Proposed Exemption for Certain Prohibited Transaction Restrictions: Fedeli Group, Inc. Employee Benefits Plan Located in Cleveland, OH, 76253-76259 [2023-24401]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 88, Number 213 (Monday, November 6, 2023)]
[Notices]
[Pages 76253-76259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-24401]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Exemption Application No. L-11954]


Proposed Exemption for Certain Prohibited Transaction 
Restrictions: Fedeli Group, Inc. Employee Benefits Plan Located in 
Cleveland, OH

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemption.

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SUMMARY: This document provides notice of the pendency before the 
Department of Labor (the Department) of a proposed individual exemption 
from certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (ERISA or the Act). This 
proposed exemption would permit the Fedeli Group, Inc. Employee 
Benefits Plan (the Benefit Plan) sponsored by Fedeli Group, Inc. 
(Fedeli Group or the Applicant) to enter into an insurance contract 
with THP Insurance Company, Inc. (THP), an unrelated insurance company, 
and THP will, in turn, enter a reinsurance arrangement with Risk 
Specialists LLC (Risk Specialists), a captive reinsurance company 
affiliated with Fedeli Group.

DATES: 
    Comments due: Written comments and requests for a public hearing on 
the proposed exemption should be submitted to the Department by 
December 21, 2023.
    Exemption date: If granted, this proposed exemption will be in 
effect on the date that the grant notice is published in the Federal 
Register.

ADDRESSES: All written comments and requests for a hearing should be 
submitted to the Employee Benefits Security Administration (EBSA), 
Office of Exemption Determinations, Attention: Application No. L-11954 
via email to [email protected] or online through https://www.regulations.gov. Any such comments or requests should be sent by 
the end of the scheduled comment period. The application for exemption 
and the comments received will be available for public inspection in 
the Public Disclosure Room of the Employee Benefits Security 
Administration, U.S. Department of Labor, Room N-1515, 200 Constitution 
Avenue NW, Washington, DC 20210. See SUPPLEMENTARY INFORMATION below 
for additional information regarding comments.

FOR FURTHER INFORMATION CONTACT: Blessed Chuksorji-Keefe of the 
Department, telephone (202) 693-8567. (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION: 
    Comments: Persons are encouraged to submit all comments 
electronically and not to follow with paper copies. Comments should 
state the nature of the person's interest in the proposed exemption and 
how the person would be adversely affected by the exemption, if 
granted. Any person who may be adversely affected by an exemption can 
request a hearing on the exemption. A request for a hearing must state: 
(1) the name, address, telephone number, and email address of the 
person making the request; (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; and (3) a statement of the issues to be 
addressed and a general description of the evidence to be presented at 
the hearing. The Department will grant a request for a hearing made in 
accordance with the requirements above where a hearing is necessary to 
fully explore material factual issues identified by the person 
requesting the hearing. A notice of such hearing shall be published by 
the Department in the Federal Register. The Department may decline to 
hold a hearing if: (1) the request for the hearing does not meet the 
requirements above; (2) the only issues identified for exploration at 
the hearing are matters of law; or (3) the factual issues identified 
can be fully explored through the submission of evidence in written 
(including electronic) form.
    Warning: All comments received will be included in the public 
record without change and may be made available online at https://www.regulations.gov, including any personal information provided, 
unless the comment includes information claimed to be confidential or 
other information whose disclosure is restricted by statute. If you 
submit a comment, EBSA recommends that you include your name and other 
contact information in the body of your comment, but DO NOT submit 
information that you consider to be confidential, or otherwise 
protected (such as a Social Security number or an unlisted phone 
number) or confidential business information that you do not want 
publicly disclosed. However, if EBSA cannot read your comment due to 
technical difficulties and cannot contact you for clarification, EBSA 
might not be able to consider your comment.
    Additionally, the https://www.regulations.gov website is an 
``anonymous access'' system, which means EBSA will not know your 
identity or contact information unless you provide it in the body of 
your comment. If you send an email directly to EBSA without going 
through https://www.regulations.gov, your email address will be 
automatically captured and included as part of the comment that is 
placed in the public record and made available on the internet.

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974, as amended (ERISA). If the exemption is granted, the 
Fedeli Group, Inc. Employee Benefits Plan (the Benefit Plan) sponsored 
by Fedeli Group, Inc. (Fedeli Group or the Applicant) will enter into 
an insurance contract with THP Insurance Company, Inc. (THP), an 
unrelated insurance company, and THP will, in turn, enter a reinsurance 
arrangement with Risk Specialists LLC (Risk Specialists), a captive 
reinsurance company affiliated with Fedeli Group. Under the reinsurance 
arrangement, Risk Specialists will reinsure the insurance risks 
associated with the Benefit Plan. The reinsurance arrangement would 
result in an indirect transfer of premium payments from the Benefit 
Plan to Risk Specialists, LLC. This exemption requires, among other 
things, annual reports to be prepared by a qualified, independent 
fiduciary and submitted to the Department of Labor confirming whether 
Fedeli and its

[[Page 76254]]

affiliates have met the exemption's terms and conditions.\1\
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    \1\ The Department notes that the independent fiduciary's annual 
written report is essential to the Department's tentative finding 
that this proposed exemption is and will continue to be, in the 
interest and protective of the Plan and its participants and 
beneficiaries. Each report must demonstrate that the independent 
fiduciary has clearly, prudently, and loyally determined whether 
Fedeli and its affiliates have complied with each term and condition 
of the exemption. The exemption's relief is conditioned on the 
independent fiduciary's compliance with this requirement.
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Summary of Facts and Representations \2\
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    \2\ The Department notes that availability of this exemption is 
subject to the express condition that the material facts and 
representations contained in Application L-11954 are true and 
complete, and accurately describe all material terms of the 
transactions covered by the exemption. If there is any material 
change in a transaction covered by the exemption, or in a material 
fact or representation described in the application, the exemption 
will cease to apply to the covered transactions as of the date of 
such change.
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    1. The Plan Sponsor. Fedeli Group is an S corporation based in 
Cleveland, Ohio. Fedeli Group provides insurance products and risk 
management services. Fedeli Group is 51% owned by the Umberto P. Fedeli 
Amended and Restated Revocable Trust (dated July 16, 2016), 29% by the 
Umberto P. Fedeli 2012 Discretionary Trust (dated November 28, 2012) 
and 20% by the Umberto P. Fedeli 2009 Discretionary Trust (dated 
December 23, 2009).
    2. The Plan. The Fedeli Group sponsors and administers the Benefit 
Plan, which is a self-funded employee welfare benefit plan covering 
medical and hospital expenses for eligible Fedeli Group employees. The 
Benefit Plan currently covers approximately 64 participants.
    3. The Captive Reinsurer. Risk Specialists is a licensed property 
and casualty captive insurance company that operates under applicable 
Tennessee law. Risk Specialists is 100% owned by Risk Specialists 
Captive Holdings, LLC (Risk Specialists Captive Holdings LLC), a 
limited liability company formed in Ohio on the same date as Risk 
Specialists. Risk Specialists Captive Holdings is 51% owned by the 
Fedeli Revocable Trust, 29% owned by the Fedeli 2012 Trust, and 20% 
owned by the Fedeli 2009 Trust. Risk Specialists serves as the 
reinsurer with respect to 13 different lines of insurance coverages 
provided to Fedeli Group and unrelated third parties.
    4. The Third-Party Insurer. THP Insurance Company, Inc. (THP) is a 
domestic stock insurance company domiciled in West Virginia and 
licensed in both Ohio and West Virginia. THP is unrelated to all Fedeli 
Group-related entities and is currently rated ``A+'' by A.M. Best 
Company.
    5. Transitioning the Benefit Plan to the Third-Party Insurer Using 
the Captive Reinsurer. Fedeli Group seeks to use its captive insurance 
company, Risk Specialists, to reinsure the Benefit Plan's claims. If 
this proposed exemption is granted, the Plan will enter into a Master 
Group Policy with THP, pursuant to which THP will provide group health 
insurance coverage to eligible participants under the Benefit Plan. THP 
will enter into a reinsurance agreement (the Reinsurance Agreement) 
with Risk Specialists. Under this arrangement, Risk Specialists will be 
responsible for the Benefit Plan's insurance claims under the Master 
Group Policy with THP, and Risk Specialists will indirectly receive the 
Benefit Plan's premium payments to THP. The Reinsurance Agreement 
between THP and Risk Specialists will be ``indemnity only,'' which 
means that THP will be responsible for Benefit Plan claims under the 
Master Group Policy to the extent Risk Specialists does not satisfy 
those claims under the Reinsurance Agreement.
    6. Exemptive Relief Requested. The proposed reinsurance arrangement 
would violate certain prohibited transaction provisions of ERISA for 
the following reasons:
     Fedeli Group is a party in interest with respect to the 
Benefit Plan pursuant to ERISA section 3(14)(C), because it is an 
employer whose employees are covered by the Benefit Plan;
     The Trusts are parties in interest with respect to the 
Benefit Plan under ERISA section 3(14)(E) because they collectively own 
100% of Fedeli Group, the Benefit Plan sponsor.
     Risk Specialists, the captive reinsurer, is a party in 
interest with respect to the Benefit Plan under ERISA section 3(14)(G) 
because it is 100% owned by the Trusts.
    7. ERISA section 406(a) prohibits a wide range of transactions 
between plans and parties in interest with respect to those plans. As 
relevant here, ERISA section 406(a)(l)(D) prohibits a plan fiduciary 
from engaging in a transaction if the fiduciary knows or should know 
the transaction constitutes a direct or indirect transfer any plan 
assets for the use or benefit of a party in interest. The reinsurance 
arrangement would result in an indirect transfer of Benefit Plan 
premium payments to Risk Specialists, which is a party in interest with 
respect to the Benefit Plan.
    8. ERISA section 406(b)(1) of ERISA prohibits a fiduciary from 
dealing with plan assets for the fiduciary's own interest or own 
account. The fiduciaries of the Benefit Plan would violate ERISA 
section 406(b)(1) by causing the Benefit Plan to pay premiums to THP, 
with the knowledge that the premiums will ultimately be directed to 
Risk Specialists, the captive reinsurer.
    9. Benefits to the ERISA-Covered Plan. The Department has the 
authority under ERISA section 408(a) to exempt transactions from the 
prohibitions of ERISA section 406. Specifically, ERISA section 408(a) 
provides that the Department may not grant an exemption unless it finds 
that the exemption is administratively feasible, in the interests of 
the plan and the plan's participants and beneficiaries, and protective 
of the rights of the plan's participants and beneficiaries.
    10. The Department has tentatively determined that the proposed 
reinsurance arrangement would be in the interest of the Benefit Plan 
and its participants and beneficiaries. As described in further detail 
below, a qualified, independent fiduciary has concluded that the 
reinsurance arrangement will reduce each Benefit Plan participant's 
share of the Benefit Plan premium paid to THP by at least $2,023.20 \3\ 
per participant per year for the duration of the exemption relative to 
the contribution the participant would otherwise have made under a non-
captive arrangement with a competitive third party insurer receiving no 
more than reasonable compensation within the meaning of ERISA section 
408(b)(2). Historically, Benefit Plan participants contributed 
approximately 25% towards the cost of the Benefit Plan. Under the 
proposal, all the savings from the Captive Approach will be used to 
reduce Benefit Plan participants' share of the Benefit Plan's premiums, 
and Benefit Plan participants will contribute no more than 17.38% of 
the Benefit Plan's costs throughout the duration of the exemption.
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    \3\ The independent fiduciary's determination of the $2,023.20 
amount is described below in more detail.
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    11. The Department requested that the Applicant provide a complete 
and accurate accounting of all benefits the Fedeli Group expects to 
derive from the captive reinsurance arrangement, including tax and non-
tax benefits. In addition, the Department requested that the Applicant 
provide a full explanation of the ``economic substance of the proposed 
transaction,'' that is, the economic impact or outcome that the 
exemption would have on the Fedeli Group, Fedeli-related parties and 
the Benefit Plan's participants and beneficiaries. Both the accounting 
of

