Notice2025-00813
Exemption From Certain Prohibited Transaction Restrictions Involving Memorial Sloan Kettering Cancer Center (MSKCC or the Applicant) Located in New York, New York
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
January 15, 2025
Effective
January 15, 2025
Issuing agencies
Employee Benefits Security Administration
Abstract
This document contains a notice of exemption issued by the Department of Labor (the Department) from certain prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (ERISA or the Act) and/or the Internal Revenue Code of 1986 (the Code). This exemption permits the reinsurance of risks and the receipt of a premium by MSK Employee Benefits IC (MSK EB or the Captive), a captive insurance and reinsurance subsidiary that is wholly-owned by MSKCC, in connection with a single premium group insurance contract sold by an unrelated fronting insurer (the Fronting Insurer or the Fronter) to provide pension annuities to participants and beneficiaries in the Memorial Sloan Kettering Cancer Center Pension Plan (the Plan). The relief provided in the exemption will only be available if the conditions in Section III are met in conformance with the definitions in Section I.
Full Text
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<title>Federal Register, Volume 90 Issue 9 (Wednesday, January 15, 2025)</title>
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[Federal Register Volume 90, Number 9 (Wednesday, January 15, 2025)]
[Notices]
[Pages 3947-3957]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-00813]
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EMPLOYEE BENEFITS SECURITY ADMINISTRATION
[Prohibited Transaction Exemption 2025-02; Exemption Application No. D-
12073]
Exemption From Certain Prohibited Transaction Restrictions
Involving Memorial Sloan Kettering Cancer Center (MSKCC or the
Applicant) Located in New York, New York
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of exemption.
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SUMMARY: This document contains a notice of exemption issued by the
Department of Labor (the Department) from certain prohibited
transaction restrictions of the Employee Retirement Income Security Act
of 1974 (ERISA or the Act) and/or the Internal Revenue Code of 1986
(the Code). This exemption permits the reinsurance of risks and the
receipt of a premium by MSK Employee Benefits IC (MSK EB or the
Captive), a captive insurance and reinsurance subsidiary that is
wholly-owned by MSKCC, in connection with a single premium group
insurance contract sold by an unrelated fronting insurer (the Fronting
Insurer or the Fronter) to provide pension annuities to participants
and beneficiaries in the Memorial Sloan Kettering Cancer Center Pension
Plan (the Plan). The relief provided in the exemption will only be
available if the conditions in Section III are met in conformance with
the definitions in Section I.
DATES: The exemption will be in effect on January 15, 2025.
FOR FURTHER INFORMATION CONTACT: Mr. Joseph Brennan of the Department
at (202) 693-8456. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: The Applicant submitted an exemption
application requesting 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\ On July 9, 2024, the
Department published a notice of proposed exemption in the Federal
Register.\2\ Based on adherence to the conditions of this exemption by
MSKCC, the Independent Fiduciary, and the IB 95-1 Independent Fiduciary
(as defined below), the Department makes the requisite findings under
ERISA section 408(a) that this exemption is: (1) administratively
feasible for the Department, (2) in the interest of the participants
and beneficiaries of the Plan, and (3) protective of the rights of the
participants and beneficiaries of the Plan. Accordingly, affected
parties should be aware that the conditions incorporated in this
exemption are, individually and taken as a whole, necessary for the
Department to grant the relief provided herein. The Department would
not have granted this exemption without these conditions.
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\1\ 76 FR 66637, 66644, (October 27, 2011).
\2\ 89 FR 56422 (July 9, 2024).
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Background
Overview of the Exemption
1. Under the exemption, the Plan will enter into a single premium
group annuity insurance contract (the GAC) with an unrelated Fronting
Insurer that will be selected by an IB 95-1 Fiduciary in compliance
with the requirements of the Department's Interpretive Bulletin 95-
1.\3\ The Fronting Insurer will, in turn, enter into a reinsurance
contract (the Reinsurance Arrangement) with the Captive. Under the
Reinsurance Arrangement, the Captive will reinsure 100 percent of the
Plan's risks under the GAC. Importantly, the Fronting Insurer will
remain fully responsible for the benefits of participants and
beneficiaries for the entire duration of the GAC and Reinsurance
Arrangement if the Captive fails to fulfill its contractual obligations
to the Fronting Insurer, without any caveats, contingencies, or
conditions that would relieve or limit the Fronting Insurer's
contractual obligation to pay benefits to the Plan's participants and
beneficiaries.
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\3\ 29 CFR 2509.95-1.
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In connection with the Reinsurance Arrangement, all Plan
participants and beneficiaries will receive an increase to their
monthly pension benefit that is currently expected to be 5.55
percent.\4\ The Applicant expects that this benefit increase will
provide $66,408,000 in additional benefits to the Plan's participants
and beneficiaries. Importantly, this increase will remain in place for
the entirety of Plan participants' and beneficiaries' lives and, as a
condition of this exemption,
[[Page 3948]]
MSKCC will not reduce any benefits that participants and beneficiaries
receive from MSKCC, including benefits they receive from the Plan, as a
result of the Reinsurance Arrangement. Absent this exemption,
participants and beneficiaries would not receive this estimated 5.55
percent benefit increase.
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\4\ As discussed in more detail below, the exemption requires
the Plan participants and beneficiaries to receive the majority of
the benefits derived from the Reinsurance Arrangement. While, as
noted above, it is ``currently expected'' that a 5.55% increase in
Plan's participants' and beneficiaries' monthly pension benefits
will achieve this objective, the exact percentage increase needed to
ensure that Plan participants and beneficiaries receive the majority
of the benefits derived from the proposed arrangement will not be
known until the Plan actually enters into the GAC, which will occur
after the Fronting Insurer is selected by the IB 95-1 Fiduciary. As
described in further detail below, after the Plan enters into the
GAC, Milliman, a second independent fiduciary acting solely on
behalf of the Plan, must determine, based on objective data, that
the Plan participants' and beneficiaries' monthly pension benefits
have been increased by a percentage that ensures they will receive
the majority of the benefits derived from the Reinsurance
Arrangement. The methodology for making this calculation is
discussed below. Milliman as independent fiduciary must, among other
things, conclude, in a written report submitted to the Department,
that Plan participants and beneficiaries received the appropriate
percentage increase in their monthly pension benefits. The written
report of the independent fiduciary will be available to the public
by contacting EBSA's Public Disclosure Office and referencing
Exemption Application D-12073.
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The Plan
2. The Plan is a defined benefit pension plan that provides
retirement and death benefits for eligible participants.\5\ The Plan
administrator and named fiduciary is the MSK Executive Benefits
Committee and the Plan trustee is JPMorgan Chase. In 2012, MSKCC
amended the Plan to close enrollment to employees hired on or after
December 16, 2012. In 2020, MSKCC amended the Plan to freeze future
benefit accruals effective December 20, 2020. As of December 31, 2023,
the Plan covered 8,089 participants and held $1,384,897,170 in total
assets.
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\5\ Under the Plan, the normal form of payment for an unmarried
participant is a single-life annuity, and the normal form of payment
for a married participant is a joint and 50% survivor annuity.
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The Captive
3. MSK Insurance US, Inc. (MSK US) is MSKCC's wholly-owned captive
insurance and reinsurance subsidiary. MSK US writes approximately $75
million in premiums and insures the property and equipment of MSKCC.
The Captive (MSK EB) is a segregated cell within MSK US that will be
used to reinsure the risks related to the Reinsurance Arrangement and
this exemption. While MSK US will contract with the Fronting Insurer as
part of the Reinsurance Arrangement, MSK EB will hold the reserves that
will be used to pay benefits to the Plan's participants and
beneficiaries under the GAC.
