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Secretary of Labor Thomas E. Perez
Proposed Class Exemption to Permit the Restoration of Delinquent Participant Contributions to Plans [Notices] [03/07/1996]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Class Exemption to Permit the Restoration of Delinquent Participant Contributions to Plans [03/07/1996]

[PDF Version]

Volume 61, Number 46, Page 9199-9203

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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10218]

 
Proposed Class Exemption to Permit the Restoration of Delinquent 
Participant Contributions to Plans

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

ACTION: Notice of proposed class exemption.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed class exemption from 
the prohibited transaction restrictions of the Employee Retirement 
Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 
1986 (the Code). The proposed class exemption would provide exemptive 
relief for certain transactions involving the failure to transmit 
participant contributions to pension plans where such delinquent 
amounts are voluntarily restored to such plans with lost earnings. This 
exemption is being proposed as part of the Department's Pension Payback 
Program, which is targeted at persons who failed to transfer 
participant contributions to pension plans, including section 401(k) 
plans, within the time frames mandated by the Department's participant 
contribution regulation, and thus violated Title I of ERISA. If 
granted, the proposed exemption would affect plans, participants and 
beneficiaries of such plans and certain other persons engaging in such 
transactions.

DATES: Written comments and requests for a public hearing must be 
received by the Department on or before April 21, 1996.

ADDRESSES: All written comments (at least three copies) and requests 
for a public hearing should be sent to: Office of Exemption 
Determinations, Pension 

[[Page 9200]]
and Welfare Benefits Administration, Room N-5649, U.S. Department of 
Labor, 200 Constitution Avenue, NW., Washington, DC 20210, (attn: D-
10218). Comments received from interested persons will be available for 
public inspection in the Public Documents Room, Pension and Welfare 
Benefits Administration, U.S. Department of Labor, room N-5638, 200 
Constitution Avenue, NW., Washington, DC. Written comments may also be 
sent by the Internet to the following address: hinz@access.digex.net.

FOR FURTHER INFORMATION CONTACT: Ms. Lyssa Hall, Office of Exemption 
Determinations, Pension and Welfare Benefits Administration, U.S. 
Department of Labor, (202) 219-8971, (This is not a toll-free number.); 
or William Taylor, Plan Benefits Security Division, Office of the 
Solicitor, U.S. Department of Labor, (202) 219-9141. (This is not a 
toll-free number.)

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed class exemption from the 
restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of ERISA and 
from 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.
    The Department is proposing the class exemption 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, August 10, 1990).<SUP>1

     1  Section 102 of 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.
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Review Under the Paperwork Reduction Act of 1995