[[Page 76255]]

expected benefits and the explanation of the expected economic 
substance of the proposed transaction were reviewed and confirmed by 
the independent fiduciary.
    Applicant's Response: The Applicant represents that the only 
benefits Fedeli Group expects to receive from the proposed Captive 
Approach relative to the Plan's current self-funding arrangement are 
the incidental benefits that would result from more predictability and 
better control over its benefit funding obligations. Under Fedeli 
Group's current self-funded arrangement, Fedeli's benefit funding 
obligations are dependent on the timing and amount of participant 
claims. In contrast, under the Captive Approach, the Fedeli Group will 
only make one annual premium payment. According to the Applicant, this 
initial funding obligation will represent an estimate of the 
anticipated claims Benefit Plan participants and beneficiaries will 
incur during the year. The ability to budget for one up-front annual 
premium payment instead of multiple weekly or monthly claims payments 
would provide Fedeli Group with predictability for Fedeli Group's 
benefit obligations.\4\
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    \4\ Under the current arrangement, the funding obligation is 
less predictable because benefits are paid out as claims are 
incurred.
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    In addition, the Applicant represents that the Captive Approach 
grants financial control to the Fedeli Group over insurance spending by 
managing risks and underwriting ``Fedeli specific'' risks rather than 
paying risk premiums to third-party insurers or self-insuring. By 
underwriting its own risks, the Fedeli Group gains greater transparency 
and improved data on its actual benefit claims cost and utilization. 
Fedeli also benefits from flexibility in underwriting and funding 
depending on the Fedeli Group's specific employee demographics and plan 
design that it could not receive by purchasing commercial insurance.
    Furthermore, the Captive Approach will result in reduced overall 
plan costs because benefit expenses are paid based on actual 
experience, as opposed to a third-party insurance carrier (the Third-
Party Approach) requiring a fixed payment at a premium charged by an 
insurance carrier where the premium amount does not change regardless 
of the amount of claims that are incurred. Moreover, the Fedeli Group 
will not bear the sole payment obligation that it does under its 
current self-insurance arrangement. These reduced costs will redound to 
the Benefit Plan in the form of lower cost of health care coverage.
    The Department's Note: This exemption is being proposed based on 
the Applicant's representations and the exemption's requirement, that 
no Fedeli Group-related entity will receive a direct or indirect 
profit, tax benefit, investment gain or other remunerative benefit 
through the Captive Approach. The Department notes that if a Fedeli 
Group-related entity ultimately receives such a profit, benefit or 
gain, the Fedeli Group must further enhance the Benefit Plan in an 
amount greater than the $2,023.20 per participant per year contribution 
reduction in a manner consistent with the terms and conditions of this 
proposed exemption. Additionally, the Department notes that this 
proposed exemption prohibits Fedeli Group or a related entity from 
using any participant-related data or information generated by, or 
derived from, the Captive Approach in a manner that benefits the Fedeli 
Group or related entity.
    As described below, this exemption, if granted, requires a 
qualified, independent fiduciary to review all relevant financial 
information of Risk Specialists and any other Fedeli-related entity as 
is necessary to ensure that this and the other terms and conditions 
described in this proposal are met and to annually certify in a written 
report submitted to the Department that all requirements of the 
proposed exemption have been met.

