Exemption Procedures under Federal Pension Law
This booklet addresses the prohibited transaction exemption procedures under the Employee Retirement Income Security Act (ERISA), which is administered by the Department of Labor’s (the Department) Employee Benefits Security Administration (EBSA).
The topics covered in this booklet include: an overview of the prohibited transaction rules; the statutory criteria that the Department uses for providing exemptive relief; a description of the procedures for requesting exemptive relief from the Department; the procedures for requesting an authorization under the “EXPRO” procedure; examples of common types of exemption transaction requests; and contact information for obtaining assistance with applications.
This booklet addresses the scope of the exemption procedures for ERISA’s prohibited transaction rules and provides a simplified explanation of the applicable law and regulations. It is not a legal interpretation of ERISA or the Internal Revenue Code (Code). The booklet is neither intended as a substitute for the advice of an employee benefits plan professional nor meant as a substitute for the full text of ERISA, the Code, the underlying regulations thereof and other guidance from the Department. For an overview of ERISA’s fiduciary provisions, please read the Department’s publication entitled Meeting Your Fiduciary Responsibilities which is available on EBSA’s website.
The full text of the Department’s exemption procedures, including the EXPRO procedure, is included in the Appendix of this booklet.
Titles I and II of ERISA, which are administered by the Department and the Internal Revenue Service, respectively contain virtually identical provisions regarding prohibited transactions and exemptions from the prohibited transaction rules. The provisions of Title II of ERISA are found in the Code. In order to avoid confusion over dual jurisdiction between the two agencies, Reorganization Plan No. 4 of 1978 transferred the authority to grant exemptions from the prohibited transaction provisions under the Code to the Department.(1) As a result, the Department has the exclusive authority to issue prohibited transaction exemptions (PTEs) involving plans: covered solely under Title I of ERISA (welfare benefit plans such as group health plans); covered solely under Title II of ERISA (plans without employees such as non-employer sponsored IRAs and Keoghs) and covered under both Titles I and II of ERISA (pension and individual account plans such as 401(k) plans).
In general, the prohibited transaction provisions prohibit fiduciaries from causing a plan to engage in certain types of transactions with persons referred to as “parties in interest” under Title I of ERISA(2) or “disqualified persons” under the Code.(3) The purpose of the prohibited transaction rules is to prevent dealings with parties who may be in a position to exercise improper influence over plan assets, and to prevent plan fiduciaries from taking actions with respect to a plan which involve self-dealing and conflicts of interest.
There are two categories of prohibited transactions. The first category deals with transactions between the plan and a party in interest with respect to the plan.(4) Specifically, for these transactions a plan fiduciary may not cause a plan to enter into a transaction which directly or indirectly constitutes: (1) A sale, exchange or leasing of property, (2) A loan or other extension of credit, (3) A provision of goods, services or facilities, (4) A transfer or use of the income or the assets of the plan, or (5) An acquisition and holding of employer securities(5) or employer real property(6) that does not meet certain conditions.(7)
The second category of prohibited transactions describes situations involving fiduciary self-dealing and conflicts of interest.(8) For example, a violation may occur where a plan fiduciary causes a plan to engage in transactions that may benefit that plan fiduciary or a person or entity in which the fiduciary has a financial interest. This second category also applies where a fiduciary acts on behalf of a party or represents a party whose interests are adverse to the interests of the plan.
Who is a Fiduciary?
The term fiduciary includes any person who: (1) Exercises any discretionary authority or control respecting management of the plan, or exercises any authority or control respecting management or disposition of the plan’s assets; (2) Renders investment advice for a fee or other compensation for any plan assets, or has any authority or responsibility to do so; or (3) Has any discretionary authority or responsibility in the administration of the plan.(9)
Who is a Party in Interest/Disqualified Person?
Parties in interest/disqualified persons are individuals or entities that have defined relationships to a plan. They include a person providing services to the plan (such as attorneys, accountants or third-party administrators), an employer or union whose employees or members participate in the plan and plan fiduciaries. It is important to note that there are some differences between these two terms under ERISA and the Code. For example, the definition of “party in interest” in ERISA includes, among other categories, employees of a plan sponsor while the corresponding term in the Code “disqualified person” includes only certain highly compensated employees.
Civil Penalties/Excise Taxes
Parties involved in a prohibited transaction, which is not exempted under a statutory or administrative exemption, may be subject to civil penalties under ERISA or excise taxes under the Code.
Both ERISA and the Code contain a number of statutory exemptions from the prohibited transaction rules for customary business practices that are necessary for the operation of plans.(10) A statutory exemption may be relied upon provided that the conditions of the exemption are met. One exemption in the law allows a plan to hire a service provider as long as the services are necessary to operate the plan and the contract or arrangement under which the services are provided and the compensation paid for those services is reasonable.(11) Another exemption permits plans to offer loans to participants.(12) To the extent that a transaction is permitted by a statutory exemption, the parties would not need to request an administrative exemption for the same transaction from the Department.
The Department has the authority to grant administrative exemptions from the prohibited transaction provisions of ERISA and the Code for a class of transactions or for individual transactions.(13) In order to grant an administrative exemption, the Department must make three determinations: (1) The exemption must be administratively feasible; (2) In the interest of the plan and its participants and beneficiaries; and (3) Protective of the rights of plan participants and beneficiaries.(14) Prior to granting an exemption, the Department must publish a notice of proposed exemption in the Federal Register so that interested persons are given the opportunity to comment on the proposal. If the transaction involves potential fiduciary self-dealing or conflicts of interest, an opportunity for a public hearing also must be provided. The exemption procedures discussed below are designed to ensure that the Department is provided with all the relevant materials that are necessary to accurately and promptly decide whether or not an exemption should be proposed.
