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.
ERISA’s “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 “trust instrument.”
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.