A DBO plan is considered to be an employee welfare benefit plan subject to the requirements of Title I of ERISA. Fortunately, most DBO plans are exempt from ERISA’s participation, vesting, and funding requirements. Reporting and disclosure is streamlined if the DBO plan is limited to a select group of management or highly compensated employees (generally, less than 5 percent of total employees should be participants). So, in most cases, no annual ERISA filings need be made with the Department of Labor.
In order to successfully avoid ERISA’s funding requirements:
- Counsel should state in the contract between the employer and employee that employees have no right to any instrument that will be used to finance the employer’s potential obligations under the DBO plan.
- The employer should maintain any life insurance as part of its general unrestricted assets (the employer should be the owner and beneficiary of the insurance). No financing vehicle, especially life insurance, should be tied to the DBO plan in any way. Life insurance should not be mentioned as a financing vehicle in the plan, nor should the phrase “fund” or “informally fund” be used in discussing the use of life insurance in any documents (such as corporate resolutions or SEC annual report disclosure statements) related to the DBO plan.
- Only a select group of management and highly compensated employees should be covered under a DBO plan.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM