[Federal Register: June 26, 2009 (Volume 74, Number 122)]
[Notices]
[Page 30631-30642]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26jn09-139]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Nos. and Proposed Exemptions; D-11432, Iron Workers Local
17 Pension Fund (the Plan); D-11483 Urology Clinics of North Texas,
P.A. 401(k) Profit Sharing Plan and Trust (The Plan); and L-11451, Ford
Motor Corporation and Its Affiliates (collectively, Ford), et al.]
Notice of Proposed Exemptions
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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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).
Written Comments and Hearing Requests
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. 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.
ADDRESSES: 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 e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``moffitt.betty@dol.gov'', 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.
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).
SUPPLEMENTARY INFORMATION: 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 (55 FR 32836, 32847, August 10, 1990).
[[Page 30632]]
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.
Iron Workers Local 17 Pension Fund (the Plan) Located in Cleveland,
Ohio
[Application No. D-11432]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code, and in accordance with the procedures set forth in 29 CFR part
2570 subpart B (55 FR 32836, 32847, August 10, 1990). If the proposed
exemption is granted, the restrictions in sections 406(a)(1)(A),
406(a)(1)(D), and 406(b)(1) and (b)(2) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of sections 4975(c)(1)(A) and 4975(c)(1)(D) through (E) of the Code,
shall not apply to the sale of a leasehold interest, which includes an
office building (the Building) and certain rights pursuant to a ground
lease, held by the Plan, to the Bridge, Structural and Ornamental Iron
Workers Local Union No. 17 (the Union), a party in interest with
respect to the Plan, provided that the following conditions are
satisfied:
(a) The terms and conditions of the sale are at least as favorable
to the Plan as those that the Plan could obtain in an arm's length
transaction with an unrelated party;
(b) The Plan receives the greater of $285,000 or the fair market
value of the Building and lot on which the Building is located (the
Lot), as of the date of the sale, as determined by a qualified,
independent appraiser;
(c) The sale is a one-time transaction for cash;
(d) The Plan pays no commissions, costs, or other expenses in
connection with the sale (other than fees associated with the retention
of a qualified, independent appraiser and the retention of a qualified,
independent fiduciary);
(e) The Board of Trustees retains a qualified, independent
fiduciary, who will review and approve the methodology used by the
qualified, independent appraiser, will ensure that such methodology is
properly applied in determining the fair market value of the Building
and Lot as of the date of the sale, and will determine whether it is
prudent to go forward with the proposed transaction; and
(f) Prior to the publication of a final exemption, if granted, in
the Federal Register, regarding the transaction that is the subject of
this proposed exemption, the Union: Files Form 5330 (Return of Excise
Taxes Related to Employee Benefit Plans) with the Internal Revenue
Service and pays all applicable excise taxes that are due by reason of
its prohibited past leasing to the Plan of the Lot on which the subject
Building was constructed by the Plan; and Provides a copy of the
cancelled check and other documentary evidence to the Department
indicating that the taxes were correctly computed and paid.
Summary of Facts and Representations
1. The Plan is a multi-employer, defined benefit pension plan,
created and maintained pursuant to collective bargaining agreements
between the Union and the Construction Employers Association (CEA). The
Plan is administered by a Board of Trustees (the Trustees), consisting
of three trustees appointed by the Union and three, by the CEA. As of
April 30, 2008, the Plan had approximately 2,180 participants and
beneficiaries and total assets of approximately $115,313,797.
2. Among the assets of the Plan is its leasehold interest in a
property located at 1564 East 23rd Street, Cleveland, Ohio. A one-story
office building (the Building), measuring 4114 square feet, sits on a
51' x 147' lot belonging to the Union (the Lot) that is currently being
leased to the Plan. The lease provides for an initial term of 99 years
until 2084 and a rental rate of $200 per month. Under the lease terms,
the Plan also has an option to terminate the lease at any time, to
extend the term of the lease indefinitely at the same rental rate, or
to purchase the Lot for $20,000. The Building is adjacent to, and
shares a common wall with, the Union's building at 1544 East 23rd
Street, Cleveland, Ohio. There is a parking lot consisting of eight
parking spaces in front of the Building. The immediate neighborhood is
a mixed-use commercial area.
The Building was constructed on the Lot by the Plan in 1986,
pursuant to a feasibility study by Coopers & Lybrand commissioned by
the Trustees; Coopers & Lybrand opined that it would be more cost-
effective in the long run for the Plan to construct its own office
space rather than to continue renting, as it had been doing.
Subsequently, the Plan entered into a lease for the Lot with the Union,
made retroactive to September 1985 but without the benefit of an
administrative prohibited transaction exemption.\1\
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\1\ The Department is not proposing any exemptive relief herein
for these past prohibited transactions, whose background is
described in greater detail in Facts and Representations 5,
below.
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The Plan uses the Building for administrative office space and also
leases office space to its ``sister plans,'' the Iron Workers Local 17
Annuity Fund and the Iron Workers Local 17 Insurance Benefit Fund,
pursuant to Prohibited Transaction Exemption (PTE) 76-1 and PTE 77-
10.\2\ According to the applicant, shared expenses are allocated on a
pro rata basis, with the Plan consistently receiving an allocation of
approximately 40% of shared expenses.
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\2\ PTE 76-1 (41 FR 12740, March 26, 1976) is a class exemption
that provides relief from sections 406(a) and 407(a) of the Act (and
section 4975(c)(1)(A) through (D) of the Code), under certain
conditions, for the leasing of office space by a multiple employer
plan to a participating employee organization, participating
employer, participating employer association, or another multiple
employer plan, which is a party in interest or disqualified person
with respect to the plan. PTE 77-10 (42 FR 33918, July 1, 1977) is a
class exemption that provides relief from section 406(b)(2) of the
Act, under certain conditions, for the leasing of office space by a
multiple employer plan to a participating employee organization,
participating employer (without regard to whether the office space
constitutes ``qualifying employer real property''), participating
employer association, or another multiple employer plan, which is a
party in interest with respect to the plan or to which it is related
by virtue of having common trustees. The Department expresses no
opinion herein as to whether the Plan's leases to its ``sister
plans'' satisfy the terms and conditions of PTEs 76-1 and 77-10.
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3. The Building and Lot were appraised by James P. Prosek, SRA, and
Aaron Baaske, CRA, CREA, independent appraisers located in Amherst,
Ohio. Mr. Prosek and Mr. Baaske are experienced real estate appraisers
licensed in the state of Ohio and are members of recognized societies
that award professional designations in their field. In their appraisal
report, Mr. Prosek and Mr. Baaske utilized the Sales Comparison
Approach and the Income Approach, with greater reliance on the former,
to arrive at an estimated value of $285,000, as of November 14, 2008,
for the fee simple interest of the Building and Lot (as a unified
property). They then opined that the value of the Union's leased fee
interest in the property, belonging to the Union as the lessor, is
$20,000, or the amount specified in the Plan's option to purchase the
Lot under the terms of the ground lease. To isolate the value of the
Plan's leasehold interest in the property, they then subtracted $20,000
from the value of the fee simple interest
[[Page 30633]]
($285,000), so that the value of the Plan's interest is $265,000, as of
November 14, 2008. Although the Plan does not own the whole property
but only the leasehold interest, the Union is willing to pay a purchase
price encompassing the fair market value of both the Building and Lot
as a unified property.
Mr. Prosek and Mr. Baaske also determined that no premium is due
from the Union to the Plan, as a term of the proposed sale, for any
assemblage value resulting from the adjacency of the Union's building
to the Plan's Building. The appraisers state, ``A study of the
influence of incremental size on office property values in this market
does not reveal a premium being paid, on a price per square foot basis,
for larger properties. In fact, some tendency toward diminishing return
on size is evident * * *.'' The report continues, ``Further, the
subject building was designed and built for a single user * * *. It was
not designed to be incorporated with the neighboring building and
combining the two might result in a larger building that offers less
than optimum utility.'' The report concludes, ``[T]he highest and best
use of the subject property is a continuation of its current use as an
independent office facility.''
