EBSA (Formerly PWBA) Federal Register Notice
Amendment to Prohibited Transaction Exemption 80-26 (PTE 80-26) for Certain Interest Free Loans to Employee Benefit Plans [04/03/2000]
[PDF Version]
Volume 65, Number 64, Page 17540-17542
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 2000-14; Exemption Application D-
10830]
Amendment to Prohibited Transaction Exemption 80-26 (PTE 80-26)
for Certain Interest Free Loans to Employee Benefit Plans
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of
Labor.
ACTION: Adoption of Amendment to PTE 80-26.
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SUMMARY: This document provides a temporary amendment to PTE 80-26, a
class exemption that permits parties in interest with respect to
employee benefit plans to make interest free loans to such plans,
provided the conditions of the exemption are met. The amendment affects
all employee benefit plans, their participants and beneficiaries, and
parties in interest with respect to those plans engaging in the
described transactions.
EFFECTIVE DATE: The amendment to PTE 80-26 is effective from November
1, 1999 until December 31, 2000.
FOR FURTHER INFORMATION CONTACT: Mr. J. Martin Jara, Office of
Exemptions Determinations, Pension and Welfare Benefits Administration,
U.S. Department of Labor, (202) 219-8881. (This is not a toll-free
number); or Wendy McColough, Plan Benefits Security Division, Office of
the Solicitor, U.S. Department of Labor (202) 219-4600. (This is not a
toll-free number).
SUPPLEMENTARY INFORMATION: On November 29, 1999, notice was published
in the Federal Register (64 FR 66666) of the pendency before the
Department of a proposed amendment to PTE 80-26 (45 FR 28545, Apr. 29,
1980).\1\ PTE 80-26 provides an exemption from the restrictions of
section 406(a)(1)(B) and (D) and section 406(b)(2) of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and from the
taxes imposed by section 4975(a) and (b) of the Internal
[[Page 17541]]
Revenue Code of 1986 (the Code), by reason of section 4975(c)(1)(B) and
(D) of the Code in connection with certain interest free loans to
employee benefit plans.
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\1\ A minor correction was made to the title of the final
exemption in a notice published in the Federal Register on May 23,
1980. (45 FR 35040).
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The amendment to PTE 80-26 adopted by this notice was proposed by
the Department on its own motion pursuant to section 408(a) of ERISA
and section 4975(c)(2) of the Code, and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).\2\
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\2\ Section 102 of the Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978, 5 U.S.C. App. 1 [1995]) generally
transferred the authority of the Secretary of the Treasury to issue
administrative exemptions under section 4975 of the Code to the
Secretary of Labor.
In the discussion of the exemption, references to section 406 of
ERISA should be read to refer as well to the corresponding
provisions of section 4975 of the Code.
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The notice gave interested persons an opportunity to submit written
comments or requests for a public hearing on the proposed amendment to
the Department. The Department received three comments and no requests
for a public hearing. Upon consideration of the record as a whole, the
Department has determined to grant the proposed amendment with minor
modifications.
For the sake of convenience, the entire text of PTE 80-26, as
amended, has been reprinted with this notice.
Discussion of the Comments Received
The Department received three comments with regard to the proposed
amendment, all generally supporting the grant of the exemption. Two of
the comments requested additional modifications, as addressed below.
The proposed amendment limited relief to transactions involving the
lending of money or other extension of credit from a party in interest
or disqualified person to an employee benefit plan for a purpose
incidental to the ordinary operation of the plan which arises in
connection with the plan's inability to liquidate, or otherwise access
its assets or data as a result of a Y2K problem. A Y2K problem was
defined in Section III of the proposed amendment as `a disruption of
computer operations resulting from a computer system's inability to
process data because such system recognizes years only by the last two
digits, causing a ``00'' entry to read as the year ``1900'' rather than
the year ``2000.'' '
The Association of Private Pension and Welfare Plans (APPWP) raised
concerns regarding the language in the preamble to the proposed
amendment which states that ``* * *'' plan fiduciaries must establish a
contingency plan that will be implemented in the event that the plans'
essential operations are affected.'' \3\ The APPWP is concerned that
this language adds a new standard of liability for plan sponsors and
other fiduciaries. Accordingly, the APPWP suggests that this sentence
be restated as follows: ``[a]s in dealing with all situations in which
plan operations could suffer some level of disruption, plan fiduciaries
should consider whether to create a contingency plan to be implemented
in the event that the plan's essential operations are affected by Y2K
problems.''