Applicant's Analyses

    12. The Applicant represents to the Department that it evaluated 
two different insurance-based approaches to provide the benefits 
payable under the Benefit Plan and the effects on the costs from each, 
based on the 2023 plan year information for the Benefit Plan. The 
Applicant's first insurance-based approach contemplates a Third-Party 
Approach, while the second insurance-based approach takes into account 
Risk Specialists as the captive reinsurer (the Captive Approach).
    13. The Applicant states that, based on actual values from the 
Benefit Plan's 2023 financial statement, the annual premium under the 
Third-Party Approach would have been $2,254,314, compared to the 
$2,124,829 annual premium under the Captive Approach. Therefore, the 
Applicant calculated the total annual cost savings under the Captive 
Approach would be $129,485 for the 2023 Plan Year.
    14. The cost savings under the Captive Approach will be passed on 
to Benefit Plan participants on a pro-rata basis, by reducing 
employees' Benefit Plan contribution obligations. As of September 19, 
2023, the Benefit Plan covered 64 participants, the $129,485 in total 
annual cost savings under the Captive Approach will be directly applied 
to Benefit Plan participants as a reduction in their contribution 
obligations.
    15. The Applicant calculated the monthly $161.60 contribution 
reduction per Benefit Plan participant ($129,485.00/12 months = 
$10,790.42/64 participants = $168.60). The Applicant states that this 
monthly reduction in contribution obligations will result in annual 
savings per participant of $2,023.20 ($168.60 x 12 months) with no 
reduction in medical, health, or other plan benefits. Further, the 
Applicant states that these cost savings for Benefit Plan participants 
will be implemented simultaneously with the establishment of the 
Captive Approach.
    16. The Applicant represents that, historically, contributions to 
the Benefit Plan by Benefit Plan participants have been targeted at 25% 
of Benefit Plan costs. By implementing the proposed Captive Approach 
and lowering annual Benefit Plan costs by $129,485, there will be a 
cost savings to the Benefit Plan of 7.62% per year. Based on the 
Applicant's assertions that the Captive Approach will result in 
participants' savings of 7.62% per year, the Department is including an 
exemption condition that requires participant contributions to comprise 
no more than 17.38% (i.e., 25%-7.62%) of the Benefit Plan's premiums on 
a going-forward annual basis.

The Independent Fiduciary

    17. George J. Stadtlander, President and majority owner of 
Consoliplex L.L.C. (Consoliplex), a health plan service organization 
located in Cleveland, Ohio, will serve as the Benefit Plan's qualified 
independent fiduciary (the Independent Fiduciary) with respect to the 
proposed transactions. Mr. Stadtlander states that he is qualified to 
serve as the Independent Fiduciary for the Benefit Plan because he: (a) 
is not employed by Fedeli Group or its affiliates; (b) has more than 
thirty years of experience in the field of health benefits, including 
serving as an officer and executive vice president for Medical Mutual, 
a local health insurance company with over $2 billion in annual 
premiums; (c) currently owns an organization that serves as a plan 
manager for five multiple employer welfare arrangements; and (d) has 
managed the actuarial department, the underwriting department, network 
contracting, utilization management and sales departments, in his 
capacity with the local health local health insurance company, which 
has provided him with

[[Page 76256]]

