The Labor Department has suspended a procedure that employers have used for a decade to obtain fast regulatory review of applications to fund employee benefits through their captive insurers, Business Insurance has learned.
The temporary suspension, which some describe as a review, gives regulators time to examine whether what is known as the “ExPro” procedure ensures that captive benefit funding arrangements adequately protect plan participants, according to consultants.
Under ExPro, applicants can receive, in just over two and one-half months, a Labor Department exemption for arrangements that would normally be considered a prohibited transaction. ExPro is generally available to applicants that can cite two substantially similar exemptions the department has approved within the past five years.
Employers can considerably reduce the time, effort and legal fees needed to get through the Labor Department review process, which can take years, by using the ExPro process.
ExPro “was a big step forward. It considerably speeded up the review process,” said George O'Donnell, technical director-global risk consulting at Aon Risk Solutions in Somerset, N.J.
But Labor Department regulators now are examining the two central conditions — enhancing participants' benefits and retaining an independent fiduciary to ensure the transaction is in the interests of participants — that employers must satisfy to utilize the ExPro process for captive benefit funding applications.
It isn't known how long it will take the Labor Department to complete its review.
During the review, employers can take one of two approaches to seek approval of captive benefit funding applications. They could seek an individual exemption, which in some cases has taken a year or longer, or they could seek approval utilizing what is known as a class exemption that the Labor Department instituted in 1979.
However, the basic requirement of the 1979 rule, that at least 50% of a captive's premium volume must be generated by business unrelated to its parent, is one that few captives can meet as most parents would not want that much outside business flowing through their captives.
It is not known what triggered the Labor Department review that resulted in the ExPro suspension.
“Perhaps they wanted a better understanding of what constitutes a meaningful benefit enhancement,” said Kathleen Waslov, a senior vice president at Willis North America Inc.'s global captive practice in Boston.
“Perhaps they are trying to formalize the criteria more,” said Karin Landry, a managing partner at Spring Consulting Group in L.L.C. in Boston.
Some experts say more formalized ExPro criteria could be a positive.
For example, applicants would know ahead of time what would be considered an acceptable benefit enhancement.
“That could be a positive,” Ms. Landry said.
On the other hand, some flexibility on what would be an acceptable captive funding arrangement could be lost, experts say.
A Labor Department review isn't surprising, given the length of time ExPro has been in use.
“It is natural for government regulators to see whether changes are needed,” said Aon Risk Solutions' Mr. O'Donnell.
Since the first employer, International Paper Co., utilized the ExPro approach in 2003 for its captive benefit funding application, about 20 other employers have followed (see chart). International Paper cited captive benefit funding applications the Labor Department previously approved by Columbia Energy Corp. and Archer Daniels Midland Co. in its submission for approval under ExPro.
Prior to the suspension, the Labor Department this year approved — through the ExPro process — captive benefit applications filed by Google Inc., the Mountain View, Calif.-based search engine giant; Microsoft Corp. of Richmond, Wash.; and Via Christi Health, a big Wichita, Kan.-based health care system.
One of the best-known employers to receive Labor Department approval to fund benefit risks through its captive — The Coca-Cola Co. — received an individual authorization in 2010 for its complex transaction that also involved a voluntary employees' beneficiary association.
Coca-Cola is waiting for an Internal Revenue Service ruling before proceeding.
Corporate interest in captive benefit funding has been driven by several factors, experts say. Those factors include reduced costs compared with purchasing commercial insurance as well as diversifying their captives' book of business.
“This is a win for everyone. Employers can save money” with employees receiving enhanced benefits, Ms. Landry said.
“There continues to be substantial interest in this approach as companies have become more sophisticated about the management of risk, especially benefit risks,” Mr. O'Donnell said.