DOL’s Proposed Form T–1 Would Require Detailed Financial Reporting for Most Union-Negotiated Benefit Plans
For the last 50 years or so, Taft-Hartley benefit plans — plans that are administered jointly by labor and management representatives pursuant to the Labor Management Relations Act of 1947 — have been required to file annual financial reports with the federal government that are essentially the same as those required from other types of benefit plans. Since the enactment of ERISA in 1974, the Form 5500 has been the principal reporting form for virtually all non-governmental employee benefit plans, and no additional reporting burdens were placed on Taft-Hartley plans simply because of their status as union-negotiated plans.
All that may be about to change. On March 4, 2008, the Office of Labor Management Standards (OLMS) of the Department of Labor published a proposed rule pursuant to Section 208 of the Labor Management Reporting and Disclosure Act of 1959 that would require the filing of a new annual financial report — Form T–1 — for most Taft-Hartley plans if more than 50% of the plan’s annual revenue is derived from union sources, including collectively bargained employer contributions.¹ This new report would require disclosure in far greater detail of a plan’s financial condition and operations than is either currently required by the Form 5500 or would be required by the significantly expanded Form 5500 for plan years beginning after 2008.
The most significant departure from the Form 5500 level of disclosure is a requirement that all receipts from or disbursements to any individual or entity during the plan’s fiscal year be itemized if the total receipts from or disbursements to such individual or entity are $10,000 or more. The itemization would have to include the name and address of the individual or entity involved and the purpose of the transactions. By contrast, Schedule C of Form 5500 only requires disclosure of the total salaries, fees and commissions paid to each plan employee, trustee and service provider who receives $5,000 or more in direct or indirect compensation from the plan during the year.
The proposed rule and the Form T–1 give little guidance on what constitutes a receipt or disbursement, although they do make clear that benefit payments to plan participants and employer contributions are included. Service provider fees clearly are included; what is less obvious is whether, and to what extent, investment transactions are included. For example, the following may be considered receipts or disbursements:
- dividend and interest payments received on the plan’s investment holdings;
- purchases and sales of securities (and brokerage commissions paid on those transactions); and
- realized and unrealized investment gains and losses.
The Form T–1 annual report would be in addition to, not in lieu of, a Form 5500. However, unlike the Form 5500, which must be prepared and filed by the employee benefit plan itself, Form T–1 must be prepared and filed by each labor union whose members are plan participants provided that union has annual revenues of $250,000 or more.
Since the information a union needs to prepare Form T–1 for a covered plan can come from only one source — the plan itself — the burden and cost of providing that information would fall on the plan, if in fact the plan has any obligation to provide such information, which is discussed below. Thus, the application and scope of the final Form T–1 reporting requirement should be a matter of great interest and concern to all Taft-Hartley plan trustees. Trucker Huss is preparing comments on the proposed T–1 rule that will address what we believe to be the very real legal and practical concerns trustees and administrators of Taft-Hartley benefit plans should have about the proposal. Comments must be filed with the OLMS by May 5, 2008.
Genesis of the Proposed Form T–1
To fully understand the issues posed by the current Form T–1 proposal, a little history is in order. Form T–1 is intended to complement and augment the detailed annual financial reports that most labor unions are required to file with OLMS on the Form LM series disclosing their financial condition and operations for the fiscal year. The statutory basis for these reports is the Labor Management Reporting and Disclosure Act of 1959 (LMRDA). Form T–1 was first proposed by OLMS in December 2002 along with significantly revised and expanded reporting requirements for labor unions through the LM series of Forms. Form T–1 would implement the authority of the OLMS to require that labor unions file annual financial reports on trusts “in which the labor organization is interested” to the extent necessary “to prevent circumvention or evasion” of the union’s own reporting obligations under LM–2, LM–3 or LM–4. Because the LMRDA only gives OLMS authority to require financial reporting by labor organizations, not Taft-Hartley plans, the Form T–1 filing obligation is imposed on the labor unions whose members participate in the plan, not on the plans themselves.
The 2002 proposal (finalized in 2003) contained several exemptions from the Form T–1 reporting requirement, the most significant of which was that no report was required for any trust that filed a Form 5500, an exemption that encompassed virtually all Taft-Hartley trusts providing pension or health and welfare benefits. Not surprisingly, the OLMS received virtually no comments from the employee benefits community on the 2002 proposed Form T–1.
