Notice2024-27630
Exemption Application No. L-11954; Exemption From Certain Prohibited Transaction Restrictions Involving the 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 26, 2024
Effective
November 26, 2024
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document contains a notice of exemption from certain prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (ERISA) issued by the Department of Labor (the Department) to the Fedeli Group Employee Benefits Plan.
Full Text
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<title>Federal Register, Volume 89 Issue 228 (Tuesday, November 26, 2024)</title>
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[Federal Register Volume 89, Number 228 (Tuesday, November 26, 2024)]
[Notices]
[Pages 93353-93356]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27630]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption 2024-04]
Exemption Application No. L-11954; Exemption From Certain
Prohibited Transaction Restrictions Involving the Fedeli Group, Inc.
Employee Benefits Plan Located in Cleveland, OH
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of exemption.
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SUMMARY: This document contains a notice of exemption from certain
prohibited transaction restrictions of the Employee Retirement Income
Security Act of 1974 (ERISA) issued by the Department of Labor (the
Department) to the Fedeli Group Employee Benefits Plan.
DATES: Exemption date: This exemption will be in effect on November 26,
2024.
FOR FURTHER INFORMATION CONTACT: Mrs. Blessed Chuksorji-Keefe of the
Department at (202) 693-8567. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: On November 6, 2023, the Department
published a notice of proposed exemption in the Federal Register at 88
FR 76253. The proposed exemption involved the reinsurance of risks and
the receipt of premiums by Risk Specialists Insurance Company, Inc.
(Risk Specialists) in connection with insurance contracts sold by THP
Insurance Company, Inc. (THP) or THP's successor to provide medical and
hospital coverage to participants in the Fedeli Group Inc. Employee
Benefits Plan (the Benefit Plan or the Applicant). THP, is unrelated to
the Fedeli Group, Inc. and any entities related to Fedeli.
(collectively, Fedeli Group). The Applicant requested an individual
exemption pursuant to ERISA section 408(a) in accordance with the
Department's exemption procedures set forth in 29 CFR part 2570,
subpart B.\1\
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\1\ 76 FR 66637, 66644, (October 27, 2011).
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Based on the record, the Department has determined to grant the
proposed exemption. This exemption provides only the relief specified
herein. It provides no relief from violations of any law other than the
prohibited transaction provisions of ERISA, as expressly stated herein.
The Department makes the requisite findings under ERISA Section
408(a) based on the Applicant's adherence to all the conditions of the
exemption. Accordingly, affected parties should be aware that the
conditions incorporated in this exemption, considered individually and
as a whole, are necessary for the Department to grant the relief
requested by the Applicant. Absent these or similar conditions, the
Department would not have granted this exemption.
Background
1. As discussed in greater detail below and in the notice of
proposed exemption, Fedeli Group seeks to use its captive insurance
company, Risk Specialists, to reinsure participants' benefit claims
under the Benefit Plan.
Parties to the Transaction
2. Fedeli Group: Fedeli Group is a corporation based in Cleveland,
Ohio that provides insurance products and risk management services. The
Fedeli Group is 51 percent owned by The Umberto P. Fedeli Restated
Revocable Trust (dated July 16, 2016) 19 percent owned by the Umberto
P. Fedeli 2012 Discretionary Trust (dated November 28, 2012) and 20%
owned by the Umberto P. Fedeli 2009 Discretionary Trust (dated December
23, 2009). The Fedeli Group sponsors and administers the Benefit Plan.
3. Risk Specialists: Risk Specialists is a property and casualty
captive insurance company that is licensed and operates under
applicable Tennessee law. Risk Specialists is 100 percent owned by Risk
Specialists Captive Holdings, LLC, a limited liability company formed
in Ohio on the same date as Risk Specialists. Risk Specialists Captive
Holdings, LLC is 51 percent owned by the Fedeli Revocable Trust, 29%
owned by the Fedeli 2012 Trust, and 20 percent 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. THP. THP Insurance Company, Inc. 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. The Benefit Plan. The Benefit Plan is a self-funded employee
welfare benefit plan covering medical and hospital expenses for
eligible Fedeli Group employees that is sponsored and administered by
the Fedeli Group.
The Transaction
6. Fedeli Group plans to use its captive insurance company, Risk
Specialists, to reinsure the Benefit Plan's claims. 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.
7. As described in the notice of proposed exemption, 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. The proposed exemption describes that the Captive Approach
will result in reduced overall plan costs because benefit expenses will
be 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.
ERISA Analysis
8. The 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.
9. ERISA section 406(a) prohibits a wide range of transactions
between plans and parties in interest with respect to those plans. As
relevant here,
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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 of 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.
10. 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.