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\3\ 64 FR 66667 (1999).
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The language in the preamble did not create a new fiduciary
standard of care. The relevant standard of care is set forth in the Act
at section 404(a)(1)(B) as follows:
A fiduciary shall discharge his duties with respect to the plan
* * * with the care, skill and diligence under the circumstances
then prevailing that a prudent man acting in like capacity and
familiar with such matters would use in the conduct of an enterprise
of like character and with like aims.
The preamble merely stated the Department's view that, given the well-
documented risk that was associated with Y2K, a prudent person
similarly situated would have established a contingency plan. The
Department notes that the comprehensiveness of a particular contingency
plan an employee benefit plan adopts would necessarily depend on the
facts and circumstances of each case. Accordingly, the Department has
determined not to adopt the suggested modification to the preamble.
In addition, the APPWP urged the Department to expand the relief
under the amendment to include situations such as computer viruses,
``hacking,'' and other technological problems caused by human
malfeasance that would impede benefits administration. In this regard,
the Department does not believe it has sufficient information on the
record at this time to provide additional relief. However, upon further
demonstration that there is a need for lending of money to plans in
such circumstances, the Department would be prepared to consider
further relief.
Another commentator noted that the relief proposed is too
restrictive and requested that the language be liberalized.
Specifically, the commentator was concerned that the broad relief
contemplated by the proposal may not be available if such relief is
conditioned on the establishment by a plan fiduciary of a nexus between
the cash shortfall and a specific disruption of computer operations.
The commentator further stated that, given the rippling nature of Y2K
problems, it may be impossible to determine the specific cause of a
particular cash shortfall. Accordingly, the commentator urged the
Department to modify the final exemption to provide that any cash
shortfall incurred by a plan between November 1, 1999 and December 31,
2000, should be presumed to be related to a Y2K problem and, thus,
eligible for relief under the final exemption. After reviewing the
commentator's suggestion, the Department does not believe that the
commentator has adequately demonstrated the need for such broad
exemptive relief. Accordingly, the Department has determined not to
adopt the commentator's suggestion.
The commentator also suggested that the three day repayment period
for interest-free loans made for a purpose incidental to the ordinary
operation of the plan be eliminated on a permanent basis.
Alternatively, the commentator suggested that either: (1) The concept
of ordinary operating expenses be amended to include investment
transfers and participant loans; or (2) the three day requirement be
amended to require repayment of such loans over a period of time that
is materially longer than three days. The Department believes that
consideration of the issues involved in amending PTE 80-26 as requested
by the commentator are beyond the scope of the current proceeding. In
this regard, the Department notes that, pursuant to the requirements of
section 408(a) of the Act, it is required to offer interested persons
an opportunity to present their views and an opportunity for a hearing
prior to amending an exemption. Consequently, the Department has
determined not to revise the final exemption in this regard.
Finally, the commentator requested that the Department clarify
whether the three day repayment requirement for loans used for a
purpose incidental to the ordinary operation of the plan refers to
three business days or three calender days. According to the
commentator, the adoption of ``T plus three'' as the normal settlement
practice for securities trades means that the proceeds of a sale of
securities will generally not be received until three business days
after the trade is executed. Accordingly, to be consistent with the
prevailing market practice, the commentator urged the Department to
clarify that ``three days'' means three business days for purposes of
PTE 80-26. In this regard, it is the view of the Department that the
phrase
[[Page 17542]]
``three days'' as set forth in section I(b)(2) of PTE 80-26, as
amended, means three business days, and the final exemption has been
modified to make this clear.
Description of the Exemption
PTE 80-26 permits the lending of money or other extension of credit
from a party in interest or disqualified person to an employee benefit
plan, and the repayment of such loan or other extension of credit in
accordance with its terms or other written modifications thereof,
provided that:
(a) No interest or other fee is charged to the plan, and no
discount for payment in cash is relinquished by the plan, in connection
with the loan or extension of credit;
(b) The proceeds of the loan or extension of credit are used only:
(1) For the payment of ordinary operating expenses of the plan,
including the payment of benefits in accordance with the terms of the
plan and periodic premiums under an insurance or annuity contract; or
(2) For a period of no more than three days, for a purpose
incidental to the ordinary operation of the plan;
(c) The loan or extension of credit is unsecured; and
(d) The loan or extension of credit is not directly or indirectly
made by an employee benefit plan.