The IB 95-1 Fiduciary and the Selection of the Fronting Insurer
4. MSKCC has engaged Fiduciary Counselors Inc. (FCI) as the IB 95-1
Fiduciary that is responsible for selecting a Fronting Insurer based on
a competitive bidding process. The Applicant represents that FCI will
send requests for proposals to potential Fronting Insurers and will
then select a Fronting Insurer in compliance with the Department's
Interpretive Bulletin (IB) 95-1, which provides several factors that
fiduciaries must consider to ensure they select the safest annuity
available for a plan.\6\ Within 30 days after the GAC has been
executed, FCI must provide the Department with a written report that:
(a) identifies the Fronting Insurer selected; (b) contains a detailed
representation regarding the methodology used to make the selection and
how that methodology determines that the selected Fronting Insurer and
GAC met the requirements of IB 95-1; and (c) prudently concludes that
it would have been consistent with IB 95-1 to select the Fronting
Insurer as the insurer for a final termination buy-out annuity had
MSKCC adopted that approach.
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\6\ 29 CFR 2509-95-1. As stated in IB 95-1, when conducting a
search, a fiduciary must evaluate a number of factors relating to a
potential annuity provider's claims-paying ability and
creditworthiness. Reliance solely on ratings provided by insurance
rating services would not be sufficient to meet this requirement. In
this regard, the types of factors a fiduciary should consider would
include, among other things: (a) the quality and diversification of
the annuity provider's investment portfolio; (b) the size of the
insurer relative to the proposed contract; (c) the level of the
insurer's capital and surplus; (d) the lines of business of the
annuity provider and other indications of an insurer's exposure to
liability; (e) the structure of the annuity contract and guarantees
supporting the annuities, such as the use of separate accounts; and
(f) the availability of additional protection through state guaranty
associations and the extent of their guarantees.
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Mechanics of the Reinsurance Arrangement
5. The Plan will purchase the GAC from the Fronting Insurer by
using current Plan assets to pay a one-time premium to the Fronting
Insurer. The Fronting Insurer will enter into an indemnity reinsurance
contract with the Captive and will transfer the premium amount paid by
the Plan to the Captive where it will be held in reserve. The GAC will
cover all of the Plan's liabilities and have two phases that are
described below.
Buy-In Phase: During the Buy-in Phase, the Plan will hold the GAC
as a plan asset and the Plan will remain active. During this phase, the
Fronting Insurer will send funds to the Plan Trustee (JPMorgan Chase)
to make benefit payments to participants and beneficiaries and, every
three months, the Fronting Insurer will submit payment requests to the
Captive requesting reimbursement to cover participant and beneficiary
distributions paid by the Fronting Insurer during the preceding three
months. If the Fronting Insurer and Captive fail to pay benefits during
the Buy-In Phase, MSKCC will still be required to fund the Plan, and
the Plan will still be required to pay all benefits due to participants
and beneficiaries.
Following the purchase of the GAC, and while the Plan is still
active, the Plan's fiduciaries will be obligated to manage all Plan
assets, including those assets not used to purchase the GAC, solely in
the interest of participants and beneficiaries and exclusively for
their benefit. Any payments for Plan expenses that do not clearly and
exclusively benefit participants and beneficiaries will be subject to
additional scrutiny.
Buy-Out Phase: The GAC will contain a ``conversion option'' (the
Conversion Option) that MSKCC can exercise (at any time) if and when it
decides to terminate the Plan.\7\ If exercised, the Conversion Option
would transition the GAC from the Buy-in Phase to the Buy-Out Phase,\8\
and the following events would occur: (a) the GAC will no longer be
held by the Plan as a Plan asset; (b) MSKCC will replace the Plan as
the holder of the GAC; (c) the Fronting Insurer will issue annuity
certificates to all Plan participants and beneficiaries; and (d) the
Fronting Insurer will take complete control of the administration of
the GAC and make benefit payments directly to the former Plan
participants and beneficiaries that have become annuitants.\9\ During
the Buy-Out Phase the Captive will continue to hold the reserves and
the Fronting Insurer will continue to remit quarterly reimbursement
payment requests to the Captive.
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\7\ This exemption would not relieve the Plan's fiduciaries from
their express ERISA duties to manage the assets of the plan solely
in the interest of the plan and its participants and beneficiaries,
including when the fiduciaries are contemplating terminating the
plan.
\8\ The effective date of the conversion would be aligned with
the Plan's termination (i.e., the Conversion Option will be
exercised only if and when the Plan terminates).
\9\ As a condition of this exemption, after the Buy-In phase for
the Reinsurance Arrangement is completed and MSKCC exercises the
Conversion Option, MSKCC will terminate the Plan in compliance with
all applicable Code and ERISA requirements.
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The relationship between the Fronting Insurer and Captive will
remain the same during both the Buy-In and Buy-Out Phases; therefore,
the Fronting Insurer will assume full responsibility for benefit
obligations to participants and beneficiaries, without conditions or
caveats, and the Captive will assume the reinsurance risk. During both
phases, the Captive is fully obligated to make payments to the Fronting
Insurer under the Reinsurance Arrangement. This means that the Captive
is fully obligated to satisfy the benefit obligations, but the
mechanism of that obligation flows through the Fronting Insurer rather
than directly to the Plan or to participants and beneficiaries.
As a condition of this exemption, the Fronting Insurer must have a
direct contractual relationship with the Plan during the Buy-In phase
of the GAC and with the Plan's participants and
[[Page 3949]]
beneficiaries during the Buy-Out phase, without any caveats,
contingencies, or conditions that would relieve or limit the Fronting
Insurer's contractual obligation to pay benefits to the Plan's
participants and beneficiaries.
Collateral Under the Reinsurance Agreement
6. As part of the Reinsurance Arrangement, the Captive will be
collateralized by MSKCC. The Captive is expected to use the assets
received as the reinsurance premium to collateralize its obligations
under the Reinsurance Arrangement, in each case with such modifications
as the Fronting Insurer's regulatory, accounting, or commercial
considerations may require.\10\ MSKCC will capitalize the Captive in
accordance with the requirements of the State of Vermont and will
provide a parental guarantee for the benefit of the Fronting Insurer
with respect to the Captive's obligations. Parental guarantee assets
will be separate and apart from the Plan assets used to purchase the
GAC.
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\10\ The Fronting Insurer will be required to carry statutory
reserves on its financial statements in such amounts as the
insurance law in its state of domicile may require, and the
collateral requirements will be based on those reserve requirements.
The Fronting Insurer will have the right to access the collateral
assets in accordance with the Reinsurance Arrangement. Collateral
assets will back the Captive's reserves but will not be distinct
from them.
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Oversight by the Vermont DFR
7. Before MSKCC submitted its exemption request, the Captive
requested and received formal approval from the Vermont Department of
Financial Regulation (Vermont DFR) to enter into the Reinsurance
Arrangement and operate the Captive to reinsure the Plan's pension
benefits. The Vermont DFR issued formal approval after reviewing the
Captive's Feasibility Report, which included, among other things,
actuarial projections, an investment policy statement, and a business
plan. The Captive will be required to submit independent audit and
actuarial reports to the Vermont DFR annually and, at least once every
five years, the Vermont DFR will conduct a thorough review of the
Captive and issue an Exam Report.
This exemption requires the Independent Fiduciary to obtain and
review all independent audit and actuarial reports submitted by the
Captive to the Vermont DFR as well as all Exam Reports issued to the
Captive by the Vermont DFR, as long as the plan remains active.
Further, the Independent Fiduciary must provide the Department with a
detailed summary of each Exam Report in its annual Independent
Fiduciary Report covering the year the Exam Report is issued. This
exemption also requires the Captive to request a Certificate of Good
Standing from the Vermont DFR every year and provide the Department
with any Exam Reports it receives no later than 30 days after MSKCC
receives such report.
Financial Benefit to MSKCC
8. The Applicant represents that purchasing the GAC in conjunction
with the Reinsurance Arrangement will result in an estimated ten
percent cost savings. For instance, if the single premium cost to
purchase the GAC from the Fronting Insurer without the Captive would be
$1.2 billion, the cost to purchase it with the Captive would be $1.08
billion. Since the financial benefit of this cost reduction would inure
to MSKCC, this exemption requires MSKCC to provide the majority of the
derived financial benefit to the Plan's participants and beneficiaries
in the form of a permanent monthly annuity payment increase, as
described below.\11\
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\11\ The Applicant represents that because MSKCC is a non-profit
entity, there will be no associated tax advantages flowing to MSKCC
from the Reinsurance Arrangement.