The AFL-CIO promptly brought suit challenging OLMS’ authority to require more detailed financial reporting by labor unions through the expanded Form LM series. The suit also contended that the criteria for determining when a labor union must file Form T–1 were overbroad and exceeded the OLMS’ statutory authority. Those criteria required a Form T–1 filing by any labor union whose annual financial contribution to a trust fund (including collectively bargained employer contributions for its members) was $10,000 or more, provided the trust fund had annual receipts of $250,000 or more. The AFL-CIO argued that the OLMS had failed to demonstrate that such “generalized trust reporting” was necessary to prevent the union from circumventing or evading its own LM reporting and disclosure obligations.
Rejecting the challenge to the expanded LM series reporting requirements, a federal court of appeals in May 2005 nonetheless agreed that the 2003 Form T–1 requirement was invalid because there was no showing of any nexus between the $10,000 financial contribution threshold and the statute’s “necessary to circumvent or evade” requirement.
In September 2006, without soliciting additional public comment, the OLMS issued a new final Form T–1 rule that sought to rectify the deficiencies identified by the court of appeals. The 2006 final rule retained the reporting threshold of the 2003 final rule but purported to narrow its scope by conditioning the new reporting requirement with respect to any trust on one of these two additional criteria:
- one or more unions appoints a majority of the trustees of the trust; or
- the financial contributions of unions in the aggregate (including employer contributions on behalf of their members) constitute more than 50 percent of the trust’s annual revenues.
Most significantly for Taft-Hartley benefit plans, the 2006 final rule retained the Form 5500 exemption for ERISA-governed employee benefit plans.
Acting on a new AFL-CIO challenge, a federal district court in July 2007 blocked implementation of the 2006 final rule because OLMS had failed to solicit public comment on the rule before issuing it in final form. In slightly less than eight months OLMS developed a revised rule in proposed form that it published in the Federal Register on March 4, 2008.
Applicability of New T–1 Proposal to Taft Hartley Benefit Plans — Elimination of the Form 5500 Exemption
In many respects, the 2008 proposed T–1 rule resembles the OLMS’ 2006 final rule, particularly as to the level of detail that must be reported on individual financial transactions between a covered trust and third parties. In one crucial aspect, however, the new T–1 proposal differs radically from its predecessors: OLMS has completely eliminated the exemption for plans that are Form 5500 filers, which was included in all prior iterations of the T–1 rule, proposed or final, as well as the exemption for non- ERISA plans with audited financial statements that conform in all material respects with those required of Form 5500 filers. Although the stated purpose of the court-blocked 2006 final rule and this new proposed rule is to eliminate the “generalized trust reporting” deficiency that the court found in the 2003 final rule, the OLMS’ elimination of the Form 5500 exemption has actually greatly expanded the potential applicability of the Form T–1 by several thousand plans.
The new proposal does provide that a union is not required to file a Form T–1 if it has annual revenues of less than $250,000. However, for any Taft- Hartley plan with multiple unions representing covered employees, if even one of those unions has annual revenues of $250,000, a Form T–1 reporting the detailed financial information about that plan must be filed by that union.
The OLMS’ rationale for eliminating the Form 5500 exemption is that the Form 5500 does not provide “transparency for LMRDA disclosures comparable to what will be provided by the proposed Form T–1.” This assessment apparently applies even to the substantially revised and expanded disclosure of service provider fees that will be required starting with the Form 5500 for plan years beginning in 2009. Cynics might wonder what exactly could have changed so dramatically in the DOL’s experience with the Form 5500, given the agency’s apparent satisfaction with the Form 5500 as an adequate substitute for Form T–1 throughout the preceding five years as it was developing and seeking to implement the Form T–1 rule.
The Financial Domination Premise
The level of detail required to be reported on Form T–1 has not changed since the original proposed rulemaking in 2002. What has evolved is the rationale that OLMS has advanced to support its position that this kind of trust reporting is “necessary to prevent circumvention or evasion” of the financial reporting obligations that unions have under the LM series of annual reports.
In its 2006 final rulemaking effort, OLMS abandoned the requirement (essentially rejected by the appellate court in the first AFL-CIO court challenge) that a union file Form T–1 for any plan where:
- the union appointed at least one of the plan’s trustees; and
- the union directly or indirectly (through collectively bargained employer contributions) was the source of at least $10,000 of the trust’s total annual revenues.