the experience and background for forming the opinions expressed in his 
Independent Fiduciary report. Mr. Stadtlander was chosen to act as 
Independent Fiduciary by David M. Deroma, the plan fiduciary 
responsible for selecting the independent fiduciary. Mr. Deroma 
represents that Mr. Standtlander's selection was based solely on his 
qualifications to serve as an independent fiduciary after a prudent 
process without regard to whether Mr. Standtlander's views were likely 
to favor the interests of the Fedeli Group or related parties.
    18. Mr. Stadtlander represents that he understands his duties, 
responsibilities, and liabilities under ERISA as the Independent 
Fiduciary on behalf of the Benefit Plan participants and their 
beneficiaries, and that, as Independent Fiduciary of the Benefit Plan, 
he does not act on behalf of the Benefit Plan sponsor or take its 
interests into account. Mr. Stadtlander also represents that neither he 
nor Consoliplex have received, nor will they receive, more than 1% of 
their annual income from Fedeli Group and its related parties. In 
addition, Mr. Stadtlander represents that neither he nor any related 
parties, including Consoliplex: have performed any work in connection 
with the Captive Approach on behalf of the Fedeli Group or its related 
parties; have any financial interest with respect to his work as an 
independent fiduciary or the Captive Approach apart from his express 
fees for his work as an independent fiduciary for the Benefit Plan; or 
have received any other compensation or entered into any financial or 
compensation arrangements with the Fedeli Group and related parties. 
Fedeli Group and its related parties have not, and will not, indemnify 
the Independent Fiduciary, in whole or in part, for any violations of 
state or federal law that may be attributable to the Independent 
Fiduciary in performing its duties under the captive reinsurance 
arrangement. In addition, no contract or instrument purports to waive 
any liability under state or federal law for any such violations.
    19. As the Independent Fiduciary, Mr. Stadtlander prepared an 
initial report dated February 26, 2018 (the February 2018 Independent 
Fiduciary Report), which he has updated with supplemental reports on 
July 30, 2019 (the July 2019 Independent Fiduciary Report), and 
December 5, 2019 (the December 2019 Independent Fiduciary Report), at 
the Department's request.
    20. February 2018 Independent Fiduciary Report. Mr. Stadtlander 
represents that he reviewed the Applicant's rationale as to why the 
Captive Approach would directly Benefit Plan participants and 
beneficiaries. Mr. Stadtlander represents that the Applicant's factual 
assumptions and related analysis were accurate and reasonable, and that 
his access to the Fedeli Group's books and records will allow him to 
ensure that the use of the Benefit Plan's assets comply with the 
requirements of ERISA.
    21. Mr. Stadtlander represents that he is authorized to take all 
appropriate actions to safeguard the interests of the Benefit Plan and 
its participants and beneficiaries, including but not limited to 
monitoring the proposed transactions to ensure the transactions remain 
in the interests of the Benefit Plan and its participants and 
beneficiaries, and that he can take appropriate actions available under 
the circumstances with respect to the proposed transactions, including 
but not limited to enforcing compliance with all contractual conditions 
and obligations imposed on any party dealing with the Benefit Plan.
    22. July 2019 Independent Fiduciary Report. In the July 30, 2019 
Independent Fiduciary Report, Mr. Stadtlander certified that the 
proposed captive reinsurance arrangement would: (a) primarily Benefit 
Plan participants and beneficiaries and only provide non-monetary 
benefits to the Fedeli Group; (b) create real and substantial 
additional benefits for the Plan and Plan participants; (c) not be 
offset by reduction in benefits/salaries elsewhere; and (d) otherwise 
be consistent with ERISA (including the prudence and loyalty 
provisions) and the law.
    23. December 2019 Independent Fiduciary Report. At the Department's 
request, Mr. Stadtlander provided additional responses and 
clarifications related to the proposed transactions. Mr. Stadtlander: 
(a) reviewed the Applicant's representations that the Fedeli Group and/
or its related parties would not receive a monetary benefit (tax or 
non-tax, including a profit) from the proposed captive reinsurance 
arrangement, and certified that the Applicant's representations were 
accurate; \5\ (b) determined that the proposed captive reinsurance 
arrangement would: (i) primarily Benefit Plan participants inasmuch as 
the financial benefits to Benefit Plan participants would exceed the 
amount of any non-monetary incidental benefit to the Fedeli Group and 
related parties; \6\ (ii) create real and substantial additional 
benefits for the Benefit Plan and for Benefit Plan participants; (iii) 
not be offset by reduction in benefits/salaries elsewhere; and (iv) be 
otherwise consistent with ERISA (including prudence/loyalty provisions) 
and the law; (d) certified, within the context of the captive, that the 
savings from the Captive Approach would inure to the benefit of the 
participants through a combination of some or all improved benefits or 
reduced contributions; (e) confirmed that, as the Independent 
Fiduciary, he had the requisite knowledge regarding captive reinsurance 
arrangements to fulfill his duties under ERISA section 404 as a prudent 
plan fiduciary; (f) confirmed that he, as the Independent Fiduciary, 
would monitor the reinsurance arrangement throughout the duration of 
the exemption, if granted by the Department; (g) confirmed that the 
proposed captive reinsurance arrangement is consistent with the 
prudence and loyalty provisions of ERISA section 40 and other 
applicable laws; and (h) provided analyses to support all 
representations it made to the Department.
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    \5\ In this regard, Mr. Stadtlander stated that he received full 
disclosure of all benefits the Applicant expected to derive from the 
proposed transactions. Among other things, Mr. Stadtlander reviewed 
internal analyses of the economic benefits to the Applicant prepared 
by consultants and the Applicant itself, and he received full access 
to all data necessary to evaluate the transactions, including 
submissions made by the Applicant to state insurance departments.
    \6\ As described above, Fedeli Group represents that it would 
benefit by an increased predictability and greater control over its 
benefit funding obligations.
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    24. In addition, Mr. Stadtlander stated that he would annually 
determine whether the terms and conditions of the exemption, if 
granted, had been met in the prior year. Specifically, the terms of the 
proposed exemption, if granted, provide that Mr. Stadtlander must file 
annual certified reports with the Department that confirm whether all 
terms and conditions of the exemption have been met under penalty of 
perjury. Under the terms of the proposed exemption, each report must be 
completed within six months from the end of the 12-month period to 
which it relates (the first 12-month period beginning on the effective 
date of the exemption, if granted, and submitted to the Department 
within six months thereafter).
    25. Finally, Mr. Stadtlander attached his supporting analysis to 
the Independent Fiduciary Report. Stadtlander's analysis confirmed the 
Fedeli Group's calculations of the final saving value and annual cost 
savings. As stated above, the Applicant calculated a savings of $168.60 
per Benefit Plan participant per month using the Captive Approach based 
on an

[[Page 76257]]

overall annual cost savings to the Benefit Plan of $129,485.00.

