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Secretary of Labor Thomas E. Perez
Proposed Amendment to Prohibited Transaction Exemption 92-6 (PTE 92-6) Involving the Transfer of Individual Life Insurance Contracts and Annuities From Employee Benefit Plans to Plan Participants, Certain Beneficiaries of Plan Participants, [Notices] [05/10/2002]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Amendment to Prohibited Transaction Exemption 92-6 (PTE 92-6) Involving the Transfer of Individual Life Insurance Contracts and Annuities From Employee Benefit Plans to Plan Participants, Certain Beneficiaries of Plan Participants, [05/10/2002]

[PDF Version]

Volume 67, Number 91, Page 31835-31838

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application Number D-10786]

 
Proposed Amendment to Prohibited Transaction Exemption 92-6 (PTE 
92-6) Involving the Transfer of Individual Life Insurance Contracts and 
Annuities From Employee Benefit Plans to Plan Participants, Certain 
Beneficiaries of Plan Participants, Personal Trusts, Employers and 
Other Employee Benefit Plans

AGENCY: Pension and Welfare Benefits Administration, Department of 
Labor.

ACTION: Notice of proposed amendment to PTE 92-6.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed amendment to PTE 92-
6. PTE 92-6 is a class exemption that enables an employee benefit plan 
to sell individual life insurance contracts and annuities to: (1) A 
plan participant insured under such policies; (2) a relative of such 
insured participant who

[[Page 31836]]

is the beneficiary under the contract; (3) an employer any of whose 
employees are covered by the plan; or (4) another employee benefit 
plan, for the cash surrender value of the contract, provided certain 
conditions are met. The proposed amendment, if adopted, would affect, 
among others, certain participants, beneficiaries and fiduciaries of 
plans engaged in the described transactions.

DATES: If adopted, the proposed amendment would be effective February 
12, 1992. Written comments and requests for a public hearing should be 
received by the Department on or before June 24, 2002.

ADDRESSES: All written comments and requests for a public hearing 
(preferably three copies) should be addressed to the U.S. Department of 
Labor, Office of Exemption Determinations, Pension and Welfare Benefits 
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington, 
DC 20210, (attention: PTE 92-6 Amendment). Interested persons are also 
invited to submit comments and/or hearing requests to PWBA via e-mail 
or FAX. Any such comments or requests should be sent either by e-mail 
to: ``moffittb@pwba.dol.gov'' or by FAX to (202)219-0204 by the end of 
the scheduled comment period. The application pertaining to the 
exemptive relief proposed herein (Application No. D-10786) and the 
comments received will be available for public inspection in the public 
Documents Room of the Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz, Office of 
Exemption Determinations, Pension and Welfare Benefits Administration, 
U.S. Department of Labor, (202)693-8540. (This is not a toll-free 
number).

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed amendment to PTE 92-6 (57 FR 5189, 
February 12, 1992), which amended Prohibited Transaction Exemption 77-8 
(PTE 77-8) (42 FR 31574, June 21, 1977). PTE 92-6 provides an exemption 
from the restrictions of section 406(a) and 406(b)(1) and (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 
Revenue Code of 1986 (the Code), by reason of section 4975(c)(1)(A) 
through (E) of the Code.
    The amendment to PTE 92-6 proposed herein was requested in an 
exemption application filed by the Chicago, Illinois law firm of 
Sonnenschein, Nath & Rosenthal on behalf of the General American Life 
Group (the Applicant). The Department is proposing the amendment 
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).\1\
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    \1\ Section 102 of the Reorganization Plan No. 4 of 1978 (5 
U.S.C. App. 1 [1996]) 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.
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A. General Background

    The prohibited transaction provisions of the Act generally prohibit 
various transactions between plans covered by Title I of ERISA and 
certain related parties with respect to such plans. Specifically, 
section 406(a)(1)(A) and (D) of the Act states that a fiduciary with 
respect to a plan shall not cause the plan to engage in a transaction, 
if he knows or should know that such transaction constitutes a direct 
or indirect--
    (A) sale or exchange, or leasing, of any property between the plan 
and a party in interest; or
    (D) transfer to, or use by or for the benefit of, a party in 
interest of any assets of the plan.
    Accordingly, unless a statutory or administrative exemption is 
applicable, the sale of a life insurance contract, or annuity contract, 
by a plan to a party in interest is prohibited.

