The Ninth Circuit U.S. Court
of Appeals has ruled that ERISA's hold-in-trust requirement does not
necessitate the creation of a document including express words of
trust. In Barboza v. California Association of Professional
Firefighters, the court ruled that a long-term disability
("LTD") plan did not breach its duty to hold plan assets in
trust by depositing participant contributions into a checking account
that was used exclusively to pay benefits and plan expenses.
Background. The plaintiff was a participant in an
ERISA-covered LTD plan that received its funding exclusively from
participants and paid benefits solely from plan assets. Under the
plan, participants' monthly contributions were deposited into a
checking account that was used by the plan's third party
administrator ("TPA") to pay LTD benefits and plan
expenses. The plan document required the plan sponsor to supervise
the TPA. Under the plan document, all funds, property, and additional
assets held by the plan were to be maintained exclusively in the name
of the plan sponsor for the benefit of the participants.
In 2008, the plaintiff sued
the plan sponsor claiming wrongful withholding of LTD benefits. While
that action was ongoing, the plaintiff also filed a lawsuit against
the plan sponsor alleging it violated ERISA by failing to hold plan
assets in trust.
"Hold-in-Trust" Requirement. ERISA provides that "all assets of an
employee benefit plan shall be held in trust by one or more
trustees," and that "such trustee or trustees shall be
either named in the trust instrument or in the plan instrument ... or
appointed by a person who is a named fiduciary." However, ERISA
does not define the term "trust," "trustee," or
Ninth Circuit. After reviewing the history of common law
trusts, the Ninth Circuit concluded that ERISA's
"hold-in-trust" requirement only requires that a person
must hold legal title to the assets of an employee benefit plan with
the intent to deal with the plan's assets solely for the benefit of
plan participants and beneficiaries. The Ninth Circuit held that the
plan sponsor had satisfied ERISA's trust requirement because the plan
document required the plan sponsor to hold legal title to the plan's
assets for the benefit of plan participants.
The plaintiff also argued
that the plan sponsor failed to maintain exclusive authority over the
plan assets because the TPA was administering the plan. The Ninth
Circuit rejected this argument because the plan document required the
plan sponsor to supervise the TPA.
Employer Takeaways from Barboza. Despite the Ninth Circuit's conclusion in Barboza,
it is strongly advised that in a circumstance where ERISA's trust
requirement must be met, a plan's assets be held by a trustee
pursuant to a formal trust instrument. Among other potential issues,
there could be adverse tax consequences associated with plan assets
being held under an informal trust arrangement.