1. Class Exemptions
A class exemption may provide exemptive relief from the prohibited transaction provisions in ERISA or the Code or both to an identified class of entities or individuals who engage in the transaction(s) described in the exemption and who also satisfy the conditions contained in the exemption. As of 2012, there are approximately 50 class exemptions covering a wide range of plan transactions. Some examples of transactions covered by a class exemption include:
- The purchase or sale by an employee benefit plan of shares of a mutual fund when an investment adviser for the fund, other than the plan sponsor, also is the fiduciary for the plan (PTE) 77-4;(15)
- Transfers of individual life insurance contracts between plans and their participants (PTEs 92-5(16) and 92-6(17));
- Interest-free loans made to plans by their sponsoring employers (PTE 80-26(18)); and
- The receipt of certain services at reduced or no cost by an IRA/Keogh Plan beneficiary from a bank (PTE 93-33(19)).
In 1996, the Department published a class exemption PTE 96-62(20), commonly referred to as EXPRO. The EXPRO exemption is available for a class of prospective transactions which meet the conditions contained in PTE 96-62 as well as the authorization requirements described therein. If the conditions and authorization procedures are met, an applicant may be able to obtain individual prohibited transaction relief on an expedited basis. The specific requirements of EXPRO are discussed in Chapter 4 below.
Many of the Department’s class exemptions are identified at www.dol.gov/ebsa/Regs/ClassExemptions/main.html on EBSA’s website.
2. Individual Exemptions
Individual exemptions involve case-by-case determinations as to whether the specific facts represented by an applicant concerning a specific transaction (as well as the conditions applicable to such a transaction) support a finding by the Department that the requirements for relief from the prohibited transaction provisions of ERISA, and the Code have been satisfied. Unlike a class exemption, an individual exemption may be relied upon only by the specific parties in interest named or otherwise identified in the exemption. Parties in interest or disqualified persons that are unable to meet the conditions of a class exemption also may request an individual exemption. A list summarizing the Department’s most recent individual exemptions is located at www.dol.gov/ebsa/regs/ind_exemptionsmain.html on EBSA’s website.
The procedure for filing and processing prohibited transaction exemption applications is contained in the Department’s regulations at 29 C.F.R. Part 2570 and are located in the Appendix of this booklet. The procedure applies to both individual and class exemption requests. The procedure provides, among other things, that an exemption will not be granted until a notice of pendency is published in the Federal Register and interested persons (typically, plan participants but also may include other parties) have been provided an opportunity to comment on the proposed transaction. Following consideration of the entire record, the Department then makes its final determination whether to grant the exemption. If the Department contemplates not granting the requested exemption, the procedure also provides an applicant with the opportunity to submit additional information and to request a conference.
General Information Required
Applications for individual exemptions must include, among other items, the following information:
- Detailed description of the transaction and the reasons a plan would have for entering the transaction, including a description of any larger integrated transaction or series of transactions of which the prohibited transaction is a part;
- The chronology of events leading up to the transaction;
- Identification of parties in interest;
- Description of relevant safeguards and conditions;
- Percentage of total assets involved in the exemption transaction;
- Names of persons with investment discretion over assets involved in the transaction;
- Extent of plan assets already invested in other exempt or non-exempt transactions with the party in interest involved in the subject transaction (i.e., loans to, property leased to, and securities issued by parties in interest involved in the transaction);
- Copies of all contracts, agreements, instruments and relevant portions of plan documents and trust agreements bearing on the exemption transaction;
- Information regarding plan participation in pooled funds where the exemption transaction involves such funds;
- The provisions from which exemptive relief is requested and the reason why the transaction is otherwise prohibited;
- Declaration, under penalty of perjury by the applicant, attesting to the truth of representations made in such exemption submissions; and
- Statement of consent by third-party experts acknowledging that their statements are being submitted to the Department as part of an exemption application.
The Statutory Criteria
Because applicants have the burden of demonstrating that they should be granted exemptive relief, it is important to make sure that submitted applications are complete and that all material facts and legal analyses needed to justify the request for exemptive relief are included. An applicant should consider relief previously provided by the Department when preparing its application. In addition, applicants are expected to review the statutory criteria for granting administrative exemptions and must:
- Explain with as much specificity as possible why a requested exemption would pose no administrative problems;
- Describe why the requested exemption is in the interests of the plan and of its participants and beneficiaries; and
- Describe any proposed safeguards or conditions that would protect the rights of participants and beneficiaries of the affected plan.
Notice to Interested Persons
Once a notice of proposed exemption is published in the Federal Register, an applicant must notify interested persons of the pendency of the proposal. This notification requirement is satisfied when interested persons are furnished with (1) a copy of the notice of proposed exemption as published in the Federal Register, together with (2) a supplemental statement containing contact information for recipients who wish to comment on the proposed exemption or request a hearing concerning the exemption.(21) The method used by an applicant to furnish notice to interested persons must be reasonably calculated to ensure that interested persons actually receive the notice. In all cases, personal delivery and delivery by first-class mail will be considered reasonable methods of furnishing notice. After furnishing notification, an applicant must provide the Department with a statement under penalty of perjury certifying that notice was given to the persons and in the manner and time specified in the application or any superseding agreement with the Department.
