Employee Benefits Security Administration Takes Action on Rock Wool Manufacturing Involving Alabama, South Carolina

Targeted News Service

WASHINGTON, April 16 -- The Department of Labor published the following notice in the Federal Register from the Employee Benefits Security Administration:

Proposed Exemptions From Certain Prohibited Transaction Restrictions

<p>A Notice by the Employee Benefits Security Administration on 04/15/2015

Publication Date: Wednesday, April 15, 2015

Agencies: Department of Labor

Employee Benefits Security Administration

Dates: All interested persons are invited to submit written comments or requests for a hearing on the pending exemptions, unless otherwise stated in the Notice of Proposed Exemption, within 45 days from the date of publication of this Federal Register Notice.

Entry Type: Notice

Action: Notice of Proposed Exemptions.

Document Citation: 80 FR 20246

Page: 20246 -20261 (16 pages)

Agency/Docket Number: Application No. D-11726

Document Number: 2015-08565

Shorter URL: https://federalregister.gov/a/2015-08565

ACTION

Notice Of Proposed Exemptions.

SUMMARY

This document contains notices of pendency before the Department of Labor (the Department) of proposed exemptions from certain of the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (ERISA or the Act) and/or the Internal Revenue Code of 1986 (the Code). This notice includes the following proposed exemptions: D-11726, Rock Wool Manufacturing Company; L-11784, Eli Lilly and Company and Elco Insurance Company Limited; D-11798, Robert A. Handelman Roth IRA No. 2; and, D-11809 and L-11810, Roofers Local 195 Pension Fund and Roofers Local 195 Joint Apprenticeship Training Fund.

DATES:

All interested persons are invited to submit written comments or requests for a hearing on the pending exemptions, unless otherwise stated in the Notice of Proposed Exemption, within 45 days from the date of publication of this Federal Register Notice.

ADDRESSES:

Comments and requests for a hearing should state: (1) The name, address, and telephone number of the person making the comment or request, and (2) the nature of the person's interest in the exemption and the manner in which the person would be adversely affected by the exemption. A request for a hearing must also state the issues to be addressed and include a general description of the evidence to be presented at the hearing. All written comments and requests for a hearing (at least three copies) should be sent to the Employee Benefits Security Administration (EBSA), Office of Exemption Determinations, Room N-5700, U.S. Department of Labor, 200 Constitution Avenue NW.,

Washington, DC 20210. Attention: Application No. __, stated in each Notice of Proposed Exemption. Interested persons are also invited to submit comments and/or hearing requests to EBSA via email or FAX. Any such comments or requests should be sent either by email to: [email protected], or by FAX to (202) 219-0204 by the end of the scheduled comment period. The applications for exemption and the comments received will be available for public inspection in the Public Documents Room of the Employee Benefits Security Administration, U.S. Department of Labor, Room N-1513, 200 Constitution Avenue NW., Washington, DC 20210.

Warning: All comments will be made available to the public. Do not include any personally identifiable information (such as Social Security number, name, address, or other contact information) or confidential business information that you do not want publicly disclosed. All comments may be posted on the Internet and can be retrieved by most Internet search engines.

SUPPLEMENTARY INFORMATION:

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all interested persons in the manner agreed upon by the applicant and the Department within 15 days of the date of publication in the Federal Register. Such notice shall include a copy of the notice of proposed exemption as published in the Federal Register and shall inform interested persons of their right to comment and to request a hearing (where appropriate).

The proposed exemptions were requested in applications filed pursuant to section 408(a) of the Act and/or section 4975(c)(2) of the Code, and in accordance with procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27, 2011). [1] Effective December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the Secretary of the Treasury to issue exemptions of the type requested to the Secretary of Labor. Therefore, these notices of proposed exemption are issued solely by the Department.

The applications contain representations with regard to the proposed exemptions which are summarized below. Interested persons are referred to the applications on file with the Department for a complete statement of the facts and representations.

Rock Wool Manufacturing Company Salaried Retirement Plan (the Plan) Located in Leeds, AL

Proposed Exemption

The Department is considering granting an exemption under the authority of section 408(a) of the Act (or ERISA) and section 4975(c)(2) of the Code, and in accordance with the procedures set forth in 29 CFR part 2570, subpart B (76 FR 46637, 66644, October 27, 2011). [2] If the exemption is granted, the restrictions of sections 406(a)(1)(A), 406(b)(1) and 406(b)(2) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) and (E) of the Code, shall not apply to the proposed in-kind contribution (the Contribution) to the Plan of a parcel of unimproved real property (the Property) by Rock Wool Manufacturing Company (Rock Wool or the Company), the Plan sponsor and a party in interest with respect to the Plan, provided that the following conditions are satisfied: (a) A qualified independent fiduciary (the Independent Fiduciary), acting on behalf of the Plan:

(1) Determines that the Contribution is in the interests of the Plan and protective of the Plan's participants and beneficiaries; and

(2) Determines that the Property is valued for purposes of the Contribution at the Property's fair market value as of the date of the Contribution, as determined by a qualified independent appraiser (the Independent Appraiser); (b) The Independent Fiduciary performs the following steps in order to make the determinations described above in paragraph (a):

(1) Reviews, negotiates, and approves the specific terms of the Contribution; and

(2) Ensures, for the purposes of the Contribution, that the appraisal report (the Appraisal Report) is consistent with sound principles of valuation;

(c) As of the date of the Contribution, the Independent Fiduciary monitors compliance by Rock Wool with respect to the terms of the Contribution and with the conditions of this exemption, if granted, to ensure that such terms and conditions are satisfied at all times;

(d) The Plan does not pay any commissions, costs or other expenses, including any fees that are currently charged or accrued in the future by the Independent Fiduciary and theIndependent Appraiser, in connection with the Contribution; and

(e) The terms and conditions of the Contribution are no less favorable to the Plan than the terms that would be negotiated at arm's length between unrelated third parties under similar circumstances.

