PTE 79-41 Need e-copy

[Guest ak]

Anyone know where I can get this online? Thanks

[JanetM]

From CCH database.

Prohibited Transaction Class Exemption 79-41, August 7, 1979 (44 FR 46365).

Insurance companies related to employers: Sale of contracts to fund employee benefit plans maintained by such employers. --

This class exemption permits an insurance company which is a party in interest or disqualified person with respect to an employee benefit plan to sell life insurance, health insurance, or annuity contracts which provide funding for such plans under certain circumstances.

Annotation references: See "Finding Lists."

[Prohibited Transaction Exemption 79-41]

Class Exemption To Permit Sales of Employee Benefit Funding Contracts by Insurance Companies That are Substantially Affiliated With Employers Maintaining the Plans

AGENCY: Department of Labor.

ACTION: Grant of Class Exemption.

SUMMARY: This document allows insurance companies that have substantial stock or partnership affiliations with employers establishing or maintaining employee benefit plans to sell life insurance, health insurance or annuity contracts which fund such plans under certain circumstances. In the absence of this exemption, such sales transactions might be prohibited by the Employee Retirement Income Securi ty Act of 1974 (the Act) and the Internal Revenue Code of 1954 (the Code). The exemption affects participants and beneficiaries of plans to which such contracts are furnished, employers maintaining these plans, affiliated insurance companies that are covered by the exemption, and other persons participating in the transactions.

EFFECTIVE DATES: January 1, 1975, as to transactions exempted; January 1, 1982, as to the requirement for financial examinations and as to the conditions (a) barring commissions on sales of contracts and (b) limiting the percentage of premium receipts derived from "captive" plans and their employers.

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz, Office of Fiduciary Standards, Room C-4526, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, D.C. 20216, (202) 357-0040. This is not a toll free number.

SUPPLEMENTARY INFORMATION: On May 26, 1978, notice was published in the Federal Register (43 FR 22800) of the pendency before the Department of Labor (the Department) and the Internal Revenue Service (the Service) of a proposed class exemption from the restrictions of sections 406(a), 406(b)(1) and (2) and 407(a) of the Act and from the taxes imposed by section 4975(a) and (b) of the Code by reason of section 4975©(1)(A) through (E) of the Code.

The class exemption, proposed in response to applications filed jointly by the Alliance of American Insurers (Alliance)1 and the National Association of Independent Insurers (NAII)2 , and by the American Council of Life Insurance3 , applies to certain sales of insurance contracts or annuities to provide funding for employee benefit plans maintained by affiliates of the insurance company making the sale. A class exemption was requested on behalf of numerous insurance companies who currently do not meet the requirements of a statutory exemption4 requiring, generally, that the insurer be a wholly-owned subsidiary of the employer maintaining the plan and that no more than 5 percent of the insurer's premium and annuity revenues come from the plan and its employer.

The exemption was proposed and comments were received in accordance with the procedures set forth in ERISA Procedure 75-1 (40 FR 18471, April 28, 1975) and Rev. Proc. 75-26, 1975-1, C.B. 722. However, effective December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978) as implemented by Executive Order 12108 (44 FR 1065, January 3, 1979) transferred the authority of the Secretary of the Treasury to issue exemptions of the type requested to the Department of Labor. Thus, the Department of Labor alone is issuing this exemption.

Upon consideration of the comments received, the Department is adopting the proposed exemption with certain modifications.

Discussion of Significant Comments, Modifications of Proposed Exemption and Clarifications

A. Affiliation Requirement (Condition (a)(1)): The proposed class exemption applied only if the insurance company making the sale was a disqualified person or party in interest with respect to the plan by reason of a 50 percent or more stock affiliation with the employer establishing or maintaining the plan that is described in section 4975(e)(2) (E) or (G) of the Code and section 3(14) (E) or (G) of the Act. Several commentators pointed out that those sections refer to partnership interests as well as stock interests, and argued that it would be reasonable and proper for the exemption to cover sales to plans maintained by partnerships that are related to the insurer through the ownership of substantial capital or profits interests. It was represented that insurance companies quite commonly enter into or acquire an interest in partnerships. The commentators claimed that it would be contrary to ordinary business practice to require a plan established by the partnership to purchase its funding contracts from an unrelated insurance company where they are available from a 50 percent or greater affiliate of the employer. The Department has determined that these contentions have merit and has expanded the scope of transactions covered by the exemption to include sales of funding contracts to plans maintained by partnerships (including joint ventures) that are affiliated with the insurance company under section 3(14) (E) or (G) of the Act and section 4975(e)(2) (E) or (G) of the Code.

The Department has not expanded the exemption, as requested by one commentator, to cover insurance sales made to plans by an insurance company which is a party in interest by virtue of a stock affiliation described in section 3(14)(H) of the Act and section 4975(e)(2)(H) of the Code (e.g., an insurance company which has a 10 percent or more equity interest in an entity which owns a 50 percent or more interest in the employer maintaining the plan). In the absence of such an expansion, such transactions would be permissible if the conditions of Prohibited Transaction Exemption 77-9 (PTE 77-9) as amended (44 FR 4479, January 5, 1979) were satisfied. One of the conditions of PTE 77-9 is that the transaction be approved by an independent fiduciary. In the above situations, the Department believes that it is feasible to require prior approval of the sales transactions by an independent fiduciary on behalf of the plan.5 Accordingly, the Department believes that no additional relief is necessary.