The Department's Findings

    26. The Department has the authority under ERISA section 408(a) to 
grant an exemption from the prohibition transaction provisions of ERISA 
section 406 if the Department finds that the transaction is in the 
interest and protective of the rights of the affected plan and its 
participants and beneficiaries, and is administratively feasible.\7\ 
The Department's findings required under ERISA section 408(a) with 
respect to the proposed captive reinsurance arrangement are discussed 
below.
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    \7\ ERISA section 408(a).
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    27. The Proposed Exemption is ``Administratively Feasible.'' The 
Department has tentatively determined that the proposed exemption would 
be administratively feasible, because the proposed captive reinsurance 
arrangement is subject to robust annual reviews by Mr. Stadtlander and 
included in a report he must file with the Department's Office of 
Exemption Determinations.
    28. The Proposed Exemption is ``Protective of the Plan.'' The 
Department has tentatively determined that the proposed exemption is 
protective of the rights of the Benefit Plan's participants and 
beneficiaries because, among other things, a the exemption contains a 
number of additional conditions in addition to the requirement 
discussed above, including the following: (a) no commissions will be 
paid by the Benefit Plan with respect to the direct sale of any third 
party insurance contract and/or any reinsurance contract; and (b) the 
Fedeli Group will only contract on behalf of the Benefit Plan with 
insurers having a financial strength rating of ``A'' or better from 
A.M. Best Company or the equivalent rating from another rating company. 
In addition, for each taxable year of Risk Specialists, the gross 
premiums received in that taxable year by Risk Specialists for benefit 
insurance provided to Fedeli Group and its employees with respect to 
which Risk Specialists is a party in interest by reason of the 
relationship to Fedeli Group as described in ERISA section 3(14)(E) or 
(G), will not exceed 50% of the gross premiums received for all lines 
of insurance (i.e., benefit insurance and non-benefit insurance) in 
that taxable year by Risk Specialists.
    29. Further, the interests of the Benefit Plan and its participants 
and beneficiaries are represented in the covered transactions by an 
Independent Fiduciary that is obligated, among other things, to: (a) 
monitor the transactions described in the exemption on behalf of the 
Benefit Plan, on a continuing basis, to ensure the transactions remain 
in the interest of the Benefit Plan; (b) take all appropriate actions 
to safeguard the interests of the Benefit Plan; and (c) enforce 
compliance with all conditions of the exemption and all conditions and 
obligations imposed on any party dealing with the Benefit Plan. In 
connection with the provision to participants in the Benefit Plan of 
the insurance coverage provided by THP or its successor, which is 
reinsured by the Risk Specialists, the Independent Fiduciary will 
review all contracts (and any renewal of such contracts) of the 
reinsurance of risks and the receipt of premiums therefrom and ensure 
that the requirements of this exemption, and the terms of the increased 
benefits continue to be satisfied.
    30. The Proposed Exemption is ``In the Interests of the Plan.'' The 
Department has tentatively determined that the proposed exemption would 
be in the interest of the Benefit Plan because, among other things, all 
of the cost savings from the Captive Approach (relative to the 
reasonable cost the Benefit Plan would otherwise have paid for 
comparable benefits pursuant to a non-captive arrangement with an 
unrelated, third-party insurer) will be used to reduce the amount that 
each Benefit Plan participant is required to contribute toward the 
premium the Benefit Plan pays to THP or another fronting insurer. 
Specifically, based on calculations confirmed by the Independent 
Fiduciary, the captive reinsurance arrangement will reduce the monthly 
contribution of each Benefit Plan participant by approximately $168.60. 
This monthly reduction in contribution obligations will result in 
annual savings per participant of $2,023.20 ($168.60 x 12 months). 
Significantly, Benefit Plan participants will contribute no more than 
17.38% of the premium paid by the Benefit Plan to THP or another 
fronting insurer in any Benefit Plan year, which is less than the 25% 
the participants previously contributed to Benefit Plan premiums.
    In addition, the proposed exemption conditions require 
contributions of Benefit Plan participants to be further reduced by any 
net benefit received by any Fedeli Group entity, including Risk 
Specialists, that is generated by the Captive Approach over each five-
year period, the first year of which would begin on the date this 
exemption is granted. Net benefits may include, but are not limited to, 
increased earned income, increased savings, a tax reduction or a profit 
or any benefit arising from a further diversification of Risk 
Specialist's risks in connection with adding Plan-related insurance 
risks to Risk Specialist's other risks. Participants' contributions 
will be reduced by the amount of the net benefit (plus interest) on a 
pro rata basis in the year following the five-year period to which the 
net benefit relates.
Summary
    31. Based on Fedeli Group, Inc. satisfying the conditions described 
above and the representations made in its exemption allocation and 
communications with the Department, the Department has tentatively 
determined that the relief sought by the Applicant satisfies the 
statutory requirements for an exemption under ERISA section 408(a).