(f) The contributed value of the Property is equal to the Property's fair market value, as determined by the Independent Appraiser on the transaction date, less a 35 percent discount to account for certain marketability limitations.

Summary of Facts and Represenations

1. Rock Wool, headquartered in Leeds, Alabama, was founded in 1943. The current Chairman and CEO of Rock Wool is Sylvester Miniter III and the current Vice President of Operations is Gerald Miller. Rock Wool operates as a manufacturer of residential blowing wool insulation and high temperature pipe insulation fabrication. During the 1970's, Rock Wool began to incorporate into its product line certain materials containing asbestos. When the harmful effects of asbestos were later discovered, Rock Wool was named as the defendant in numerous lawsuits. Following the exhaustion of its insurance coverage, Rock Wool filed for Chapter 11 bankruptcy protection. Subsequent to Rockwool's bankruptcy filing, plaintiff attorneys reached a settlement agreement under which Rockwool's owners relinquished ownership rights and contributed Company stock to an asbestos settlement fund (the Settlement Fund). Pursuant to the terms of the settlement agreement, any profits earned by Rock Wool are to be deposited into the settlement fund to pay claimants on a periodic basis. As of September 30, 2014, Rock Wool had total assets of $5,706,884.62 and total liabilities of 3,108,653.82.

2. The Plan, which was adopted by Rock Wool on May 1, 1974, is structured as a defined benefit plan. The Plan's trustees are Sylvester Miniter III and Gerald Miller (the Trustees), and the Plan's investment manager is Lee Robertson of Legg Mason Investment Counsel. As the Plan's investment manager, Mr. Robertson exercises discretion over the Plan's assets, and as such, qualifies as a fiduciary under section 3(38) of the Act.

As of January 28, 2015, the Plan covered 27 participants and held assets valued at approximately $2,537,114. The Plan has been frozen to new participants since December 31, 2001, and to benefit accruals since August 31, 2008.

3. Rock Wool contributed $26,675 to the Plan during the year ending December 31, 2012, and $134,428 for the year ending December 31, 2013. As of September 1, 2012 and September 1, 2013, the adjusted funding target attainment percentage (AFTAP) for the Plan was 80.82% and 81.09%, respectively. Pursuant to section 302 of the Act, Rock Wool is obligated to make a required minimum cash contribution to the Plan of $134,000 on or before May 15, 2015 for the 2014 Plan year (the Required Contribution).

4. Rock Wool proposes to make an in-kind contribution to the Plan of certain unimproved real property, in lieu of cash, due to its current cash flow restrictions. Currently, Rock Wool is experiencing restricted cash flow problems due to, among other things, its inability to obtain third party financing and its funding obligations with respect to the Settlement Fund. In effect, the in-kind contribution of the Property to the Plan will offset the minimum funding amount due to the Plan under section 302 of the Act, as the contribution value of the Property (the fair market value of the Property minus the marketability discount) will exceed the $134,000 Required Contribution. Thus, the contribution of the Property will allow Rock Wool to forego making a $134,000 cash payment to the Plan. [4]Accordingly, Rock Wool requests an administrative exemption from the Department because the proposed Contribution would otherwise violate several provisions of the Act.

5. Section 406(a)(1)(A) of the Act provides that a fiduciary with respect to a plan shall not cause a plan to engage in a transaction if the fiduciary knows or should know that such transaction constitutes a direct or indirect sale or exchange, or leasing, of any property between a plan and a party in interest. Section 3(14)(A) of the Act defines the term "party in interest" to include a fiduciary. Section 3(14)(C) of the Act also defines the term party in interest to include an employer, any of whose employees are covered by such plan. The Trustees, who are principals of Rock Wool, together with Mr. Robertson, are parties in interest with respect to the Plan, as fiduciaries. In addition, Rock Wool is a party in interest with respect to the Plan as an employer whose employees are covered by the Plan.

With respect to a defined benefit plan, such as the Plan, an employer assumes an obligation to make cash contributions to the plan in order to fund promised benefits. Rock Wool's proposed Contribution of the Property to the Plan would thus constitute a discharge of Rock Wool's legal obligation with respect to the Required Contribution, as noted above, as well as, depending on the Plan's funding status in future years, Rock Wool's obligation to make cash contributions to the Plan in the future. As such, the Plan would, in effect, be exchanging its legal right to receive a cash contribution for the receipt of real property. Thus, Rock Wool's proposed Contribution of the Property to the Plan constitutes a prohibited sale or exchange in violation of section 406(a)(1)(A) of the Act.

The Contribution would also violate section 406(b)(1) and (b)(2) of the Act. Section 406(b)(1) prohibits a fiduciary from dealing with the assets of the plan in such fiduciary's own interests or for such fiduciary's personal account. In determining that it would be appropriate for the Plan to receive the Contribution of the Property from Rock Wool instead of cash, the Trustees would effectively be releasing Rock Wool from, at minimum, its $134,000 cash obligation to the Plan. Due to the fact that the Trustees hold executive positions at Rock Wool, each Trustee would be dealing with the assets of the Plan for his own interest or personal account.

In addition, section 406(b)(2) of the Act prohibits a fiduciary from acting in such fiduciary's individual or other capacity in any transaction involving the plan on behalf of a party (or from representing a party) whose interests are adverse to the interests of the plan, or the interests of the Plan participants and beneficiaries. As Trustees and Rock Wool principals, Messrs. Miniter and Miller may have divided loyalties in representing both the interests of the Plan and Rock Wool with respect to the Contribution of the Property.