In regard to the fair market rental value of the Building, Mr.
Prosek and Mr. Baaske state, ``The observed leasing activity produces a
fairly tight range of contract and asking rents, generally from about
$9.00 to $12.00 per square foot of building area * * *. These leases
and offerings suggest rent, assuming the described market expense
structure, near $10.50 per square foot per year as appropriate for the
subject space.''
4. The Trustees have retained Ms. Nell Hennessy, President and
Chief Executive Officer of Fiduciary Counselors Inc. (FCI) to act as an
independent fiduciary on behalf of the Plan. Ms. Hennessy has headed
FCI since its incorporation in 1999. From 1993 to 1998, she served as
Deputy Executive Director and Chief Negotiator of the Pension Benefit
Guaranty Corporation (PBGC), the federal agency that guarantees private
defined benefit pensions. Prior to Ms. Hennessy's employment at the
PBGC, Ms. Hennessy was a partner in the law firm of Willkie Farr &
Gallagher, where she advised clients on a wide range of benefit,
investment, and corporate governance issues. Ms. Hennessy will review
and approve the methodology used by the appraisers to ensure that such
methodology is properly applied in determining the fair market value of
the Building and Lot, to be updated as of the date of the sale. She
also will determine whether it is prudent to go forward with the
proposed transaction.
5. At the Department's request, the applicant provided background
on the Union's past and on-going lease of the Lot to the Plan.
According to the applicant, the Cincinnati Regional Office opened an
investigation of the Plan in 1985, which continued until 1989. The
investigator advised the Union that, because the Plan did not have
separate title to the Building, use of the Plan assets to construct the
Building on Union land was a prohibited transaction.
Upon the advice of counsel, the Union, on July 10, 1987, entered
into a lease of the Lot located at 1564 East 23rd Street to the Plan,
with a retroactive effective date of September 1, 1985, pursuant to the
terms described in Facts and Representations 2, above. The
Trustees represent that they were advised by counsel, at that time,
that the ground lease was covered by the statutory exemption contained
in section 408(b)(2) of the Act.\3\ The Trustees, however, were unable
to locate and produce contemporaneous written documentation of the
advice from an ERISA counsel regarding the applicability of section
408(b)(2) to the lease.\4\ The applicant has agreed, as a condition of
this proposed exemption, to file Form 5330 and pay all applicable
excise taxes that are due by reason of its prohibited past leasing to
the Plan of the Lot on which the subject Building was constructed.
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\3\ The Department's review of correspondence with the
Cincinnati Regional Office revealed that the field office had
advised their counsel that the ground lease was a prohibited
transaction and that an administrative prohibited transaction
exemption should be sought to cover it. The regulation at 29 CFR
2550.408b-2 clarifies that section 408(b)(2) provides relief for
payments by a plan for leases of office space. It also limits the
scope of the exemptive relief to section 406(a) so that relief from
section 406(b), which prohibits, among other things, self-dealing by
plan fiduciaries, is not provided.
\4\ The request for retroactive prohibited transaction relief
for the ground lease was withdrawn. The Department's standard for
obtaining a retroactive prohibited transaction exemption is set
forth in ERISA Technical Release 85-1.
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6. The Trustees have determined that the proposed sale to the Union
of the Plan's leasehold interest, which includes the Building, a right
of first refusal to purchase the Lot, a purchase option for the Lot,
and an option to renew for successive terms, is in the best interests
of the Plan. According to the applicant, the Plan and its ``sister
plans'' have reduced the size of their respective office staffs over
the past few years and thus their need for office space. Although the
Plan's leasehold interest represents less than three-tenths of one
percent of the Plan's assets, the Trustees believe that it is in the
best interests of the Plan to divest itself of this illiquid asset.
Further, the Plan will eliminate the operating and maintenance expenses
associated with the Building. It is represented that the Plan will
realize savings by renting the smaller amount of office space it needs
rather than continuing to occupy the Building, as explained below.
All three of the Iron Workers Local 17 plans will rent nearby
office space from an unrelated party following the sale of the Plan's
leasehold interest to the Union. The three plans will split the monthly
rental cost of $1,125 per month. Based upon the Plan's current expense
allocation of 40% of the overall cost, the Plan will pay rent of $450
per month, or $5,400 per year. The Plan's expense allocation in 2007 in
connection with the Building that it currently occupies (for holding
costs, such as the land lease, utilities, and taxes) was $10,383 per
year, the amount not offset by rent payments from the Plan's sister
plans. Thus, according to the Trustees, the move to different office
space will yield annual savings to the Plan of $4,983, approximately
47%.
Although the Plan owns only the leasehold interest, the Union is
willing to pay the greater of $285,000 or the fair market value for the
fee simple interest of the Building and Lot as a unified property (as
previously stated in Facts and Representations 3, above); the
fair market value is to be updated as of the date of the sale by a
qualified, independent appraiser. The Plan's cost of construction for
the Building was initially quoted at $231,900, but, due to cost
overruns, came to a total of $321,738.\5\ Nevertheless, the Trustees
represent that the Plan saved approximately $16,830 in rental costs
from owning the Building, which also has generated rental income for
the Plan. Although the minimum $285,000 sales price will not enable the
Plan to recoup its construction and holding costs of $640,631, the
Trustees state that the Plan has had use of the Building for the past
22 years and the imputed value of the rental income it did not have to
pay is estimated to be $367,463.
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\5\ The Department expresses no opinion herein as to whether the
cost overruns paid by the Plan violated any of the provisions of
part 4 of Title I of the Act.
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7. The Trustees represent that the subject sale will be a one-time
transaction for cash and that the Plan will incur no fees, commissions,
or other expenses in connection with the sale (other than fees
associated with the
[[Page 30634]]
retention of a qualified, independent appraiser and the retention of a
qualified, independent fiduciary). The Union is also bearing the costs
of the exemption application and of notifying interested persons.
8. In summary, the applicant represents that the proposed
transaction satisfies the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons: (a) The terms and
conditions of the sale will be at least as favorable to the Plan as
those that the Plan could obtain in an arm's length transaction with an
unrelated party; (b) the Plan will receive the greater of $285,000 or
the fair market value of the Building and Lot as of the date of the
sale, as determined by a qualified, independent appraiser; (c) the sale
will be a one-time transaction for cash; (d) the Plan will pay no
commissions, costs, or other expenses in connection with the sale
(other than fees associated with the retention of a qualified,
independent appraiser and the retention of a qualified, independent
fiduciary); and (e) the Trustees have retained a qualified, independent
fiduciary, who will review and approve the methodology used by the
qualified, independent appraiser, will ensure that such methodology is
properly applied in determining the fair market value of the Building
and Lot as of the date of the sale, and will determine whether it is
prudent to go forward with the proposed transaction.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 693-8557. (This is not a toll-free number).
Urology Clinics of North Texas, P.A. 401(k) Profit Sharing Plan and
Trust (The Plan) Located in Dallas, TX
[Application No. D-11483]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (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) through (E) of the
Code, will not apply to the proposed sale (the Sale) of a 2.52 percent
ownership interest comprising five (5.0) Class I Units (the Units)
issued by the Center for Pediatric Surgery (CPS), an unrelated party,
by the individually directed account in the Plan (the Account) of David
Ewalt, M.D. (Dr. Ewalt), to Dr. Ewalt, a party in interest with respect
to the Plan.