Notice to Interested Persons

    Notice of the proposed exemption will be provided by the Applicant 
to all Interested Persons within 15 days of the publication of the 
notice of proposed exemption in the Federal Register, by first class 
U.S. mail to the last known address of all such individuals. Such 
notice will contain a copy of the notice of proposed exemption, as 
published in the Federal Register, and a supplemental statement, as 
required pursuant to 29 CFR 2570.43(a)(2). The supplemental statement 
will inform interested persons of their right to comment on the pending 
exemption. Written comments are due within 45 days of the publication 
of the notice of proposed exemption in the Federal Register. All 
comments will be made available to the public.
    Warning: If you submit a comment, EBSA recommends that you include 
your name and other contact information in the body of your comment, 
but DO NOT submit information that you consider to be confidential, or 
otherwise protected (such as Social Security number or an unlisted 
phone number) or confidential business information that you do not want 
publicly disclosed. All comments may be posted on the internet and can 
be retrieved by most internet search engines.

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 ERISA section 408(a) does not relieve a fiduciary or other party 
in interest or disqualified person from certain other provisions of 
ERISA and/or the Code, including any prohibited transaction

[[Page 76258]]

provisions to which the exemption does not apply and the general 
fiduciary responsibility provisions of ERISA section 404, which, among 
other things, require a fiduciary to discharge their duties respecting 
the plan solely in the interest of the participants and beneficiaries 
of the plan and in a prudent fashion in accordance with ERISA section 
404(a)(1)(B); nor does it affect the requirement of Code Section 401(a) 
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 ERISA section 408(a), 
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;
    (3) The proposed exemption would be supplemental to, and not in 
derogation of, any other provisions of ERISA 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 exemption would be subject to the express 
condition that the material facts and representations contained in the 
application are true and complete at all times and that the application 
accurately describes all material terms of the transactions which are 
the subject of the exemption.

Proposed Exemption

Section I. Proposed Transactions

    If the proposed exemption is granted, the restrictions of ERISA 
sections 406(a)(1)(D)and 406(b)(1) shall not apply to the reinsurance 
of risks and the receipt of premiums therefrom by Risk Specialists 
Insurance Company, Inc. (Risk Specialists), in connection with 
insurance contracts sold by THP Insurance Company, Inc. (THP) or any 
successor insurance company to THP, which is unrelated to the Fedeli 
Group, Inc., including any entity related to Fedeli Group Inc. 
(collectively, Fedeli Group), to provide medical and hospital coverage 
to participants in the Fedeli Group Inc. Employee Benefit Plan (the 
Benefit Plan) provided that the conditions set forth in Section II are 
met.

Section II. Conditions

    (a) All of the savings from the captive reinsurance arrangement 
will be used to reduce the amount that each Benefit Plan participant is 
required to contribute toward the premium the Benefit Plan pays to THP 
or another fronting insurer. The cost savings must be determined 
relative to the reasonable cost the Benefit Plan would otherwise have 
paid for comparable benefits pursuant to a non-captive arrangement with 
an unrelated, third-party insurer. In no year will the reduction in 
Benefit Plan participant contributions be less than $2,023.20 per 
participant per year. The premium reduction must benefit all Plan 
participants equally and must be verified by the Independent Fiduciary 
as described below.
    (b) Benefit Plan participant contributions will be further reduced 
by an amount equal to any net benefit (the Extra Benefit) any Fedeli 
Group entity received that is directly or indirectly generated by the 
Captive Approach over each five-year period, the first of which begins 
on the grant date this exemption is granted. Extra Benefits include, 
but are not limited to, increased earned income, increased savings, a 
tax reduction or a profit or any benefit arising from a further 
diversification of Risk Specialist's risks in connection with adding 
Plan-related insurance risks to Risk Specialist's other risks. The 
reduction must be received by Benefit Plan participants on a pro rata 
basis in the year following the five-year period to which the Extra 
Benefit relates; plus, an additional interest payment on the amount of 
the Extra Benefit at the Internal Revenue Code's federal underpayment 
rate established in Code section 6621(b). The interest on the Extra 
Benefit must be calculated for the period from the end of the Benefit 
Plan year the Extra Benefit was earned through the start of the Benefit 
Plan year in which the Extra Benefit is applied to reduce Benefit Plan 
participants' contributions.
    (c) Benefit Plan participants contribute no more than 17.38% of the 
premium paid by the Benefit Plan to THP or another fronting insurer;
    (d) Risk Specialists:
    (1) Is a party in interest with respect to the Benefit Plan by 
reason of a stock affiliation with Fedeli Group that is described in 
ERISA section 3(14)(E) or (G);
    (2) Is licensed to sell insurance or conduct reinsurance operations 
in the state of Tennessee;
    (3) Has obtained a Certificate of Authority from the insurance 
commissioner of the State of Tennessee to transact the business of a 
captive insurance company, which has neither been revoked nor 
suspended, and has undergone a financial examination (within the 
meaning of the law of its domiciliary State, Tennessee) by the 
Insurance Commissioner of the State of Tennessee within five years 
before the end of the year preceding the year in which the reinsurance 
transaction occurred;
    (4) Has undergone and shall continue to undergo an examination by 
an independent certified public accountant for its last completed 
taxable year immediately prior to the taxable year of the reinsurance 
transaction covered by this exemption; and
    (5) Is licensed to conduct reinsurance transactions by a state 
whose law requires that an actuarial review of reserves be conducted 
annually by an independent firm of actuaries and reported to the 
appropriate regulatory authority;
    (e) The Benefit Plan pays no more than adequate consideration with 
respect to insurance that is part of the captive reinsurance 
arrangement covered by the exemption;
    (f) No commissions are paid by the Benefit Plan with respect to the 
direct sale of such contracts or the reinsurance thereof;
    (g) In the initial year of any contract involving Risk Specialists 
and THP or any successor insurer, the Benefit Plan's participants and 
beneficiaries receive an immediate and objectively determined benefit 
in the form of decreased participant contributions, and such benefits 
will continue in all subsequent years of each contract and in every 
renewal of each contract;
    (h) In the initial year and in subsequent years of coverage 
provided by THP or another fronting insurer (either, a Fronting 
Insurer), the formulae used by the Fronting Insurer to calculate 
premiums must be similar to formulae used by other insurers providing 
comparable life insurance coverage under similar programs that are not 
captive reinsured. Furthermore, the premium charges calculated in 
accordance with the formulae must be reasonable and must be comparable 
to the premiums charged by the Fronting Insurer and its competitors 
with the same or a better financial strength rating providing the same 
coverage under comparable programs that are not captive reinsured;
    (i) Fedeli Group only contracts with insurers with a financial 
strength rating of ``A'' or better from A.M. Best Company. The 
reinsurance arrangement between any fronting insurer and Risk 
Specialists will be indemnity insurance only, such that the fronting 
insurer will not be relieved of any liability to the Benefit Plan 
should Risk Specialists be unable or unwilling to cover any