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The Primary Benefits Test
9. This exemption requires the Plan to receive the majority of the
financial benefits flowing from the Reinsurance Arrangement (the
Primary Benefits Test). Under this exemption, the Independent Fiduciary
must quantify all benefits derived from the Reinsurance Arrangement,
including all benefits directly and indirectly received by MSKCC and
any entity affiliated with MSKCC, and confirm that participants and
beneficiaries receive at least 51 percent of all benefits derived from
the arrangement. Throughout the Reinsurance Arrangement, while the Plan
remains active, the Independent Fiduciary must continuously review and
confirm that the Primary Benefits Test is being met.
MSKCC-Provided Benefit Enhancement
10. MSKCC will implement a one-time benefit increase sufficient to
pass the Primary Benefits Test (the Benefit Enhancement). If the
savings generated from using the Captive, as determined by the
Independent Fiduciary, equals 10 percent, MSKCC will implement a
Benefit Enhancement in the form of a permanent 5.37 percent \12\
increase to the monthly benefits of all participants and beneficiaries
that will continue without reduction for the remainder of their lives.
In addition, and as discussed below, MSKCC will add a second layer
benefit enhancement of .18% for participants and beneficiaries--which
is derived from the present value of the Independent Fiduciary's fees
over the expected life of the GAC, post-plan termination.\13\ Thus, if
the savings from the Captive equals 10 percent, all plan participants
and beneficiaries will receive a permanent pension benefit increase of
5.55 percent. Collectively, Plan participants and beneficiaries would
receive increased pension benefit payments with a present value of
$66,408,000 and, therefore, will receive the majority of the financial
benefit derived from the Reinsurance Arrangement plus the present value
of the Independent Fiduciary's fees over the expected life of the GAC.
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\12\ The formula underlying the 5.37 percent calculation is
based on the actual percentage of savings in the annuity purchase,
including the value of the pension benefit enhancement. All details
regarding the formula used to calculate the Benefit Enhancement are
included in the exemption application file and available to the
public upon request.
\13\ The Independent Fiduciary confirmed that the present value
of its fees over the expected life of the GAC would be $1,968,000.
As a condition of this exemption, MSKCC will add this entire amount
into the GAC as a second-layer benefit enhancement which will result
in an additional .18 percent permanent monthly pension increase for
all participants and beneficiaries. Thus, the total benefit
enhancement under this exemption is expected to be 5.55 percent.
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As noted in the proposed exemption, MSKCC represents that: (a)
apart from the conditions of this exemption, MSKCC otherwise had no
preexisting obligation to provide a benefit increase to participants
and beneficiaries; and (b) before its formal submission for exemptive
relief, MSKCC had not considered or offered any increase to the current
value of the benefits of the Plan's participants and beneficiaries.
Department's Note: The Department notes that the ratio of the
benefit enhancement to MSKCC savings described in this exemption should
not be relied upon as a precedent for future exemption applicants. If
the Department receives applications for similar reinsurance exemptions
in the future, it may require a higher ratio of participant and
beneficiary benefit enhancements to plan sponsor savings, based upon
the specific design of the transaction and financial circumstances of
the plan and plan sponsor. In this regard, the Department's exemption
procedure regulation provides that ``[t]he existence of previously
issued administrative exemptions is not determinative of whether the
Department will propose future exemptions for applications with the
same or similar facts, or whether a proposed exemption will contain the
same conditions as a similar previously
[[Page 3950]]
issued administrative exemption.'' \14\ As the Department stated in the
preamble to that regulation, ``. . . this language reinforces the
Department's existing policy that it has the sole discretionary
authority to issues exemptions and is not bound by the facts or
conditions of prior exemptions in making determinations with respect to
an exemption application.''
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\14\ 29 CFR 2570.30(g).
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Independent Fiduciary
11. Milliman will serve as the Plan's Independent Fiduciary with
respect to the Reinsurance Arrangement and Kathleen E. Ely of Milliman
will perform the functions required of the independent fiduciary on
behalf of Milliman with respect to the requirements of this exemption.
As the Plan's Independent Fiduciary, Milliman must represent the Plan
in accordance with the obligations of prudence and loyalty under ERISA
sections 404(a)(1)(A) and (B) and determine whether the Reinsurance
Arrangement is in the interests of the Plan's participants and
beneficiaries. In this regard, before the Plan purchases the GAC,
Milliman must prudently and loyally confirm that the Benefit
Enhancement is sufficient to meet the Primary Benefits Test.
Further, not later than 30 days after the purchase of the GAC and
consummation of the Reinsurance Arrangement, Milliman must confirm to
the Department in writing that all terms and conditions of the
exemption have been met. This confirmation must include copies of each
document relied upon and the steps taken to make this determination. In
this written determination, the Independent Fiduciary must confirm the
actual cost savings associated with the Reinsurance Arrangement by
obtaining documentation from the Fronting Insurer that compares the
cost to purchase the GAC without the Captive in place to the cost to
purchase the GAC with the Captive in place. The Independent Fiduciary
must include this documentation from the Fronting Insurer with its
written determination to the Department.
The Independent Fiduciary must also monitor and ensure that any
assets that remain in the Plan during the Buy-In phase of the
Reinsurance Arrangement are managed and used exclusively to provide
benefits to Plan participants and beneficiaries and to defray
reasonable expenses of administering the Plan in compliance with ERISA
sections 403(c)(1) and 404(a)(1)(A).
Ms. Ely and Milliman represent that they are independent of all
parties associated with the Reinsurance Arrangement, including the
Plan, MSKCC, and the Captive. Milliman also represents that its gross
income received from parties in interest to the Plan in connection with
the Reinsurance Arrangement represents less than 0.1 percent of
Milliman's gross annual income from all sources.
Milliman will be required to continue monitoring, enforcing, and
ensuring compliance with all conditions of this exemption until the
plan is terminated, and report any instance of non-compliance
immediately to the Department. As long as the plan is active, Milliman
must submit written annual Independent Fiduciary Reports to the
Department certifying under penalty of perjury whether each term and
condition of the exemption has been met over the applicable period. In
this regard, Milliman's final Independent Fiduciary Report will be due
to the Department no later than six months after the Plan's termination
date. Please see below for a discussion regarding the removal of the
Independent Fiduciary after plan termination.
In its final independent fiduciary report, Milliman must determine
that the plan termination, transfer of assets, and new contractual
arrangements accord with all conditions of this exemption at the time
of termination, and that it remains the case that the primary benefits
of this arrangement are expected to inure to the plan for the entire
duration of the arrangement. The Independent Fiduciary must also
represent that MSKCC has not managed plan assets in a way that results
in MSKCC receiving a greater benefit from this arrangement than plan
participants and beneficiaries.
Written Comments
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 notice of proposed exemption by August 23, 2024.
The Department received written comments from the Applicant and Plan
participants and beneficiaries and no requests for a public hearing.
I. Comments From the Applicant
1. Removal of the Independent Fiduciary After Plan Termination
The proposed exemption requires an Independent Fiduciary to act on
behalf of the Plan's participants and beneficiaries and provide
oversight through the end of the Reinsurance Arrangement. Section
III(h)(4) of the proposed exemption would require the Independent
Fiduciary to: ``Represent and protect the interests of the participants
and beneficiaries of the Plan during both the Buy-In and Buy-Out Phases
to ensure they receive everything that they are entitled to receive
under this exemption, the terms of the Plan, and the GAC.'' Further,
Section III(i)(1) of the proposed exemption would require the
Independent Fiduciary to submit annual Independent Fiduciary Reports to
the Department until the end of the Reinsurance Arrangement. The
proposed exemption also provides that the Independent Fiduciary must
prudently and loyally confirm that the Primary Benefits Test is met
throughout the Reinsurance Arrangement and continue to monitor,
enforce, and ensure compliance with all conditions of the exemption
throughout the Reinsurance Arrangement.