In its place, OLMS embraced what it described as “principles of management control and financial domination” to establish the critical ties between a union and a trust that, if satisfied, would require the union to file a Form T–1 for that trust.
This nexus would be established if:
- the union, alone or in combination with other unions, appointed a majority of the trustees of the trust (a test that Taft-Hartley trusts could never legally satisfy); or
- the union, alone or in combination with other unions, was responsible for more than 50 percent of the trust’s total annual revenues.
For the purpose of calculating total revenues, all collectively bargained contributions must be counted in determining the unions’ aggregate share of the trust’s total annual revenues. (The domination test does not require that any of the unions involved have any affiliation with one another or with a common umbrella union organization.) In the view of OLMS, the fact that more than half of a trust’s annual revenues come from employer contributions to the trust negotiated by unions on behalf of their members establishes a union/trust relationship that can lead to the circumvention or evasion of the union(s)’ LM series reporting obligations.
Satisfied that its new “domination” concept adequately addresses the legal deficiencies of the 2003 final rule, OLMS then concludes that because those unions required to file Form T–1 “dominate” the trust for which financial reporting is required, those unions will, with relative ease, be able to cause those trusts to provide them with the detailed financial information necessary to complete the Form T–1. The 2006 final rule and the 2008 notice of proposed rulemaking give short shrift to the distinct possibility that Taft-Hartley plan trustees might refuse to provide the necessary financial information out of legitimate concern over possibly breaching their fiduciary duties under ERISA in at least the following respects:
- By expending trust assets for the benefit of a party-in-interest to pay for the substantial expense involved in developing the integrated data reporting systems required to provide detailed and itemized information on virtually all of the trust’s financial interactions with the rest of the world; and
- By disclosing to the unions confidential information about participants and beneficiaries, including the amounts of their benefit payments and their home addresses, which will end up on the OLMS website for viewing by any member of the public.
Should a trust refuse to provide the necessary financial information, the proposed rule states that the “Department [of Labor] would exercise any available investigative and other authority to assist the reporting union in obtaining the necessary information.” Accordingly to OLMS, this as an unlikely prospect because in none of the comments provided to it throughout the 2002–2006 rulemaking process did any plan administrator express an intention of withholding from a union information required to complete Form T–1. Apparently OLMS did not consider whether the absence of prior comments by ERISA-covered Taft-Hartley plans was attributable to their complete exemption from Form T–1 reporting rather than any lack of concern about reporting requirements that at the time had no application to them.
Unless certain aspects of the proposed rule’s domination criteria are clarified, most Taft-Hartley pension plans may not be able to determine whether they are in fact subject to the new reporting requirement. The proposed rule appears to take a broad and all-encompassing view of what makes up a trust’s receipts/revenues, but it is not clear whether the concept includes only cash income or unrealized investment gains and losses as well. If only cash investment income qualifies as revenue, then most pension plans will rarely be subject to Form T–1 reporting, a result seemingly at odds with the view of OLMS that such plans generally represent a significant opportunity for unions to circumvent or evade their own reporting obligations. If realized but not unrealized gains and losses are counted, then satisfaction of the union domination test may well depend on how rapidly the trust’s investment assets are turned over during the plan year. If total return is the DOL’s intended measure of a trust’s investment revenues, then whether the trust is considered “union-dominated” will vary depending on its overall investment performance.
Health and welfare trusts in contrast, will satisfy the majority of revenue test in most instances since the income from their investment assets usually represents a relative small portion of their total revenue from all sources, however measured.
Challenges Presented by Itemization Requirements
As noted above, the proposed Form T–1 calls for itemized information on all financial transactions, receipts and disbursements, between the covered plan and any third party — including participants, beneficiaries, contributing employers, service providers, trustees or any other third parties — provided that the annual total of the receipts or disbursements involving that party is $10,000 or more. Assuming that dollar threshold is met, every transaction between the trust and that third party must be itemized by date, amount and purpose, and the name and address of the third party must be provided. Even though there may be multiple unions with members participating in the trust, each reporting union is required to include on its Form T–1 financial information for the trust as a whole, not just information that relates to that union, or its members.