The amendment to PTE 80-26 granted pursuant to this notice
temporarily broadens the availability of PTE 80-26 to include certain
interest-free loans to be used for a purpose incidental to the ordinary
operations of a plan which arise in connection with a Y2K problem, as
defined in the amendment. The amendment to PTE 80-26 permits these
loans to be repaid no later than December 31, 2000.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of ERISA and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person with respect to a plan from certain other provisions of ERISA
and the Code, including any prohibited transaction provisions to which
the exemption does not apply and the general fiduciary responsibility
provisions of section 404 of ERISA which require, among other things,
that a fiduciary discharge his or her duties respecting the plan solely
in the interests of the participants and beneficiaries of the plan; nor
does it affect the requirement of section 401(a) of the Code that the
plan must operate for the exclusive benefit of the employees of the
employer maintaining the plan and their beneficiaries;
(2) This exemption does not extend to transactions prohibited under
section 406(b)(1) and (3) of the Act or section 4975(c)(1)(E) and (F)
of the Code;
(3) In accordance with section 408(a) of the Act and 4975(c)(2) of
the Code, the Department makes the following determinations:
(i) The amendment set forth herein is administratively feasible;
(ii) It is in the interests of plans and of their participants and
beneficiaries; and
(iii) It is protective of the rights of participants and
beneficiaries of plans;
(4) The amendment is applicable to a particular transaction only if
the transaction satisfies the conditions specified in the exemption;
and
(5) The amendment is supplemental to, and not in derogation of, any
other provisions of ERISA and the Code, including statutory or
administrative exemptions and transitional rules. Furthermore, the fact
that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction.
Exemption
Accordingly, PTE 80-26 is amended under the authority of section
408(a) of the Act and section 4975(c)(2) of the Code and in accordance
with the procedures set forth in 29 CFR 2570, Subpart B (55 FR 32836,
32847, August 10, 1990), as set forth below:
Section I: General Exemption
Effective January 1, 1975, the restrictions of section 406(a)(1)(B)
and (D) and section 406(b)(2) of the Act, and the taxes imposed by
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(B)
and (D) of the Code, shall not apply to the lending of money or other
extension of credit from a party in interest or disqualified person to
an employee benefit plan, nor to the repayment of such loan or other
extension of credit in accordance with its terms or written
modifications thereof, if:
(a) No interest or other fee is charged to the plan, and no
discount for payment in cash is relinquished by the plan, in connection
with the loan or extension of credit;
(b) The proceeds of the loan or extension of credit are used only:
(1) For the payment of ordinary operating expenses of the plan,
including the payment of benefits in accordance with the terms of the
plan and periodic premiums under an insurance or annuity contract; or
(2) For a period of no more than three business days, for a purpose
incidental to the ordinary operation of the plan;
(c) The loan or extension of credit is unsecured; and
(d) The loan or extension of credit is not directly or indirectly
made by an employee benefit plan.
Section II: Temporary Exemption
Effective November 1, 1999 through December 31, 2000, the
restrictions of section 406(a)(1)(B) and (D) and section 406(b)(2) of
the Act, and the taxes imposed by section 4975(a) and (b) of the Code
by reason of section 4975(c)(1)(B) and (D) of the Code, shall not apply
to the lending of money or other extension of credit from a party in
interest or disqualified person to an employee benefit plan, nor to the
repayment of such loan or other extension of credit in accordance with
its terms or written modifications thereof, if:
(a) No interest or other fee is charged to the plan, and no
discount for payment in cash is relinquished by the plan, in connection
with the loan or extension of credit;
(b) The proceeds of the loan or extension of credit are used only
for a purpose incidental to the ordinary operation of the plan which
arises in connection with the plan's inability to liquidate, or
otherwise access its assets or access data as a result of a Y2K
problem.
(c) The loan or extension of credit is unsecured;
(d) The loan or extension of credit is not directly or indirectly
made by an employee benefit plan;
(e) The loan or extension of credit begins on or after November 1,
1999 and is repaid or terminated no later than December 31, 2000.
Section III: Definition
For the purposes of section II, a Y2K problem is a disruption of
computer operations resulting from a computer system's inability to
process data because such system recognizes years only by the last two
digits, causing a ``00'' entry to be read as the year ``1900'' rather
than the year ``2000.''
Signed at Washington, DC, this 28th day of March, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 00-8057 Filed 3-31-00; 8:45 am]
BILLING CODE 4510-29-P