B. Description of Existing Relief

    Section I of PTE 92-6 permits the sale of an individual life 
insurance or annuity contract by an employee benefit plan to: (1) A 
plan participant; (2) a relative of such insured participant who is the 
beneficiary under the contract; (3) an employer any of whose employees 
are covered by the plan; or (4) another employee benefit plan, if: (a) 
Such participant is the insured under the contract; (b) such relative 
is a ``relative'' as defined in section 3(15) of the Act (or a ``member 
of the family'' as defined in section 4975(e)(6) of the Code), or is a 
brother or sister of the insured (or a spouse of such brother or 
sister), and the beneficiary under the contract; (c) the contract 
would, but for the sale, be surrendered by the plan; (d) with respect 
to sales of the policy to the employer, a relative of the insured or 
another plan, the participant insured under the policy is first 
informed of the proposed sale and is given the opportunity to purchase 
such contract from the plan, and delivers a written document to the 
plan stating that he or she elects not to purchase the policy and 
consents to the sale by the plan of such policy to such employer, 
relative or other plan; (e) the amount received by the plan as 
consideration for the sale is at least equal to the amount necessary to 
put the plan in the same cash position as it would have been had it 
retained the contract, surrendered it, and made any distribution owing 
to the participant on his vested interest under the plan; and (f) with 
regard to any plan which is an employee welfare benefit plan, such plan 
must not, with respect to such sale, discriminate in form or in 
operation in favor of plan participants who are officers, shareholders 
or highly compensated employees.
    Section II of PTE 92-6 amended PTE 77-8 to provide that the relief 
for transactions described in part I would be available, effective 
October 22, 1986, for plan participants who are owner-employees (as 
defined in section 401(c)(3) of the Code) or shareholder-employees (as 
defined in section 1379 of the Internal Revenue Code of 1954 as in 
effect on the day before the date of enactment of the Subchapter S 
Revision Act of 1982), if the conditions set forth in part I are met.

C. Discussion of the Proposed Amendment

    The Department, at the request of the Applicant, proposes to amend 
PTE 92-6 in order to expand the coverage of the exemption to include 
the sale by an employee benefit plan (the Plan) of an individual life 
insurance or annuity contract to a personal or private trust (the 
Trust) established by or for the benefit of an individual who is a 
participant in the Plan and the insured under the policy, or by or for 
the benefit of one or more relatives (as defined in section I(2) of PTE 
92-6) of the participant.\2\
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    \2\ Section 402(a)(1)(A) of the Act prohibits a direct or 
indirect sale or exchange of any property between a Plan and a party 
in interest. Section 406(a)(1)(D) of the Act prohibits a transfer 
to, or use by or for the benefit of, a party in interest, of any 
assets of the Plan. In most cases, the participant will be a party 
in interest with respect to the Plan under section 3(14)(H) of the 
Act, as an employee of an employer any of whose employees are 
covered by the Plan. In some cases, the participant or relative will 
also be a party in interest under section 3(14)(A) or (E) as a 
fiduciary of the Plan, or as an owner of 50% or more of the employer 
maintaining the Plan. The Trust would be a party in interest under 
section 3(14)(G) of the Act if 50% or more of the beneficial 
interest of such Trust is owned or held by persons described in 
section 3(14)(A) or (E) of the Act.
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    The Applicant notes that many Plans provide pre-retirement death 
benefit protection that is funded in whole or in part by the purchase 
of individual whole life and universal life insurance policies on the 
lives of the Plan's

[[Page 31837]]