    The collection of information contained in this proposed class 
exemption has been submitted to the Office of Management and Budget for 
review under section 3507(d) of the Paperwork Reduction Act of 1995. 44 
U.S.C. 3507(d). For copies of the OMB submission, contact Mrs. Theresa 
O'Malley, U.S. Department of Labor, OASAM/DIRM, Room N-1301, 200 
Constitution Ave. NW., Washington, D.C. 20210, 202-219-5095 or via 
Internet to tomalley@dol.gov. Comments are solicited on the 
Department's need for this information, specifically to: (1) Evaluate 
whether the proposed collection of information is necessary for the 
proper performance of the functions of the agency, including whether 
the information will have practical utility; (2) evaluate the accuracy 
of the agency's estimate of the burden of the proposed collection of 
information, including the validity of the methodology and assumptions 
used; (3) enhance the quality, utility, and clarity of the information 
to be collected; and (4) minimize the burden of the collection of 
information on those who are to respond, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses. Persons wishing to 
comment on the collection of information should direct their comments 
to the Office of Information and Regulatory Affairs, OMB, Room 10235, 
NEOB, Washington, D.C. 20503, Attn: Desk Officer for PWBA. Comments 
must be filed with the Office of Management and Budget within 30 days 
of this publication.
    Title: Class Exemption To Permit The Restoration of Delinquent 
Participant Contributions to Plans.
    Summary: This document contains a notice of pendency before the 
Department of a proposed class exemption from the prohibited 
transaction restrictions of ERISA and the Code. The proposed class 
exemption would provide exemptive relief for certain transactions 
involving the failure to transmit participant contributions to pension 
plans where such delinquent amounts are voluntarily restored to such 
plans with lost earnings. This exemption is being proposed as part of 
the Department's Pension Payback Program, which is targeted at persons 
who failed to transfer participant contributions to pension plans, 
including section 401(k) plans, in accordance with the time frames 
described in the Department's participant contribution regulation, and 
thus violated Title I of ERISA (29 CFR 2510.3-102). If granted, the 
proposed exemption would affect plans, participants and beneficiaries 
of such plans and certain other persons engaging in such transactions.
    Needs and Uses: ERISA requires that the Department make a finding 
that the proposed exemption meets the statutory requirements of section 
408(a) before granting the exemption. The Department therefore finds it 
necessary to receive certain information from the applicants, and that 
participants and beneficiaries receive notice and an opportunity to 
comment on the proposed transaction.
    Respondents and Proposed Frequency of Response: The Department 
staff estimates that approximately 1,772 plan sponsors will seek to 
take advantage of this class exemption and/or participate in the 
Pension Payback Program. The respondents will be parties in interest to 
plans.
    Estimated Annual Burden: According to 1992 Form 5500 data, 
approximately 172,246 plans (including approximately 139,704 401(k) 
plans) permitted participant contributions. We have no hard data on the 
number of plan sponsors that might wish to participate in the 
conditional compliance program. However, on the basis of preliminary 
investigations conducted by the Department, the number of plan sponsors 
who fail to transfer participant contributions to pension plans as 
required by ERISA appears to be quite small. We estimate only about one 
percent of the plans that permit participant contributions will 
actually be interested in participating in this program. Consequently, 
the number of respondents is 1,722 (.01 x 172,246). We also estimate 
that it will take those plan sponsors who are interested in 
participating in this program and using the exemption only one hour. 
Consequently, the total burden hours are 1,722 (1 x 1,722).
    Under the proposed exemption, one condition that must be satisfied 
is that all delinquent participant contributions be restored to the 
pension plan plus earnings from the date on which such contributions 
were paid to, or withheld by, the employer until such money is restored 
to the plan. The earnings are calculated at the greater of: (1) The 
amount that would have been earned on the participant contributions 
during such period if applicable plan provisions had been followed, or 
(2) the amount that would have been earned on the participant 
contributions during such period using an interest rate equal to the 
underpayment rate defined in section 6621(a)(2) of the Code during such 
period. In the Department's view, this condition requires that the 
earnings be calculated on an account by account basis in order to 
mirror the earnings the participants would have otherwise accrued. The 
Department's burden hour calculation does not reflect any hours imposed 
by this requirement because of a lack of data.

Background

    In 1988, the Department published a final regulation defining when 
certain monies which a participant pays to, or has withheld by, an 
employer for contribution to a plan are ``plan assets'' for purposes of 
Title I of ERISA and the related prohibited transaction provisions of 
the Code. 53 FR 17628 (May 17, 1988). The final participant 
contribution regulation provided that 

[[Page 9201]]
the assets of a plan include amounts (other than union dues) that a 
participant or beneficiary pays to an employer, or amounts that a 
participant has withheld from his or her wages by an employer, for 
contribution to the plan as of the earliest date on which such 
contributions can reasonably be segregated from the employer's general 
assets, but in no event more than 90 days from the date on which such 
amounts are received by the employer (in the case of amounts that a 
participant or beneficiary pays to an employer) or 90 days from the 
date on which such amounts would otherwise have been payable to the 
participant in cash (in the case of amounts withheld by an employer 
from a participant's wages).<SUP>2 This final rule was based on a 
record developed with respect to a proposed regulation published in 
1979. 44 FR 50363 (August 28, 1979).

     <SUP>2 The Department has taken the position that elective 
contributions to an employee benefit plan, whether made pursuant to 
a salary reduction agreement or otherwise, constitute amounts paid 
to or withheld by an employer (i.e., participant contributions) 
within the scope of section 2510.3-102, without regard to the 
treatment of such contributions under the Internal Revenue Code. See 
53 FR 29660 (August 8, 1988).
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    Except as provided in ERISA section 403(b), plan assets are 
required to be held in trust by one or more trustees pursuant to 
section 403(a) of ERISA.<SUP>3 In addition, ERISA's fiduciary 
responsibility provisions apply to the management of plan assets. Among 
other things, ERISA sections 403 and 404 make clear that the assets of 
a plan may not inure to the benefit of any employer and shall be held 
for the exclusive purpose of providing benefits to participants in the 
plan and their beneficiaries, and defraying reasonable expenses of 
administering the plan. These basic fiduciary provisions are 
supplemented by the per se rules set forth in section 406 which 
prohibit certain classes of transactions between plans and persons 
defined as parties in interest under section 3(14) of ERISA. The term 
``party in interest'' includes a fiduciary and an employer any of whose 
employees are covered by the plan.