This proposed exemption is subject to the following conditions:
(a) The Sale is a one-time transaction for cash;
(b) the closing of the Sale (the Closing Date) occurs within 60
days of the Department's grant of the final exemption;
(c) the Units are sold to Dr. Ewalt at the greater of the fair
market value of the Units as of the Closing Date, as determined by a
qualified, independent appraiser or for $441,000 for the 2.52 percent
interest of ownership of CPS;
(d) in addition to the sale price described above, the Account will
have received $408,954.00 in consideration for the reduction of the
Account's interest in CPS as a result of an investment by Cook
Children's Health Care System (Cook) in CPS;
(e) the proceeds from the Sale are credited to the Account
simultaneously with the transfer of the Units' title to Dr. Ewalt;
(f) neither the Plan nor the Account pay any fees, commissions, or
other costs or expenses associated with the Sale; and
(g) the terms and conditions of the Sale remain at least as
favorable to the Account as the terms and conditions obtainable under
similar circumstances negotiated at arm's length with an unrelated
party.
Summary of Facts and Representations
1. Urology Clinics of North Texas, P.A. (the Employer) has its
principal office and place of business in Dallas, TX. The Employer has
27 physician partners including Dr. Ewalt.
2. The Plan is a defined contribution profit sharing plan and has
147 participants and beneficiaries. As of December 31, 2007, the Plan's
assets were valued at $20,190,735.00. The Plan's trustees consist of
four physicians. Dr. Ewalt is one of the trustees of the Plan and is
also a member of the Plan's administrative committee. The value of the
Account as of May 8, 2009 is $1,336,000.00.
3. In 2002, the Plan purchased 4.63 percent (4.63%) interest in CPS
for the benefit of the Account from the Plano Pediatric Surgery Center
(Plano Center). The Plano Center was the entity that originally
established CPS and it is not affiliated in any way with the Employer,
the Plan or Dr. Ewalt. The Account paid $43,500 for the 4.63% interest
in CPS. The acquisition of the Units occurred at the time of the
original capitalization of CPS.
4. CPS was formed in 2005 as an outpatient surgery facility in
Plano, Texas. Construction on CPS' facility was completed in 2006. CPS
currently performs cases in the following medical specialties: GI,
Dermatology, Ophthalmology, Dental Surgery, Orthopedic Surgery, ENT,
General Surgery, Plastic Surgery, and Urology.
5. Since 2006, the Units have generated Unrelated Business Taxable
Income (UBTI) under Code section 511. It is represented that the Plan
has paid income taxes equal to $74,789 in 2006 and $58,937.00 in 2007
resulting from the UBTI. It is estimated that for the 2008 tax year,
the Plan will pay $59,000 in income tax based on the UBTI. It is
represented that the Account has borne the entire tax burden on behalf
of the Plan. Due to the burden on the Account for paying taxes
generated by the UBTI, Dr. Ewalt determined that selling the Units was
in the best interest of the Account. Following the Sale, the Account
would no longer be subject to UBTI liability. Because CPS is a medical
provider, only physicians or entities representing physicians could
purchase the Units. Moreover, the general partner of CPS must also
approve any sales of the Units to any outside physicians or entities
that represent physicians. Accordingly, Dr. Ewalt proposes to purchase
the Units from the Account.
6. The Employer hired Vincent Kickirillo (the Appraiser) of VMG
Health, LLC, to appraise the value of the Units. He is a member of the
Association for Investment Management and Research, the National
Association of Certified Valuation Analysts and the Dallas Society of
Financial Analysts. In addition, he holds a Chartered Financial Analyst
designation. Neither the Appraiser nor VMG Health, LLC have any
affiliation with the Employer and less than one percent of the income
received by VMG Health, LLC is generated from services rendered to the
Plan or any party in interest with respect to the Plan. The Appraiser
applied a minority discount to the Units of 25 percent when compared to
a controlling interest stake. The Appraiser valued each one percent
interest of ownership of CPS at $175,000 as of January 9, 2008. Since
the Units represent a 4.63% interest in CPS, the value of the Units as
of January 9, 2008 was $810,250 ($175,000 x 4.63).
7. On August 1, 2008, Cook Children's Health Care System (Cook)
completed a capital investment in CPS that resulted in Cook's ownership
of 51 percent of the aggregate ownership interest CPS. Cook is not a
party in interest to the Plan. The Cook investment did not represent an
actual purchase from the Account of any
[[Page 30635]]
of the Units. Instead, the Cook investment represented an injection of
capital into CPS which resulted in the issuance of additional ownership
units to Cook and dilution of the then existing investors of CPS.
8. Prior to the investment by Cook, individual investors, including
the Account, together held an 81 percent aggregate interest in CPS,
while the remaining 19 percent interest was held by Nuettera Holdings,
LLC, (Nuettera) the entity providing business management services to
CPS. Following the investment by Cook, the individual investors'
aggregate interest in CPS has been reduced to 44 percent and the
interest held by Nuettera Holdings, LLC has been reduced to five
percent.\6\ Due to the Cook investment and the resulting dilution and
reduction of the ownership of the individual investors, the Account's
aggregate interest in CPS decreased from 4.63 percent to 2.52 percent.
As consideration for this dilution of their ownership interest, the
previous investors received a special cash distribution from CPS. The
Account's share of this cash consideration was $408,954.00. This amount
was deposited in the Account and invested in accordance with Dr.
Ewalt's directions. On March 30, 2009, the Appraiser updated his
appraisal concerning the value of a one percent ownership interest in
CPS as a result of the Cook investment. The Appraiser determined that a
one percent interest in CPS is valued at $175,000. Therefore, the
current value of the Units which now represent a 2.52% interest in CPS
is valued at $441,000 (2.52 x $175,000).
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\6\ Nuetttera was engaged to provide management services for the
surgery center. Nuettera held an ownership interest in CPS, but that
interest was represented by units of a different class (Class II
units) than those held by the physician practitioners who owned the
remaining interests in CPS (Class I units). When Cook acquired its
interest in CPS in 2008, it acquired both Class I and Class II
units. The dilution of Nuettera's interest in CPS was
proportionately greater than the dilution of the physicians'
interests because Cook acquired seventy-five percent (75%) of the
Class II units. In contrast, the aggregate ownership of the
physicians was diluted by roughly fifty-four percent (54%) following
the Cook investment. The reason the relative dilution of the two
groups was different was a result of the fact that the two groups
owned different classes of units.
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9. In summary, it is represented that the Sale satisfies the
statutory criteria for an exemption under Section 408(a) of the Act for
the following reasons: (a) The Sale to Dr. Ewalt is a one-time
transaction for cash; (b) the Closing Date occurs within 60 days of
grant of the final exemption; (c) the Units will be sold to Dr. Ewalt
at the greater of the fair market value of the Units as of the Closing
Date, as determined by a qualified, independent appraiser, or $441,000;
(d) In addition to the sale price described above, the Account will
have received $408,954.00 from Cook in consideration for the reduction
of the Account's interest in CPS; (e) the Sale proceeds from the
transaction are credited simultaneously to Dr. Ewalt's Account as the
transfer of the Units' title to Dr. Ewalt; (f) the Account pays no
fees, commissions or other costs and expenses associated with the Sale;
(g) The terms and conditions of the Sale remain at least as favorable
to the Account as the terms and conditions obtainable under similar
circumstances negotiated at arm's length with an unrelated party.
Notice to Interested Parties: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the Employer and Department within 15 days of the date of publication
of this notice of proposed exemption in the Federal Register. Comments
and requests for a hearing are due forty-five (45) days after
publication of this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Anh-Viet Ly of the Department,
telephone (202) 693-8648 (this is not a toll-free number).
Ford Motor Corporation and Its Affiliates (Collectively, Ford) Located
in Detroit, MI
[Application No. L-11451]
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 (55 FR 32836,
32847, August 10, 1990).
