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Secretary of Labor Thomas E. Perez
Proposed Amendment to Prohibited Transaction Exemption 80-26 (PTE 80-26) for Certain Interest Free Loans to Employee Benefit Plans [Notices] [11/29/1999]

Proposed Amendment to Prohibited Transaction Exemption 80-26 (PTE 80-26) for Certain Interest Free Loans to Employee Benefit Plans [11/29/1999]

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Volume 64, Number 228, Page 66666-66668

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application Number D-10830]

 
Proposed 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, 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 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, their participants and beneficiaries, and parties in interest 
with respect to those plans engaging in the described transactions.

DATES: If adopted, the proposed amendment would be effective from 
November 1, 1999 through December 31, 2000. Written comments and 
requests for a public hearing should be received by the Department on 
or before January 13, 2000.

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: Y2K Interest Free Loans).

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: Notice is hereby given of the pendency 
before the Department of a proposed amendment to PTE 80-26 (45 FR 
28545, Apr. 29, 1980) <SUP>1</SUP>. 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).<SUP>2</SUP>
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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 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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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 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--
    (B) Lending of money or other extension of credit between a 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 a plan. Accordingly, loans, including 
interest free loans, to a plan from a party in interest and the 
repayment of such loans may be prohibited by those provisions of the 
Act.
    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

    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.

C. Discussion of the Proposed Exemption

    The Department, on its own motion, proposes an amendment to PTE 80-
26 in order to expand its interest free loan exemption to address 
potential Y2K problems. The Y2K problem is a computer problem where 
date-dependent computations or operations produce erroneous results 
because systems recognize years only by the last two digits, causing a 
``00'' entry to be read as the year ``1900'' rather than the year 
``2000''. Congress has passed several Acts <SUP>3</SUP> to address the 
Y2K problem and has found that it could incapacitate systems that are 
essential to the functioning of markets, commerce, consumer products, 
utilities, government, and safety and defense systems, in the United 
States and throughout the world.
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    \3\ Year 2000 Information and Readiness Disclosure Act, Pub. L. 
105-271, 112 Stat. 2386 (1998) (encourages the disclosure and 
exchange of information about computer processing problems, 
solutions, test practices and test results, and related matters in 
connection with Y2K); Y2K Act, Pub. L. 106-37, 106 Stat. 185 (1999) 
(established uniform legal standards to provide businesses and 
technology product users reasonable incentives to solve Y2K problems 
before they develop, encourages continued remediation and testing 
efforts, encourages parties to resolve Y2K disputes by alternative 
dispute mechanisms, and discourages insubstantial lawsuits).
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    Employee benefit plans rely on computers to perform critical 
operations such as benefit calculations and

[[Page 66667]]

payments, eligibility, vesting, start dates for required distributions, 
normal retirement age, QDROs, ESOP diversification rights, funding 
calculations, health claims processing, plan investments, and so on. 
Calculations performed by service providers, such as TPAs, insurance 
companies, banks, investment managers, and others, having systems that 
are not Y2K compliant, may result in a temporary interruption of plan 
operations.
    To date, PWBA has implemented a comprehensive national outreach 
program designed to assist fiduciaries in preparing to address Y2K. 
Nevertheless, it remains possible that Y2K related problems could 
result in a temporary disruption of computer operations. As a result, 
plan fiduciaries must establish a contingency plan that will be 
implemented in the event that the plans' essential operations are 
affected.
    Current information indicates that in some cases small and medium 
size businesses are taking a ``wait-and-see'' approach to Y2K and that, 
although the financial services sector appears highly prepared, the 
industry remains susceptible to secondary risks, such as borrowers 
failing to meet their obligations as a result of Y2K. \4\
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    \4\ ``Investigating the Year 2000 Problem: The 100 Day Report,'' 
issued by the United States Senate Special Committee on the Year 
2000 Technology Problem on September 22, 1999.
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    Furthermore, there is some uncertainty about the cost and 
availability of funds to individual depository institutions. Potential 
liquidity exigencies created by Y2K might arise from the conversion of 
deposits to currency, heightened credit demands, greater lender and 
depositor caution, and potential market disruptions. In this regard, 
the Board of Governors of the Federal Reserve System established a 
special lending program under which Federal Reserve Banks may extend 
credit to depository institutions \5\ and, in addition, Congress has 
passed the ``Small Business Year 2000 Readiness Act'' \6\ to provide a 
loan guarantee program to small businesses.
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    \5\ 64 FR 41765 (1999).
    \6\ Pub. L. 106-8, 113 Stat. 13 (1999).
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    The potential liquidity problem created by Y2K could be detrimental 
to employee benefit plans in trying to meet the many demands of plan 
participants and beneficiaries. Plan officials need to assure 
themselves that sufficient liquidity is available to pay benefits and 
administer the plan, including transfers among investment options, 
distributions, hardship withdrawals, health claim payments, and loans 
to participants and beneficiaries. In addition, employee benefit plans 
may incur costs associated with addressing and fixing Y2K problems that 
may arise. As a result, the Department has determined to amend PTE 80-
26 to expand its provisions for interest free loans to employee benefit 
plans to meet Y2K contingencies.
    In the event of a possible Y2K disruption to ordinary plan 
operations related to the payment of benefits or insurance premiums, 
relief for an interest free loan or extension of credit on an unlimited 
basis from a party in interest to deal with these problems would 
already be available under the first prong, paragraph (b)(1) of PTE 80-
26.
    However, plans may need interest free loans to address potential 
Y2K problems that are only incidental to the ordinary operation of the 
plan. Specifically, the Department notes that the three day limit on 
loans for purposes incidental to the ordinary operation of the plan, 
under the second prong, paragraph (b)(2), of PTE 80-26, may not be a 
sufficient period of time to address such Y2K contingencies. 
Accordingly, beginning November 1, 1999 and ending December 31, 2000, 
the proposed amendment to PTE 80-26 would permit certain interest free 
loans for an extended period of no more than fourteen months. All loans 
made pursuant to this amendment must be repaid by December 31, 2000.
    Examples of transactions that may require loans or other extensions 
of credit for a period longer than three days due to temporary cash 
flow problems or computer malfunctions created by Y2K would include: 
(1) The transfer of all or part of a participant's account balance from 
one investment option to another; (2) participant loans; (3) temporary 
overdraft protection; (4) failure of a plan's internal computer 
systems; and (5) the crediting of dividends or interest by a bank 
trustee prior to receipt of such dividends or interest.

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) 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 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 part 2570, 
subpart B (55 FR 32836, 32847, August 10, 1990), the Department 
proposes to amend PTE 80-26 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

[[Page 66668]]

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 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 data as a result of the 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 23rd day of November, 1999.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 99-30932 Filed 11-26-99; 8:45 am]
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