participants. This is particularly true for Plans of small employers 
offering a pre-retirement death benefit, which do not have a sufficient 
number of participants to incur the actuarial risk of premature death 
of one or more participants in the absence of insurance. In addition, 
the cash value element of life insurance creates a funding vehicle for 
post-retirement pension benefits. The Internal Revenue Service has 
historically permitted Plans to invest in whole life insurance and 
universal life insurance by establishing specific standards for the 
provision of incidental death benefits funded by whole and universal 
life insurance.\3\
    In conformity with these tax standards for insurance in Plans, pre-
retirement death benefit protection under a Plan typically ceases upon 
the retirement of a covered participant. At that time, the Plan will 
need to obtain the policy's cash value to support post-retirement 
pension benefits, either by converting the policy's cash value to an 
annuity payment from the issuer of the policy, or realizing such cash 
value through a surrender of the policy to the issuer, or by a sale of 
the policy for an amount at least equal to the cash surrender value. 
Insured death benefit protection supported by policies may also cease 
before retirement when a participant terminates employment with a 
vested or partially vested benefit, when a Plan converts its funding 
method from individual policies to a group contract or to a different 
funding medium, when a Plan is amended to cease death benefit coverage 
for participants or for the class of employees to which a particular 
participant belongs, or when a Plan terminates.
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    \3\ See, for example, Treas. Reg. Section 1.401-1(b)(1)(i); and 
Rev. Rul. 66-143, 1966-1 C.B. 79.
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    In these circumstances, where a Plan will not continue the Policy 
in effect, Plans have historically permitted the insured participant, 
or other persons with consent of the participant, to purchase the 
policy. Sale of the policy by a Plan to, or for the benefit of, a 
participant allows the participant (or other owner) to keep the policy 
death benefit in effect while simultaneously allowing the Plan to 
realize the policy cash value. Maintaining the death benefit in effect 
is particularly advantageous where a participant, at the time the 
policy would otherwise be surrendered, is medically impaired so that he 
or she is uninsurable or insurable only at substantially higher premium 
rates (to reflect the higher risk of death) or where the policy 
contains valuable options or features that cannot be replicated for the 
same premium cost in the current market. All of the above 
circumstances, and the advantage to the participants of allowing the 
Plan to sell the policy to his or her designee in lieu of surrender, 
were recognized by the Department in granting PTE 77-8 and PTE 92-6.
    In many circumstances, the participant will have created a Trust as 
part of his or her estate plan to hold a policy or policies on his or 
her life. The Trust beneficiaries are typically the participant's 
spouse or children or both, or other relatives. The Trust will 
typically purchase insurance contracts on the life of the participant, 
including the policy from the Plan, if available, with funds 
contributed by the participant or by one or more of his relatives. The 
Trust will almost always be irrevocable (although a right to amend and 
revoke may be given to a person other than the insured who created the 
Trust) and will commonly provide for the participant's spouse or 
another relative, or an independent person, to be the trustee of the 
Trust. The governing instruments of Trusts holding life insurance 
policies vary markedly in format (depending on the applicable state 
law, the types of contracts held, the insured's desired disposition of 
the proceeds and other Trust assets, the likely tax impact, and the 
drafter's style).
    The principal reason a participant will want someone other than 
himself or herself to own a policy purchased from a Plan is to conform 
to the federal estate tax standards for excluding the proceeds of the 
policy from the participant's gross estate. The aim is for the 
participant to divest himself or herself of all ``incidents of 
ownership,'' or never to have had in the first instance any ``incidents 
of ownership,'' in the policy.\4\ In general, this estate tax result 
can be achieved by having a policy (including all its ``incidents of 
ownership'') held by a relative of the participant (as allowed under 
PTE 92-6), as well as by a Trust. Accordingly, use of a Trust is not 
necessary for a participant to achieve this estate tax exclusion. 
However, a participant may prefer that a policy available from a Plan 
be purchased by a Trust rather than by an individual for a variety of 
non-tax reasons related to his or her family situation. Having the 
policy held by a spouse or other relative may expose the policy to 
undesirable consequences related to probate if, for instance, the owner 
should become incapacitated or pre-decease the participant. Those 
participants who are unsure of their own or their relatives' continued 
capacity to act as owners and stewards of the policy and its proceeds 
may indeed prefer to have the policy held within a Trust under the 
control of an independent trustee. In addition, ownership by a spouse 
or family member subjects the participant's desired ultimate 
disposition of the policy proceeds to risks associated with changes in 
family relationships or discord among family members. Also, a policy 
owned by the participant or relative may be exposed to claims of the 
owner's future creditors, which result can often be avoided by having 
the policy held in a properly structured Trust. Finally, a Trust can 
embody a carefully tailored, intricate dispositive scheme that 
precisely carries out the participant's intentions. Simply allowing the 
Plan to sell the policy to a relative or other individual owner will 
not always reflect what a participant really wants to do.
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    \4\ See, generally, section 2042 of the Code.
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    Based upon the arguments presented by the Applicant and the 
protections already embodied in PTE 92-6, the Department has determined 
to amend PTE 92-6 to expand the scope of relief for sales of life 
insurance policies by Plans. Accordingly, effective February 12, 
1992,\5\ the proposed amendment to PTE 92-6 would expand the coverage 
of the exemption to include the sale by a Plan of an individual life 
insurance or annuity contract to a Trust established by or for the 
benefit of an individual who is a participant in the Plan and the 
insured under the policy, or by or for the benefit of one or more 
relatives (as defined in Section I(2) of PTE 92-6) of the participant.
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    \5\ i.e., the date of publication in the Federal Register of PTE 
92-6.
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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