     <SUP>3 ERISA section 403(b) contains a number of exceptions to 
the trust requirements for certain types of assets, including assets 
which consist of insurance contracts, and for certain types of 
plans. In addition, the Secretary has issued a technical release, 
T.R. 92-1, which provides that, with respect to certain welfare 
plans (e.g., cafeteria plans), the Department will not assert a 
violation of the trust or certain reporting requirements in any 
enforcement proceeding, or assess a civil penalty for certain 
reporting violations, involving such plans solely because of a 
failure to hold participant contributions in trust. 57 FR 23272 
(June 2, 1992), 58 FR 45359 (August 27, 1993).
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    As previously noted, amounts paid by a participant or beneficiary 
to an employer and/or withheld by an employer for contribution to the 
plan are participant contributions that become plan assets as of the 
earliest date on which such contributions can reasonably be segregated 
from the employer's general assets. An employer holding these assets 
after that date commingled with its general assets will have engaged in 
a prohibited use of plan assets under section 406 of ERISA.
    Recent investigations conducted by the Department have revealed 
employer delays in transmitting or a failure to transmit to pension 
plans amounts that a participant or beneficiary pays to an employer, or 
amounts that employers withhold from participants' wages, for 
contribution to the plans.<SUP>4 It appears that many employers who 
receive participant contributions are under the misimpression that 
current regulation permits a delay of up to 90 days in segregating such 
contributions, even if the participant contributions can be reasonably 
segregated much sooner. Such delays deprive participants of earnings on 
their contributions and increase the risk to participants and their 
beneficiaries that their contributions will be lost due to the 
employer's insolvency or misappropriation by the employer.

     <SUP>4 In the Spring of 1995, PWBA began a project to 
investigate misuse of employee contributions to employee benefit 
plans and in particular 401(k) plans. As of October 31, 1995 there 
were 417 employee contribution investigations open and 130 cases 
were closed during the year. More than $3.7 million has been 
recovered through voluntary compliance in situations where employee 
contributions were not placed in trust for participants.
    Of the 130 closed employee contribution cases, 44, or 33.8 
percent of closed cases, resulted in findings of violations of 
ERISA's fiduciary provisions. This compares to a finding of 
fiduciary violations in 12 percent of all other closed cases in FY 
95.
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    In order to better protect the security of participant 
contributions to employee benefit plans, the Department determined to 
revise the final regulation published in 1988. The proposed regulation 
(60 FR 66036, December 20, 1995) revises the 1988 regulation by 
changing the maximum period during which participant contributions to 
an employee benefit plan may be treated as other than ``plan assets''. 
Under the proposed rule, the maximum period for an employer to transmit 
participant contributions to the plan would be the same number of days 
in which the employer is required to deposit withheld income taxes and 
employment taxes under rules promulgated by the IRS.<SUP>5 The proposed 
regulation also solicited comments on the advisability of other 
measures that the Department might consider to address the problem of 
delays in transmitting participant contributions to plans.

    \5\ See 26 CFR section 31.6302-1.
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    In addition to the proposed revision to the participant 
contribution regulation, the Department, adopted a conditional 
compliance program for those persons who voluntarily restore delinquent 
participant contributions to pension plans.
    The Pension Payback Program (the Program), which is being published 
today, is designed to benefit workers by encouraging persons to restore 
delinquent participant contributions to pension plans. This Program is 
targeted at persons who failed to transfer participant contributions 
plus lost earnings to pension plans, including section 401(k) plans, 
within the time frames mandated by the Department's participant 
contribution regulation, and thus violated Title I of ERISA. Those who 
comply with the terms of the Program will avoid potential ERISA civil 
actions initiated by the Department, the assessment of civil penalties 
under section 502(1) of ERISA and Federal criminal prosecutions arising 
from their failure to timely remit such contributions. The Department 
of Justice has indicated its support for the Program. This proposed 
class exemption under section 408(a) of ERISA, when finalized, will 
govern those transactions described in the Program. However, persons 
who participate in the Program may rely on the proposed exemption 
notwithstanding any subsequent modifications made in issuing the final 
exemption. Thus, on a temporary basis, pending promulgation by the 
Department of the final class exemption setting forth the conditions 
for retroactive relief, the Department will not pursue enforcement 
against persons who comply with the conditions of the Program with 
respect to any prohibited transaction liability which may have arisen 
as a result of a delay in forwarding participant contributions. The 
Internal Revenue Service has advised the Department that it will not 
seek to impose the Code section 4975 (a) and (b) sanctions with respect 
to any prohibited transaction that is covered by the proposed class 
exemption, notwithstanding any subsequent changes to the proposed 
exemption when it is finalized, provided that all requirements 
specified in the proposed class exemption have been met.