Section I. Covered Transactions
If the exemption is granted, the restrictions of sections
406(a)(1)(B), 406(a)(1)(D), 406(b)(1), and 406(b)(2) of the Act shall
not apply, effective July 13, 2006, to: (1) Monthly cash advances to
Ford by the Independent Health Care Trust for UAW Retirees of Ford
Motor Company (the DC VEBA), as defined in section III(f), below, of
this exemption, to reimburse Ford for the estimated mitigation of
certain health care expenses (the Mitigation), as defined in section
III(h), below, of this exemption, and during the period from July 14,
2006 through February 28, 2007, for the payment of dental expenses
incurred by participants in the DC VEBA; and (2) an annual ``true-up''
of the Mitigation payments and dental expenses against the actual
expenses incurred, with the result that: (a) if Ford has been underpaid
by the DC VEBA, Ford receives the balance outstanding from the DC VEBA
with interest, or (b) if the DC VEBA has overpaid Ford, Ford reimburses
the DC VEBA for the amount overpaid, with interest.
Section II. Conditions
This proposed exemption is conditioned upon adherence to the
material facts and representations described herein and upon
satisfaction of the following conditions:
(a) A committee (the Committee), as defined in section III(d),
below, of this exemption, acting as a fiduciary independent of Ford,
has represented and will continue to represent the DC VEBA and its
participants and beneficiaries for all purposes with respect to the
Mitigation process under the settlement agreement (the DC VEBA
Settlement Agreement or the Settlement Agreement), as defined in
section III(g), below, of this exemption.
(b) The Committee for the DC VEBA has discharged and will continue
to discharge its duties consistent with the terms of the DC VEBA and
the Settlement Agreement.
(c) The Committee and actuaries retained by the Committee have
reviewed and approved and will continue to review and approve the
estimation process involved in the Mitigation, which results in the
monthly Mitigation amount paid to Ford.
(d) Outside auditors retained by the Committee, along with an
administrative company that is partly owned by the DC VEBA, have
audited and will audit the calculation of the true-up to determine
whether there are any differences between the estimated Mitigation and
actual Mitigation amounts and have made and will make such information
available to Ford.
(e) Ford has provided various reports and records to the Committee
concerning dental care reimbursements for the period from July 14,
2006, through February 28, 2007, which were subject to review and audit
by the Committee, and Ford has provided and will continue to provide
various reports and records to the Committee concerning the Mitigation
required under the Settlement Agreement which were and will continue to
be subject to review and audit by the Committee.
(f) The terms of the covered transactions are no less favorable and
will continue to be no less favorable to the DC VEBA than the terms
negotiated at arm's length under similar circumstances between
unrelated third parties.
(g) The interest rate applied to any true-up payments is a
reasonable rate, as
[[Page 30636]]
set forth in the DC VEBA Settlement Agreement, and will continue to be
a reasonable rate that runs from the beginning of the year being trued
up and does not and will not present a windfall or detriment to either
party.
(h) The DC VEBA has not incurred and will continue not to incur any
fees, costs, or other charges (other than those described in the DC
VEBA and the DC VEBA Settlement Agreement) as a result of the covered
transactions described herein.
(i) Ford and the Committee have maintained and will continue to
maintain for a period of six (6) years from the date of any of the
covered transactions, any and all records necessary to enable the
persons described in section II(j), below, of this exemption to
determine whether conditions of this exemption have been and will
continue to be met, except that (1) a prohibited transaction will not
be considered to have occurred if, due to circumstances beyond the
control of Ford or the Committee, the records are lost or destroyed
prior to the end of the six-year period, and (2) no party in interest
other than Ford or the Committee shall be subject to the civil penalty
that may be assessed under section 502(i) of the Act if the records are
not maintained, or are not available for examination as required by
section II(j), below, of this exemption.
(j)(1) Except as provided in section II(j)(2), below, of this
exemption and notwithstanding any provisions of subsections (a)(2) and
(b) of section 504 of the Act, the records referred to in section
II(i), above, of this exemption have been or will be unconditionally
available at their customary location during normal business hours to:
(A) Any duly authorized employee or representative of the
Department;
(B) The International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America (the UAW) or any duly
authorized representative of the UAW;
(C) Ford or any duly authorized representative of Ford; and
(D) Any participant or beneficiary of the DC VEBA, or any duly
authorized representative of such participant or beneficiary.
(2) None of the persons described in section II(j)(1)(B) or (D),
above, in this exemption is authorized to examine the trade secrets of
Ford, or commercial or financial information that is privileged or
confidential.
Section III. Definitions
For purposes of this proposed exemption, the term--
(a) ``Ford'' means Ford Motor Company and its affiliates.
(b) ``Affiliate'' means:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with such other person;
(2) Any officer, director, or partner, employee or relative (as
defined in section 3(15) of the Act) of such other person; or
(3) Any corporation, partnership or other entity of which such
other person is an officer, director or partner. (For purposes of this
definition, the term ``control'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.)
(c) ``Class'' or ``Class Members'' mean all persons who, as of the
ratification date (the Ratification Date), as defined in section I(a)
of the Settlement Agreement, (i.e., December 22, 2005) were: (1) Ford/
UAW hourly employees who had retired from Ford with eligibility to
participate in retirement in the Hospital-Surgical-Medical-Drug-Dental-
Vision Program (the Original Plan), as in effect prior to the
Ratification Date, or (2) the spouses, surviving spouses, and
dependents of Ford/UAW hourly employees, who, as of the Ratification
Date, were eligible for post-retirement or surviving spouse health care
coverage under the Original Plan as a consequence of a Ford/UAW hourly
employee's retirement from Ford or death prior to retirement. Active
employees, as defined in section I(A) of the Settlement Agreement, are
not members of the Class.
(d) ``Committee'' means the seven (7) individuals, consisting of
two classes: (1) The UAW with three members, and (2) the public class
with four members, who act as the named fiduciary and administrator of
the DC VEBA.
(e) ``Court'' or ``Michigan District Court'' means the United
States District Court for the Eastern District of Michigan.
(f) ``DC VEBA'' means the defined contribution--Voluntary
Employees' Beneficiary Association trust established by Ford pursuant
to the Settlement Agreement and the trust agreement (the Trust
Agreement).
(g) ``DC VEBA Settlement Agreement'' or the ``Settlement
Agreement'' means the agreement, dated February 13, 2006, which was
entered into between Ford, the UAW, and class representatives, on
behalf of a class of plaintiffs in a class action suit cited as Int'l
Union, UAW, et. al. v. Ford Motor Company (Civil Case No. 05-74730
(E.D. Mich. July 13, 2006), aff'd, 497 F.3d 615 (6th Cir. 2007)
(hereinafter referred to as the Hardwick I Case).
(h) ``Mitigation'' means the reduction of monthly contributions,
deductibles, out-of-pocket maximums, co-insurance payments, or any
other payment in accordance with section 14 of the Settlement Agreement
to the extent payments from the DC VEBA are made, as directed by the
Committee, to Ford and/or to providers, insurance carriers and other
agreed-upon entities.
(i) ``OPEB'' means Other Post-Employment Benefits. The OPEB
Valuation is an actuarially developed valuation of a company's post
retirement benefit obligations, other than for pension and other
retirement income plans. The OPEB Valuation is based on a set of
uniform financial reporting standards promulgated by the Financial
Accounting Standards Board and embodied in Financial Accounting
Standard 106, as revised from time to time. The types of benefits
addressed in an OPEB Valuation typically are retiree healthcare
(medical, dental, vision, hearing) life insurance, tuition assistance,
and legal services
(j) ``Shares'' or ``Stock'' refers to the common stock of Ford for
which the par value is $.01.
(k) ``UAW'' means the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America or the United
Auto Workers, if shortened.
(l) ``VEBA'' means a voluntary employees' beneficiary association.
(m) ``Defined Contribution Plan'' or ``the Defined Contribution
Plan of the Independent Health Care Trust for UAW Retirees of Ford
Motor Company'' means the defined contribution welfare benefit plan
funded by the DC VEBA following the effective date (the Effective
Date), as defined in section I(A) of the Settlement Agreement (i.e.,
July 13, 2006), which will include the requirement to make
contributions to the DC VEBA, as set forth in section 13 of the
Settlement Agreement.