Given the lack of definitional guidance in the proposed rule, the required information would or may encompass the following items, among others:
- Benefit payments to participants and beneficiaries (maybe, depending on privacy issues)
- Payments to service providers (definitely)
- Payments to trustees and plan employees (definitely)
- Contributions received from employers and participants (definitely)
- Dividend, interest and similar cash income payments from trust investments (definitely)
- Payments to effect purchases and sales of trust investments (probably)
- Commissions paid to brokers executing trust investment transactions (maybe)
- Transactions between the trust and pooled investment vehicles (e.g., bank collective funds, mutual funds and insurance company pooled separate accounts, venture capital partnerships) (probably)
- Transactions within such pooled investment vehicles (probably not)
Most trusts will have recorded on their books of account the detailed information required for the first four categories of itemized transactions. Very likely, the detailed information required for the second four categories of transactions (all investment related) is contained only in the statements provided by the entities charged with custody of the trust’s investment assets. The trust’s books of account will only reflect the aggregate amount of each transaction category for the plan year. Depending on the size of the trust and the complexity of its investment strategy, more than one and perhaps a dozen or more custodians may be involved. Transactional information involving investments within pooled investment vehicles may or may not be available to the participating trust investors and in any case, would not be broken down into each participating trust’s percentage interest in the transaction which will often vary from one time period to the next.
Capturing all of the required detail into one consolidated report in many cases will require either significant enhancements to, or wholesale revamping of, a trust’s data and accounting systems, with equally significant administrative costs and burdens associated with the effort.
In the case of benefit payments, the itemization requirement also raises serious privacy issues for affected trusts. The proposed rule pays lip service to the need to protect an individual’s privacy but provides little concrete guidance on when the detailed itemization requirement is trumped by privacy considerations, saying only that itemized disclosure is not required if it “is otherwise prohibited by law or … would endanger the health or safety of an individual.” Clearly, this language would override any requirement to provide detailed and individualized information about health benefit and premium payments since such disclosure is expressly prohibited under HIPAA. Not so clear is whether it also overrides the disclosure requirement for individualized pension benefit information since we are not aware of any federal law that expressly prohibits disclosure of that information.
Under the proposed rule, a reporting union must file Form T–1 for all covered trusts by the same deadline for filing its Form LM–2, LM–3 or LM–4, namely 90 days after the close of the union’s fiscal year. The information to be reported on Form T–1 must be for the trust’s fiscal/plan year that ends with or within the reporting union’s fiscal year. Since most labor unions have a calendar year fiscal year, their Form T–1 will be due by the end of March of the following year. If the plan involved is also a calendar year plan, the financial information to be reported on the union’s Form T–1 would have to be compiled, audited and provided to the union in less than 90 days after the close of the calendar year. Contrast this deadline with the due date for filing the Form 5500, which is seven months after the close of the plan year (July 31st for a calendar year plan), with the ability to extend that time until the 15th day of the tenth month after the end of the plan year (October 15th for calendar year plans).
We know from experience that many Taft-Hartley plans cannot close their books for the year until sometime in the second or third month of the following year (to allow time for recording of contributions received after plan year end that are based on employment during the plan year). With the increasing use of private equity, hedge fund and similar investment vehicles, plans these days often do not have the necessary information to complete preparation and audit of their financial statements until six months or even more after plan year end. We seriously doubt that most Taft-Hartley plans can provide the necessary information to sponsoring unions for reporting on Form T–1 (assuming the plan’s trustees conclude it is legally permissible to do so) within the time frames contemplated in the proposed rule unless their plan year happens to end in the first eight or nine months of the calendar year.
There are other issues raised by the proposed rule that may or may not be of concern to Taft-Hartley plans and their trustees, depending on their circumstances, as well as to the sponsoring unions who are required to obtain and file the required information and certify to its accuracy. We have attempted to address in this article those issues we believe should be of most concern to the majority of those plans.
If experience with the 2002–2003 round of rulemaking is any guide, OLMS could produce a final rule for Form T–1 in as few as nine months even with the avalanche of negative comments they can be expected to receive from the Taft-Hartley plan community on their current proposal. Unless OLMS radically changes the proposed rule to address some of the issues described above, further litigation over the rule is likely to ensue.
¹ The Form T–1 also would be required for employee benefit plans a union maintains for its own employees, for unionsponsored benefit plans financed by member dues or contributions rather than employer contributions and for certain other union related entities (e.g., credit unions, strike funds). This article does not address the new reporting requirements for these entities.