In addition to providing the notice of proposed exemption and the supplemental statement, the Department may require applicants requesting relief for unusually complex transactions to furnish interested persons with an additional statement which succinctly explains the essential facts and circumstances surrounding the proposed exemption. This additional statement, known as a Summary of Proposed Exemption (SPE), must be written in a manner calculated to be understood by the average recipient. Among other things, the SPE must objectively describe the exemption transaction and the involved parties, the reasons why the plan seeks to engage in the transaction, and the conditions and safeguards proposed to protect the plan and its participants from potential abuse or unnecessary risk of loss in the event the Department grants the exemption. Those applicants who are required to provide interested persons with an SPE must also furnish the Department with a copy of such summary for review prior to its distribution.
As a general matter, the Department will consider requests for retroactive relief only where the safeguards necessary for the grant of a prospective exemption were in place at the time at which the parties entered into the transaction. In such cases, an applicant must demonstrate that it acted in good faith by taking reasonable and appropriate steps to protect the plan from abuse and unnecessary risk at the time the transaction occurred. The Department ordinarily will take into account a variety of objective factors in determining whether a plan fiduciary had exhibited good faith conduct in connection with the past prohibited transaction for which relief is sought (such as whether the fiduciary had utilized a contemporaneous independent appraisal or reference to an objective third-party source, e.g., a nationally recognized stock exchange, in establishing the fair market value of the plan assets acquired or disposed of by the plan in connection with the transaction at issue). Although the satisfaction of objective criteria may indicate that a fiduciary exhibited good faith conduct, the Department will examine the totality of facts and circumstances surrounding a past prohibited transaction before reaching a final determination on whether a retroactive exemption is warranted.
EXPRO is the common name for the class exemption (PTE 96-62) that allows the Department to authorize relief from the prohibited transaction rules on an expedited basis. The EXPRO process is only available for routine prospective transactions, including loans, leases and sales of real property, for which the Department already has developed standard terms and conditions. Authorization for exemptive relief pursuant to PTE 96-62 with respect to a prospective transaction may be obtained from the Department in as few as 78 days for applicants who meet the conditions and authorization procedures of this class exemption.
In general, an EXPRO request must contain sufficient information demonstrating that the proposed transaction and the conditions, material terms, and representations are substantially similar to other transactions for which relief has been provided by the Department. Specifically, parties who wish to take advantage of the EXPRO process must cite as substantially similar, either two individual exemptions granted by the Department within the previous five years, or one individual exemption granted within the past 10 years and a transaction authorized pursuant to the EXPRO class exemption within the past five years.
The person seeking authorization has the burden of providing the Department with the citations to the identified exemption(s) and/or authorization, and to demonstrate compliance with the provisions of the class exemption including the requirement that there is little, if any, risk of abuse or loss to the plan as a result of the transaction. The authorization request also must include, among other things, a description that compares the proposed transaction with the substantially similar exemption(s)/authorization that have been identified and an explanation as to why any differences should not be considered material. Further, all information that is otherwise required to be submitted with an individual exemption application must be included with the authorization request.
In addition, an EXPRO applicant must submit to the Department a complete and accurate draft of the notice to interested persons which it intends to distribute after the Department provides tentative authorization with respect to the subject transaction. The purpose of this notice is to afford interested persons the opportunity to provide the Department with relevant information to assist it in its consideration of the proposed transaction. The notice must include, among other things, an objective description of the proposed transaction, the approximate date on which the transaction will occur, a statement apprising interested persons of their right to comment to the Department, and the citation for the transactions identified as substantially similar to the contemplated transaction.
Tentative authorization occurs at the expiration of the 45 day period following acknowledgement by the Department of the receipt of the written submission with respect to the proposed transaction, unless the Department notifies the party requesting authorization that it is not eligible to go forward with the transaction. Following tentative authorization, it is the responsibility of the party who is to engage in the transaction to promptly distribute the notice to interested persons because the 25 day comment period will not commence until notification to all interested persons is complete. Upon completion of the notification to interested persons, the applicant must inform the Department of the date notification was completed.
The applicant must resolve all substantive adverse comments by interested persons to the satisfaction of the Department. Final authorization for the proposed transaction occurs on the fifth day following the expiration of the comment period unless the Department notifies the applicant that the transaction is not eligible for authorization, or the Department and the applicant mutually agree to extend the period for evaluating comments from interested persons. If mutual agreement between the Department and the applicant is not reached regarding the time period in which the comments must be resolved, the applicant will be notified that the Department will not provide authorization with respect to the proposed transaction. If the Department notifies the applicant that the transaction is not eligible for authorization, the written submission may be considered by the Department in accordance with the normal procedures for the processing of individual exemption requests.
The most recent list of the Department’s authorizations for EXPRO requests is located at www.dol.gov/ebsa/Regs/expro_exemptions.html on EBSA’s website.
Each application received by the Department is considered on its own merits. Accordingly, the fact that an application contains all of the information described in the Department’s procedures does not, in itself, guarantee the grant of an exemption or the issuance of an EXPRO authorization. Moreover, exemptions are granted and authorizations for EXPROs are issued only with respect to the transactions as described. Therefore, if an exemption is granted or an authorization is issued with respect to a transaction and the transaction is not as described in some material aspect, the exemption or authorization does not take effect or protect parties in interest from liability for the transaction.
Similarly, to the extent that a condition, contained in an exemption or otherwise described in a notice to interested persons that was submitted in a request for authorization, is not met, the exemption or authorization does not take effect or protect parties in interest from liability for the transaction. Further, for transactions that are continuing in nature, such as leases and loans, an exemption does not protect parties in interest from liability with respect to an exemption transaction if, subsequent to the granting of an exemption, there are material changes to the original facts and representations underlying such exemption or if one or more of the exemption’s conditions are not met.
Q1: How quickly can I obtain an authorization pursuant to the Department’s expedited EXPRO program for a proposed transaction?