Effective Date: If granted, this proposed exemption will be
effective as of July 13, 2006.
Summary of Facts and Representations
1. Ford is primarily engaged in automotive production and marketing
operations. Ford designs, manufactures, and markets vehicles worldwide,
with its largest operating presence in North America. As of December
31, 2005, Ford had approximately 131,000 active employees in the United
States, of whom approximately 86,000 are represented by the UAW and
other unions. Approximately 590,000 retirees and dependents in the U.S.
receive
[[Page 30637]]
retiree health benefits from Ford, and of this total, as of January 1,
2006, approximately 170,000 are hourly retirees and spouses, surviving
spouses, and eligible dependents.
Ford is a corporation organized under the laws of the State of
Delaware and maintains its headquarters in Dearborn, Michigan. As of
December 17, 2007, Ford had total assets of $279,264,000,000, as
reported in the consolidated balance sheet in Ford's Form 10-k filed
for the fiscal year ended December 31, 2007.
2. The DC VEBA Settlement Agreement, dated February 13, 2006, was
entered into among Ford, the UAW, and class representatives, on behalf
of plaintiffs (i.e., the Class Members), in the Hardwick I Case. The
Settlement Agreement was approved by the United States District Court
for the Eastern District of Michigan in an order dated July 13, 2006,
and was affirmed by the United States Court of Appeals for the 6th
Circuit in 2007. The Hardwick I Case contested whether Ford had the
right to unilaterally modify retiree welfare benefits for hourly
retired Ford employees who had been represented by the UAW. The
settlement of the Hardwick I Case provided Ford with the opportunity to
address its retiree health care costs in an agreed-upon fashion without
compromising the future rights of Ford, the UAW, and the hourly retired
Ford employees.
3. Ford's spiraling retiree health care costs were at the heart of
the Hardwick I Case. Ford and the UAW engaged in discussions regarding
the impact of rising health care costs on Ford's financial condition.
In conjunction therewith, Ford provided the UAW and the Class with
extensive information as to its financial condition and its health care
expenditures. Separate teams of investment bankers, actuaries, and
legal experts reviewed Ford's information and provided an assessment to
the UAW and to the Class as to the state of Ford's financial condition.
Upon completion of such review, the UAW, the representatives of the
Class, and counsel to the Class concluded that, without the Settlement
Agreement, Ford's ability to provide retiree health care benefits to
Class Members would be unlikely over the long term.
4. The Settlement Agreement modifies the health plan that Ford
sponsors for its hourly retirees and their enrolled spouses and
dependents. The modified plan imposes new cost sharing requirements
with respect to retiree health benefits. Specifically, the Ford
modified retiree health plan will require hourly retiree participants
to make monthly contributions toward the cost of their retiree health
coverage, and also imposes annual deductibles, out-of-pocket maximums,
and certain co-insurance payments on participants and beneficiaries.
In order to soften the impact of these new cost sharing
obligations, the Settlement Agreement created a new employee welfare
benefit plan, as described in section 3(1) of the Act. The new welfare
benefit plan is called the Defined Contribution Plan of the Independent
Health Care Trust for UAW Retirees of Ford Motor Company (the Defined
Contribution Plan). The purpose of the Defined Contribution Plan is to
provide mitigation to the affected Ford retirees of the costs shifted
to them and no longer to be paid by the Ford modified health plan.
5. The Defined Contribution Plan Mitigation benefits will be paid
from a new voluntary employee beneficiary trust, the DC VEBA,
controlled by a seven (7) member Committee which is independent of
Ford. The DC VEBA qualifies as a ``voluntary employees' beneficiary
association'' within the meaning of section 501(c)(9) of the Code. The
DC VEBA was established on July 18, 2006, through a welfare benefit
trust (the Trust), as described under section 419(A)(f)(5)(A) of the
Code. The Trust was established by the Trust Agreement between State
Street Bank and Trust (the Trustee) and Ford.
Under the terms of the Settlement Agreement, Ford is required to
make certain contributions to the DC VEBA. In this regard, Ford is
obligated to make a contribution in cash in the amount of $30 million
as soon as practicable following the Effective Date (i.e., July 13,
2006) of the Settlement Agreement. It is represented that on August 10,
2006, the initial cash contribution in the amount of $30 million was
paid into the DC VEBA. Ford is obligated to make a second contribution
in cash in the amount of $35 million on the third anniversary of the
first contribution and to make a third contribution in cash in the
amount of $43 million in 2011, on the anniversary of the first
contribution. It is represented that Ford's obligation to make the
second contribution and, if necessary, the third contribution, will be
moved up to the extent necessary in order to enable the DC VEBA to
continue paying mitigation at the initial mitigation level.
In addition, monthly cash contributions relating to certain wage
increases and COLA amounts for active hourly employees will be diverted
into the DC VEBA. Further, a series of contributions in cash (the
Contribution Obligation) based on the increase in the notional value of
8,750,000 shares of common stock of Ford (the Notional Shares) will be
made. Each of these cash contributions will be equal to the value of
any appreciation in the share price of Ford common stock over a value
based on a share price of $8.145. One third of the Notional Shares
shall be taken into account on the Effective Date of the Settlement
Agreement (i.e., July 13, 2006); one third on the first anniversary of
the Effective Date; and the final third on the second anniversary of
the Effective Date. The right to such cash contributions is non-
transferable, and the DC VEBA shall have no shareholder rights with
respect to such cash contributions based on Notional Shares. It is
represented that the calculation of such cash contribution will be
based on the average price per share of Ford common stock for the five
(5) consecutive trading days ending on the day preceding the applicable
of the three (3) calculation dates. In the event of a special dividend
issued by Ford prior to the third anniversary of the Effective Date,
Ford will be obligated to make a contribution in cash equal to the per
share dividend times the total number of Notional Shares minus the
number of Notional Shares with respect to which Ford has already made a
cash contribution based on such Notional Shares.
Under section 13.C of the Settlement Agreement, no contributions
are payable by Ford to the DC VEBA, unless and until Ford has received
either assurances that such contributions are covered by an exemption
issued by the Department, or do not violate section 406 and 407 of the
Act. In this regard, with respect to the value of the Notional Shares,
as of the Effective Date of the Settlement Agreement (i.e., July 13,
2006), Ford's common stock had not increased above the base value as
set forth in section 13.C of the Settlement Agreement, and, as a
result, no contribution was due to the DC VEBA with respect to that
measurement date. As of the first anniversary of the Effective Date,
(i.e., July 13, 2007), Ford's common stock had increased over the base
value; however, based on section 13.C of the Settlement Agreement, Ford
declined to make a contribution at that time. In this regard, pursuant
to section 13.C, Ford and the UAW have the option to agree upon a
contribution to replace the Contribution Obligation, as set forth
therein, if certain alternatives had not been satisfied by the first
anniversary of the Effective Date of the Settlement Agreement. Because
neither of the alternatives were satisfied by such date, Ford and the
UAW agreed in the Memorandum of
[[Page 30638]]
Understanding on Post Retirement Medical Care, dated November 3, 2007,
(the MOU) (as subsequently embodied in a settlement agreement, dated
March 28, 2008, (the New Settlement Agreement), that Ford shall satisfy
its Contribution Obligation, pursuant to section 13.C, by making an
aggregate cash contribution of $33 million to the DC VEBA, within five
(5) days of the ``Final Effective Date'' (as defined in the New
Settlement Agreement) \7\ in full satisfaction of Ford's obligations
thereunder.
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\7\ It is represented that ``Final Effective Date'' means the
later of the date on which the U.S. District Court enters the
approval order or the date on which Ford has completed, on a basis
reasonably satisfactory to Ford, its discussions with the staff of
the SEC regarding certain accounting treatment with respect to the
New VEBA and Ford's post-employment retiree health obligation for
the covered group.