Merits of the Transaction
11. As described in further detail in the notice of proposed
exemption, 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 per
participant per year for the duration of the exemption relative to the
contribution the participant would otherwise have made under a
noncaptive 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 this
exemption, all the savings from the reinsurance arrangement 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.
12. Therefore, this exemption requires the Fedeli Group to use any
of the savings it derives from the captive reinsurance arrangement to
reduce the amount each Benefit Plan participant is required to
contribute toward the premiums the Benefit Plan pays to THP or another
fronting insurer. If any Fedeli Group-related entity receives a direct
or indirect profit, tax benefit, investment gain or other remunerative
benefit through the reinsurance arrangement, 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 exemption.
13. On an on-going basis, the independent fiduciary is required 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. Furthermore,
as described in the notice of proposed exemption, this exemption
requires a number of protective conditions designed to ensure that the
rights of the Plan and its participants and beneficiaries are
protected.
Comments Received Regarding Proposed Exemption
In the proposed exemption, the Department invited all interested
persons to submit written comments and/or requests for a public hearing
with respect to the proposed exemption by December 21, 2023. The
Department did not receive any written comments or requests for a
public hearing.\2\
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\2\ The Department notes that it did not make any changes to the
operative text of the proposed exemption in this final grant notice
except for minor editorial revisions.
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Therefore, on basis of the entirety of the public record for this
exemption application and the conditions for relief included below, the
Department finds that the exemption is administratively feasible for
the Department, in the interests of the Benefit Plan and its
participants and beneficiaries, and protective of the rights of the
Benefit Plan's participants and beneficiaries.
The complete application file (L-11954) is available for public
inspection in the Public Disclosure Room of the Employee Benefits
Security Administration, Room N-1515, U.S. Department of Labor, 200
Constitution Avenue NW, Washington, DC 20210. For a more complete
statement of the facts and representations supporting the Department's
decision to grant this exemption, please refer to the notice of
proposed exemption published on November 6, 2023, at 88 FR 76253.
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 from certain requirements of other ERISA provisions,
including any prohibited transaction 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 his or her duties respecting the plan solely in the interest
of the plan's participants and beneficiaries and in a prudent fashion
in accordance with ERISA section 404(a)(1)(B).
(2) As required by ERISA section 408(a), the Department hereby
finds that the exemption is: (a) administratively feasible for the
Department; (b) in the interests of affected plans and of their
participants and beneficiaries; and (c) protective of the rights of
participants and beneficiaries of the Benefit Plan.
(3) This exemption is supplemental to and not in derogation of any
other ERISA provisions, including statutory or administrative
exemptions and transitional rules. Furthermore, the fact that the
Department is granting an administrative exemption for this transaction
is not dispositive to determining whether the transaction is in fact a
prohibited transaction.
(4) The Department's grant of this exemption is based on the
express condition that the material facts and representations contained
in the application accurately describe all material terms of the
transactions that are the subject of the exemption.
Accordingly, the Department grants the following exemption under
the authority of ERISA Section 408(a)in accordance with its exemption
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637,
66644, October 27, 2011):
Exemption
Section I. Covered Transactions
The restrictions of ERISA sections 406(a)(1)(D) and 406(b)(1) will
not apply to the reinsurance of risks and the receipt of premiums
therefrom by Risk Specialists LLC (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. (Fedeli Group or the Applicant), including any
entity related to Fedeli Group to provide medical and hospital coverage
to participants in the Fedeli Group, Inc. Employee Benefits Plan (the
Benefit Plan) (these covered transactions are referred to as the
Captive Reinsurance Arrangement) 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
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Benefit Plan pays to THP or another fronting insurer. The cost savings
will 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 will
benefit all Plan participants equally and will 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 Reinsurance Arrangement 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 will 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 will 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 will 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 will pay no more than adequate consideration
with respect to insurance that is part of the Captive Reinsurance
Arrangement.
(f) No commissions will be 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 will 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 THP or a Fronting Insurer to calculate
premiums will 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 will be reasonable and will 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 will only contract 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, which means 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
liability arising from the reinsurance arrangement.
(j) Participants and beneficiaries in the Benefit Plan will 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 will retain 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;
(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 will 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), and be
submitted to the Department within 60 days thereafter. The relevant
report will include all the objective data necessary to demonstrate
that the Primary Benefit Test has been met.
(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
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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 will 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 will 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, will
be paid by Fedeli Group and not the Plan.
(s) All the material facts and representations set forth in the
Summary of Facts and Representation are and will be true and accurate
at all times.
Exemption date: This exemption will be in effect on November 26,
2024.
Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2024-27630 Filed 11-25-24; 8:45 am]
BILLING CODE 4510-29-P
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</html>Indexed from Federal Register on November 26, 2024.
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