MSKCC requests the Department remove the independent fiduciary
requirement following the Plan's termination. MSKCC states that the
phrases ``throughout the Reinsurance Arrangement'' and ``throughout the
duration of the Reinsurance Arrangement'' should be modified, as they
suggest that there is a Plan fiduciary obligation that extends beyond
the termination of the Plan. MSKCC asserts that the Plan will terminate
in connection with the Buy-Out conversion of the GAC and cease to
exist, and once the Plan terminates, there will be no ongoing fiduciary
obligations with respect to the Plan. MSKCC further asserts that at the
time of the Plan's termination, Plan fiduciaries must ensure that the
Plan's obligations are discharged, and that determination would include
ensuring that the structure of the Reinsurance Arrangement complies
with the exemption's conditions.
Accordingly, MSKCC requests the Department to revise Section
III(h)(4) of the proposed exemption to read as follows: ``The
Independent Fiduciary must . . . Represent and protect the interests of
the participants and beneficiaries of the Plan unless and until the
Plan is terminated to ensure they receive everything that they are
entitled to receive under this exemption, the terms of the Plan, and
the GAC.''
Department's Response: After considering this comment, the
Department has determined to remove the requirement that the
Independent Fiduciary perform duties beyond the date of a plan
termination if the
[[Page 3951]]
Independent Fiduciary calculates the present value of its expected fees
over the expected life of the GAC and MSKCC adds that amount into the
GAC as an additional benefit enhancement for participants and
beneficiaries. Also, as noted above, the Independent Fiduciary has
confirmed that the present value of its expected fees is $1,968,000.
Therefore, as a condition of this exemption, MSK must add an additional
$1,968,000 as a second-layer benefit increase into the GAC to
permanently increase the pension benefits for participants and
beneficiaries. This $1,968,000 second-layer benefit increase will add
an additional .18 percent increase to the monthly annuity payable to
participants and beneficiaries and thus increase the total monthly
annuity payable to participants and beneficiaries from 5.37 percent to
5.55 percent.
The Department's determination to allow the Independent Fiduciary
to step aside after plan termination is based upon an understanding
that the Vermont DFR will be performing substantial oversight over the
Captive after the plan is terminated, and that this oversight is
similar to the duties the Independent Fiduciary would have had to
perform under the proposed exemption. The Department notes that under
this exemption, the Captive must request a Certificate of Good Standing
from the Vermont DFR every year, and that before issuing a Certificate,
Vermont DFR will review the Captive, its reserves, and investments. If
Vermont finds anything concerning, including risk, solvency,
investments, or compliance issues, they will not issue the Certificate
to the Captive. Also, during this review, the Vermont DFR will look
into the financial health of MSKCC and the unrelated Fronting Insurer.
Additionally, at least once every five years, the Vermont DFR will
conduct a more thorough examination of the Captive and produce an Exam
Report. Through its Exam Report process, the Vermont DFR will determine
compliance with state insurance laws and regulations and evaluate the
Captive's solvency. As part of this report, a team of examiners from
Vermont DFR will conduct an in-depth review of the Captive's operations
and balance sheet, and if they find something concerning, they will
issue a Company Action Letter or a Regulatory Action Letter to the
Captive. The Department notes that this exemption requires MSK to
submit all Exam Reports to the Department.
Moreover, the Fronting Insurer will have a strong interest in
ensuring the Captive has sufficient reserves to pay benefit liabilities
because the Fronter pays pension benefits to participants and
beneficiaries from its own account. The Fronter's obligation to
participants and beneficiaries is unconditional and will continue even
if the Captive becomes insolvent, because the Fronter's arrangement
with the Captive is an indemnity reinsurance arrangement. This means
that the Captive reimburses the Fronter every three months for pension
payments that the Fronter has already paid to participants and
beneficiaries over the preceding three months. Under the reinsurance
contract between the Fronter and the Captive, the Fronter monitors the
investment of the Captive's reserves and also has the contractual right
to draw on a collateral account that is funded by the Captive.
Finally, the Department notes that after plan termination, all
participants and beneficiaries become individual annuitants with the
Fronter, and those annuities are regulated by the state in which the
Fronter is domiciled. Under state insurance law, the Fronter is
required to submit to an annual independent audit and file that report
with their state regulator.
Based on the foregoing, the Department has determined to remove the
requirement that the Independent Fiduciary perform duties beyond the
date of a plan termination because there will be sufficient oversight
of the Captive after the plan terminates to ensure that participants
and beneficiaries are protected and their benefits remain secure.
Moreover, the second-layer benefit enhancement that will result from
adding the additional $1,968,000 into the GAC is a meaningful
additional benefit for participants and beneficiaries that will provide
a more secure retirement for all participants and beneficiaries covered
by the Plan.
2. Timing of Identifying the Fronting Insurer
In paragraph 5 of the proposed exemption, the Department states
that ``given the importance of a highly rated Fronting Insurer to the
security of the pension benefits provided to the Plan's participants
and beneficiaries, Fiduciary Counselors must provide the Department
with a written submission that identifies the Fronting Insurer selected
along with a written representation detailing the methodology that it
used to select the Fronting Insurer and how that methodology, and the
Fronting Insurer selected, met the requirements of IB 95-1.'' Section
III(e)(1) of the proposed exemption states that this report must be
provided to the Department ``before this proposed exemption is
granted.''
MSKCC maintains in its comment letter, that it will not be
practicable for the IB 95-1 Fiduciary to select the Fronting Insurer
and provide the IB 95-1 Report to the Department before the exemption
is granted. According to MSKCC, FCI would not be able to negotiate
every term of the annuity purchase with the Fronter--including final
pricing--until the terms of the final exemption are known and the
timing of the annuity purchase is certain and imminent. And further, if
the final exemption is conditioned upon the selection of a particular
Fronting Insurer, MKSCC would lose leverage to negotiate final annuity
purchase terms favorable to the Plan's participants and beneficiaries.
Instead, MSK requests that the Department revise the exemption to
require the IB 95-1 Fiduciary to provide its written IB 95-1 Report and
identify the Fronting Insurer after the exemption is granted. However,
in their comment letter, MSKCC offers to provide the Department with a
list of Fronting Insurers that FCI has determined should be considered
and approached as part of the request for proposal (RFP) process before
the Department issues the final exemption, but on a confidential basis
to preserve the integrity of the RFP process. Further, if FCI
subsequently decides not to select a Fronter from the list, they would
provide the Department with 30 days advance notice before selecting the
Fronter to provide the Department with an opportunity to comment or
discuss with MSKCC before the Fronter is engaged.
Department's Response: After considering the applicant's request
and rationale, the Department accepts the Applicant's request to remove
the condition requiring Fiduciary Counselors to provide a written
submission that identifies the Fronting Insurer selected along with
detail on the methodology it used to select the Fronter and how that
methodology, and the Fronter selected, met the requirements of IB 95-1
before the exemption is granted. The Department, instead, has revised
the exemption to remove this requirement entirely. Therefore, Fiduciary
Counselors will not be required to submit anything to the Department
before the exemption is granted. In making this change, the Department
emphasizes that Fiduciary Counselors must follow IB 95-1 and prudently
and loyally select the safest available annuity for the plan
participants and beneficiaries and submit a detailed written report to
the Department regarding the methodology
[[Page 3952]]
the IB 95-1 Fiduciary used to determine that the selected Fronting
Insurer and GAC met the requirements of IB 95-1 no later than 30 days
after the execution of the GAC.
3. Use of Participant Data
Section III(j) of the proposed exemption states that ``neither
MSKCC nor any related entity may use participant or beneficiary-related
data, or information generated by or derived from the Reinsurance
Arrangement in a manner that benefits MSKCC or a related entity.''
