Running an effective apprenticeship program requires the management of a wide variety of key stakeholders. Navigating this complicated landscape and avoiding potential pitfalls have long been concerns of these contacts. The International Foundation Apprenticeship Program Answer Guide can help. This online, member-exclusive resource is designed to be a quick Q&A-style reference for a wide variety of apprenticeship program stakeholders, including training directors, coordinators and trustees.
Below are nine questions that address some common program pitfalls, including prohibited transactions; what constitutes a plan fiduciary; the use of plan assets for marketing, contests and competitions; and lending agreements.
What is a prohibited transaction?
Under the Employee Retirement Income Security Act of 1974 (ERISA), there is a broad prohibition against fiduciaries causing (directly or indirectly) a benefit plan to engage in transactions that would create a potential or actual conflict of interest. Any such transaction would be considered a prohibited transaction.
What are the specific types of transactions that could trigger a prohibited transaction?
ERISA Section 406(a) states that the following transactions between a benefit plan and a party in interest are prohibited transactions absent an exemption:
- Sale or exchange of property
- Loan or other extension of credit
- Provision of services, goods or facilities
- Transfer of plan assets to or for the use or benefit of a party in interest.
ERISA also provides for prohibited transactions applicable only to fiduciaries. Under ERISA Section 406(b), these prohibited transactions are:
- Fiduciary conflict of interest
Fiduciary responsibility is the “highest standard known to law.” The prohibited transactions in Section 406(b) set specific guidelines on impermissible behavior by those charged with fiduciary responsibility. The key for these types of prohibited transactions is that fiduciaries cannot use plan assets for their own interest, act on both sides of a transaction involving the plan or receive financial benefit from a party doing business with the plan related to plan business.
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What is the definition of a fiduciary?
With respect to an ERISA benefit plan, including apprenticeship plans, a fiduciary is a person (or entity) that performs certain functions for the plan. There are several ways to become a fiduciary. Fiduciary status may be conferred by simply holding a particular plan position, such as plan trustees who are automatically fiduciaries. ERISA also requires that plans designate a named fiduciary. The named fiduciary has the ultimate responsibility for the plan. For multiemployer plans, the named fiduciary is virtually always the board of trustees.
There are also general fiduciaries under ERISA. These individuals or entities include those who exercise discretion or control over plan assets or plan management, provide investment advice to the plan for compensation or have any discretionary responsibility in administering the plan. It is important to know that people can be fiduciaries without expressly accepting fiduciary responsibility if they are performing fiduciary functions. This is true even if they have expressly stated (in a contract or otherwise) that they do not intend to be a fiduciary. ERISA places actions over words in this context.
What are the pillars of fiduciary responsibility?
There are five basic principles, or pillars, of fiduciary responsibility. These pillars, which are derived from ERISA Section 404, provide the fundamental guidelines by which fiduciaries, including those associated with a JATC, must act.
- Act solely in the interest of plan participants and beneficiaries
- Hold and deal with plan assets for the exclusive purpose of paying benefits and defraying costs of plan administration
- Act prudently
- Diversify plan investments
- Act in accordance with plan documents, insofar as the plan documents are consistent with ERISA.
Use of Plan Assets
Can an apprenticeship program use plan assets to purchase marketing and other promotional materials?
Yes, an apprenticeship program can use plan assets to purchase marketing and other promotional materials. Like other educational enterprises, apprenticeship and training programs have to perform outreach to increase awareness of the program and to recruit prospective applicants for the program. Outreach efforts may include distributing information about the program and program standards, publishing advertisements, participating in workshops or other job fairs, and partnering with local school districts and vocational education systems.
The use of plan assets to purchase marketing and other promotional materials must be consistent with ERISA fiduciary responsibilities. The expenses must be for marketing or promotional materials, and the amount of the expenses must be consistent with the fiduciaries’ obligation to be prudent and economical in the use of plan assets. For example, T-shirts bearing the name of the program would be a permissible expenditure, but expensive sporting event tickets would be impermissible.
As with other expenditures, trustees should be mindful of prohibited transaction rules when authorizing the use of plan assets for marketing and promotional activities. In addition, as a matter of general prudence, a written expense policy and internal controls should be in place to prevent abuse and inappropriate or excessive expenditures of plan assets.
Can an apprenticeship program use plan assets to pay for contests and other competitions?
Yes, an apprenticeship program may use plan assets to pay for modest graduation ceremony expenses, provided that (1) the amount of the expense is modest in relation to plan assets; (2) the expenses are approved in accordance with internal accounting, recordkeeping and administrative controls designed to prevent inappropriate, excessive or abusive expenditures; and (3) the expenses are directly related to the graduation ceremony.
Like other educational enterprises, apprenticeship and training programs often coordinate graduation ceremonies to honor apprentices who have successfully completed the program. Apprenticeship programs may use plan assets to pay for modest graduation ceremonies, including light refreshments, diplomas or certificates, and small token gifts for those associated with the program (e.g., instructors).
However, the use of plan assets to pay for a graduation dinner for all attendees, valet parking, or payment for travel and accommodation would be impermissible.
As with other expenditures, trustees should be mindful of prohibited transaction rules when authorizing the use of plan assets for graduation ceremony expenses. In addition, as a matter of general prudence, a written expense policy and internal controls should be in place to prevent abuse and inappropriate or excessive expenditures of plan assets.
A final note: Although there is clear DOL guidance permitting the use of plan assets for marketing, promotional activities and modest graduation ceremony expenses, trustees still have to closely monitor and review these types of expenses. Despite such DOL guidance on graduation ceremonies, DOL interpretation and application of that guidance may still vary from auditor to auditor. For example, some DOL auditors may apply the guidance in a narrower fashion than others when determining whether the actual cost of light refreshments or token gifts is sufficiently modest in relation to plan assets.
Is a written lease agreement required if the space has been leased over a long period of time?
Yes. A written lease agreement is always required to document the transaction and its terms. Importantly, a written lease is required before day one!
What terms should be included in the lease?
Terms that should be included in a lease are:
- Length of the lease
- Monthly lease payment
- Description of the premises
- Termination provisions.
Can a JATC buy land or property from a party in interest?
No. A JATC cannot buy land or real property from a party in interest. There is no exception in ERISA to permit this type of transaction. However, a JATC can lease real property from a party in interest as long as certain criteria are met, including (1) the transaction is just as favorable to the JATC as any other arm’s length transaction with an uninterested party would have been, (2) the transaction is appropriate and helpful in carrying out the purposes of the JATC, and (3) all records related to the transaction are maintained for at least six years from the termination of the transaction in order to allow interested parties and the Department of Labor (DOL) an opportunity to review.
Looking for a One-of-a-Kind Apprenticeship Learning Experience?
Join the Foundation for an elusive event to see firsthand how the German Model for Apprentices operates. Register today for the German Apprenticeship Tour, June 3-7, 2019 in Munich, Germany to learn best practices that you can implement in your own program.
If you’d like to learn more about this exciting opportunity, plan to attend the upcoming German Apprenticeship Program Tour webcast on May 2, 2019 at 3:00 p.m. ET.
Justin Held, CEBS
Senior Research Analyst at the International Foundation