An authorization may be obtained from the Department in as few as 78 days from the acknowledgment of receipt by the Department of a written submission filed in accordance with the requirements of PTE 96-62.
Q2: How do I apply for an authorization with respect to a proposed prospective transaction under the Department’s EXPRO program?
An optional checklist of the information required to be submitted to the Department is included in section III of PTE 96-62 (Appendix). Thus, a submission under the EXPRO program must include all information that is otherwise required to be submitted with an individual exemption application. Further, the submission must include a complete and accurate draft of a “Notice to Interested Persons” (Notice) that will be distributed to interested persons. The purpose of the Notice is to provide interested persons with relevant information about the proposed transaction. The Notice must apprise interested persons of their right to comment to the Department concerning the proposed transaction. The Notice also must include citations and a discussion of the prior exemptions and authorizations identified by the applicant as “substantially similar” to the contemplated transaction.
Notices describing proposed transactions that have recently received final authorization may be found at www.dol.gov/ebsa/Regs/expro_exemptions.html on EBSA’s website.
Q3: What does the term “substantially similar,” referenced above, mean for purposes of the EXPRO class exemption?
The term “substantially similar” is contained in section IV(a) of PTE 96-62 and is defined as alike in all material respects as determined by the Department, in its sole discretion. The party who intends to engage in the transaction should carefully determine whether the contemplated transaction contains terms and conditions which closely parallel the transaction delineated in either two individual exemptions granted by the Department within the previous five years or one exemption granted by the Department within the past ten years and a transaction authorized under PTE 96-62 within the past five years.
Q4: Who are “interested persons?”
As a general matter, the Notice must be sent to plan participants and any individuals receiving benefits or payments from the plan that is the subject of the application for either exemptive relief (in the case of an individual exemption request) or authorization (in the case of a request for authorization under the EXPRO program). Because the determination of who must receive the Notice depends on the facts and circumstances for a particular transaction, there may be instances where the Notice must be sent to persons other than participants and beneficiaries.
Q5: Are applications for individual prohibited transaction exemptions and for authorizations under PTE 96-62 subject to public disclosure?
Information submitted to the Department is available for public inspection. Accordingly, applications for class and individual prohibited transaction exemptions as well as authorizations under the EXPRO program may be viewed by the general public. For more information about viewing such applications, you may call EBSA’s Public Disclosure Room at (202) 693-8664.
Q6: Must an applicant for both an individual prohibited transaction exemption and for authorization under PTE 96-62 pay any user fees?
There are no user fees charged by the Department of Labor for requesting a prohibited transaction exemption or requesting an authorization under the EXPRO program.
Q7: Must a plan fiduciary or other party in interest who wants to rely on a prohibited transaction class exemption notify the Department?
Parties who wish to rely on a prohibited transaction class exemption are not required to notify the Department. Nevertheless, the party seeking to take advantage of a class exemption, and not the Department, has the burden of demonstrating that the conditions of the exemption are satisfied.
Q8: What is the responsibility of an applicant when an exemption or authorization provides relief for a transaction that is continuing in nature (e.g., lease payments) and there is a change in the facts described in the written submission for an individual prohibited transaction exemption or the written submission for an authorization under the EXPRO program?
With respect to transactions that are continuing in nature, any change in the material facts and representations described in the written submission may result in the unavailability of the relief provided by the Department as of the date the material facts or representations change. In the event of a change in material facts or representations, the parties involved in the transaction have the option of applying for a new exemption under the Department’s procedure for requesting an individual exemption or applying for authorization under PTE 96-62 if the requirements under EXPRO are otherwise met. As previously noted in this booklet, retroactive relief is not available under the EXPRO program. Applicants also have the option to write to the Office of Exemption Determinations to obtain guidance as to whether a change in facts or representations is material.
Q9: How many applications must I submit to the Department if the same transaction involves either multiple parties in interest or more than one plan?
As a general matter, for a common transaction or transactions involving multiple parties in interest or more than one plan, only a single application is needed by the Department.
Q10: Will the Department issue an EXPRO authorization for a retroactive transaction?
No. Only prospective relief is available under the EXPRO program.
Q11: How can I obtain additional information about ERISA’s prohibited transaction rules?
The Office of Exemption Determinations can be reached at (202) 693-8540.
The individual transactions described in this chapter and the factors following each example represent general guidelines that the Department will consider in its evaluation of requests for prohibited transaction exemptive relief. Thus, merely because all of the listed factors are addressed by an applicant does not necessarily mean that the subject transaction is appropriate for a particular plan or that the Department will grant the requested exemptive relief. Many applications also will contain facts that are unique in nature and must be given special consideration before the Department can make a determination on the case.
Example 1: Sale of Property by Plan to Party in Interest or Disqualified Person for Cash
XYZ Corporation sponsors a retirement plan for its employees. The Plan owns an asset, such as a parcel of real property, which it wishes to sell to XYZ Corporation.
The factors which the Department would expect an applicant to address include:
- The background history of the property including: the party from whom it was acquired and whether that party is a party in interest; the date of acquisition and the purchase price paid by the Plan; the Plan’s holding costs such as insurance and real estate taxes; whether the property has been used by or leased to anyone, including parties in interest, since its acquisition by the Plan; the reason for the proposed sale; and whether the Plan has made any efforts to sell the property to an unrelated third party.
- An explanation as to whether all terms and conditions of the sale are at least as favorable to the Plan as those that the Plan could obtain in an arm’s-length transaction with an unrelated party.
- Whether the sale will be other than a one-time cash transaction.
- Whether commissions and other expenses will be paid by the Plan sponsor in connection with the sale.
