pact that these trust plans have upon the society of our country. It is important that they be allowed to continue granting benefits to the public and that the public's confidence therein should not be shaken. We are doing everything in our power to assist in the programing of properly managed trust plans following good business practices, administered in an open manner that permits any participating member thereof to review his plan's financial affairs at any time. Certain unusual practices have come to our attention from time to time and in each instance we assisted in the improvement or elimination thereof. On the other hand, if any embezzlement or other fraudulent activities should be discovered, much more drastic action will be taken.

We sincerely hope that we have contributed toward your program. We have no reports covering such background or administrative activities other than the Commissioner's report to legislature each year. However, they would not be of any value in this regard.

This is the conclusion of this letter. I think it sets up a good beginning for this discussion today.

In order to get a good start and since we are talking about Washington's law certainly as the reason why I am here, maybe it would be a good idea to take the law which is not a very long one and go over it section by section and read it. Then we would know just exactly what we are talking about.

Chairman BARDEN. That would be fine.

Mr. HOLBROOK. Section 1 of this law has to do with definitions. Section 1, paragraph (1) defines the insurance commissioner of the State of Washington. Paragraph (2) states as follows.

Mr. WARD. There are copies of this law in a report before the committee on page 62 which they might they like to follow along with the witness.

Mr. HOLBROOK. I know it is not necessary to mention that any time I anticipate any questions at all just speak up and we will stop. From here on ask any question any time and we will try to explain it if we

can.

Paragraph (2) of Section 1 says,

"Employee welfare trust fund" means any fund established for employees of one or more employers for providing employees, their families or dependents *

and so forth.

In other words, gentlemen, this says any funds whether or not it is self-administered, self-insured or any other way; just so long as it is a trust fund it is subject to our act.

Mr. WIER. That will be one of the bones of contention here. It was a bone of contention in my State. You say any trust fund.

Mr. HOLBROOK. That is right.

Mr. WIER. A department store in Minneapolis with 1,200 employees sets up its own fund in that department store for retirement purposes and sickness under the administration of one of their employees. That is a plan that the department stores usually have. The funds are retained by the store. There is no collective bargaining. This is a voluntary action on the part of this corporation. Do you classify that fund as a trust fund?

Mr. HOLBROOK. We have not. In the first place, there are a sufficient number of trust funds themselves that are clearly definable to keep us extremely busy for a long time, and since that is not a trust fund, unless there is an actual trust document, unless trustees are appointed under it, unless there is a separation of in whose possession the funds are kept, the funds are actually paid by the employer or employees to a trust

established for the purpose of providing these benefits from those funds, in other words, if there is not a trust plan involved we do not consider them at all.

Mr. TELLER. Would not any retirement fund set up under the internal revenue law have to be a trust fund as distinguished from an employee welfare fund? The Bureau of Internal Revenue has to pass on the validity of an employee pension fund in advance and my impression is that you must have a trust fund to qualify under the income-tax laws. Am I right in that impression?

Mr. HOLBROOK. I am sorry. I am not sure whether that is technically it. If there is a trust fund established under the pension program why is there this consideration of losing your interest when you transfer from one employer to another?

Mr. TELLER. It is because that is one of the allowable provisions of the trust fund under the Internal Revenue regulations.

Mr. HOLBROOK. I am sorry that I cannot say whether or not it has to be a trust fund to be a pension fund.

Mr. TELLER. Suppose it had to be a trust fund in order to be a pension fund under the Internal Revenue regulations. Would it come within the purview of the Washington law?

Mr. HOLBROOK. If it is a trust fund it would.

Mr. GWINN. Then the way to avoid this act is not to create a trust fund.

Mr. HOLBROOK. Perhaps.

Mr. TELLER. You could not have a pension fund without a trust fund under the Internal Revenue regulation.

Mr. GWINN. As a matter of fact, are all of your funds in Washington under some form of trust fund and subject to your examination? Mr. HOLBROOK. They are not. There are a number of very large employers in the State of Washington that have not ever established a trust fund for the health and welfare benefits for their employees. They are not subject to our act.

Mr. GWINN. Then are there also union funds set up which are not subject to your examination?