MSKCC contends that this condition is too broad and requests that it be
changed to only prohibit MSKCC from using participant data ``for
purposes unrelated to the administration, funding, or security of
retirement benefits (including obligations under the GAC and the
Reinsurance Arrangement).'' MSKCC states that the proposed condition is
too broad because MSKCC benefits by providing retirement benefits to
its employees and retirees and ensuring that benefits are secure and
appropriately administered.
Department's Response: After considering this comment, the
Department accepts MSKCC's requested revision with some modifications
that narrow the scope of MSKCC's requested change. The Department is
limiting the expanded permitted uses of participant data under this
exemption to purposes related to the administration, funding, or
security of the GAC, Reinsurance Arrangement, or Plan. Expanding the
scope of permissible data use to administration, funding, and security
of the GAC, Reinsurance Arrangement, or Plan is appropriate, but
expanding permitted uses to purposes related to the administration,
funding, or security of retirement benefits generally, as requested by
MSKCC, is too broad. Therefore, Section III(j) of this exemption
provides that ``neither MSKCC nor any related entity may use
participant or beneficiary-related data, or information generated by or
derived from the Reinsurance Arrangement for purposes unrelated to the
administration, funding, or security of the GAC, Reinsurance
Arrangement, or Plan.''
The Department notes that this exemption does not permit the use of
participant and beneficiary data in a way that primarily benefits
MSKCC, the Captive, or the Fronting Insurer. Under this exemption,
prohibited uses of participant and beneficiary data include, but are
not limited to, selling the data to third parties, using the data to
cross-sell services, or using the data to target participants and
beneficiaries to attempt to sell them new products or services. MSKCC
did not explain why they would need to use information derived from the
Reinsurance Arrangement for more general purposes. Because the security
of participant data is critically important to the Department, the Plan
and participants and beneficiaries, the Department has construed its
permitted uses as narrowly as possible.
4. Allow MSKCC To Take Dividends From the Captive
Section III(p) of the proposed exemption states that ``MSKCC may
not receive a dividend or any other form of distribution from the
Captive at any point during the Reinsurance Arrangement.'' In its
comment letter, MSKCC requests a revision that would allow it to
receive dividends and distributions from the Captive, provided that
MSKCC would contribute the majority of each such dividend or
distribution as a benefit enhancement to another MSKCC-sponsored
employee benefit plan under the Primary Benefits Test.
Department's Response: The Department declines to make this
requested change because there is no compelling reason to allow MSKCC
to take distributions from the Captive. An essential purpose of this
exemption is to ensure that Plan participants' and beneficiaries'
pension benefits are as secure as possible. This objective is best
achieved by ensuring that the assets formerly held in the Plan's trust
that will be transferred to the Captive as part of the Reinsurance
Arrangement remain in the Captive's reserves where they can be used to
pay the retirement benefits of the participants and beneficiaries of
this Plan. The Department notes that MSKCC does not provide any detail
on the risk impact associated with allowing MSKCC to receive future
distributions from the Captive. Furthermore, it is inappropriate for
participants in another MSKCC-sponsored employee benefit plan to
receive a portion of a dividend taken from the Captive before the
Captive has satisfied all liabilities under the GAC.
The Department also notes that MSKCC has consistently represented
that the Captive will be funded on a break-even basis and that no
excess assets are anticipated at the end of the Reinsurance
Arrangement. If this is the case, then all Plan assets used to fund
participant and beneficiary liabilities should remain in the Captive
where they can be used to pay benefits to the participants and
beneficiaries of this Plan--rather than as distributions to MSKCC and
contributions to another plan.
5. Factual Accuracy
Condition (k) of the proposed exemption provides that ``all the
facts and representations set forth in the Summary of Facts and
Representations must be true and accurate at all times.'' The Applicant
requests that section (k) be modified to state, ``All the material
facts and representations set forth in the Summary of Facts and
Representations (as modified by the clarifications set forth in the
comment letter submitted by the Applicant) must be true and accurate at
all times;''
The Department accepts the Applicant's request to modify Section
(k) in part. Instead of expanding section (k) to incorporate all
modifications noted in the Applicant's comment letter, the Department
will expand Section (k) to incorporate all modifications from the
proposed exemption, as detailed in this final exemption. Section (k)
now states: ``All the material facts and representations set forth in
the Background section of this exemption, including all modifications
from the proposed exemption as detailed in this final exemption, must
be true and accurate at all times[.]''
6. Factual Clarifications
Paragraph 6 of the proposed exemption's Summary of Facts and
Representations states, ``the Plan would purchase the GAC from the
Fronting Insurer by using current Plan assets (including an in-kind
transfer) to pay a one-time premium amount to the Fronting Insurer...
Subsequently, the Fronting Insurer would transfer the premium amount
paid by the Plan to the Captive where it would be held in reserve
within the captive cell (MSK EB) throughout the duration of the
Reinsurance Arrangement.''
MSKCC requests a clarification that the insurance premium and the
reinsurance premium may be paid concurrently and that the Captive is
expected to use the assets received as reinsurance premium to
collateralize its obligations under the Reinsurance Arrangement, in
each case with such modifications as the Fronting Insurer's regulatory,
accounting or commercial considerations may require.
The Department accepts MSKCC's requested clarification but notes
that in its application MSKCC stated that: ``The Fronter will purchase
the reinsurance contract from MSK Insurance through a transfer from the
Fronter to MSK Insurance of cash and, through an in-kind transfer,
assets previously transferred from the Pension Plan.''
[[Page 3953]]
Paragraph 8 of the proposed exemption's Summary of Facts and
Representations states that ``as part of the Reinsurance Arrangement,
the Captive would be collateralized by MSKCC, and all collateral will
be separate and apart from the Plan assets used to purchase the GAC.''
Further, the second sentence of paragraph 8 states that ``collateral
would be distinct from the reserves'' and that ``pursuant to the GAC,
MSKCC would establish a collateral account that the Fronting Insurer
can access: (1) in the event the Captive fails to make a required
quarterly payment to the Fronting Insurer; or (2) to reduce the
financial risk that would arise if, for example, the Captive is holding
too large a portion of the reserves in illiquid investments.'' Finally,
the fourth sentence of paragraph 8 states that ``the collateral
requirements will be determined by the Fronting Insurer and will be
based on the reserve requirements mandated by the State of Vermont.''
MSKCC requests the following clarifications. First, to further
support the Captive, MSKCC will capitalize the Captive in accordance
with the requirements of the State of Vermont and will provide a
guarantee for the benefit of the Fronting Insurer with respect to the
Captive's obligations, and those assets will be separate and apart from
the Plan assets used to purchase the GAC. Second, the Fronter will be
required to carry statutory reserves on its financial statements in
such amounts as the insurance law in its state of domicile may require,
and the collateral requirements will be based on those reserve
requirements. Third, the Fronting Insurer will have the right to access
the collateral assets in accordance with the Reinsurance Arrangement.
Collateral assets will back the Captive's reserves but will not be
distinct from them. In addition, other assets of the Captive will
support the Reinsurance Arrangement.
Paragraph 6 of the proposed exemption states, ``[t]he Fronting
Insurer would assume full responsibility for benefit obligations to
participants and beneficiaries, without conditions or caveats, and the
Captive would assume the reinsurance risk.'' However, paragraph 6 also
states that ``. . . both the Fronting Insurer and the Captive would
assume full responsibility for making pension benefit payments to
participants and beneficiaries . . . the Fronting Insurer and the
Captive would remain 100 percent liable for making benefit payments to
participants and beneficiaries.''
The Applicant states that, while it is correct that both the
Fronting Insurer and the Captive are fully obligated to satisfy the
benefit obligations, paragraph 6 of the Summary requires a technical
modification in its description of the mechanism of those obligations.