[[Page 31838]]

for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) This exemption, if granted, would not extend to transactions 
prohibited under section 406(b)(3) of the Act or section 4975(c)(1)(F) 
of the Code;
    (3) Before an exemption may be granted under section 408(a) of 
ERISA and 4975(c)(2) of the Code, the Department must find that the 
exemption is administratively feasible, in the interests of the plan 
and its participants and beneficiaries, and protective of the rights of 
participants and beneficiaries of the plan;
    (4) If granted, the proposed amendment is applicable to a 
particular transaction only if the transaction satisfies the conditions 
specified in the exemption; and
    (5) The proposed amendment, if granted, will be 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.

Written Comments and Hearing Requests

    The Department invites all interested persons to submit written 
comments or requests for a public hearing on the proposed amendment to 
the address and within the time period set forth above. All comments 
received will be made a part of the record. Comments and requests for a 
hearing should state the reasons for the writer's interest in the 
proposed exemption. Comments received will be available for public 
inspection at the above address.

Paperwork Reduction Act

    Prohibited Transaction Exemption 92-6 includes a disclosure 
provision that requires an insured participant to be informed prior to 
the sale of an applicable life insurance policy. Although this 
disclosure requirement constitutes a collection of information as 
defined in the Paperwork Reduction Act of 1995, that collection of 
information as currently approved under OMB control number 1210-0063 is 
not substantially or materially altered by the terms of this proposed 
amendment. Accordingly, no information collection request has been 
submitted to the Office of Management and Budget in connection with 
this Notice of Proposed Amendment to PTE 92-6.

Proposed Amendment

    Under 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 part 2570, 
subpart B (55 FR 32836, 32847, August 10, 1990), the Department 
proposes to amend PTE 92-6 as set forth below:
    I. Effective January 1, 1975, the restrictions of sections 406(a), 
406(b)(1) and 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)(A) through 
(E) of the Code, shall not apply to the sale of an individual life 
insurance or annuity contract by an employee benefit plan to: (1) A 
participant under such plan; (2) a relative of a participant under such 
plan; (3) an employer any of whose employees are covered by the plan; 
(4) another employee benefit plan; or (5) effective February 12, 1992, 
a trust established by or for the benefit of one or more of the persons 
described in (1) or (2) above;, if:
    (a) Such participant is the insured under the contract;
    (b) Such relative is a ``relative'' as defined in section 3(15) of 
the Act (or a ``member of the family'' as defined in section 4975(e)(6) 
of the Code), or is a brother or sister of the insured (or a spouse of 
such brother or sister), and such relative or trust is the beneficiary 
under the contract;
    (c) The contract would, but for the sale, be surrendered by the 
plan;
    (d) With respect to sales of the policy to the employer, a relative 
of the insured, a trust, or another plan, the participant insured under 
the policy is first informed of the proposed sale and is given the 
opportunity to purchase such contract from the plan, and delivers a 
written document to the plan stating that he or she elects not to 
purchase the policy and consents to the sale by the plan of such policy 
to such employer, relative, trust or other plan;
    (e) The amount received by the plan as consideration for the sale 
is at least equal to the amount necessary to put the plan in the same 
cash position as it would have been had it retained the contract, 
surrendered it, and made any distribution owing to the participant on 
his vested interest under the plan; and
    (f) With regard to any plan which is an employee welfare benefit 
plan, such plan must not, with respect to such sale, discriminate in 
form or in operation in favor of plan participants who are officers, 
shareholders or highly compensated employees.
    II. Effective October 22, 1986, the exemption provided for 
transactions described in part I is available for plan participants who 
are owner-employees (as defined in section 401(c)(3) of the Code) or 
shareholder-employees as defined in section 1379 of the Internal 
Revenue Code of 1954 as in effect on the day before the date of 
enactment of the Subchapter S Revision Act of 1982) if the conditions 
set forth in part I are met.

    Signed at Washington, DC, this 6th day of May, 2002.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Pension and Welfare 
Benefits Administration, Department of Labor.
[FR Doc. 02-11661 Filed 5-9-02; 8:45 am]
BILLING CODE 4520-29-P