue to be satisfied. Each report must be completed
within six months after the end of the twelve-month period to which it
relates (the first twelve-month period begins on the first day of the
implementation of the captive reinsurance arrangement covered by this
exemption), and be submitted to the Department within 60 days
thereafter. The relevant report must include all the objective data
necessary to demonstrate that the Primary Benefit Test has been met;
and
(n) The Benefit Plan, Fedeli Group and its related parties have
not, and will not, indemnify the Independent Fiduciary, in whole or in
part, for negligence and/or for any violations of state or federal law
that may be attributable to the Independent Fiduciary in performing its
duties under the captive reinsurance arrangement. In addition, no
contract or instrument will purport to waive any liability under state
or federal law for any such violations. In the event a successor
Independent Fiduciary is appointed to represent the interests of the
Plan with respect to the subject transaction, no time shall elapse
between the resignation or termination of the former Independent
Fiduciary and the appointment of the successor Independent Fiduciary.
(o) No Fedeli Group entity or related entity may use participant-
related data or information generated by or derived from the proposed
arrangement in a manner that benefits the Fedeli Group or related
entity;
(p) No amount of THP's reserves that are attributable to the Plan
participants' contributions may be transferred to Fedeli Group or a
related party;
(q) Fedeli Group will not evade the conditions in this exemption by
offsetting or reducing any benefits provided to Fedeli Group employees
to defray the costs, expenses, or obligations of complying with this
exemption;
(r) All expenses associated with the exemption and the exemption
application, including any payment to the Independent Fiduciary, must
be paid by Fedeli Group and not the Plan;
and
(s) All the material facts and representations set forth in the
Summary of Facts and Representation are true and accurate at all times.
Effective Date: The proposed exemption will be in effect as of the
date the grant notice is published in the Federal Register.
Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2023-24401 Filed 11-3-23; 8:45 am]
BILLING CODE 4510-29-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on November 6, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.