Trust Asset FAQ
Q. How are the Trust assets being used?
A. The Trust holds two types of assets: encumbered and unencumbered.
Encumbered
Encumbered assets are owned by the Trust and earn interest; however, these assets must be held in reserve to cover future claims liability. For example, the Trust must hold a reserve for Incurred But Not Reported (IBNR) claims. If the Trust were to terminate its insurance contract with Principal, the IBNR reserve would be used to pay for claims that were incurred while the contract was in force, but were presented for payment after the contract was terminated and Principal was no longer obligated to pay them.
Any money not spent on future claims would be returned to the Trust; however, they would have to remain in reserve for 12 to 18 months after the contract termination to satisfy all claims liabilities.
Unencumbered
Unencumbered assets are also owned by the Trust, earn interest and do not have a reserve requirement. These assets have been used, if needed, to fund the premium rate credits.
We sometimes hear people overstate the amount of unencumbered assets that are held by the Trust. This is probably due to a misunderstanding of what assets are actually encumbered versus unencumbered. Currently, unencumbered assets would equal approximately two months worth of participant premiums paid to Principal.
Q. Can the Trust simply divide the unencumbered assets among the co-ops and send each one a check for their pro-rata share?
A. Simply put, no. Under Federal law as a 501(c)(9) trust, the SBC may only use its assets either directly or indirectly for the benefit of its plan participants (employees and their dependents). If the Trust were to pay this money directly to the employer, it would be subject to a 100% tax. In other words, if the Trust wrote each co-op a check for their share of the assets, it would be completely forfeited to the government in tax.
These assets also cannot be used for any other type of employee benefit, such as a pension plan or 401k plan.
Because of this restriction, the only legal and practical use of these assets is to subsidize and stabilize your insurance rates in the form of rate credits. Since 2004, these credits have totaled well over $2 million.
Q. The news reported that the Indiana State Teachers Association insurance trust was having financial problems. Can this same thing happen to the SBC?
A. There are many safeguards we have in place to ensure this situation cannot happen to the SBC.
Click here to review the communication we sent out in May describing these safeguards. Please know that the SBC is financially secure and performing well.
