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Attorney Forwarded Background Materials on Employee Benefits Trusts

Attorney Forwarded Background Materials on Employee Benefits Trusts

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=============== SUMMARY ===============

 

C. Frederick Oliphant of Miller & Chevalier, Washington, recently sent Treasury some background materials for a March 9, 2000, meeting on the classification of employee benefit trusts as domestic or foreign. In the materials, Oliphant uses examples involving a foreign corporation with a U.S. pension plan.

 

=============== FULL TEXT ===============

 

BACKGROUND INFORMATION FOR MEETING ON MARCH 9, 2000

 

 

Organization of Companies and Plans

 

 

o The Companies are foreign-owned corporations sponsoring tax-

 

qualified retirement and 401(k) plans for U.S. workers. The trusts

 

under these plans were treated as domestic trusts under prior law.

 

 

o Company #1 sponsors a retirement plan and is a second-tier

 

subsidiary of a foreign corporation. With the exception of one

 

individual, foreign nationals (Frenchmen, Italians,

 

Englishmen, and Belgians) comprise the current members of the

 

Board of Directors of Company #1. The Board has delegated most

 

functions of plan administration of its retirement plan to a

 

Pension Committee comprised entirely of U.S. citizens. (The

 

Plan document does not currently require U.S. citizenship as a

 

condition to being eligible to serve on the Pension

 

Committee.) The Board appoints the Pension Committee, thereby

 

individually becoming fiduciaries of the plan for ERISA

 

purposes.

 

 

By delegation from the Board, the Pension Committee can

 

appoint and remove the Trustee, hire an investment advisor,

 

direct investments, and determine the amount of benefits. The

 

President of Company #1 (currently a U.S. citizen) has the

 

authority to amend the plan, unless the amendment would

 

substantially increase the annual cost of benefits, in which

 

case the Board must approve the amendment. Additionally, if an

 

amendment would affect the qualified status of the plan or

 

extend plan benefits to new locations, participating

 

employers, or classifications of employees, the Pension

 

Committee or the Board must recommend or approve the

 

amendment. The Board also retains the rights to terminate or

 

merge the plan. Additionally, the Board has the right to

 

rescind the delegation of its authority to the Pension

 

Committee at any time.

 

 

The assets of the plan are held in what would otherwise be

 

thought of as a U.S. trust. The assets are in the U.S. and the

 

trustee is a U.S. corporation. Other plan fiduciaries are U.S.

 

fiduciaries.

 

 

o Company #2 sponsors a savings plan. Like Company #1, Company

 

#2 is a second-tier subsidiary of the same foreign

 

corporation. Company #2 is the plan administrator of the

 

savings plan. Again, with the exception of one person, foreign

 

individuals comprise the Board of Directors of Company #2,

 

although they are not necessarily the same individuals who

 

comprise the Company #1 Board. In all other respects, the

 

facts concerning the administration of the Company #2 plan

 

mirror the facts concerning the administration of the Company

 

#1 plan, except that the Company #2 Board appointed and

 

delegated functions to a Company #2 Pension Committee and the

 

Company #2 President. The Company #2 plan uses the same

 

trustee as the Company #1 plan.

 

 

o Two other U.S. controlled group subsidiaries of the foreign

 

parent corporation participate in the Company #2 plan. The

 

Boards of these subsidiaries are comprised entirely of foreign

 

persons. These persons do not have any direct powers over the

 

Company #2 plan, but they must approve participation in the

 

plan for their locations and classifications of employees. The

 

adoption agreements signed by these two entities expressly

 

delegate complete authority for plan design and plan

 

administration to Company #2.

 

 

Companies' Response to Foreign Trust Regulations

 

 

o Foreign trust regulations promulgated by the Secretary of the

 

Treasury on February 2, 1999 created uncertainty with regard

 

to the application of the regulations' "control" test to tax-

 

qualified employee benefit plans. The regulations provide that

 

a qualified trust described in Code section 401(a) will be

 

deemed to satisfy the "control" test if "the United States

 

fiduciaries control all the substantial decisions made by

 

trustees or fiduciaries." The regulations do not define

 

"fiduciaries" for these purposes.

 

 

o In the case of the tax-qualified plans sponsored by the

 

Companies, a number of the important decisions with respect to

 

these plans are made by the Companies and by their Boards of

 

Directors -- see above. ERISA would characterize some of these

 

decisions as decisions made in a fiduciary capacity.

 

 

o In these circumstances, it is not clear whether the presence

 

of foreign nationals on the Companies' Boards adversely

 

affects the application of the "control" test to the trusts

 

under the respective plans. The foreign trust regulations

 

indicate that a U.S. corporation is a U.S. person, regardless

 

of whether its shareholders are foreign persons. The

 

regulations are silent, however, as to the effect of having

 

foreign directors exercising power on behalf of a domestic

 

corporation.