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6. The Committee acts as the named fiduciary and administrator for
the Defined Contribution Plan and is responsible for the
administration, operation, management and interpretation of the Trust,
as set forth in the Trust Agreement. In this regard, the Committee
appoints (and may remove) the Trustee, the investment managers of the
DC VEBA's assets, and other suitable professionals and agents to
provide advice and services to the Committee or the Trust. The
Committee's duties include directing the investment of the assets of
the Trust, except and to the extent that the Committee has invested
such authority in the Trustee or has appointed an investment manager.
In addition the Trust may be amended in writing at any time and from
time to time, in whole or in part, by the action of the Committee. It
is represented that Ford has no right to amend the Trust at any time.
The Committee is comprised of seven individuals, consisting of two
classes, the ``UAW class,'' and the ``public class.'' The UAW Class has
three (3) members which are appointed by the UAW and serve at the
discretion of the UAW. The members of the UAW class may be removed or
replaced at any time by written notice by the President of the UAW to
the members of the Committee.
The public class has four (4) members who serve terms of four (4)
years, except that the initial members serve terms, as set forth in the
Trust Agreement. In the event of a vacancy in the public class, whether
by expiration of a term, resignation, removal, incapacity, death or
otherwise, the public class will elect a new member of the public class
by majority vote of the continuing public class members, excluding such
member vacating his or her seat. A public class member can be removed
by the affirmative vote of any five (5) other members of the Committee
at any time.
One of the members of the public class serves as the Chair of the
Committee. William E. Spriggs serves in the capacity as Chairman of the
Committee. The Committee Chair serves for a term of two (2) years. Any
successor Committee Chair will be elected by a majority vote of the
Committee.
All of the members of the Committee are independent of Ford. The
members of the Committee do not include any Ford representative, and
Ford does not have any authority to select members of the Committee. No
member of the Committee may be an affiliate of Ford, as the term,
``Affiliate,'' is defined in section III(b), above of this exemption,
including a current or former officer, director or salaried employee of
Ford. No member of the public class may be an active employee or
retiree of the UAW, nor may any member of the public class have any
financial or institutional relationship with Ford, with the Committee
or any Committee member that the Committee, in its sole discretion
determines to be material.
The Committee handles administrative tasks on behalf of the DC VEBA
and the Defined Contribution Plan which is funded by the DC VEBA, as
described in the Settlement Agreement, through Retiree Health
Administration Company, LLC (RHAC). RHAC is a limited liability company
set up to administer the Defined Contribution Plan on behalf of the
Committee. RHAC is jointly owned by the UAW-GM VEBA and the DC VEBA.
RHAC has joined and will continue to join with the Committee's outside
auditors in auditing the calculation of the true-up in connection with
the Defined Contribution Plan.
RHAC also administers the provision of dental coverage to eligible
retirees by the DC VEBA. For the plan year beginning in July 2006 and
for January and February of 2007, Ford provided dental coverage for
UAW-Ford retirees and surviving spouses and their dependents, and the
DC VEBA reimbursed Ford for the claims and premiums attributable to
this group. From and after March 1, 2007, dental benefits are provided
by the DC VEBA to eligible groups separate and apart from Ford, without
Mitigation or reimbursement arrangement of any kind. The DC VEBA has
contracted directly with carriers for dental services and has paid the
applicable claims and premiums directly. Claims processing is
contracted out to Blue Cross Blue Shield of Michigan. Maintaining
eligibility records is contracted to Ford's National Employee Service
Center which also provides a call center to respond to participant
needs. RHAC pays the bills, negotiates and monitors outside vendor
contracts, audits claims and eligibility, coordinates the activities of
outside professionals, and provides for certain other needs of the
Committee with respect to the provision of dental benefits.
The Committee has retained George Johnson & Company as its outside
auditor responsible for the audit of the financial statements for the
DC VEBA and the Defined Contribution Plan, including preparation of
certain annual form filings. The Committee has also retained Plante &
Morgan, L.L.P. (Plante) as its outside auditor responsible for
assisting the staff of the Committee with the review of differences
between estimated and actual Mitigation amounts. As such, Plante has
audited the calculation of the true-up and has made and will continue
to make, such information available to Ford.
The Committee has retained Milliman, Inc. (Milliman), as its
actuary. The Committee and Milliman have reviewed and approved the
estimation process which results in the monthly Mitigation amounts paid
to Ford and will continue to do so.
7. As of December 31, 2006, the DC VEBA had cash of approximately
$119 million. The DC VEBA uses its assets to mitigate the cost sharing
requirements imposed on the retirees by the Settlement Agreement.
Initial levels of Mitigation are set forth in the Settlement Agreement,
and may be modified later by the Committee in accordance with the terms
of the Settlement Agreement and the Trust Agreement.
8. The initial Mitigation levels provide for Mitigation of monthly
retiree contributions down to $10 per individual and $21 per family
(from $50 per individual, and $105 per family). Deductibles will be
mitigated down to an annual maximum of $150 per individual (from $300
per individual) and $300 per family (from $600 per family). The out-of-
pocket maximum will be mitigated so that it is capped for in-network
benefits at $250 per individual per year (from $500 per individual) and
$500 per family per year (from $1,000 per family), and capped for out-
of-network benefits at $500 per individual (from $1,000 per individual)
and $1,000 per family (from $2,000 per family). It is represented that
the Mitigation provided by the Defined Contribution Plan through the DC
VEBA provides a significant benefit to participants who would otherwise
be
[[Page 30639]]
required to make these payments out of their own pockets.
In addition, dental benefits were provided from July 2006 through
February 2007, pursuant to a reimbursement arrangement with Ford. Since
March 1, 2007, however, the DC VEBA has been the sole source of dental
benefits for eligible groups.
9. In order to reduce the administrative burden on the DC VEBA, and
avoid having participants initially pay the costs and subsequently
request reimbursement upon submission of documentation, the Settlement
Agreement contemplates having Ford act as the conduit through which the
DC VEBA will make Mitigation. Specifically, Ford will make certain
payments that hourly retirees and their enrolled dependents would
otherwise be required to make out of their own pockets. Ford will then
accept Mitigation payments from the DC VEBA and apply such payments in
accordance with the direction and instruction of the Committee for the
benefit of the participants in the Defined Contribution Plan.
This reimbursement process anticipates monthly advance payments to
Ford from the DC VEBA of the actuarially anticipated cost of the
initial Mitigation amounts, with a true-up no later than December 23 of
the following calendar year.
Specifically, the Mitigation process will work as follows:
Annually, no later than May 1 of the preceding year, the Committee will
inform Ford of the Mitigation levels for the following calendar year.
Thereafter, no later than September 1 of the year preceding the
forthcoming Mitigation year, Ford will provide the Committee with a
preliminary estimate of the annual mitigation amount for the following
calendar year. On December 1 of the preceding year, Ford will provide
the Committee with the actuarially-determined, final estimated annual
mitigation amount. Both the preliminary and final estimated mitigation
amounts need to be agreed to by the Committee. Then, as of the
beginning of the calendar year of Mitigation, the DC VEBA will pay to
Ford on a monthly basis an amount equal to \1/12\ of the final
estimated annual mitigation amount.
No later than December 1 following the calendar year in which the
monthly estimated mitigation payments have been made, Ford and the DC
VEBA will engage in a true-up process. Ford will provide the Committee
an actuarial report that determines the actual annual Mitigation amount
and compares it to the estimated annual Mitigation payments that Ford
received during the prior year. No later than December 23 of the year
following the year being trued-up, a true-up payment either will be
paid by the DC VEBA to Ford, or by Ford back to the DC VEBA. Interest
for any late payments, or for any true-up payment (whether from Ford
back to the DC VEBA or from the DC VEBA to Ford) will be paid at the
interest rate \8\ for Other Post-Employment Benefits (the OPEB), as
defined in section III(i) of this exemption. In addition, Ford is
required to provide detailed quarterly reports to the Committee
detailing retiree health claims experience, and the Committee shall
have the right to request a reasonable audit of Ford's books and
records with respect to Mitigation payments made to Ford by the DC
VEBA. The amount of any true-up payment will need to be approved by the
Committee. If there is a dispute as to the true-up report or the amount
of the true-up payment, undisputed amounts will be paid and the parties
will enter into an arbitration dispute process, as set forth in the
Settlement Agreement, which involves independent decision-makers who
will resolve any true-up dispute.