6. The Property that is the subject of the Contribution was purchased for $36,175 in 1947 by the Cusick Family, the original owners of Rock Wool. The Cusicks incorporated Rock Wool in July of 1958, at which time the Property became the Company's primary manufacturing and warehouse facility.

The Property is located at 8200 Thorton Avenue, Leeds, Alabama, andcurrently consists of 2.67 acres of unimproved vacant land that is not encumbered by a mortgage. The Property is located approximately 1.3 miles from Rock Wool's manufacturing plant. The land is not presently used by Rock Wool, nor will it be used in the future by Rock Wool, its affiliates, or members of the Cusick Family. The only ongoing expenses associated with the Property are real estate taxes, which amount to approximately $1,800 per year.

7. The Property was appraised on August 4, 2014, by James P. Sumners, a State Certified Real Property Appraiser in the State of Alabama (License # G00037) (the Independent Appraiser). Mr. Sumners is employed by the real estate appraisal firm of Providence Company (Providence), located in Birmingham, Alabama. Mr. Sumners has certified that he "has no present or prospective interest in the [P]roperty that is the subject of this report, and has no personal interest or bias with respect to the parties involved." Further, Mr. Sumners represents that his fees derived from Rock Wool are equal to less than 1% of Providence's revenues, from all sources.

Due to the fact that the Property is a parcel of vacant land, Mr. Sumners based his valuation solely on the Market Approach. Mr. Sumners reported his conclusion in a summary appraisal report, dated August 6, 2014, and formulated his opinion and conclusion in accordance with Standard Rule 1 of the Uniform Standards of Professional Appraisal Practice (USPAP). The Appraisal Report was written in compliance with USPAP and Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) guidelines. After inspecting the Property and analyzing all relevant data, Mr. Sumners determined the "AS-IS" Fee Simple Market Value of the Property to be $325,000.00, as of August 4, 2014.

8. On August 21, 2013, the Trustees hired Layton Engineering of Birmingham, Alabama (Layton), an unrelated party, to conduct an environmental engineering report (the Environmental Report) on the Property. In its Environmental Report, Layton tested soil at the Property for heightened levels of chromium. The tests were compared with a previous soil assessment conducted at the Property by Layton in 2002, as well as against four background samples that were obtained from a nearby property. Each nearby property was reasonably expected to be unaffected by current or historical processes and within depositional environments similar to those at the Property. Based on the tests, Layton concluded that the results of the analysis demonstrated that the levels of chromium at the Property site were well within the range of natural background concentrations of chromium in the unaffected adjacent soils. Thus, Layton has confirmed that the Property is environmentally clean.

9. The Trustees have selected Lubbock National Bank (LNB) to serve on behalf of the Plan as the Independent Fiduciary with respect to the proposed Contribution. Specifically, LNB has designated Christopher L. Robinson, Senior Vice President and Senior Trust Officer of LNB, to prepare the Independent Fiduciary Report and to assume the duties and responsibilities of the Independent Fiduciary for the Plan. Mr. Robinson's qualifications include thirteen years of experience as an ERISA attorney and graduate and undergraduate degrees in Finance. Mr. Robinson represents that he is knowledgeable as to the duties and responsibilities of an ERISA fiduciary by virtue of his educational background and his experience as an official with LNB. Mr. Robinson has also served as a fiduciary for other qualified plans.

10. Mr. Robinson represents that the only revenue received by LNB from any party in interest to the Plan are those fees derived from Rock Wool in connection with Mr. Robinson's duties as the Plan's Independent Fiduciary, and that these fees are equal to less than 1% of LNB's revenues from all sources, for both 2013 and 2014. In addition, Mr. Robinson states that neither he nor any officer, board member, or shareholder of LNB is related in any way to Rock Wool, or its principals, through ownership, common officers or directors, debt relationships, business dealings, or family relationships. Mr. Robinson further represents that neither Rock Wool nor any of its principals have deposited any funds in checking accounts, savings accounts, or certificates of deposit maintained by LNB.

11. In his role as Independent Fiduciary, Mr. Robinson represents that he will confirm that the Property has been properly titled in the name of the Plan by reviewing the title records and by ensuring that the Contribution to the Plan has in fact been made. Further, Mr. Robinson will ensure that the Plan does not pay any fees or commissions with respect to the Contribution.

12. Mr. Robinson has expressed his views in support of the Contribution, stating that the Contribution is favorable to the Plan. In determining whether the in-kind contribution would be in the interests of the Plan, Mr. Robinson reviewed and considered: (a) Representations made by Rock Wool regarding the Plan and the Property; (b) the value conclusions and related analysis presented by the Independent Appraiser; (c) discussions with certain members of Rock Wool's senior management regarding the Plan and the related investment policy, the nature of the Property, and future prospects for the usefulness and marketability of such Property [5] ; (d) the Plan's investment objectives, policies, and related Plan documents; (e) whether the terms and conditions of the Contribution are no less favorable to the Plan than terms negotiated at arm's length under similar circumstances between unrelated third parties; and (f) other analyses and investigations.

13. Based on his review, Mr. Robinson determined that the Contribution of the Property is appropriate and in the interest of the Plan's participants and beneficiaries. In this regard, Mr. Robinson concluded that the Contribution will substantially increase the funded status of the Plan, and will place the Plan in a more secure actuarial and financial position, with both a higher funding percentage and a larger funding standard account balance. Additionally, Mr. Robinson concluded that the Plan's acquisition of the Property will improve the diversification of Plan investments and further Plan investment policies and objectives. Further, Mr. Robinson stated that the Contribution presents the Plan with the added benefit of a potential future stream of cash flow, in the event that the Property is leased to third parties.

