US Department of Labor Proposes First Pension Plan Exemption for Captive Insurance

For a number of years, the US Department of Labor (DOL) has responded favorably to requests for prohibited transaction exemptions (PTE) relating to welfare benefit plan benefits being reinsured to a captive insurer.

Simply stated, the requests were filed with the DOL because a transaction between an employer and a "party in interest" (which would include a captive that, e.g., would be more than 50 percent owned by the employer) is prohibited under the Employee Retirement Income Security Act of 1974 (ERISA) and subject to various sanctions.

The DOL, however, has authority to grant exemptions, and such exemptions were granted based on requirements designated by the DOL. However, until a proposed exemption recently appeared in the Federal Register all of the previous exemptions dealt with welfare benefit plans. In general, these are plans providing differing types of benefits (e.g., life insurance, health insurance, etc.) and include plans fully paid for by employers, plans partially paid for by employers, and completely voluntary plans (i.e., employee paid).

On July 18, 2024, the DOL published a proposed exemption involving Memorial Sloan Kettering Cancer Center (MSKCC), which applied to a pension plan (not a welfare benefit plan) maintained by MSKCC. Under the proposed exemption, MSKCC would purchase a guaranteed annuity contract (GAC) issued by a licensed commercial insurer, and which would be reinsured with a captive insurer formed in Vermont, owned by MSKCC, which would also guaranty the obligations of the captive.

There are, of course, a number of conditions set forth in the PTE that would have to be addressed by others seeking a similar exemption, but it is significant that after more than 20 years of addressing PTEs only with respect to welfare benefit plans the DOL has now decided to address a pension benefit plan in this proposed exemption.