Mr. HOLBROOK. If they did not have a trust fund they would not be subject to our act. The act plainly states "trust fund." As I say, we have more than we can take care of just examining these and we have not gone beyond this.

Mr. GWINN. You do not know how many other funds there are that are not subject to your examination?

Mr. HOLBROOK. I would believe there would be very few union funds. There are probably quite a number of employer funds.

Mr. TELLER. Any union fund subject to the Taft-Hartley Act, if drawn from employer contributions would have to be a trust fund. Mr. HOLBROOK. That is right, according to the act.

Mr. TELLER. So that the only employee welfare funds administered by a union unilateral would be those which had to do with wholly intrastate industries which do not come within the purview of the Taft-Hartley Act.

Mr. HOLBROOK. Perhaps, but I think that most of the unions at least in our area have tried very hard to follow the Taft-Hartley Act in every case whenever they could, and even though they may not have to they would, according to the information we can get from the people that are actually administering these plans. Now, it would

not be very often that a union would be able to set up a plan of its own with its own funds except by virtue of employer contributions, I think, but they could and if they did and did not establish a trust they would not be subject to the act.

Mr. TELLER. The International Typographical Union has such a plan, does it not? Its plan or fund is not drawn from employer contributions directly, is it?

Mr. HOLBROOK. That, I do not know. As I say, we have done everything we can do to take care of our own affairs out there and in some cases we have not been able to follow all others.

Mr. TELLER. My understanding is that the International Typographical Union creates a fund from employee contributions solely and does not come either within the purview of the Taft-Hartley Act or any other law.

Mr. HOLBROOK. They would not be able to get group insurance in the State of Washington.

Mr. TELLER. The fact that they would have to go to an insurance company would not create a trust fund within the meaning of your law would it?

Mr. HOLBROOK. No, but they cannot go on employee contributions only. It is against the State insurance code. They cannot be issued an insurance contract by a carrier on a group basis.

Mr. TELLER. Is that true of employers also? Suppose an employer sought to get insurance from an insurance company to rationalize its agreement to supply employee benefits. Would that employer be able to go directly to an insurance company?

Mr. HOLBROOK. He could, providing that the premium was not paid entirely by the employees.

Mr. TELLER. In other words, he would have to contribute a part of the premium?

Mr. HOLBROOK. A part or all, but not the employees.

Mr. TELLER. Now, suppose the union went to an insurance company and sought to secure insurance where the premiums were paid wholly by the employees who were union members. You say that the union could not get insurance.

Mr. HOLBROOK. The union could pay it out of the union funds but the employees may not contribute 100 percent to it.

Mr. TELLER. Suppose the employees contribute money to the union and the union, using its funds, then applied for insurance. Could the union not get insurance?

Mr. HOLBROOK. The union can but the employees may not pay out the premium directly. It is easier for me to quote our insurance law on the subject. Section 23050, the Insurance Code of the State of Washington concerning labor union groups:

The lives of a group of individuals may be insured under a policy issued to a labor union which shall be deemed the policyholder to insure the members of such union for the benefit of persons other than the union or its officials. Section 2 under this says:

The premium for the policy shall be paid by the policyholder

that is the union

either wholly from the union funds or partly from such funds and partly from funds contributed by the insured members specifically for their insurance. No

policy may be issued of which the entire premium is to be derived from funds contributed by the insured members specifically for their insurance.

Mr. TELLER. Could the union administer the plan without going to an insurance company at all?

Mr. HOLBROOK. I do not believe there is anything in our statute that would prevent them.

Mr. GWINN. If they did, would they be subject to review under

your act?

Mr. HOLBROOK. No, not under the act because the act refers to trust funds, but, if they set up a trust fund, yes. If they did not, no. May I continue?

Chairman BARDEN. Mr. Holbrook, going back to Mr. Wier's question which I believe was based on the employer, the owner of the store guaranteeing to the employee certain benefits, did your answer apply whether that store or company separated that fund from its normal operations or not, or did it just apply when the company did not separate it?

I have in mind that the concern that Mr. Wier spoke of set aside $50,000 in a separate fund for that purpose. On the other hand he would not set aside anything but it would be paid out just like salaries were paid out from the general treasury of the store. Would that make any difference in the handling under the Washington law? Mr. HOLBROOK. Mr. Chairman, it would not. The concern is whether or not there is a trust fund established. If there is a trust fund established, then it would be our concern to see to it that separate funds were kept and they were not commingled.