14. With regard to potential alternatives to the proposed Contribution, Mr. Robinson considered a sale of the Property to an unrelated third party. Mr. Robinson asserted that such a sale would be beneficial to neither the Plan nor Rock Wool, due to the fact that: (a) The Property likely would have to be sold at a discounted amount, approximately 25% to 35% below fair market value; and (b) the sale would likely take between 36 and 48 months to complete.

Based upon Mr. Robinson's representations, the Applicant subsequently determined that a 35%discount should be applied to the Property's fair market value to account for marketability limitations. Accordingly, the Applicant has agreed that the Property's contribution value, after applying the 35% discount, is $211,250, subject to any fair market value adjustments made by the Appraiser on the transaction date. Thus, the contributed value of the Property would represent 7.69% of the Plan' assets.

15. Rock Wool represents that the Contribution is administratively feasible because the transaction would require a simple re-deeding of the Property to the Plan and would not require the Plan to pay any fees or commissions. Further, Rock Wool believes the Contribution would be in the interests of the Plan and its participants and beneficiaries and protective of their rights because the Contribution would increase the value of the Plan's assets. 16. In summary, it is represented that the proposed transaction satisfies or will satisfy the statutory criteria for an exemption under section 408(a) of the Act because:

(a) The Independent Fiduciary, acting on behalf of the Plan:

(1) Has determined that the Contribution is in the interests of the Plan and protective of the Plan's participants and beneficiaries; and

(2) Will determine that the Property is valued for purposes of the Contribution at the Property's fair market value as of the date of the Contribution, as determined by the Independent Appraiser;

(b) The Independent Fiduciary has performed the following steps in order to make his determinations, described above in paragraph (a):

(1) Reviewed, negotiated, and approved the specific terms of the Contribution; and

(2) Ensured, for purposes of the Contribution, that the Appraisal Report is consistent with sound principles of valuation;

(c) As of the date of the Contribution, the Independent Fiduciary will monitor compliance by Rock Wool with respect to the terms of the Contribution and with the conditions of this exemption, if granted, to ensure that such terms and conditions are satisfied at all times;

(d) The Plan will not pay any commissions, costs or other expenses, including any fees that are currently charged or accrued in the future by the Independent Fiduciary and the Independent Appraiser, in connection with the Contribution; and

(e) The terms and conditions of the Contribution will not be less favorable to the Plan than the terms that would be negotiated at arm's length between unrelated third parties under similar circumstances.

(f) The contributed value of the Property will be equal to the Property's fair market value, as determined by the Independent Appraiser on the transaction date, less a 35 percent discount to account for certain marketability limitations.

Notice to Interested Parties

The persons who may be interested in the publication in the Federal Register of the Notice of Proposed Exemption (the Notice) include all individuals who are participants in the Plan. It is represented that such interested persons will be notified of the publication of the Notice by first class mail to such interested person's last known address within fifteen (15) days of publication of the Notice in the Federal Register. Such mailing will contain a copy of the Notice, as it appears in theFederal Register on the date of publication, plus a copy of the Supplemental Statement, as required, pursuant to 29 CFR 2570.43(b)(2), which will advise all interested persons of their right to comment on and/or to request a hearing. All written comments or hearing requests must be received by the Department from interested persons within 45 days of the publication of this proposed exemption in the Federal Register.

All comments will be made available to the public.

Warning: Do not include any personally identifiable information (such as name, address, or other contact information) or confidential business information that you do not want publicly disclosed. All comments may be posted on the Internet and can be retrieved by most Internet search engines.

FOR FURTHER INFORMATION CONTACT:

Mr. Joseph Brennan of the Department at (202) 693-8456. (This is not a toll-free number.)

Eli Lilly and Company (Lilly) and Elco Insurance Company Limited (Elco) (Together, the Applicants) Located in Indianapolis, IN and North Charleston, SC, Respectively

[Application No. L-11784]

Proposed Exemption

The Department is considering granting an exemption under the authority of section 408(a) of the Act and in accordance with the procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27, 2011).

Section I. Transactions

If the proposed exemption is granted, the restrictions of sections 406(a)(1)(D) and 406(b) of the Act shall not apply to the reinsurance of risks and the receipt of premiums therefrom by Elco, an affiliate of Lilly, as the term "affiliate" is defined in Section III(a)(1) below, in connection with insurance contracts sold by American United Life Insurance Company (AUL) or any successor insurance company (a Fronting Insurer) to provide optional group term life insurance benefits (Optional Group Life) to participants in the Eli Lilly and Company Life Insurance and Death Benefit Plan (the Life Insurance Plan), a component of the Eli Lilly and Company Employee Welfare Plan (the Plan), provided the conditions set forth in Section II, below, are satisfied.