- If there is no generally recognized market for the property, whether the fair market value of the property is appraised by a “Qualified Independent Appraiser,” on behalf of the Plan - - and not the plan sponsor - - and reflected in a “Qualified Appraisal Report.”(22)
- Whether the Plan fiduciaries will: determine, among other things, whether the transaction is in the interest of the plan to go forward with the sale of the property; review and, if appropriate, approve the methodology used in the appraisal that is being relied upon; and ensure that the appraisal methodology is applied by a qualified independent appraiser in determining the fair market value of the property as of the date of the sale.
- If the party in interest engaging in the transaction (or a related entity) caused the Plan to invest in the property, whether the Plan will receive no less than the greater of its cost of acquiring and holding the property (e.g., original purchase price, insurance, real estate taxes, etc.) or the current fair market value of the property at the time of the sale. A purchase price in excess of current fair market value may not be required if: (A) The applicant provides sufficient documentation that the Plan's original investment was consistent with ERISA's fiduciary standards, (B) The sale is made from a one-participant plan or an IRA not subject to Title I of ERISA; or (C) The sale is made from an individual account in the Plan and the affected participant voluntarily consents to the sale.
- Where the sale of property eliminates an on-going prohibited transaction (such as a prohibited lease to a party in interest) whether: (A) The prohibited transaction will be corrected (i.e., the plan receives the rent differential — the difference, if any, between the fair market rental value and the actual rental value)); (B) The party in interest will pay the appropriate excise taxes to the IRS; and (C) The plan will receive any true-up necessary to reimburse the plan for the time value of money if the Plan did not receive fair market rent during the prohibited transaction’s correction period.
- Whether there is any adjacent property owned by a party in interest, and if so, an explanation whether it is appropriate to pay the Plan a premium for the assemblage value(23) of the property.
- If the sale of the property for greater than fair market value will result in a contribution to the Plan under the Code, whether the applicant will represent that such contribution will not result in any violation of the requirements for tax-qualification (or, if there would be a violation, that it will be remedied without any adverse consequences for the Plan).
Example 2: Loan by Plan to Party in Interest or Disqualified Person
The ABC Corporation is interested in borrowing $100,000 from the Plan it sponsors.
The factors which the Department would expect an applicant to address include:
- The percentage of the plan (or individually-directed account’s) assets that would be represented by the sum of the principal amount of the loan, plus the amount of all other Plan loans and leases to such party in interest (or a related entity) as well as the Qualified Independent Fiduciary’s evaluation of the loan as further described below .(24)
- Whether fees, commissions or other expenses or charges will be paid by the Plan sponsor in connection with the loan.
- Whether the terms of the loan (interest rate, repayment schedule, duration of the loan, etc.) are not less favorable to the Plan than those obtainable in an arm's-length transaction between unrelated parties; and the basis for this determination. To assure comparability with the arm's-length loan condition, a statement may be required from a third-party lender that the loan terms reflect reasonable commercial practices.
- Whether the loan is secured by collateral having a fair market value, at the time the loan is made, of at least 150% of the principal amount of the loan if the collateral is real property, and at least 200% of the principal amount of the loan if the collateral is personal property or accounts receivable.
- Whether the terms of the loan require the plan sponsor to pledge additional collateral for the loan in the event necessary to maintain full collateralization of the loan as required by the Department.
- Whether the loan is adequately protected by written loan default procedures.
- Whether the collateral securing the loan has been appraised by a Qualified Independent Appraiser, on behalf of the Plan (and not the Plan sponsor), who has issued a Qualified Appraisal Report.
- Whether the property securing the loan is insured against fire and other casualty losses in an amount not less than the amount of the outstanding principal of the loan (plus accrued but unpaid interest), and the Plan is a named beneficiary on the insurance policy.
- Whether the Plan's security interest will be perfected in the manner required by applicable state law. For example, if recording is required for perfection, the Plan’s security agreement must be recorded with the appropriate government officials.
- Whether, unless the loan is from a participant-directed individual account or a non-Title I IRA, a “Qualified Independent Fiduciary”(25) who has the experience necessary to effectively review and monitor loans of this type has:
- Reviewed the terms of the loan and compared the terms with the terms for similar loans between unrelated parties;
- Examined the Plan's overall investment portfolio, considered the Plan's liquidity and diversification requirements, in light of the proposed transaction, and determined that the loan, including the amount and duration of the loan, would comply with the Plan's investment objectives and policies;
- Opined that the proposed transaction is in the best interests of the Plan and its participants and beneficiaries and has explained in detail the reasons for such opinion;
- Agreed to monitor the loan and the conditions of the exemption on behalf of the Plan throughout the term of the loan, has committed to take all appropriate actions necessary to safeguard the interests of the Plan, and has stated that it has the authority to so act; and
- Acknowledged that, as fiduciary, it is responsible for, among other things, determining whether it is prudent to go forward with the loan, including the evaluation of the financial condition of the borrower and its ability to make the required loan payments, reviewing and approving the methodology, as well as the application of the methodology, used in the appraisal of the collateral.
Example 3: Sale of Property to Plan with a Simultaneous Lease-Back to the Party in Interest
The XYZ Corporation, Inc. sponsors a pension plan for its employees. The corporation wishes to sell a parcel of land to the Plan, which then will be leased back to the corporation.
The factors which the Department would expect an applicant to address include:
- Whether the sale is a one-time transaction for cash.
- The percentage of plan assets that would be represented by the sum of the fair market value of the property, plus the amount of all other Plan loans and leases to such party in interest (or a related entity) as well as the Qualified Independent Fiduciary’s evaluation of the transactions as further described below.
- Whether real estate fees, commissions or other expenses associated with the transactions will be paid for by the Plan sponsor.
