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Apprenticeship Training Funds: Fiduciary and Tax Reporting Issues

Apprenticeship Training Funds: Fiduciary and Tax Reporting Issues

The Department of Labor’s (DOL) increased scrutiny of training and apprenticeship funds has brought to light several fiduciary and reporting issues impacting apprenticeship programs.  Read further to learn more about issues to be aware of in part two of our series on apprenticeship training funds.

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The Basics

Apprenticeship programs are funded by contributions from employers through a trust fund, making them subject to the same regulations as employee benefit plans [the Employee Retirement Income Security Act of 1974 (ERISA)].  This allows the DOL to investigate the activities of apprenticeship programs, just as the agency does with any employee benefit plan.  Fiduciaries of apprenticeship funds have the same responsibilities as fiduciaries of employee benefit plans. 

Are you a fiduciary of an apprenticeship trust fund?  If you exercise discretionary authority or control over the management, administration or assets of the trust fund, then you are a fiduciary.

Fiduciary Roles and Issues

As a fiduciary, it is your responsibility to act in the best interest of plan participants and their beneficiaries.  Violation of fiduciary responsibility can result in personal liability for you, including damages, fines, penalties, and, in some cases, criminal prosecution. 

Fiduciaries should focus their attention on verifying (1) that the assets of the trust fund are used only to provide benefits to the participants, and (2) that the trust fund is paying reasonable expenses.  To address these areas and help protect the trust fund, apprenticeship programs should have written procedures, including procedures to monitor, verify and approve expenses.

A fiduciary should also maintain a heightened awareness of the types of transactions the trust fund is entering and whether those transactions could be prohibited under ERISA, either as party-in-interest or self-dealing transactions.   

Party-in-interest transactions can occur when an apprenticeship fund enters into a transaction with fiduciaries, trust fund employees, service providers or employers/unions of covered employees. 

Some of the more common types of prohibited party-in-interest transactions are the:

Sale, lease or exchange of property
Lending of money or other extension of credit
Furnishing of goods, services or facilities
Transfer of trust fund assets to a party in interest
Acquisition or holding on behalf of the trust fund of any “employer security” or “employer real property”

Self-dealing can occur when a fiduciary:

Uses the trust fund’s assets for his/her own interests;
Acts in his or her own capacity in any trust fund transaction with a party whose interests are adverse to those of the fund’s participants; or
Receives any consideration from any party dealing with the trust fund in connection with a transaction involving trust fund assets. 

Some examples of self-dealing transactions that may occur are:

Payroll for other entities paid out of the trust fund
Inappropriate cost “sharing” arrangements between the union or other related benefit plans and the trust fund that are either not necessary, not reasonable as to the termination notice or not reasonable compensation
Misuse of trust fund assets
Improper allocations of shared expenses (if sharing office space)

The key to shared expenses with a party in interest is to maintain all written contracts, including sharing agreements and support for the amount of compensation paid or received by the trust fund.  In addition, it would be helpful to involve legal counsel to assess whether an exemption applies and to document the assessment in the minutes or formal document.

Other Tax and Audit Issues

Does your trust fund have to file Form 5500?  Apprenticeship funds are exempt from filing Form 5500 only if they have filed a notice with the DOL.  The exemption procedures can be found at 29 CFR 2520.104-22, and the completed notice should be kept on file as part of the fund’s permanent records.  If the notice was filed, then ERISA does not require an audit for Form 5500 purposes (since none is filed); however, jointly trusteed plans are required by the Taft Hartley Act to have an annual audit.  Talk to your legal counsel and auditor to assess whether your trust fund is required to have an audit.

If your apprenticeship program qualified under 501(c)(3) Charitable Organizations, 501(c)(5) Labor Organizations, or 501(c)(9) Voluntary Employees Beneficiary Association as a tax exempt organization, an Internal Revenue Service Form 990 is required to be filed on an annual basis.  The trust fund should maintain proof of the exemption and be cognizant of potential unrelated tax business income incurred by the trust fund, as a separate filing for unrelated business income tax on the Form 990 may be required.

Conclusion

Remember that a fiduciary is “an individual in whom another has placed the utmost trust and confidence to manage and protect property or money.”  We hope that this information presented above will help you succeed in your role. 

Read Apprenticeship Training Funds:  Preparing for a DOL Audit

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