Section II. Conditions

(a) Elco--

(1) Is a party in interest with respect to the Plan by reason of a stock or partnership affiliation with Lilly that is described in section 3(14)(G) of the Act;

(2) Is licensed to sell insurance or conduct reinsurance operations in at least one state as defined in section 3(10) of the Act;

(3) Has obtained a Certificate of Authority from the Director of the Department of Insurance of its domiciliary state (South Carolina), which has neither been revoked nor suspended;

(4)(A) Has undergone and shall continue to undergo an examination by an independent certified public accountant for its last completed taxable year immediately prior to the taxable year of the reinsurance transaction covered by this proposed exemption, if granted; or

(B) Has undergone a financial examination (within the meaning of the law of South Carolina) by the Director of the South Carolina Department of Insurance (SCDI) within five (5) years prior to the end of the year preceding the year in which such reinsurance transaction has occurred; and

(5) Is licensed to conduct reinsurance transactions by South Carolina, whose law requires that an actuarial review of reserves be conducted annually by an independent firm of actuaries and reported to the appropriate regulatory authority;

(b) The Life Insurance Plan pays no more than adequate consideration for the insurance contracts;

(c) No commissions are paid by the Life Insurance Plan with respect to the direct sale of such contracts or the reinsurance thereof;

(d) Effective January 1, 2012, there was an immediate and objectively determined benefit to Plan participants and beneficiaries in the form of increased benefits. Any modification to such benefits will at least approximate the increase in benefits that are effective January 1, 2012, as described in the Notice of Proposed Exemption (the Notice) and will continue in all subsequent years of each contract of reinsurance involving Elco and a Fronting Insurer and in every renewal of each contract of reinsurance involving Elco and a Fronting Insurer;

(e) In the initial year and in subsequent years of coverage provided by a Fronting Insurer, the formulae used by the Fronting Insurer to calculate premiums will be similar to formulae used by other insurers providing comparable optional life insurance coverage under similar programs. Furthermore, the premium charge calculated in accordance with the formulae will be reasonable and will be comparable to the premiums charged by the Fronting Insurer and its competitors with the same or a better rating providing the same coverage under comparable programs;

(f) The Fronting Insurer has a financial strength rating of "A" or better from A. M. Best Company (A. M. Best). The reinsurance arrangement between the Fronting Insurer and Elco will be indemnity insurance only (i.e., the Fronting Insurer will not be relieved of liability to the Life Insurance Plan should Elco be unable or unwilling to cover any liability arising from the reinsurance arrangement);

(g) The Life Insurance Plan retains an independent, qualified fiduciary, as defined in Section III(c) (the Independent Fiduciary) to analyze the transactions and to render an opinion that the requirements of Section II(a) through (f) and (h) of this proposed exemption have been satisfied;

(h) Participants and beneficiaries in the Plan will receive in subsequent years of every contract of reinsurance involving Elco and the Fronting Insurer the benefit increases effective January 1, 2012, as described in the Notice, or benefit increases no less in value, as determined by the Independent Fiduciary, than the objectively determined increased benefits such participants and beneficiaries received effective January 1, 2012;

(i) The Independent Fiduciary will monitor the transactions proposed herein on behalf of the Plan on a continuing basis to ensure such transactions remain in the interest of the Plan; take all appropriate actions to safeguard the interests of the Plan; and enforce compliance with all conditions and obligations imposed on any party dealing with the Plan; and

(j) In connection with the provision to participants in the Life Insurance Plan of the Optional Group Life which is reinsured by Elco, the Independent Fiduciary will review all contracts (and any renewal of such contracts) of the reinsurance of risks and the receipt of premiums therefrom by Elco and must determine that the requirements of this proposed exemption, if granted, and the terms of the benefit enhancements continue to be satisfied.

Section III. Definitions

(a) The term "affiliate" includes:

(1) Any person directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the person;

(2) Any officer, director, employee, relative, or partner in any such person; and

(3) Any corporation or partnership of which such person is an officer, director, partner, or employee.

(b) The term "control" means the power to exercise a controlling influence over the management or policies of a person other than an individual.

(c) The term "Independent Fiduciary" means a person who:

(1) Is not an affiliate of Lilly or Elco and does not hold an ownership interest in Lilly, Elco, or affiliate of Lilly or Elco;

(2) is not a fiduciary with respect to the Plan prior to its appointment to serve as the Independent Fiduciary;

(3) has acknowledged in writing that:

(i) It is a fiduciary and has agreed not to participate in any decision with respect to any transaction in which it has an interest that might affect its best judgment as a fiduciary; and

(ii) it has appropriate technical training or experience to perform the services contemplated by the exemption, if granted;

(4) For purposes of this definition, no organization or individual may serve as Independent Fiduciary for any fiscal year in which the gross income received by such organization or individual (or partnership or corporation of which such organization or individual is an officer, director, or 10 percent or more partner or shareholder) from Lilly, Elco, or affiliates of Lilly or Elco, (including amounts received for services as an independent fiduciary under any prohibited transaction exemption granted by the Department) for that fiscal year exceeds two percent (2%) of such organization's or individual's gross income from all sources for the prior fiscal year;

(5) No organization or individual which is an Independent Fiduciary and no partnership or corporation of which such organization or individual is an officer, director or ten percent (10%) or more partner or shareholder may acquire any property from, sell any property to, or borrow any funds from Lilly, Elco, or affiliates of Lilly or Elco during the period that such organization or individual serves as an Independent Fiduciary and continuing for a period of six months after such organization or individual ceases to be an Independent Fiduciary or negotiates any such transaction during the period that such organization or individual serves as an Independent Fiduciary; and

(6) In the event a successor Independent Fiduciary is appointed to represent the interests of the Plan with respect to the subject transaction, there should be no lapse in time between the resignation or termination of the former Independent Fiduciary and the appointment of the successor Independent Fiduciary.

Summary of Facts and Representations

Background

1. Eli Lilly and Company (Lilly), headquartered in Indianapolis, IN, is one of the world's largest manufacturers and distributors of pharmaceuticals. Lilly also engages in research and development. Lilly employs over 17,000 employees in the United States and over 38,000 employees worldwide. In 2012, Lilly had net income of approximately $4.1 billion and revenue of $22.6 billion.