- Whether the party in interest has agreed to indemnify and hold the Plan harmless from any liability arising from the sale, including hazardous materials located on the property, violation of zoning or land use regulations or restrictions, and violations of Federal, state or local environmental regulations or laws.
- Whether both the fair market value of the property acquired by the Plan and the fair market rental value of the property to be leased to the party in interest have been appraised by a Qualified Independent Appraiser and reflected in a Qualified Appraisal Report.
- An explanation as to whether the terms and conditions of the sale and the terms of the lease (e.g., rent, duration, allocation of expenses, etc.) are at least as favorable to the Plan as those that the Plan could obtain in an arm’s-length transaction with an unrelated party, and an explanation that the sales price and the scheduled lease payments received by the plan reflect fair market value.
- Whether a Qualified Independent Fiduciary who has the experience necessary to effectively review and monitor transactions of this type has:
- Negotiated, reviewed, and approved the terms of the purchase by the Plan and of the lease and opined that the proposed transactions are in the best interests of the Plan and its participants and beneficiaries and has explained in detail the reasons for this opinion;
- Examined the Plan's overall investment portfolio, considered the Plan's liquidity and diversification requirements in light of the proposed transactions, including the percentage of plan assets involved, and determined whether the proposed transactions comply with the Plan's investment objectives and policies;
- Acknowledged that, as fiduciary, it is responsible for, among other things, determining whether it is prudent to go forward with both transactions, including the evaluation of the financial condition of the lessee and its ability to make the lease payments on an on-going basis, and the review and approval of the methodology, as well as the application of the methodology, used in the Qualified Appraisal Report; and
- Agreed to monitor the lease on behalf of the Plan throughout the term of the lease, taking all appropriate actions to safeguard the interests of the Plan and has stated that it has been or will be given the authority to so act.
- Whether the lease provides for periodic upward adjustments to the rents payable there under, so that the rents will be no less than the fair market rental value of the leased premises at the time of the adjustment. The adjustment may be made by using the consumer price index, or by retaining a Qualified Independent Appraiser satisfactory to the Qualified Independent Fiduciary. The Qualified Independent Fiduciary will determine which method is appropriate for making such adjustment. In the case of long term leases, however, a periodic appraisal may be used (e.g., every three years).
- Whether the lease provisions include: (A) A “floor rental” provision so that the lease payments may not fall below the payments that were determined as of the first year of the lease; and (B) A triple net-lease provision whereby the lessee pays all expenses for the property, including all taxes and assessments, insurance, maintenance, and utilities.
Example 4: Stock Rights and Warrants Issued by Plan Sponsor(26)
The ABC Corporation, a publicly traded company, will issue stock rights to all holders of its common stock which will entitle such stockholders to acquire additional shares of common stock at a subscription price below current fair market value for a period of four weeks. The ABC Corporation also will issue warrants to all holders of its common stock that may be exercised at a specified price for a period of five years. The ABC Corporation's Profit Sharing Plan currently owns shares of the company’s common stock and, thus, is entitled to acquire and exercise these rights and warrants.
The factors which the Department would expect an applicant to address include:
- Whether the Plan's acquisition of the stock rights and warrants and exercise of those rights and warrants results from an independent business decision on behalf of the Plan's sponsor (or its affiliate) in its capacity as issuer of the securities, and not in its capacity as Plan fiduciary.
- Whether the Plan is treated in the same manner as any other holder of the same class of securities.
- If the Plan provides for individual participant-directed investments, whether the decisions with respect to the Plan's acquisition, holding and control of the rights and warrants are made, in accordance with the Plan terms, by the participants.
- With respect to plans other than those providing for participant-directed investments, whether a Qualified Independent Fiduciary who is qualified to review and monitor transactions of this type:
- Has examined the Plan's overall investment portfolio, considered the Plan's liquidity and diversification requirements, and considered the Plan's investment objectives and policies in light of the receipt of the stock rights and warrants; and
- Will exercise the authority for all decisions regarding the acquisition, holding and control of the rights and warrants, including the decision as to whether the Plan should exercise or sell the rights and warrants acquired through the offering.
- If the receipt of employer securities upon exercise of the stock rights and warrants would, when aggregated with employer securities already held by the plan, exceed the limits imposed by ERISA, the Department also will consider providing additional exemptive relief for the receipt and holding of such securities if, among other things, the securities are disposed of by the Plan within an agreed-upon period of time from their receipt.(27)
Example 5: Purchase of Real Property by Apprenticeship and Training Plans
ABC Apprentice and Training Plan is a Taft-Hartley trust established pursuant to a collective bargaining agreement between the participating employers and the ABC union. The Plan is administered by eight trustees, four of whom are appointed by the ABC Union. The ABC Apprentice and Training Plan has total plan assets of $4.5 million and seeks to purchase improved real property for $8 million from the ABC Union, which is a party in interest. The improved real property will replace the Plan’s current training facility, which is at the end of its useful life. The Plan will finance the purchase from an unaffiliated financial institution with a loan that has a 10-year term.
The factors which the Department would expect an applicant to address include:
- Whether the Plan can afford the purchase of the subject property and repayment of the loan based on:
- Current income including employer contributions vs. current expenses;
- Projected income including projected employer contributions vs. projected expenses; and
- The percentage calculated by comparing the fair market value of the property to the Plan’s total current assets.
- Whether the Plan pays the lesser of 1) the offering price or 2) the fair market value of the property.
- Whether the Union will pay the commissions, fees or other expenses with respect to the transaction.
- Whether the Plan can demonstrate purchasing the property is more cost effective than leasing the subject property or a similar property.
