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Proposed Amendment to Prohibited Transaction Exemption 80-26 (PTE 80-26) For Certain Interest Free Loans to Employee Benefit Plans [12/15/2004]
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Volume 69, Number 240, Page 75088-75090
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Number D-11046]
Proposed Amendment to Prohibited Transaction Exemption 80-26 (PTE
80-26) For Certain Interest Free Loans to Employee Benefit Plans
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Notice of Proposed Amendment to PTE 80-26.
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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 80-
26. PTE 80-26 is a class exemption that permits parties in interest
with respect to employee benefit plans to make certain interest free
loans to such plans, provided the conditions of the exemption are met.
The proposed amendment, if adopted, would affect all employee benefit
plans, the participants and beneficiaries of such plans, and parties in
interest with respect to those plans engaging in the described
transactions.
DATES: If adopted, the proposed amendment would be effective as of the
date the granted amendment is published in the Federal Register.
Written comments and requests for a public hearing should be received
by the Department on or before January 31, 2005.
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, Employee Benefits Security
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington,
DC 20210, (attention: PTE 80-26 Amendment). Interested persons are also
invited to submit comments and/or hearing requests to the Employee
Benefits Security Administration via e-mail to moffitt.betty@dol.gov or
by fax to (202)219-0204 by the end of the comment period.
FOR FURTHER INFORMATION CONTACT: Christopher Motta, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, (202) 693-8554 (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 80-26 (45 FR
28545, April 29, 1980, as amended at 65 FR 17540, April 3, 2000; and 67
FR 9485, March 1, 2002).\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
Revenue Code of 1986 (the Code), by reason of section 4975(c)(1)(B) and
(D) of the Code.
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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 Department is proposing the amendment 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 (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
transactions between a plan and a party in interest (including a
fiduciary) with respect to such plan. Specifically, section
406(a)(1)(B) and (D) of the Act provides 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-
(B) lending of money or other extension of credit 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, loans, including interest free loans, to a plan from a
party in interest and the repayment of such loans are prohibited.
In addition, section 406(b)(2) of the Act provides that a fiduciary
with respect to a plan shall not, in his individual or any other
capacity act in a transaction involving the plan on behalf of a party
(or represent a party) whose interests are adverse to the interests of
the plan or the interests of its participants or beneficiaries.
B. Description of Existing Relief
Section I of 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, 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 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.
On April 3, 2000, PTE 80-26 was amended to permit, from November 1,
1999 through December 31, 2000, 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 written
modifications thereof, provided that, among other requirements, 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 inability of the plan to liquidate, or otherwise
access its assets or access data, as a result of a ``Y2K problem.''
This amendment also added a new section to the class exemption that
provided a definition of the term ``Y2K problem.''
On March 1, 2002, PTE 80-26 was amended to permit, from September
11, 2001 through January 9, 2002, 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 written
modifications thereof, provided that, among another requirements, the
proceeds of the loan or extension of credit were used only for a
purpose incidental to the ordinary operation of the plan which arose in
connection with difficulties encountered by the plan in liquidating, or
otherwise accessing its assets, or accessing its data in a timely
manner as a direct or indirect result of the September 11, 2001
disruption. This amendment also added a definition of the term
``September 11, 2001 disruption'' to the class exemption.
C. Discussion of the Proposed Exemption
The Department, on its own motion, proposes to amend PTE 80-26 by
removing the three-day limitation that is
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imposed on the lending of money or other extension of credit for
purposes incidental to the ordinary operation of the plan. In this
regard, the Department recognizes that a plan may benefit if permitted
to enter into an interest-free loan with a party in interest or
disqualified person for a purpose incidental to the ordinary operation
of the plan in instances where the duration of the loan exceeds three
days. Specifically, the Department believes that the conditions
currently contained in the class exemption are sufficient to ensure
that such loans would pose little, if any, risk of abuse or loss to the
plan and its participants and beneficiaries. Accordingly, the
Department believes that, with respect to an interest-free loan having
a duration of more than three days that is entered into under the class
exemption for a purpose incidental to the ordinary operation of a plan,
the plan would be adequately protected to the extent that, among other
things: no interest or other fee is charged to the plan; no discount
for payment in cash is relinquished by the plan; and each loan or
extension of credit is unsecured. Consistent with the Department's view
that loans described in section 408(b)(3) of ERISA and/or section
4975(d)(3) of the Code are not within the scope of PTE 80-26, such
loans are expressly excluded from the relief described herein.
This proposed amendment incorporates the clarification described in
PTE 2002-13 (67 FR 9483 (Mar. 1, 2002)). In this regard, the proposed
exemption specifically defines the terms ``employee benefit plan'' and
``plan'' as an employee benefit plan described in ERISA section 3(3)
and/or a plan described in section 4975(e)(1) of the Code.
The Department notes that ERISA's general standards of fiduciary
conduct apply to the decision of an independent fiduciary to enter into
an interest free loan and any related transactions. Section 404
requires a fiduciary, among other things, to discharge his duties
respecting a plan solely in the interest of the plan's participants and
beneficiaries and in a prudent fashion. Accordingly, the plan fiduciary
must act prudently with respect to the decision to enter into the loan
and any related transactions. In this regard, the proposed removal of
the three-day limitation from PTE 80-26 should not be viewed as an
approval by the Department of any transactions that may give rise to
the need for a loan or other extension of credit. The Department is not
providing any relief under this proposal for any violation of ERISA
which may arise in connection with a transaction involving an interest
free loan, notwithstanding that such loan otherwise complies with the
conditions of this proposed exemption.
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 act prudently and discharge his or her duties
respecting the plan solely in the interests of the participants and
beneficiaries of the plan. Additionally, the fact that a transaction is
the subject of an exemption does not 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) or (F) of
the Code;
(3) Before an exemption may be granted under section 408(a) of
ERISA and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of the
plan and of 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 Request
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.
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 2570, Subpart
B (55 FR 32836, 32847, August 10, 1990), the Department proposes to
amend PTE 80-26 as set forth below:
Section I. Retroactive General Exemption
If this proposed class exemption is granted, effective January 1,
1975 until the date of publication of the final exemption in the
Federal Register, 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
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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; and
(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. September 11, 2001 Market Disruption Exemption
Effective September 11, 2001 through January 9, 2002, 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 difficulties encountered by the plan in
liquidating, or otherwise accessing its assets, or accessing its data
in a timely manner as a direct or indirect result of the September 11,
2001 disruption;
(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; and
(e) The loan or extension of credit begins on or after September
11, 2001, and is repaid or terminated no later than January 9, 2002.
Section IV. Prospective General Exemption
If this proposed class exemption is granted, effective as of the
date following the date of publication of the final exemption in the
Federal Register, 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 purpose incidental to the ordinary operation of the plan;
(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; and
(3) The loan is not described in section 408(b)(3) of ERISA or
section 4975(d)(3) of the Code.
Section V: Definitions
(a) For 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.''
(b) For purposes of section III, the ``September 11, 2001
disruption'' is the disruption to the United States financial and
securities markets and/or the operation of persons providing
administrative services to employee benefit plans, resulting from the
acts of terrorism that occurred on September 11, 2001.
(c) For purposes of this exemption, the terms ``employee benefit
plan'' and ``plan'' refer to an employee benefit plan described in
ERISA section 3(3) and/or a plan described in section 4975(e)(1) of the
Code.
Signed at Washington, DC, this 10th day of December, 2004.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration U.S. Department of Labor.
[FR Doc. 04-27451 Filed 12-14-04; 8:45 am]
BILLING CODE 4520-29-P