2. Elco Insurance Company Limited (Elco) is a captive insurance and reinsurance corporation and a wholly-owned subsidiary of Eli Lilly International Corporation, which itself is a wholly-owned subsidiary of Lilly. Elco was incorporated in Bermuda on July 10, 1975, to provide direct coverage to Lilly for various exposures. On June 15, 2011, the State of South Carolina Department of Banking, Insurance, Securities and Health Care Administration issued a Certificate of Authority permitting a branch of Elco to transact the business of a captive insurance company. JLT Insurance Management (Bermuda) Ltd. performs the accounting functions, records retention, and other management and administrative services for Elco. Wilmington Trust performs the same services for the Elco branch. Elco issubject to regulation by the South Carolina Department of Insurance and is required to maintain $500,000 of capital and surplus at all times. Elco currently provides the following insurance coverage to Lilly and its subsidiaries: Property, Transit, Workers' Compensation, Auto, General Liability, and Product Liability. As of December 31, 2012, Elco</org> had total assets of $141,923,761 and the gross written premium was $18,303,690.

3. Lilly sponsors the Eli Lilly and Company Employee Welfare Plan (the Plan), which provides eligible employees with medical, life insurance, dental, disability, death benefits, and other welfare benefits. As of December 31, 2011, the Plan provided benefits to approximately 25,334 active and retired participants. The total gross assets of the Plan as of December 31, 2011, were $1,372,933,491.

4. The Applicants represent that Lilly currently provides life insurance and death benefits to eligible employees through the Eli Lilly and Company Life Insurance and Death Benefits Plan (the Life Insurance Plan), which is a component of the Plan. Benefits under the Life Insurance Plan include basic life insurance, for which Lilly pays 100 percent of the cost, and optional group term life insurance benefits (Optional Group Life), for which employee participants pay 100 percent of the cost. According to the Applicants, participants in the Life Insurance Plan may elect, at their own discretion, Optional Group Life that includes Supplemental and Dependent Coverage. [7] Supplemental Coverage is equal to one, two, three, four, or five times a participant's base salary. The maximum Supplemental Coverage amount is $3 million. Dependent Coverage is equal to $10,000 per child ($2,000 for children under 6 months of age) and $10,000, $20,000, or $50,000 for a spouse or domestic partner. The Applicants represent that policy premiums are determined by American United Life Insurance Company (AUL), which insures the Optional Group Life. The Applicants state that participants who elect dependent spouse or domestic partner coverage pay premiums based on age and amount of coverage; participants pay child coverage premiums at a fixed rate (currently, $0.375 per month).

5. The Applicants represent that the Supplemental and Dependent coverages include an Accelerated Benefit Option which allows part of a participant's or dependent's Optional Group Life benefit to be paid while the participant or dependent is still living if the participant or dependent is terminally ill and has a limited life expectancy. The Applicants represent that "terminally ill" or "a limited life expectancy" means an injury or sickness that, despite appropriate medical care, is reasonably expected to result in the person's death within twelve months from the date of payment of the Accelerated Life Benefit, as determined by AUL. The Applicants represent that AUL may require that the person be examined at AUL's expense by AUL's choice of physician. The Applicants further explain that utilizing the Accelerated Benefit Option reduces the benefit that would otherwise be payable upon the participant's or dependent's death.

6. The Applicants represent that Lilly reached an agreement with AUL,[8] a party unrelated to Lilly and its affiliates, for AUL to serve prospectively as the direct insurer for the Optional Group Life coverage of the Life Insurance Plan and then contract with Elco to reinsure a portion of such coverage.

Past Reinsurance Arrangement With Elco

7. According to the Applicants, the Department recently investigated the Plan with respect to a prior reinsurance transaction that began in 1993 in which Elco had been reinsuring certain Optional Group Life coverage for Lilly that were provided under the Plan. According to the Applicants, after counsel advised Lilly and Elco that, absent an individual exemption, the Department might take the position that the reinsurance arrangement could involve one or more prohibited transactions, reinsurance payments to Elco ceased and Lilly and Elco began a process of correcting the prior transactions. According to the Applicants, Lilly paid correction expenses and took a number of steps to correct the transactions, as described below.

8. The Applicants represent that, as part of Lilly's corrective actions, Keith A. Dall, a principal with Milliman Actuarial Services (Milliman) reviewed the transactions. In a written report, Mr. Dall determined that the premiums paid by the Life Insurance Plan for the optional dependent and life insurance coverages during the period from March 14, 2005, through October 2010, [9] were within the range of premiums that would have been charged for comparable coverage by insurers comparable to AUL.

9. In addition to the review by Mr. Dall, the Applicants represent that Elco made restorative payments for the Life Insurance Plan's benefit, which represented Elco's profits during the relevant period. [10] The Applicants state that Elco used the Department's Voluntary Fiduciary Correction Program Online Calculator (the Online Calculator) to determine the appropriate amount. The Applicants further represent that in order to ensure that Elco's restorative payments could only be used for the benefit of participants and beneficiaries in the Life Insurance Plan, the payments were made to AUL to be credited to a Premium Pre-Payment Account (the Account) established for the Plan's benefit. According to the Applicants, the Account will pay 25 percent of each premium payment due under the Optional Group Life policies until the Account is exhausted, and during such time, participants electing Optional Group Life will have their premiums reduced by a corresponding 25 percent. [11] The Applicants represent that AUL agreed to credit interest on the Account monthly at a rate equal to the two-year U.S. Treasury Bond rate as of July 27, 2011. The Applicants further represent that, under a written agreement, Elco, AUL, and the Employee Benefits Committee of Eli Lilly and Company (the Committee), acting as plan administrator, recognize that the amounts credited to the Account and any earnings credited thereto are the assets of the Plan, which may not be used for any purposes other than to provide benefits and pay reasonable expenses in accordance with the terms of the Plan. Thus, according to the Applicants, Elco's total restorative payment to the Account was $3,929,834.64. [12] The Applicantsrepresent that the restorative payment did not involve any transaction that could be prohibited within the meaning of section 406(a) or (b) of the Act. In this regard, according to the Applicants, (i) Elco made the restorative payment to AUL for the Plan's benefit and there was no transfer of assets from the Life Insurance Plan or the Plan, or use of assets of the Life Insurance Plan or other Plan assets for the benefit of Elco or Lilly or another party in interest, and (ii) neither the Committee nor any other person made a waiver of remedies that might be available to the Life Insurance Plan or the Plan with respect to the prohibited reinsurance transaction. Furthermore, the Applicant states that, to the extent that AUL's administration of the Account may be deemed to constitute a provision of services to the Life Insurance Plan or the Plan by AUL, such services should be exempted by virtue of the statutory exemption under section 408(b)(2) of the Act.