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\8\ The OPEB interest rate, as defined in section 13(D) of the
Settlement Agreement, is the discount rate used by Ford's health
care actuaries in accordance with the Financial Accounting Standard
106 (FAS 106) actuarial valuation for the applicable period. Ford
has also represented that the OPEB interest rate is the discount
rate that a company uses to value ``Other Post-Retirement Employee
Benefits'' for FAS 106 accounting reporting. The discount rate is
based on market yields, as of a plan's annual measurement date, on
high quality fixed income securities of duration similar to the
benefit obligation. For purposes of Ford's retiree health
obligation, its OPEB interest rate is developed each year in
consultation with its outside accountants. Ford used an OPEB
interest rate of 5.75% in 2005, of 5.75% in 2004, and of 6.25% in
2003 relating to retiree health.
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10. It is represented that the DC VEBA has made estimated
Mitigation payments for health care to Ford for every month beginning
with August 2006 and continuing to the present. The DC VEBA has
separately reimbursed Ford for dental claims and premiums that Ford
paid on behalf of the participants in the DC VEBA for the period from
July 14, 2006, through February 28, 2007. As stated previously in this
proposed exemption, beginning March 1, 2007, the DC VEBA has contracted
directly for dental services for its participants. It is represented
that the amount of the dental reimbursement payments for 2006 and 2007
do not include the monthly administrative fee paid to Ford for
maintaining eligibility records and providing a call center to respond
to participant needs.\9\ For the period July 2006, through December
2006, the DC VEBA made total Mitigation reimbursement payments to Ford
for health care and dental benefits of approximately $30,755,460 and
$16,141,185, respectively. For the period January 2007, through
December 2007, the DC VEBA made total Mitigation reimbursement payments
to Ford for health care and dental benefits of approximately
$83,900,004 and $14,891,491, respectively. For the period January 2008,
through March 2008, the DC VEBA made total Mitigation reimbursement
payments to Ford solely for health care benefits of approximately
$22,375,000. For the period April 2008, through April 2009, the DC VEBA
made total Mitigation reimbursement payments to Ford solely for health
care benefits of approximately $30,873,428.
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\9\ Ford relies on the relief provided by the statutory
exemption, pursuant to section 408(b)(2) of the Act, in connection
with Ford's providing the DC VEBA with monthly administrative
services, maintaining eligibility records, and providing a call
center to respond to participant needs. The Department, herein, is
offering no view, as to whether the provision of such services
rendered by Ford to the DC VEBA is covered by the statutory
exemption provided in section 408(b)(2) of the Act and the
Department's regulations, thereunder, pursuant to 29 CFR
2550.408(b)-2. Further the Department is not providing, herein, any
relief with respect to the provision of such services to the DC VEBA
by Ford.
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On February 7, 2008, Ford paid to the DC VEBA a 2006 true-up
payment in the amount of $866,387. In addition, Ford paid to the DC
VEBA interest in the amount of $74,929.91 in two (2) payments dated
February 7, 2008, and April 17, 2008, of approximately $72,777 and
$2,153, respectively. The total true-up payment for the year 2006,
including interest, was $941,316.91. The total true-up payment for the
year 2007, including interest of $46,368, was $492,305. The true-up
amount for 2008 will not be determined until the fall of 2009.
11. Ford requests a retroactive administrative exemption from the
Department with respect to the following transactions: (a) monthly cash
advances to Ford by the DC VEBA to reimburse Ford for the estimated
Mitigation of certain health care expenses and for the payment of
certain dental expenses incurred by participants in the DC VEBA; and
(b) an annual true-up of such Mitigation payments and such dental
expenses. Further, in this regard, if Ford is underpaid by the DC VEBA,
it would receive the balance outstanding from the DC VEBA, with
interest. Conversely, if the DC VEBA overpaid Ford, Ford would
reimburse the DC VEBA for the amount overpaid, with interest.
Accordingly, Ford requests retroactive
[[Page 30640]]
relief from sections 406(a)(1)(B), and 406(a)(1)(D), respectively,
because these transactions could be deemed to constitute the lending of
money or extension of credit between the DC VEBA and Ford, a party in
interest, or could be viewed as the use by or for the benefit of a
party in interest of plan assets.
With respect to violations of section 406(b) of the Act, in the
opinion of Ford, the involvement in such transactions by the Committee,
a fiduciary of the Defined Contribution Plan and the DC VEBA that is
independent of Ford, eliminates any issues under section 406(b) of the
Act. However, to eliminate any uncertainty respecting the issue, Ford
seeks retroactive relief under section 406(b)(1) and (b)(2) of the Act.
If granted, the exemption would be effective as of July 13, 2006.
As discussed in paragraph 5, above of the Summary of Facts and
Representations of this proposed exemption, the Settlement Agreement
grants to the DC VEBA a right to receive, and obligates Ford to make
contributions that are based on the increase in the notional value of
8,750,000 shares of Ford common stock. Such contributions will be non-
transferable cash contributions determined on each of (i) the Effective
Date of the Settlement Agreement (i.e., July 13, 2006), (ii) the first
anniversary of the Effective Date, and (iii) the second anniversary of
the Effective Date. The Department is not providing exemptive relief
herein with respect to the Contribution Obligation because, in the view
of the Department, the Contribution Obligation is merely a contractual
provision evidenced in the DC VEBA Settlement Agreement which is
designed to determine the amount of additional cash contributions that
must be made to the DC VEBA.\10\
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\10\ The Department further believes that the Contribution
Obligation is not an ``employer security: Within the meaning of
section 407(d)(1) of the Act. Since it appears that the Contribution
Obligation does not result in the acquisition or holding by the DC
VEBA of an ``employer security,'' the Department has not proposed
separate exemptive relief herein with respect to such obligation.
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12. It is represented that the Mitigation payments significantly
benefit the interests of Ford hourly retirees and their covered
dependents. Having the Mitigation paid directly from the DC VEBA would
otherwise involve significant delays and out of pocket expenditures by
plan participants.
13. Without an administrative exemption, Ford states that the DC
VEBA would be required to establish a costly administrative scheme to
reimburse participants in the DC VEBA. In this regard, Ford retirees'
would be charged the full costs of the monthly contributions, co-pays,
and deductibles. These retirees would then have to apply for
reimbursement payments, via a claim form, from the DC VEBA or its
retained third party administrator. This alternative would have the
dual effect of significantly delaying payments to the retirees and
placing large and expensive administrative burdens on the DC VEBA, and
hardship on the retirees themselves.
14. It is represented that the proposed exemption is
administratively feasible with terms clearly established in the
Settlement Agreement and the Trust document. Further, implementation of
the covered transactions provides the resolution to the Hardwick I
Case, enabling Ford to fund the DC VEBA and provide Mitigation amounts
to the retirees.
15. The proposed exemption contains sufficient safeguards in that
Ford and the UAW negotiated at arm's length over the terms of the
covered transaction and such terms were memorialized in a court-
approved Settlement Agreement involving both the UAW and Class Counsel.
In addition, the UAW, which represents the interests of the Ford hourly
retirees and their dependents, fully supports the requested exemption.
Further the terms of the Settlement Agreement, including the Mitigation
payment process and the DC VEBA contribution rules, were subject to a
fairness hearing and a judicial determination that it is fair and
reasonable to Ford hourly retirees.