[[Page 76259]]

liability arising from the reinsurance arrangement;
    (j) Participants and beneficiaries in the Benefit Plan must receive 
no less than the immediate and objectively determined increased 
benefits the participant and beneficiary received in the initial year 
of each such contract involving Risk Specialists and THP in subsequent 
years of every contract of reinsurance involving Risk Specialists and 
THP;
    (k) For each taxable year of Risk Specialists, the gross premiums 
received in that taxable year by Risk Specialists for benefit insurance 
provided to Fedeli Group and its employees with respect to which Risk 
Specialists is a party in interest by reason of the relationship to 
Fedeli Group as described in ERISA section 3(14)(E) or (G), will not 
exceed 50% of the gross premiums received for all lines of insurance 
(i.e., benefit insurance and non-benefit insurance) in that taxable 
year by Risk Specialists;
    (l) The Benefit Plan retains a qualified independent fiduciary (the 
Independent Fiduciary) to analyze the transactions covered by the 
exemption and render an opinion that the terms and conditions of this 
exemption have been satisfied;
    (m) The Independent Fiduciary will:
    (1) Monitor the transactions described here on behalf of the 
Benefit Plan on a continuing basis to ensure such transactions remain 
in the interest of the Benefit Plan;
    (2) Take all appropriate actions to safeguard the interests of the 
Benefit Plan; and
    (3) Enforce compliance with all conditions of this exemption and 
all conditions and obligations imposed on any party dealing with the 
Benefit Plan;
    (4) Review all contracts, and any renewals of such contracts, 
pertaining to the captive reinsurance arrangement, to determine whether 
the requirements of this exemption, and the terms of the increased 
benefits continue to be satisfied; and
    (5) Provide an annual, certified report to the Department, under 
penalty of perjury, indicating whether the terms and conditions of the 
exemption continue to be satisfied. Each report must be completed 
within six months after the end of the twelve-month period to which it 
relates (the first twelve-month period begins on the first day of the 
implementation of the captive reinsurance arrangement covered by this 
exemption), and be submitted to the Department within 60 days 
thereafter. The relevant report must include all the objective data 
necessary to demonstrate that the Primary Benefit Test has been met; 
and
    (n) The Benefit Plan, Fedeli Group and its related parties have 
not, and will not, indemnify the Independent Fiduciary, in whole or in 
part, for negligence and/or for any violations of state or federal law 
that may be attributable to the Independent Fiduciary in performing its 
duties under the captive reinsurance arrangement. In addition, no 
contract or instrument will purport to waive any liability under state 
or federal law for any such violations. In the event a successor 
Independent Fiduciary is appointed to represent the interests of the 
Plan with respect to the subject transaction, no time shall elapse 
between the resignation or termination of the former Independent 
Fiduciary and the appointment of the successor Independent Fiduciary.
    (o) No Fedeli Group entity or related entity may use participant-
related data or information generated by or derived from the proposed 
arrangement in a manner that benefits the Fedeli Group or related 
entity;
    (p) No amount of THP's reserves that are attributable to the Plan 
participants' contributions may be transferred to Fedeli Group or a 
related party;
    (q) Fedeli Group will not evade the conditions in this exemption by 
offsetting or reducing any benefits provided to Fedeli Group employees 
to defray the costs, expenses, or obligations of complying with this 
exemption;
    (r) All expenses associated with the exemption and the exemption 
application, including any payment to the Independent Fiduciary, must 
be paid by Fedeli Group and not the Plan;
    and
    (s) All the material facts and representations set forth in the 
Summary of Facts and Representation are true and accurate at all times.
    Effective Date: The proposed exemption will be in effect as of the 
date the grant notice is published in the Federal Register.

    Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
[FR Doc. 2023-24401 Filed 11-3-23; 8:45 am]
BILLING CODE 4510-29-P