10. The Applicants represent that the past prohibited reinsurance transactions were reported on the Plan's 2009 Form 5500, filed with the Department in October 2010, and the correction was disclosed on the Plan's 2010 Form 5500. According to the Applicants, the Department examined the prohibited reinsurance transactions as a part of an investigation and determined that it would take no further actions with respect to the matter because Lilly had made the corrective payments described above. The Department issued a final closing letter on December 12, 2012.

Proposed Reinsurance Arrangement With Elco

11. The Applicants explain that if this proposed exemption is granted, AUL will serve as the direct insurer for the Optional Group Life part of the Life Insurance Plan and then contract with Elco to provide reinsurance coverage for 75 percent of Optional Group Life risks within the $250,000 to $600,000 band of exposure. [14] The Applicants state that the reinsurance agreement with AUL does not have a set term, but either Elco or AUL can terminate the agreement no sooner than 60 days after mailing notice to the other party. AUL may also terminate the agreement: (1) If annual premiums payable for the Optional Group Life drop below $800,000 or if Lilly ceases to own more than 50 percent of Elco; (2) upon insolvency, bankruptcy, receivership, rehabilitation, or liquidation of Elco; or (3) if Elco is unable or unwilling to meet one or more of its obligations under the agreement and fails to cure the default within 30 days of notification from AUL. The Applicants represent that the benefits to Lilly and Elco of this reinsurance arrangement include eliminating the insurer's margins (in this case AUL), more control over the life insurance program, access to data about the Life Insurance Plan, and the possibility that it could write other employer-specific coverages in the captive.

12. The Applicants state that AUL's reinsurance agreement with Elco (the Reinsurance Agreement) will be "indemnity only"--that is, AUL will not be relieved of its liability for benefits under the Life Insurance Plan if Elco is unable or unwilling to satisfy the liabilities arising from the reinsurance arrangement. The Applicants further represent that the reinsurance arrangement is a "quota share" arrangement, meaning that Elco will receive 75 percent of the premium applicable to the reinsured risk less ceding commission and risk charges. [15] The Applicants represent that although Elco is entitled to a share of the premium, Elco has no discretion with respect to denying a claim made by Lilly's Life Insurance Plan participants and beneficiaries. Finally, the Applicants note that AUL does not insure, and Elco does not reinsure, the basic life insurance benefits under the Life Insurance Plan.

13. The Applicants represent that Elco is a party in interest with respect to the Plan pursuant to section 3(14)(G) of the Act. Therefore, the reinsurance transaction would result in the indirect transfer of Life Insurance Plan premium payments, which are plan assets, to Elco, in violation of ERISA section 406(a)(1)(D), which prohibits the transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Additionally, the Applicants represent that the transactions could constitute violations of section 406(b)(1) of the Act, which prohibits a fiduciary from dealing with the assets of a plan in his interest or for his own account, and section 406(b)(3) of the Act, which prohibits a fiduciary from receiving any consideration for his own personal account from any party dealing with a plan in connection with a transaction involving plan assets. In this regard, the Applicants suggest that the Benefits Committee could be found to have used plan assets for the benefit of Lilly's affiliate, Elco, by causing the Life Insurance Plan to pay premiums to AUL under insurance contracts they know will be reinsured by Elco. The Applicants also indicate that the proposed reinsurance transaction could violate section 406(b)(2) of the Act, which prohibits a fiduciary from acting in any transaction involving a plan on behalf of a party whose interests are adverse to the interests of the Plan. In this regard, the Applicants note that, in connection with the subject reinsurance transactions, Elco has an interest that is adverse to the interests of the Plan. Therefore, Lilly could be found to have acted in a transaction involving the Life Insurance Plan on behalf of a party whose interests are adverse to the interests of the Life Insurance Plan by causing Elco to reinsure the Plan's contract with AUL for Optional Group Life. Accordingly, this proposed exemption, if granted, will provide relief from the prohibitions set forth in sections 406(a)(1)(D) and 406(b) of the Act for the reinsurance transactions and the corresponding premiums that Elco will receive.