It is represented that the calculation of the Mitigation payments
is subject to the strict scrutiny of actuaries retained by the DC VEBA
and requires the ultimate approval of the Committee. The process by
which the Mitigation payments are established ensures that the monthly
Mitigation payments will reflect an actuarially sound estimate of the
projected mitigation costs.
The Committee, acting as independent fiduciary of the Defined
Contribution Plan and the DC VEBA, ensures that the cash contributions
based on the value of Notional Shares are correctly calculated and
timely contributed to the DC VEBA.
Finally, the interest rate used to calculate the true-up payments
is a reasonable rate, as set forth in the DC VEBA Settlement Agreement
and does not present a windfall or detriment to either Ford or the DC
VEBA.
16. Ford and the Committee will each maintain records of covered
transactions for a period of six (6) years. The Committee maintains
records of payments made or received by the DC VEBA, quarterly reports,
and dental claims records, but no other health benefit claims records.
Ford has provided the reports required under the Settlement Agreement
with respect to the estimated Mitigation and the true-up. Ford will
continue to provide all reports and records concerning the Mitigation
required under the Settlement Agreement, and such reports have been and
will continue to be subject to review and audit by the Committee, as
provided in the Settlement Agreement.
17. It is represented that ultimately, the DC VEBA will be
terminated and its assets transferred to a new VEBA (the New VEBA).
However, several steps will occur before this happens. These steps were
first described in the MOU, dated November 3, 2007, and agreed to by
Ford and the UAW. The terms of the MOU were subsequently embodied in
the New Settlement Agreement between Ford and the UAW, and the Class
representatives, on behalf of the applicable class in: (a) The class
action of Int'l Union, UAW, et. al. v. Ford Motor Company, Civil Action
No. 07-14845 (E.D. Mich. filed Nov. 9, 2007) and/or (b) the class
action of the Hardwick I Case. The New Settlement Agreement resolves
and settles any and all claims for Ford contributions to the DC VEBA,
and provides for the termination of the DC VEBA and the transfer of all
assets and liabilities of the DC VEBA to the New VEBA. In the event of
an inconsistency between the New Settlement Agreement and any prior
agreements or documents, including the MOU, the New Settlement
Agreement will control.
In the negotiations leading to the MOU and the New Settlement
Agreement, Ford advised the UAW of its intent to terminate the Hardwick
I Case Settlement Agreement in accordance with its terms in 2011 and
exercise its right to terminate and/or modify retiree health coverage
for all UAW retirees and their dependents, and the UAW reasserted its
position that post-retirement medical coverage for current UAW retirees
is vested and unalterable.
The New Settlement Agreement provides that as of the day following
the ``Implementation Date'' (as defined in the New Settlement
Agreement), the ``New Plan'' (as defined in the New Settlement
Agreement) and the New VEBA shall be the employee welfare benefit plan
and trust that are exclusively responsible for all retiree medical
benefits for which Ford, the Ford Retiree Health Plan (as defined in
the New Settlement Agreement), and any other Ford entity or benefit
plan
[[Page 30641]]
formerly would have been responsible with regard to the class and
covered group.
With regard to the DC VEBA, section 12.C of the New Settlement
Agreement states that the ``Approval Order'' (as defined in the New
Settlement Agreement) shall direct the Committee and the Trustee of the
DC VEBA to transfer all assets and liabilities of the DC VEBA to the
New VEBA and terminate the DC VEBA within fifteen (15) days after the
Implementation Date. This transfer of assets and liabilities shall
include, but not be limited to, the transfer of all rights and
obligations granted to or imposed on the DC VEBA under section 14.C of
the Settlement Agreement. Further, Ford agrees that, on the day
following the Implementation Date, the New VEBA shall be substituted
for the DC VEBA for such purposes. The Approval Order shall further
provide that the DC VEBA shall be terminated after this payment is
made.
In addition, the New Settlement Agreement makes certain provisions
with respect to the wage and COLA deferrals and other contributions
payable to the DC VEBA, and further provides that Ford shall satisfy
the Contribution Obligation, set forth in section 13.C of the
Settlement Agreement by making an aggregate cash contribution of $33
million to the DC VEBA within five (5) days of the Final Effective Date
in full satisfaction of its obligations thereunder.
18. In summary, Ford represents that the transactions have
satisfied and will continue to satisfy the statutory criteria for an
exemption under section 408(a) of the Act because:
(a) The Committee, acting as a fiduciary independent of Ford, has
represented and will continue to represent the DC VEBA and its
participants and beneficiaries for all purposes with respect to the
Mitigation process under the Settlement Agreement.
(b) The Committee for the DC VEBA has discharged and will continue
to discharge its duties consistent with the terms of the Settlement
Agreement.
(c) The Committee and actuaries retained by the Committee have
reviewed and approved and will continue to review and approve the
estimation process involved in the Mitigation, which results in the
monthly Mitigation amount paid to Ford.
(d) Outside auditors retained by the Committee, along with an
administrative company that is partly owned by the DC VEBA, have
audited and will audit the calculation of the true-up to determine
whether there are any differences between the estimated Mitigation and
actual Mitigation amounts and have made and will make such information
available to Ford.
(e) Ford has provided various report and records to the Committee
concerning dental care reimbursements for the period from July 14, 2006
through February 28, 2007, which were subject to review and audit by
the Committee, and Ford has provided and will continue to provide
various reports and records to the Committee concerning the Mitigation
required under the Settlement Agreement which were and will continue to
be subject to review and audit by the Committee.
(f) The terms of the covered transactions are no less favorable and
will continue to be no less favorable to the DC VEBA than the terms
negotiated at arm's length under similar circumstances between
unrelated third parties.
(g) The interest rate applied to any true-up payments is a
reasonable rate, as set forth in the DC VEBA Settlement Agreement, and
will continue to be a reasonable rate that runs from the beginning of
the year being trued up and does not and will not present a windfall or
detriment to either party.
(h) The DC VEBA has not incurred and will continue not to incur any
fees, costs or other charges (other than those described in the DC VEBA
and the DC VEBA Settlement Agreement) as a result of the covered
transactions described herein.
(i) Ford and the Committee have maintained and will continue to
maintain for a period of six (6) years from the date of any of the
covered transactions, any and all records necessary to determine
whether conditions of this exemption have been and will continue to be
met.
Notice to Interested Persons
Ford will provide notice of the proposed exemption to: (1) The UAW;
and (2) persons who on or after December 22, 2005, and prior to the
date of the filing of the application for exemption (i.e., November 27,
2007) were: (a) Ford/UAW hourly employees who had retired from Ford
with eligibility to participate during retirement in the Ford health
plan, or (b) spouses or surviving spouses of Ford/UAW hourly employees,
who on or after December 22, 2005, were eligible for post-retirement or
surviving spouse health care coverage from Ford (collectively,
Interested Persons) within twenty (20) calendar days of the publication
of the notice of proposed exemption in the Federal Register. Such
notice will be provided to Interested Persons by first-class mail, at
the last known mailing address of such Interested Persons and will
include a photocopy of the notice of proposed exemption as published in
the Federal Register as well as a supplemental statement, as required
pursuant to 29 CFR 2570.43(b)(2). The supplemental statement will
inform interested persons of their right to comment on and/or to
request a hearing. Comments and requests for a hearing with respect to
the proposed exemption are due within fifty (50) calendar days of the
publication of this pendency notice in the Federal Register. If you
decide to submit written comments to the Department, your comments
should be limited to the transactions described in this proposed
exemption. However, if you have concerns about your retiree health
benefits or any other administrative issues relating to your benefits,
you should contact NESC, by phone at 1-800-248-4444, by mail P.O. Box
6214, Dearborn, MI 48121, or by e-mail at nesc@ford.com.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the
Department, at e-mail address ford@dol.gov, or at telephone number 202-
693-8547 (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
[[Page 30642]]
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 22nd day of June, 2009.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E9-15159 Filed 6-25-09; 8:45 am]
BILLING CODE 4510-29-P