- Whether there is a Qualified Independent Fiduciary who will determine if the transaction is in the best interest of the Plan and its participants and beneficiaries.
- Whether the Qualified Independent Fiduciary obtains an appraisal, on behalf of the Plan, from a Qualified Independent Appraiser and ensures that the Appraisal is consistent with sound principles of valuation.
- Whether the Qualified Independent Fiduciary will take whatever actions it deems necessary to protect the rights of the Plan with respect to the subject property at issue and the transaction.
- Whether the Plan can demonstrate that its existing facility is obsolete or no longer adequately serves the needs of the Plan, and its participants and beneficiaries.
Example 6: Retroactive Exemptive Relief
The trustee for Mr. Smith’s individual retirement account (IRA) is directed by the IRA owner, Mr. Smith, to purchase real property that includes a warehouse on the premises. The IRA leases the warehouse to Corporation X. After the consummation of the lease, the trustee discovers that Corporation X is 100% owned by Mr. Smith’s spouse.(28)
In general, the Department has granted retroactive exemptions where an applicant has been able to document that it acted in good faith by taking reasonable and appropriate steps to protect the plan from abuse and unnecessary risk. The Department will grant retroactive prohibited transaction exemptions for completed transactions only if, among other things, the safeguards necessary for the grant of a prospective exemption were in place on the date the transaction was consummated.
The factors which the Department would expect an applicant to address include:
- Whether an independent fiduciary acting on behalf of the IRA negotiated and approved the transaction before its completion;
- In the absence of an independent fiduciary, whether the transaction was based upon the existence of a contemporaneous appraisal, on the date of the transaction, or reference to an objective third party valuation source (for example, in the case of a security - - an independent pricing service); and
- Whether the asset acquired has declined in value since the date of the transaction.
Even if the aforementioned factors were adequately addressed by the applicant for the exemption request, the Department also would consider:
- Whether the terms of the lease were in the interest and protective of the IRA and its participants and beneficiaries; and
- Whether the use of the IRA’s assets were part of an arrangement designed to confer a current benefit on disqualified persons contrary to the purpose for which IRAs are required to be established (i.e., to accumulate income and assets for retirement).
If you have a question or need advice about an exemption or an exemption request, a past authorization or an EXPRO authorization request, we can be contacted at (202) 693-8540. Alternatively, you can write to us at:
U.S. Department of Labor
Employee Benefits Security Administration
Office of Exemption Determinations
200 Constitution Avenue, NW, Suite N-5700
Washington, DC 20210
Qualified Independent Fiduciary - A Qualified Independent Fiduciary is any individual or entity that is independent of and unrelated to any party engaging in the exemption transaction or its affiliates, that is knowledgeable as to its duties and responsibilities as an ERISA fiduciary, and that possesses the appropriate training, experience, and facilities to act on behalf of a plan in connection with an exemption transaction. Thus, for example, the independent fiduciary cannot be an affiliate of the person engaging in the transaction under the exemption.
In the event that a Qualified Independent Fiduciary is required to be retained with respect to a particular transaction, an application for an individual exemption or request for an EXPRO authorization must, among other things, include the following information from that fiduciary:
- A description of the fiduciary’s qualifications to serve as a Qualified Independent Fiduciary, as well as a description of its prior experience in serving as an independent fiduciary to an ERISA plan;
- A description of any relationship the fiduciary has had or may have with the party in interest engaging in the transaction with the plan, or its affiliates;
- A statement as to whether the fiduciary has an interest which may conflict with the interests of the plan for which it acts; and
- A representation from the fiduciary that it understands its duties under ERISA and its responsibilities in acting as a Qualified Independent Fiduciary with respect to the plan, as well as its opinion as to whether the proposed transaction would be in the interest of the plan and its participants and beneficiaries, and protective of the rights of participants and beneficiaries of the plan.
The fiduciary also must submit a written representation disclosing the percentage of such fiduciary’s current revenue that is derived from any party in interest involved in the transaction or its affiliates; in general, such percentage shall be computed by comparing, in fractional form: (i) the amount of the fiduciary’s projected revenues from the current federal income tax year that will be derived from the party in interest or its affiliates (expressed as a numerator); and (ii) the fiduciary’s revenues from all sources (excluding fixed, non-discretionary retirement income) for the prior income tax year (expressed as a denominator).
The percentage of a fiduciary’s annual revenue that is derived from a party in interest (or its affiliates) to an exemption transaction is an important factor in determining whether such person is, in fact, independent of the party in interest engaging in the covered transaction. Absent facts and circumstances demonstrating a lack of independence, the Department will operate according to the presumption that a fiduciary retained on behalf of the plan is independent if the revenues it receives, or is projected to receive, within the current federal income tax year, from parties in interest (and their affiliates) to the transaction are not more than 2% of such fiduciary’s annual revenues based upon its prior income tax year.
Although the presumption does not apply when the aforementioned percentage exceeds 2%, a fiduciary nonetheless may be considered independent based upon other facts and circumstances, provided that the fiduciary receives or is projected to receive revenues from parties in interest (and their affiliates) that are not more than 5% of such fiduciary’s annual revenues based upon its prior income tax year. Among the other factors that the Department may consider in evaluating fiduciary independence are the complexity of the exemption transaction, the amount of plan assets involved in the transaction (expressed in both absolute terms and as a percentage of the plan’s total assets), and the expected duration of the fiduciary’s engagement.