In this regard, (a) during the Buy-In Phase, the Fronting Insurer makes
payments to the Plan; and (b) during the Buy-Out Phase, the Fronting
Insurer makes benefit payments directly to participants and
beneficiaries. During both phases, the Captive is fully obligated to
make payments to the Fronting Insurer under the Reinsurance
Arrangement. The Captive, thus, is fully obligated to satisfy the
benefit obligations, but the mechanism of that obligation flows through
the Fronting Insurer, rather than directly to participants and
beneficiaries of the Plan.
Department's Response: The Department accepts MSKCC's factual
clarifications.
7. Scope of Exemptive Relief
Section II of the proposed exemption would grant relief only under
ERISA sections 406(a)(1)(D) and 406(b)(1), (2), and (3) and the
parallel provisions in Code section 4975(c)(1)(D), (E), and (F). MSKCC
states that it is plausible that certain aspects of the Reinsurance
Arrangement could constitute a prohibited transaction under ERISA
sections 406(a)(1)(A), (B), and (C) (and the parallel provisions under
Code Sec. 4975). MSKCC requests that either (1) the exemption be
expanded to provide relief under 406(a)(1)(A), (B), and (C), or (2)
include an explanation from the Department that, in its view, the
Reinsurance Arrangement (including the additional aspects to such
arrangement described above) would not result in prohibited
transactions under ERISA sections 406(a)(1)(A), (B), and (C) (and the
parallel provisions under Code Sec. 4975), and thus no relief is needed
for those sections.
Department's Response: The Department agrees with the Applicant's
request to expand the scope of relief under the exemption. The
exemption now provides relief under ERISA sections 406(a)(1)(A), (B),
and (D) and 406(b)(1), (2), and (3) and the parallel provisions of the
Code. However, with respect to ERISA section 406(a)(1)(C), the
Department expects MSKCC and the Captive to comply with the statutory
exemption codified in ERISA section 408(b)(2) (and the regulations
thereunder) for the provision of services to the Plan.\15\
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\15\ 29 CFR 2550.408(b)(2).
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II. Comments From Participants
1. Why are participants and beneficiaries not receiving more?
In their comment letters, several participants asked why they would
not receive more than 51 percent of the savings MSKCC would realize
through the Reinsurance Arrangement. One participant asked, ``how was
this number arrived at? Why couldn't or shouldn't the plan participants
receive a higher percentage? Would MSKCC still pursue this plan if
participants were to receive 90% of the benefit?''
Department's Response: The Department has crafted this exemption to
ensure that: (1) plan participants and beneficiaries receive a greater
financial benefit from the transaction than any financial savings or
benefits accruing to MSKCC; and (2) the participants and beneficiaries
are financially better off than they would have been in the absence of
an exemption. The Department is granting this exemption, in large part,
because the exemption meets these criteria. Moreover, the Department
has no basis for believing that MSKCC would have agreed to give even
greater benefits to the plan, its participants, and beneficiaries, much
less 90 percent of all the cost savings associated with the captive
arrangement.
The Department continually requested that MSKCC increase the
benefit enhancement provided under the exemption and the estimated 5.55
percent benefit increase represents a substantial benefit enhancement
for the Plan's participants and beneficiaries that will provide an
estimated 5.55 percent increase in their monthly retirement annuity for
the rest of their lives. As noted above, this benefit increase will
result in an estimated $66,408,000 of additional benefits for
participants and beneficiaries which will strengthen retirement
security for these individuals. The Department also notes that this
estimated 5.55 percent increase is consistent with the Primary Benefits
Test used by the Department in its welfare benefit plan captive
reinsurance cases.
Moreover, the permanent 5.55 percent benefit increase is
substantially more than MSKCC proposed to provide participants and
beneficiaries when it submitted its exemption application to the
Department. MSKCC initially proposed no benefit enhancements at all,
arguing that the entirety of the financial benefit derived from using
the Captive would inure to the Plan. The Department, however, pushed
back on this position and argued that a discount on the purchase price
of the GAC would
[[Page 3954]]
financially benefit MSKCC, as the plan sponsor, and not the Plan
because the participants' and beneficiaries,' whose monthly pension
benefits are set according to the Plan's benefit formula and would not
be increased as a result of a discount to the group annuity purchase
price.
MSKCC subsequently amended its application to provide for the
following two benefit enhancements: (1) a retirement planning program
available upon election for participants and beneficiaries that would
cost MSKCC $300 per election; and (2) an additional $2,000 incidental
death benefit under the plan. The Department told MSKCC that these
enhancements were insufficient for the Department to make its finding
under ERISA section 408(a) and that it would not move forward with the
exemption application unless MSKCC agreed to provide participants and
beneficiaries with the majority of the financial benefits derived from
using the Captive.
Finally, the Department notes that absent this exemption,
participants and beneficiaries would not receive any benefit increase
when MSKCC terminates the plan and purchases a group annuity.
2. Can the Fronting Insurer sell the GAC to another insurer?
One participant asked whether the Fronting Insurer would be able to
transfer or sell the GAC after the exemption is granted. The Department
posed this question to MSKCC and received the following response: ``The
Fronting Insurer will commit irrevocably to provide the benefits under
the terms of the contract and cannot sell the annuity to another
insurance company. If the fronting insurer is itself bought by another
insurance company or merges with another insurance company, the
successor insurance company would also be bound by the contract's
obligations.''
As a new condition of this exemption, the group annuity contract
between the Fronting Insurer and the Plan must include language that
unequivocally prohibits the Fronting Insurer from selling or otherwise
transferring the GAC to another insurer. The Department notes that the
appointment of an independent IB 95-1 Fiduciary to prudently select the
Fronting Insurer and GAC is an essential part of this exemption and
allowing the Fronter to sell the GAC to another insurer after the
Plan's acquisition of the GAC would not be protective of the
participants and beneficiaries because the acquiring insurer might not
meet the standards of IB 95-1.
3. Will a lump sum distribution option be provided under the GAC?
Two participants asked whether MSKCC will retain the lump sum
distribution option currently provided under the Plan in the GAC. The
Department referred this question to MKSCC, and they confirmed that the
lump sum distribution option will be retained in the GAC. To ensure
this is the case, the Department has added a new condition to the
exemption that requires the GAC to include a lump sum distribution
option for all participants and beneficiaries who have the right to
receive a lump sum distribution under the terms of the Plan.
III. Final Independent Fiduciary Report
The Department has added a new Section III(i)(4) to provide
specific requirements for the final Independent Fiduciary Report. In
its final Independent Fiduciary Report, the Independent Fiduciary must
determine that the plan termination, transfer of assets, and new
contractual arrangements accord with all conditions of this exemption
at the time of termination, and that it remains the case that the
primary benefits of this arrangement are expected to go to the Plan's
participants and beneficiaries for the entire duration of the
arrangement. The Independent Fiduciary must also represent that MSKCC
has not managed plan assets in a way that results in MSKCC receiving a
greater benefit from this arrangement than plan participants and
beneficiaries.
The complete application file (D-12073) 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 July 9, 2024, at 89 FR 56422.
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 but not limited to 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 their 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 the Plan and the Plan's
participants and beneficiaries; and (c) protective of the rights of the
Plan and the Plan's participants and beneficiaries.
(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 a
transaction is subject to an administrative or statutory exemption is
not dispositive for determining whether the transaction is in fact a
prohibited transaction.
(4) The availability of this exemption is subject to 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 and are true at all times.
Accordingly, after considering the entire record developed in
connection with the Applicant's exemption application, the Department
has determined to grant the following exemption under the authority of
ERISA section 408(a) in accordance with the Department's exemption
procedures set forth in 29 CFR part 2570, subpart B: \16\
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\16\ 76 FR 66637, 66644 (October 27, 2011).