Chairman BARDEN. I had that in mind when I said that the $50,000 was set aside and earmarked, we will say, as a fund to pay those benefits to the employees and, of course, you normally refer to that as a trust fund. That fund is there for the purpose of paying these benefits.

Now, how would that be treated under the Washington law?

Mr. HOLBROOK. If there is a trust fund established to pay benefits, and we have been trying in every way we can to locate any and all such trust funds, it is subject to our act.

Mr. WIER. Will you read over the provisions of the law that define trust funds.

Mr. HOLBROOK. Let me read this provision right here:

"Employee welfare trust fund" means any fund established for employees of one or more employers for providing employees, their families, or dependents medical or hospital care, disability benefits, death benefits, retirement benefits, annuity benefits, health care services, or any insurance benefits whether such benefits or services are to be paid directly from such fund or interest therefrom, or paid under contracts entered into by the trustees of the fund with an insurer or health care service contractor.

Mr. WIER. Mr. Chairman, in the case I mentioned, that would be a trust fund because it is called a retirement fund.

Now we come to hospitalization and sick leave. They are paid. I think there is a contract with the Blue Cross organization. What do you do in the State of Washington where an employer sets aside a reserve for taking care of hospitalization?

Mr. HOLBROOK. Mr. Wier, again I am trying to draw this line very definitely between a trust fund and a trusteeship established, a written document as being separate from just a reserve on the books of the corporation to pay these funds.

!

Mr. WIER. In other words, then, in the case of a number of these funds, just funds that are set up for this purpose of welfare covering the whole field, whether it is death, insurance, retirement at a compulsory age, or whether it is hospitalization, surgery and so forth, if that does not become a trust fund by the interpretation of the language in the act, it is free.

Mr. HOLBROOK. That is correct.

Mr. WIER. That is true even if that company is in interstate

commerce.

Mr. HOLBROOK. Even if it is covered, if it is not a trust fund it is not covered by this act. This act relates to trust funds.

Mr. TELLER. The Taft-Hartley Act only applies to such trust funds as arise from employer contributions to union welfare plans. A jointly administered employer-union trust fund would not come under the language of the Taft-Hartley Act.

Chairman BARDEN. I believe there were some exceptions of those in existence and operation prior to the passage.

Mr. TELLER. That took it out and did not put it in, Mr. Chairman. Chairman BARDEN. I understand. You may proceed, Mr. Holbrook.

Mr. HOUSE. Mr. Chairman, may I attempt to clarify the question as to the Internal Revenue Service situation?

Chairman BARDEN. I think it would be appropriate at this point.

Yes.

Mr. HOUSE. That question was asked by Mr. Teller. As I understand the internal revenue section applicable to the pension funds, if the plan qualifies for the pension fund then the amount of contribution that the employer makes year by year into the fund is a proper deduction for tax purposes. If it does not qualify, that is not a proper deduction for tax purposes. But on the other hand even without a plan which qualifies to the extent to which the employer's moneys are actually paid out to employees for pension or welfare benefits the moneys paid out would always be proper deductions without qualification of the plan.

Mr. TELLER. I do not entirely go along with you. If your proposition were correct, an employer in a good year could pay a disproportionate amount and get an income-tax benefit and I do not think Internal Revenue would stand for that. I have before me the Internal Revenue Code. Section 401 speaks of a trust created by an emplcyer for pension purposes and only such a trust created by an employer, so that even amount being paid each year without relation to profits would qualify for income-tax deductibility under the Internal Revenue Code and prior approval must be secured from Internal Revenue.

The basic point that I would like to make is that every retirement fund would have to be a trust fund in order to qualify for income-tax deductibility and therefore would come within the purview of the Washington law or for that matter to view any rational law governing regulation of pension fund for employees.

Mr. HOUSE. I think perhaps I did not make my point clear. I am distinguishing between the amounts which the employer pays into this fund which is still held and not actually disbursed to employees. As to that, the requirements as to pension plans do apply, but as I understand it, without the creation of any funds, if an employer pays out a