Enhancements

14. The Applicants note that, since January 1, 2012, in anticipation of the proposed exemptive relief described herein, certain enhancements (the Enhancements) have been provided to participants in the Eli Lilly Health Plan (the Health Plan), which is a component of the Plan. In this regard, the Applicants state that the Enhancements described below would not have been added to the Health Plan but for the proposed arrangement that is the subject of this notice. The Applicants state that Lilly is bearing the entire cost of such Enhancements. The Applicants explain that all programs are voluntary and consist of the following:

(a) Enhanced Coaching Program--provides additional coaching for health conditions not previously covered. Theprogram also provides a new predictive model to identify participants who would most likely benefit from coaching;

(b) Biometric Screenings--participants have multiple options in which to participate in the voluntary screenings. The screenings include data on height, weight, waist circumference, full lipid panel, and glucose testing. Each participant can obtain a well-being report through a web portal and then share it with his or her personal physician, health coach, or employee health services practitioner to help detect health risks earlier. If a participant receives a result that is critically abnormal, the participant receives a follow-up call to explain the results and any available Plan or wellness program resources for that particular condition or risk factor; and

(c) Enhanced Health Risk Assessment/Well-Being Assessment--a more comprehensive voluntary health and wellness assessment will combine questions on physical and emotional health, productivity, work environment, and healthy behaviors. This assessment is intended to help employees better understand their health risks and areas where behaviors may hinder their health. It will be used in connection with the biometric screenings to communicate with individuals about voluntary coaching programs that would be medically beneficial to such individuals based on their particular condition or risk factors.

15. The Applicants represents that Lilly has incurred substantial costs related to the enhanced wellness program. The Applicants represent that, although it is difficult to break down in its entirety, the following costs are associated with the enhanced wellness program: On-site health coach for Indianapolis sites ($200,000 per year); Web site portal ($250,000 per year); On-site biometric screenings for all U.S. employees (approx. $50/employee); and Counseling, support groups, one-on-one coaching, and smoking cessation products (approx. $12,000 per year).

16. The Applicants represent that if the Enhancements are modified, alternative enhancements of at least the same approximate value, as determined by an independent, qualified fiduciary will continue in all subsequent years of the reinsurance arrangement.

Independent Fiduciary

17. In connection with this exemption request, the Applicants represent that they have retained Keith A. Dall, from Milliman, to act as the Independent Fiduciary (the Independent Fiduciary) on behalf of the Plan for the purpose of evaluating, and if appropriate, approving the subject transactions. [17] In this regard, Mr. Dall is responsible for conducting a due diligence review and analysis of the proposed transactions and for providing a written opinion explaining why he believes the arrangement meets the Department's requirements for an administrative exemption. The Applicants represent that Mr. Dall will also determine whether the conditions of the proposed exemption and the terms of the benefits enhancements continue to be satisfied.

18. Mr. Dall certifies that he is qualified to serve as the Independent Fiduciary in that, among other things, he has appropriate training, experience, and facilities to act on behalf of the Plan in accordance with the fiduciary duties and responsibilities prescribed by the Act. Mr. Dall represents that he and Milliman are independent of the parties to the covered transactions because Milliman's gross income from Lilly for the prior fiscal year does not exceed two percent of Milliman's gross annual income. Mr. Dall also represents that neither he nor Milliman was a fiduciary with respect to the Plan prior to this appointment. Moreover, Mr. Dall represents that neither he nor Milliman is an affiliate, officer, director, employee, or partner of Elco, Lilly, or AUL. Furthermore, the Applicants state that Milliman is not a corporation or partnership in which Lilly or Elco has an ownership interest or is a partner and that Milliman does not, on its own account, own any shares or otherwise have an ownership interest in Lilly, Elco, or any of their affiliates. Finally, the Applicants represent that Milliman will acknowledge in writing its acceptance of fiduciary responsibility and has agreed not to participate in any decision with respect to any transaction in which it has an interest that might affect its best judgment as a fiduciary. Moreover, neither Milliman, nor any partnership or corporation of which Milliman is an officer, director, or ten percent or more partner or shareholder, intends to acquire any property from, sell any property to, or borrow funds from Lilly, Elco, or their affiliates while serving as the Independent Fiduciary or for six months after serving as the Independent Fiduciary. If it becomes necessary in the future to appoint a successor Independent Fiduciary to replace Milliman, the Applicants represent that they will notify the Department sixty (60) days in advance of such appointment. Any successor will have the same, or substantially similar, responsibilities, experience, and independence as Milliman. If such a successor is appointed, the Applicants represent there will be no lapse in time between the resignation or termination of the former Independent Fiduciary and the appointment of the successor Independent Fiduciary.

19. The Applicants represent that in connection with the reinsurance transactions, Mr. Dall reviewed, among other things: A draft of Eli Lilly and Elco's request to the Department for an administrative exemption; Elco's audited financial statements for the year ending December 31, 2012; the insurance rates between Lilly and AUL; the reinsurance agreement between AUL and Elco; and documentation summarizing the Enhancements. Furthermore, Mr. Dall produced an Independent Fiduciary Report (the Independent Fiduciary Report) wherein he considered the covered transactions and made the following determinations:

Mr. Dall represents that Milliman compared the insurance rates between Lilly and AUL to rates for similar group supplemental life and dependent life benefits and found them to be competitive and within normal ranges. In addition to this, Mr. Dall represents that Milliman reviewed the premium rate history with the claims and expense history on this block of business and found the loss ratios to be reasonable relative to the industry and consistent with the intended loss ratio stated in the AUL actuarial memorandum provided by AUL. Mr. Dall represents that Milliman believes that other insurance carriers would offer similar rates given the experience on this block of business. Additionally, Mr. Dall confirmed that he received a copy of the reinsurance agreement between AUL and Elco and the Plan pays no commissions with respect to the reinsurance with Elco.

Mr. Dall also confirmed that Elco is licensed to conduct insurance transactions, including reinsurance transactions, in the State of South Carolina, which requires

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Signed at Washington, DC, this 9th day of April, 2015.

Lyssa E. Hall,

Director, Office of Exemption Determinations, Employee Benefits Security Administration.

[FR Doc. 2015-08565 Filed 4-14-15; 8:45 am]

Myron Struck, editor, Targeted News Service, Springfield, Va., 703/304-1897; [email protected]; http://www.targetednews.com

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