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Exemption
Section I. Definitions
(a) An ``affiliate'' of MSKCC, MSK US, or MSK EB includes: (1) any
person or entity who controls MSKCC, MSK US, or MSK EB or is controlled
by or under common control with MSKCC, MSK US, or MSK EB; (2) any
officer, director, employee, relative, or partner with respect to
MSKCC, MSK US, or MSK EB; and (3) any corporation or partnership of
which a person described in (2) above in this paragraph is an officer,
director, partner, or employee;
(b) The term ``Benefit Enhancement'' means the benefit increase, as
determined by the Independent Fiduciary based upon the Primary Benefits
Test, that will be applied equally to all participants and
beneficiaries across the Plan and last throughout the duration of the
group annuity contract (the GAC) and Reinsurance Arrangement with no
corresponding offsets or reductions;
[[Page 3955]]
(c) The term ``Captive'' means MSK Employee Benefits IC, Inc., a
segregated cell within MSK Insurance US, Inc., a captive insurance and
reinsurance subsidiary that is wholly-owned by MSKCC and domiciled in
the state of Vermont. MSK Employee Benefits IC, Inc. will be used to
reinsure the risks related to the Reinsurance Arrangement;
(d) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual; and
(e) The term ``Independent Fiduciary'' means a person who:
(1) Is not MSKCC or an affiliate of MSKCC, or the Captive and does
not hold an ownership interest in MSKCC, the Captive, or their
affiliates;
(2) Was not a fiduciary with respect to the Plan before its
appointment to serve as the Independent Fiduciary;
(3) Has acknowledged in writing that:
(i) It is a fiduciary and has agreed not to participate in any
decision with respect to any transaction in which it has an interest
that might affect its best judgment as a fiduciary; and
(ii) Has appropriate technical training or experience to perform
the services contemplated by this exemption;
(4) For purposes of this definition, no organization or individual
may serve as Independent Fiduciary for any fiscal year if the gross
income received by such organization or individual from MSKCC, the
Captive, or their affiliates for that fiscal year exceeds two percent
of such organization's or individual's gross income from all sources
for the prior fiscal year. This provision also applies to a partnership
or corporation of which such organization or individual is an officer,
director, or 10 percent or more partner or shareholder and includes as
gross income amounts received as compensation for services provided as
an independent fiduciary under any prohibited transaction exemption
granted by the Department;
(5) No organization or individual that is an Independent Fiduciary
and no partnership or corporation of which such organization or
individual is an officer, director, or ten percent or more partner or
shareholder may acquire any property from, sell any property to, or
borrow any funds from MSKCC, the Captive, or their affiliates while the
individual serves as an Independent Fiduciary. This prohibition will
continue for a period of six months after the party ceases to be an
Independent Fiduciary and/or the Independent Fiduciary negotiates any
transaction on behalf of the Plan during the period that the
organization or individual serves as an Independent Fiduciary; and
(6) In the event a successor Independent Fiduciary is appointed to
represent the interests of the Plan with respect to the subject
transaction, no time should elapse between the resignation or
termination of the former Independent Fiduciary and the appointment of
the successor Independent Fiduciary.
Section II. Covered Transactions
This exemption provides relief from the prohibited transactions
provisions of ERISA sections 406(a)(1)(A), (B), and (D), and 406(b)(1),
(b)(2), and (b)(3), and the excise tax imposed by Code section 4975(a)
and (b) (due to the operation of parallel prohibited transaction
provisions contained in Code section 4975(c)(1) (A), (B), (D), (E), and
(F)) with respect to: (1) the reinsurance of risks; and (2) the receipt
of a premium by the Captive in connection with a single premium group
insurance contract sold by an unrelated fronting insurer (the Fronting
Insurer) to provide pension annuities to Plan participants and
beneficiaries. To receive this relief, the conditions in Section III
must be met in conformance with the definitions in Section I.
Section III. Conditions
(a) MSKCC must amend the Plan document to provide a universal
benefit increase to all participants and beneficiaries that will apply
immediately once the GAC is purchased and will continue with no
reduction or offsets for the remainder of the participants and
beneficiaries' lives (the Benefit Enhancement). The additional benefit
provided by the Benefit Enhancement to participants and beneficiaries
must be greater than 51 percent of the total benefit, including cost
savings, derived by MSKCC from the Reinsurance Arrangement (the Primary
Benefits Test). In addition, MSKCC must include an additional
$1,968,000 in the GAC as a second-layer benefit increase that will
further permanently increase the monthly pension benefit of all
participants and beneficiaries covered by the Plan. This second layer
benefit enhancement represents the present value of the expected
Independent Fiduciary's fees over the projected life of the GAC;
(b) Following the Plan's purchase of the GAC from the Fronting
Insurer and the consummation of the Reinsurance Arrangement between the
Fronting Insurer and the Captive, the Independent Fiduciary must
prudently and loyally determine the Primary Benefits Test has been met.
The Independent Fiduciary must submit its determination in writing to
the Department within 30 days after the GAC is entered into. In this
written determination, the Independent Fiduciary must confirm the
actual cost savings associated with the Reinsurance Arrangement by
obtaining documentation from the Fronting Insurer that compares the
cost to purchase the GAC without the Captive in place to the cost to
purchase the GAC with the Captive in place. The Independent Fiduciary
must include this documentation from the Fronting Insurer with its
written determination to the Department;
(c) The Captive or MSK US Insurance US, Inc. must:
(1) Be a party in interest with respect to the Plan based on an
affiliation with MSKCC that is described in ERISA section 3(14)(G);
(2) Be licensed to sell insurance or conduct reinsurance operations
in Vermont;
(3) Have obtained a Certificate of Authority from the Insurance
Commissioner of Vermont to transact business as a captive insurance
company and such certificate must not have been revoked or suspended;
(4) Have undergone a financial examination (within the meaning of
the law of its domiciliary State, Vermont) by the Insurance
Commissioner of Vermont within five years before the end of the year
preceding the year in which the reinsurance transaction occurred;
(5) Have undergone, and continue to undergo, an examination by an
independent certified public accountant for its last completed taxable
year immediately before the taxable year of the Reinsurance Arrangement
covered by this exemption; and
(6) Be licensed to conduct reinsurance transactions by a state
whose law requires an actuarial review of reserves to be conducted
annually by an independent firm of actuaries and reported to the
appropriate regulatory authority;
(d) The Plan must pay no commissions with respect to the purchase
of the GAC or the Reinsurance Arrangement;
(e)(1) The Fronting Insurer and GAC must be selected by Fiduciary
Counselors, an independent fiduciary to the Plan, in compliance with
the Department's Interpretive Bulletin 95-1 (29 CFR 2509-95-1). Within
30 days after the GAC is entered into, Fiduciary Counselors must submit
a written report to the Department that identifies the Fronting Insurer
selected, details the methodology used to select the Fronting Insurer,
and explains how Fiduciary Counselors determined that the selected
Fronting Insurer and GAC meet the
[[Page 3956]]
requirements of IB 95-1. Fiduciary Counselors must also represent in
writing to the Department that it would have been consistent with IB
95-1 to select the Fronting Insurer as the insurer for a final
termination buy-out annuity had MSKCC adopted that approach. To meet
its fiduciary responsibility owed to the Plan's participants and
beneficiaries to select and purchase the ``safest available annuity,''
before selecting the Fronting Insurer, Fiduciary Counselors must
evaluate such insurer's claims-paying ability and creditworthiness in
full compliance with guidance provided in the Department's Interpretive
Bulletin 95-1;
(f) (1) The Reinsurance Arrangement between MSK US and the Fronting
Insurer must be indemnity insurance only and must not relieve the
Fronting Insurer from any responsibility or liability to the Plan's
participants and beneficiaries, including any liability that would
result if MSK US fails to meet any of its contractual obligations to
the Fronting Insurer or any successor Fronting Insurer under the
Reinsurance Arrangement;
(2) The Fronting Insurer must have a direct contractual
relationship with the Plan during the Buy-In phase of the GAC and with
the Plan's participants and beneficiaries after MSKCC exercises the
Conversion Option under the GAC when it terminates the Plan, without
any caveats, contingencies, or conditions that would relieve or limit
the Fronting Insurer's contractual obligation to pay benefits to the
Plan's participants and beneficiaries in accordance with the Plan and
