DOL Issues "Plan Asset" Advice for Insurance Company Investment Transactions

By George H. Bostick, Daniel M. Buchner, Adam B. Cohen, Ian A. Herbert, Carol T. McClarnon, Alice Murtos, Robert J. Neis, W. Mark Smith, William J. Walderman, Carol A. Weiser, Brendan M. Wilson and Walter H. Wingfield

In Advisory Opinion 2005-19A, issued August 26, 2005, the Department of Labor opined on the treatment under the ERISA "plan asset" regulations of investments held by insurance company subsidiaries. The Advisory Opinion considers the case of direct or indirect subsidiaries constituted for legal or business reasons to make or hold investments, where:

• The insurance company’s equity interest in the subsidiary is allocated to its general account;

• The assets of the subsidiary are available to the parent insurance company’s creditors in the event of insolvency;

• The assets of the subsidiary are subject to state limitations on investments by insurance companies; and

• The subsidiary is disregarded for both federal and state tax purposes and for GAAP purposes, and is consolidated with the parent insurance company.

In these circumstances, DOL concluded that, for purposes of the ERISA plan asset regulations, the subsidiary is disregarded and its assets treated as held by the insurance company’s general account, provided that the insurance company wholly owns the subsidiary during the period of the subsidiary’s existence. In particular, to determine whether the subsidiary’s equity interest in an investment entity constitutes "significant participation" (25% or more) by benefit plan investors in that investment entity – which could subject the operations of the investment entity to ERISA fiduciary requirements – that equity interest is treated as held by the general account.

While its ultimate conclusion is somewhat narrow, the Advisory Opinion and its reasoning should be useful:

• DOL ratified and elaborated a legal point made in a 1995 preamble to a prohibited transaction exemption – that where the general account is treated as holding "plan assets," most typically by issuing contracts that are not "guaranteed benefit policies" under ERISA section 401(b), only the proportion of the general account reflecting such "plan assets" is treated as investment by benefit plan investors under the significant participation test. For example, if 10% of the general account constitutes plan assets, and its wholly-owned subsidiary owns 50% of an investment entity, then only 5% of that interest in the investment entity is treated as held by benefit plan investors under the significant participation test.

• On the basis of both that point and its ultimate conclusion, the Advisory Opinion should clarify the "plan asset" and "significant participation" representations an insurance company or its subsidiary is often required to give in investment transactions.

© 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.