Qualified Independent Appraiser (QIA) - A QIA is any individual or entity that it independent of and unrelated to any party engaging in the exemption transaction and its affiliates, and that possesses the appropriate training, experience, and facilities to provide a qualified appraisal report on behalf of a plan in connection with a particular asset or property involved in an exemption transaction. Thus, for example, the independent appraiser cannot be an affiliate of the person engaging in the transaction under the exemption. The QIA must represent in writing its qualifications to serve in that capacity, and must also detail any relationship it may have with the party in interest engaging in the transaction with the plan, or its affiliates, that could enable the party in interest or its affiliates to control or materially influence the actions of the appraiser. Exemption and authorization requests also must include a copy of the QIA’s engagement letter acknowledging that the appraiser has been engaged on behalf of the plan.
If the property in question is real property, the appraiser shall provide the Department with a written representation that he or she is a member of a professional organization of appraisers that can sanction its members for misconduct. If the property is an asset other than real property, the appraiser must demonstrate that it has substantial experience in valuing assets of that type.
The appraiser also must submit a written representation disclosing the percentage of the appraiser’s current revenue that is derived from any party in interest involved in the transaction or its affiliates; in general, such percentage shall be computed by comparing, in fractional form: (i) the amount of the appraiser’s projected revenues from the current federal income tax year (including amounts received from preparing the appraisal report) that will be derived from the party in interest or its affiliates (expressed as a numerator); and (ii) the appraiser’s revenues from all sources for the prior income tax year (expressed as a denominator).
The percentage of an appraiser’s annual revenue that is derived from a party in interest (or its affiliates) to an exemption transaction is an important factor in determining whether such person is, in fact, independent of the party in interest engaging in the covered transaction. Absent facts and circumstances demonstrating a lack of independence, the Department will operate according to the presumption that an appraiser retained on behalf of the plan is independent if the revenues it receives, or is projected to receive, within the current federal income tax year, from parties in interest (and their affiliates) to the transaction are not more than 2% of such appraiser’s annual revenues based upon its prior income tax year. Although the presumption does not apply when the aforementioned percentage exceeds 2%, an appraiser nonetheless may be considered independent based upon other facts and circumstances provided that the appraiser receives or is projected to receive revenues from parties in interest (and their affiliates) that are not more than 5% of such appraiser’s annual revenues based upon its prior income tax year.
Qualified Appraisal Report - The appraisal must be in writing and, among other things, include a detailed description of the property and set forth the methods available for determining its fair market value. The document submitted by the appraiser should describe the methodology used to determine the fair market value of the property, and explain why that methodology, in lieu of other methodologies, best represents the fair market value of the property. The appraisal also must take into account any special benefit that the party in interest (or any related party including its affiliate) may derive from the property such as the fact that it owns an adjacent parcel of property or would gain voting control over a company.
The appraisal that is included in the application should be current; if an appraisal report older than one year is submitted, a new appraisal prepared by a QIA must be submitted to the Department. Further, there must be a written update of the appraisal by a QIA as of the date the transaction is consummated.
A statement of consent also must be submitted by a QIA, which acknowledges that the appraiser knows that the appraisal is being submitted to the Department for its consideration. In other words, the appraisal must not by its terms preclude the Department from relying on its contents.
- Under Reorganization Plan No. 4 of 1978 (5 U.S.C. App. 672 (2006)), the authority of the Secretary of the Treasury to issue exemptions pursuant to section 4975 of the Code was transferred, with certain exceptions not here relevant, to the Secretary of Labor.
- ERISA § 3(14).
- Code § 4975(e)(2).
- ERISA § 406(a) and Code §§ 4975(c)(1)(A) through (D).
- ERISA § 407(d)(1).
- ERISA § 407(d)(2).
- ERISA § 407(d)(4)-(5).
- ERISA § 406(b) and Code §§ 4975(c)(1)(E)-(F).
- ERISA § 3(21) and Code § 4975(e)(3).
- ERISA § 408(b) and Code § 4975(d).
- ERISA § 408(b)(2)
- ERISA § 408(b)(1)
- ERISA § 408(a) and Code § 4975(c)(2).
- See 42 F.R. 18732
- See 57 F.R. 5019
- PTE 92-6 was amended on September 3, 2002. See 67 F.R. 56313
- PTE 80-26 was amended on April 7, 2006. See 71 F.R. 17917.
- PTE 93-33 was amended on March 8, 1999. See 64 F.R. 11044
- PTE 96-62 was amended on July 3, 2002. See 67 F.R. 44622.
- The determination of who is an “interested person” depends on the facts and circumstances of a particular transaction. Typically, the term includes participants and beneficiaries.
- These two terms are defined in the glossary contained in Chapter 9.
- Assemblage value reflects the willingness of a purchaser to pay above market value for a parcel of property in order to enhance the purchaser’s interest in its present holdings of other parcels which are adjacent to such property.
- In the case of a loan, such amount will be the outstanding principal balance plus accrued but unpaid interest. In the case of a prohibited transaction involving a lease, such amount will be the fair market value of the leased property determined by a Qualified Independent Appraiser and reflected in a Qualified Appraisal Report.
- This term is defined in the glossary contained in Chapter 9.
- This prohibited transaction involves stock rights and warrants, which are not considered qualifying employer securities under ERISA. In these cases, the stock rights and warrants are issued to the Plan by reason of its being a holder of stock of the employer, which is a qualifying employer security. When a business decision is made to issue stock rights and warrants to all shareholders of the employer, the Plan's acquisition and holding of such rights would be prohibited in the absence of an administrative exemption.
- There is a general prohibition on the acquisition of additional employer securities by a defined benefit plan or welfare plan if the plan already holds qualifying employer securities up to the limit imposed under ERISA. There are special rules for eligible individual account plans in ERISA § 407(b)(1).
- Because of the attribution rules under section 4975 of the Code, the lease is considered a prohibited transaction.