the terms of this exemption;
(g) MSKCC must not offset or reduce any benefits provided to Plan
participants and beneficiaries in relation to its implementation of the
Benefit Enhancement at any time. In this regard, MSKCC must not
implement any benefit cuts or offsets of any kind to the benefits the
Plan provides to any Plan participant or beneficiary;
(h) The Independent Fiduciary must:
(1) In compliance with its fiduciary obligations of prudence and
loyalty under ERISA sections 404(a)(1)(A) and (B): (i) review the
Reinsurance Arrangement and the terms of the exemption; (ii) obtain and
review all current objective, reliable, third-party documentation
necessary to make the determinations required of the Independent
Fiduciary by the exemption; and (iii) confirm in writing that all of
the exemption's terms and conditions have been met (or, due to timing
requirements, can reasonably be expected to be met consistent with the
terms of the exemption) and send this confirmation to the Department's
Office of Exemption Determinations not later than 30 days after the
Captive enters into the Reinsurance Arrangement. In this written
report, the Independent Fiduciary must also confirm that the Fronting
Insurer and GAC selected, and the methodology used by Fiduciary
Counselors to make the selection, meet the requirements of IB 95-1 and
that it would have been consistent with IB 95-1 to select the Fronting
Insurer as the insurer for a final termination buy-out annuity had
MSKCC adopted that approach;
(2) Approve the Reinsurance Arrangement in advance and ensure that
the Reinsurance Arrangement is in the interest of the Plan's
participants and beneficiaries and protective of the Plan's
participants and beneficiaries;
(3) As long as the Plan remains active, monitor, enforce, and
ensure compliance with all conditions of this exemption in accordance
with its obligations of prudence and loyalty under ERISA sections
404(a)(1)(A) and (B), including all conditions and obligations imposed
on any party dealing with the Plan, throughout the period during which
the Captive's assets are directly or indirectly used in connection with
a transaction covered by this exemption;
(4) Represent and protect the interests of the participants and
beneficiaries of the Plan when the plan is active during the Buy-In
Phase to ensure they receive everything that they are entitled to
receive under this exemption, the terms of the Plan, and the GAC;
(5) Monitor and ensure that any assets that remain in the Plan
during the Buy-In Phase of the Reinsurance Arrangement are managed and
used exclusively to provide benefits to Plan participants and
beneficiaries and to defray reasonable expenses of administering the
Plan in compliance with ERISA sections 403(c)(1) and 404(a)(1)(A);
(6) Report any instance of non-compliance immediately to the
Department's Office of Exemption Determinations until the Plan is
terminated;
(7) Take all appropriate actions to safeguard the interests of the
Plan and its participants and beneficiaries until the Plan is
terminated; and
(8) Review all contracts pertaining to the Reinsurance Arrangement,
and any renewals of such contracts, to determine whether the
requirements of this exemption and the terms of Benefit Enhancement
continue to be satisfied until the Plan is terminated;
(i)(1) The Independent Fiduciary must submit annual Independent
Fiduciary Reports to the Department's Office of Exemption
Determinations as long as the plan remains active, certifying under
penalty of perjury whether each term and condition of the exemption has
been met over the applicable period. 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 would begin on the effective
date of the exemption grant); and submitted to the Department's Office
of Exemption Determinations within 60 days thereafter;
(2) In preparing the Independent Fiduciary Report, the Independent
Fiduciary must:
(i) Review the Captive's annual audit and actuarial reports as
submitted to the Vermont Department of Financial Regulation (Vermont
DFR);
(ii) Review any Certificate of Good Standing received by the
Captive;
(iii) Review any Exam Report completed by the Vermont DRF and
include a detailed summary of the Exam Report;
(iv) Confirm that MSKCC has not reduced or offset any benefits in
relation to its implementation of the Benefit Enhancement; and
(v) Confirm that MSKCC has not reduced the Benefit Enhancement
amount at any point during the year covered.
(3) The Independent Fiduciary must confirm in each Report that the
Primary Benefits Test was met for the covered year. In this regard, the
Independent Fiduciary must determine the value of the Benefit
Enhancement and the total value of the Reinsurance Arrangement to
MSKCC, including cost savings, and confirm that MSKCC has not received
any additional financial benefit that the Independent Fiduciary did not
account for when it previously used the Primary Benefits Test to derive
the Benefit Enhancement amount;
(4) In its final independent fiduciary report, the Independent
Fiduciary must determine that the plan termination, transfer of assets,
and new contractual arrangements accord with all conditions of this
exemption at the time of termination, and that it remains the case that
the primary benefits of this arrangement are expected to go to the plan
for the entire duration of the arrangement. The Independent Fiduciary
must also represent that MSKCC has not managed plan assets in a way
that results in MSKCC receiving a greater benefit from this arrangement
than plan participants and beneficiaries;
(j) Neither MSKCC nor any related entity may use participant or
beneficiary-related data or information
[[Page 3957]]
generated by or derived from the Reinsurance Arrangement for purposes
unrelated to the administration, funding, or security of the GAC,
Reinsurance Arrangement, or Plan;
(k) All the material facts and representations set forth in the
Background section of this exemption, including all modifications from
the proposed exemption as detailed in this final exemption, must be
true and accurate at all times;
(l) No party related to this exemption request has or will
indemnify the Independent Fiduciary or the IB 95-1 Independent
Fiduciary, in whole or in part, for negligence and/or for any violation
of state or federal law that may be attributable to the Independent
Fiduciary's or IB 95-1 Independent Fiduciary's performance of its
duties in connection with the Reinsurance Arrangement. In addition, no
contract or instrument may purport to waive any liability under state
or federal law for any such violations;
(m) MSKCC must provide the Department's Office of Exemption
Determinations with all Exam Reports issued by the State of Vermont
throughout the duration of the Reinsurance Arrangement within 30 days
after such Exam Report is received;
(n) The Captive must request a Certificate of Good Standing from
the State of Vermont on an annual basis;
(o) MSKCC must notify the Department's Office of Exemption
Determinations if there is any change in the Captive's business plan,
auditor, or the composition of its board of directors;
(p) MSKCC may not receive a dividend or any other form of
distribution from the Captive at any point during the Reinsurance
Arrangement;
(q) MSKCC and the Captive must maintain all the records necessary
to demonstrate that the conditions of this exemption have been met for
a period of six years from the date of each record. MSKCC must provide
these records to the Department's Office of Exemption Determinations
within 30 days from the date of a request by the Department;
(r) MSKCC must provide a Parental Guarantee to the Captive and
provide cash as needed if the Captive's general and separate account
asset balances have been extinguished;
(s) The Captive must invest the reserves in accordance with the
regulations and under the supervision of the State of Vermont;
(t) MSKCC must amend the Plan document to memorialize the Benefit
Enhancement and provide a copy of the amended plan document to the
Department's Office of Exemption Determinations no later than 30 days
after the date the Captive enters into the Reinsurance Arrangement;
(u) After the Buy-In phase for the Reinsurance Arrangement is
completed and MSKCC exercises the Conversion Option, MSKCC will
terminate the Plan in compliance with all applicable Code and ERISA
requirements;
(v) MSKCC must notify the Department of any change in the
Independent Fiduciary no later than 30 days after the engagement of a
substitute or subsequent Independent Fiduciary and must explain the
substitution or change, including a description of any material
disputes between the terminated Independent Fiduciary and MSKCC;
(w) Once the Benefit Enhancement percentage amount is set (in
conformity with the Primary Benefits Test), MSKCC may not reduce that
Benefit Enhancement percentage amount at any point;
(x) The GAC between the Fronting Insurer and the Plan must include
language that unequivocally prohibits the Fronting Insurer from selling
or otherwise transferring the GAC to another insurer; and
(y) The GAC must include a lump sum distribution option for all
participants and beneficiaries who have the right to receive a lump sum
distribution under the Plan.
Effective Date: This exemption is in effect on January 15, 2025.
Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2025-00813 Filed 1-14-25; 8:45 am]
BILLING CODE 4510-29-P
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</html>Indexed from Federal Register on January 15, 2025.
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.