Discussion of the Proposed Exemption

1. Scope

    The proposed exemption would provide conditional relief from the 
restrictions of sections 406(a)(1) (A) 

[[Page 9202]]
through (D), 406(b)(1) and 406(b)(2) of ERISA and the sanctions 
resulting from the application of section 4975 (a) and (b) of the Code, 
by reason of section 4975(c)(1) (A) through (E) of the Code, for 
transactions that result from a person's failure to transmit 
participant contributions to pension plans within the time frames 
required by the participant contribution regulation, provided that such 
delinquent contributions are restored to the plans together with lost 
earnings.
    The Department notes that the proposal only provides relief for 
those transactions involving delinquent participant contributions and 
earnings that are restored to pension plans no later than September 7, 
1996. The payments to the plan must relate to amounts paid by 
participants to, or withheld by, an employer for contribution to a plan 
no later than 30 days following the date of announcement of the 
Program.<SUP>6 The Department believes that it is appropriate to 
propose limited relief in order to provide employers with the 
opportunity to restore delinquent participant contributions plus 
earnings to plans and to modify their withholding practices without 
fear of legal action or excise taxes.

    \6\  The Department notes that this date corresponds to the date 
contained in the Program.
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2. Proposed Conditions

    The proposal contains conditions, as discussed below, which the 
Department views as necessary to ensure that any transaction covered by 
the proposed exemption would be in the interests of plan participants 
and beneficiaries and to support a finding that the proposed exemption 
meets the statutory standards of section 408(a) of ERISA.
    Under the proposed exemption, all delinquent participant 
contributions must be restored to the pension plan plus earnings from 
the date on which such contributions were paid to, or withheld by, the 
employer until such money is restored to the plan. The earnings are 
calculated at the greater of: (1) The amount that would have been 
earned on the participant contributions during such period if 
applicable plan provisions had been followed, or (2) the amount that 
would have been earned on the participant contributions during such 
period using an interest rate equal to the underpayment rate defined in 
section 6621(a)(2) of the Code during such period.<SUP>7 In the 
Department's view, this condition requires that the earnings be 
calculated on an account by account basis in order to mirror the 
earnings the participants would have otherwise accrued.

     <SUP>7 The underpayment rate defined in section 6621(a)(2) is 
based on the Federal short-term rate determined quarterly by the 
Secretary of the Treasury and is designed to reflect market rates of 
interest rather than serve as a penalty. Courts have applied rates 
determined under section 6621 in awarding prejudgment interest in 
cases under title I of ERISA. Martin v. Harline, No. 87-NC-115J (D. 
Utah Mar. 31, 1992) 15 Emp. Ben. Cases (BNA) 1138, 1153; Whitfield 
v. Cohen, 686 F. Supp. 188, 193 (E.D.N.Y. 1988); Whitfield v. 
Tomasso, 682 F. Supp. 1287, 1306 (E.D.N.Y. 1988).
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    Second, the proposal requires that the total of all outstanding 
delinquent participant contributions on the date of announcement of the 
Program, excluding earnings, does not exceed the aggregate amount of 
participant contributions that were received or withheld by an employer 
from the employees' wages for calendar year 1995. Provided that the 
preceding limitation is met, the proposal also would permit the 
restoration of any earnings on participant contributions that have been 
restored to the plan prior to the effective date of the Program.
    Third, the proposed exemption requires that the person meet the 
requirements set forth in paragraphs (2) through (6) of the Program. 
Those requirements include, among other things, that: (1) The person 
notify the Department in writing of its intention to participate in the 
Program and provide written evidence demonstrating that participant 
contributions and earnings have been restored to the plan; (2) the 
person notify affected participants (and send a copy to the Department) 
that prior delinquent contributions and lost earnings have been 
restored to their accounts pursuant to participation in the Program; 
(3) at the time of notification to the Department of the person's 
determination to participate in the Program, neither the Department nor 
any other Federal agency has informed such person of its intention to 
investigate or examine the plan or otherwise make inquiry with respect 
to the status of participant contributions under the plan; and (4) the 
person must certify in writing, under oath, that it is in compliance 
with the requirements of the Program and, to its knowledge, not the 
subject of any criminal investigation or prosecution involving any 
offense against the United States; has not been convicted of any 
criminal offense involving employee benefit plans or any other offense 
involving financial misconduct, nor entered into a consent decree with 
the Department or have been found by a court of competent jurisdiction 
to have violated any fiduciary responsibility provision of ERISA.

