Insurer Allowed to Benefit From Foreign Tax Credits Distributed by Underlying Funds

The Eleventh Circuit Court of Appeals recently held that a life insurance company did not breach its fiduciary duties by retaining the benefits that it derived from foreign tax credits. The plaintiffs argued that, under ERISA, the insurer had a fiduciary duty to pass those benefits back to certain retirement plans.

Under a group annuity contract that the plaintiff’s plan had purchased from the insurer, participants could allocate contributions among specific mutual funds selected by the plan sponsor from the insurer’s broader menu of investment options. A number of these funds passed foreign tax credits through to the insurer as the owner of the fund shares, which were held in a “separate account” of the insurer pursuant to the terms of the group annuity contract.

After sleuthing hard to find a violation, the plaintiffs argued that (a) the insurer was a functional fiduciary under ERISA section 3(21)(A)(i) because it exercised “authority or control respecting management or disposition” of plan assets and (b) it engaged in a prohibited transaction under ERISA section 406(b)(1) by dealing with plan assets for its own interest or own account. The Eleventh Circuit held that, even though the insurer exercised authority over the foreign tax credits, under “ordinary notions of property rights under non-ERISA law,” they were not plan assets because the plan had neither a legal nor beneficial interest in the foreign tax credits. The court noted that the separate account was established, administered, owned, and managed by the insurer and that the insurer was also the legal and taxable owner of the assets
in the separate account.

The plaintiffs also argued that the insurer was a functional fiduciary because the distribution of the foreign tax credits to the insurer resulted from its “discretionary authority” over the management and administration of the separate account. The court rejected this argument as well, ruling that the insurer did not have control over the factors that gave rise to the foreign tax credits. Rather, the undisputed facts showed that the plaintiffs and plan participants chose the mutual funds
in which to invest.