 

 

o The regulations provided for a grandfather election with

 

respect to trusts that existed as of August 19, 1996, and were

 

treated as domestic trusts under prior law. The Companies

 

filed grandfather elections with respect to the trusts for

 

their qualified plans in view of the uncertainty with respect

 

to the application of the foreign trust regulations.

 

 

o The election is good only so long as it is not terminated. The

 

regulations provide that the election will terminate if

 

changes are made to the trust that result in the trust no

 

longer having any reasonable basis for claiming domestic trust

 

status under prior law. The regulations are not entirely clear

 

as to what changes will be taken into account for these

 

purposes, and, more generally, whether there is a point at

 

which extensive changes to a trust can result in the trust

 

being treated as a new trust that is ineligible for

 

grandfather protection.

 

 

Pending Issues for Companies

 

 

o Plan changes in 2000 will force the Companies to consider the

 

application of the foreign trust regulations to its plans very

 

carefully.

 

 

o The Company #1 plan presently has union and non-union

 

participants. Company #1 wishes to change the formula for the

 

company match for non-union participants. Although this could

 

be done in the context of one plan document, Company #1 does

 

not wish to make the richer benefit formula available to the

 

union. Therefore, Company #1 desires to split the plan into

 

two mirror plans and then to amend the non-union plan. Can

 

Company #1 create a new trust for one of these plans without

 

violating the domestic trust requirements? Would changes to

 

the administrative structure of the plans be required to

 

assure domestic trust status for the plans? In the

 

alternative, can Company #1 amend the trust under the plan to

 

create a master trust for the two plans without losing the

 

protection of the grandfather election for the trust? Would

 

such changes to the trust and the related plan be so

 

substantial as to cause a de facto termination of the

 

grandfather election? Company #1 will need to take action by

 

April 1, 2000.

 

 

o By June 1, 2000, Company #2 needs to create a new money

 

purchase plan with a thrift feature for union employees of a

 

newly acquired location in Rhode Island. The new plan was

 

collectively bargained in exchange for withdrawal from a

 

multiemployer plan under prior ownership. Normally, Company #2

 

would create a new trust for the new plan. How would the plan

 

document and plan administration need to be structured to

 

comply with the domestic trust requirements? In the

 

alternative, can the trust for the Company #2 plan be

 

converted to a master trust without a de facto termination of

 

the grandfather election for the trust? This would require

 

placing the assets for very different plans -- the savings

 

plan and the new money purchase plan -- into the same master

 

trust, something that may not be customary.

 

 

The Organization for International Investment (OFII) is a Washington DC-based association representing the US subsidiaries of overseas parent companies. OFII's member companies range from medium- sized enterprises to some of the largest firms in the United States. OFII's members employ hundreds of thousands of workers in thousands of plants and locations throughout America. OFII's mandate is to explain to policymakers and the public the positive economic contributions its members make to the US economy and to ensure that US subsidiaries receive nondiscriminatory treatment under US federal and state law.

Members

ABB, Inc. ACE INA Holdings, Inc. AEGON USA AirTouch Communications Akzo America, Inc. Alcan Aluminum Corporation Allied Domecq Alusuisse-Lonza America, Inc. AstraZeneca Pharmaceuticals Austin Nichols & Co., Inc. Aventis Barclays Capital Barrick Goldstrike Mines, Inc. BASF Corporation BATUS Inc. Boehringer Ingelheim Corporation BP Amoco The Broken Hill Proprietary Company, Ltd. Bunge Corporation Celanese Americas Corporation Ciba Specialty Chemicals Corporation Cosmair, Inc. DaimlerChrysler Diageo, Inc. Elf Aquitaine, Inc. EMI Group, Inc. EBS - America Fireman's Fund Insurance Company Glaxo Wellcome, Inc. Hitachi, Ltd. Hoffmann-La Roche, Inc. Honda North America, Inc. ICI Americas, Inc. ING America Insurance Holdings Corporation Joseph E. Seagram & Sons, Inc. Laidlaw, Inc. Manulife Financial NEC USA, Inc. Nestle USA, Inc. Novartis Corporation Panasonic/Matsushita Electric Corporation of America Pearson Inc. Philips Electronics North America Corporation Reckitt & Colman Reed Elsevier Inc. Reuters America, Inc. Rio Tinto America Rolex Watch, U.S.A., Inc. Schering Berlin, Inc. Schlumberger Technology Corporation Shaklee Corporation SKF USA, Inc. SKW Americas, Inc. SmithKline Beecham Sony Corporation of America Tomkins Industries, Inc. Toyota Motor Sales, U.S.A., Inc. Tyco International (US), Inc. Unilever United States, Inc. US Filter Corporation VIAG North America VNA Holding, Inc. Zurich Insurance Group

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