Notice to Interested Persons

    Because many participants, plans, fiduciaries, and parties in 
interest with respect to plans could be considered interested persons, 
the only practical form of notice of the proposed exemption is 
publication in the Federal Register.

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 to which the exemption does not expressly apply and the 
general fiduciary responsibility provisions of section 404 of ERISA. 
Section 404 requires, in part, that a fiduciary discharge his or her 
duties respecting the plan solely in the interests of the participants 
and beneficiaries of the plan and in a prudent fashion in accordance 
with section 404(a)(1)(B) of ERISA. Nevertheless, the Department notes 
that those persons who comply with the conditions of the Pension 
Payback Program will avoid potential ERISA civil actions initiated by 
the Department resulting from their failure to timely remit participant 
contributions to pension plans.
    (2) The proposed exemption, if granted, will not extend to 
transactions prohibited under section 406(b)(3) of ERISA or section 
4975(c)(1)(F) of the Code.
    (3) Before this 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 plans 
and of participants and beneficiaries and protective of the rights of 
participants and beneficiaries of such plans.
    (4) The proposed exemption, if granted, will be supplemental to, 
and not in derogation of 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.
    (5) If granted, the proposed class exemption will be applicable to 
a transaction only if the conditions specified in the class exemption 
are satisfied.

[[Page 9203]]


Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a public hearing on the proposed exemption to the address 
above and within the time period set forth above. Comments received 
will be made part of the record and will be available for public 
inspection at the above address.

Proposed Exemption

    The Department has under consideration the granting of the 
following class exemption, under the authority of section 408(a) of 
ERISA 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, August 10, 
1990).
    I. The restrictions of sections 406(a)(1) (A) through (D), 
406(b)(1) and 406(b)(2) of ERISA and the sanctions resulting from the 
application of 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 
transactions that result from a person's failure to transmit 
participant contributions to a pension plan within the time frames 
required by the plan asset--participant contribution regulation (29 CFR 
2510.3-102), provided that the following conditions are met:
    (a) All delinquent participant contributions are restored to the 
pension plan plus the greater of:
    (1) The amount that otherwise would have been earned on the 
participant contributions from the date on which such contributions 
were paid to, or withheld by, the employer until such money is fully 
restored to the plan, had such contributions been invested in 
accordance with applicable plan provisions, or
    (2) The amount the participant would have earned on the participant 
contributions during such period using an interest rate equal to the 
underpayment rate defined in section 6621(a)(2) of the Code from the 
date on which such contributions were paid to, or withheld by, the 
employer until such money is fully restored to the plan.
    (b) The total of all outstanding delinquent participant 
contributions on March 7, 1996, excluding earnings, does not exceed the 
aggregate amount of participant contributions that were paid to, or 
withheld by, the employer for contribution to the plan for calendar 
year 1995. Provided that the preceding limitation is met, the proposed 
exemption shall apply without limit to the restoration of any earnings 
on delinquent participant contributions that have been restored to the 
plan prior to the effective date of the Program.
    (c) The conditions set forth in paragraphs (2) through (6) of the 
Program are met.
    II. Definitions: For purposes of this proposed exemption:
    (a) The term ``plan'' means an employee pension benefit plan 
described in section 3(2) of ERISA.
    (b) The term ``person'' means a person as that term is defined in 
section 3(9) of ERISA.
    (c) The term ``Program'' means the Pension Payback Program 
published by the Department on March 7, 1996.
    III. Effective Date: If granted, the proposed exemption provides 
retroactive and prospective relief for those transactions involving 
participant contributions and earnings that are restored to pension 
plans no later than September 7, 1996. Such restorative payments must 
relate to amounts paid to, or withheld by, an employer for contribution 
to a plan no later than April 5, 1996.

    Signed at Washington, D.C. this 4th day of March, 1996.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Department of Labor, 
Pension and Welfare Benefits Administration.
[FR Doc. 96-5392 Filed 3-6-96; 8:45 am]
BILLING CODE 4510-29-P