One commentator requested assurance that the phrase "employer establishing or maintaining the plan", contained in Condition (a)(1), would not preclude the application of the exemption granted herein to purchases made from an affiliated insurance company by an employer who, rather than establish a separate plan, adopts a plan established by the insurance company. The Department confirms this interpretation.

B. Scope of Contracts Covered: A diversity of views was submitted in response to the proposed exemption's specific invitation for comments concerning whether the exemption should include, in addition to life and health insurance and annuities, sales of other types of contracts currently being marketed to employee benefit plans. Some of the commentators requested that the exemption be broadened to permit, as is permitted under Prohibited Transaction Exemption 77-9, sales of all products issued by an insurance company in the ordinary course of its business, including, among other types, fidelity bonds6 and casualty insurance. Another commentator did not see any need for such expanded coverage noting the ability of a plan to provide protection for its assets with hazard insurance purchased from an unrelated insurer. In view of the clear Congressional intent to provide relief for the acquisition of life and health insurance and annuity contracts (policies which fund benefits due participants), the purpose of this administrative exemption --to ease the restrictive ownership conditions of the statutory exemption, and the failure of the commentators to demonstrate any convincing reason to expand the exemption in light of the continuing potential for abuse in transactions between a plan and an affiliate of the employer, the Department has decided not to broaden the exemption in this manner.

The Department, however, has decided, in light of the comments received and the administrative relief previously provided for transactions involving "in-house" plans of other types of financial institutions,7 to expand the exemption to cover the acquisition of contracts used to fund the payment of benefits (i.e., fixed annuity contracts as well as contracts described in section 801(g) of the Code). In addition, the Department wishes to note in response to requests for amplification of the term "health insurance," that the term as used in the exemption includes such forms of health coverage as accident, disability, hospital and dental expense policies.

C. Revision of the Alternative Audit Requirements: Condition (a)(3) of the proposed class exemption provided alternative requirements that the insurance company making the sale either (i) have undergone a financial examination by the insurance commissioner of its domiciliary state within the five years prior to the transaction, or (ii) have undergone an examination by an independent certified public accountant (CPA) for each of the five years prior to the sales transaction. The effective date of the proposed condition was January 1, 1975. The Department and the Service specifically solicited comments concerning the feasibility of the alternative requirements in a class exemption.

Most of the respondents expressed strong support for the alternative involving CPA examination, but indicated that it would be difficult to coordinate the five consecutive year CPA audit with the insurance commissioner test under proposed condition (a)(3)(i). These comments noted that the timing, type and extent of insurance department examinations are completely discretionary with the commissioners. Although an insurance company generally could expect to be audited periodically, it could not be foreseen that the state audit would necessarily take place within five years of its last completed examination. Questions were raised as to what would constitute a financial examination, for purposes of the exemption. Several commentators noted that insurers who had not heretofore undergone CPA audits for consecutive years but wished to switch to that alternative might be in technical noncompliance both retroactively and for a number of prospective years.

After considering these comments, the Department has decided to revise the financial examination requirement. In place of the alternative proposed condition requiring five consecutive CPA audits, the final exemption permits, as an alternative, that the insurance company making the sale has undergone a CPA examination for its last complet ed taxable year prior to the sales transaction. The effective date of the revised requirement has been delayed until January 1, 1982, to facilitate compliance by both new and existing companies. With respect to the insurance commissioner's examination, the exemption also has been revised to make clear that the adequacy of a financial examination is to be determined in light of applicable state law. The Department has made this revision because state regulatory authorities are responsible, under applicable state law, for conducting the financial examination and for determining what is, under the particular circumstances, an appropriate examination.

D. Sales Commissions: The application for class exemption filed by the NAII and the Alliance represented that insurance sales between an affiliated insurer and the plan or its employer are in the interests of the plan because such sales are generally arranged directly, without the intervention of an insurance agent whose services would entitle it to a commission. Thus, it was represented, the selling company can furnish the insurance at a lower rate to the plan, or its employer. Economies of cost generally would not be available if the plan were forced to purchase insurance from an unrelated company which included acquisition costs and an allowance for profits in its premium charges. The class applicants also represented that state laws did not require commissions to be paid upon sales of either group or individual policies to plans of affiliates. Based on these representations, the proposed exemption contained a condition that upon the grant of the exemption, no commissions could be paid with respect to transactions covered by the exemption.

Many of the commentators confirmed the views of the NAII and the Alliance. Nevertheless, several comments argued that the condition should be withdrawn or its imposition delayed, particularly with respect to sales of individual contracts. It was argued that commissions represent not only sales inducements to agents (who may be either independent contractors or employees of the insurance company) but also provide remuneration for necessary ongoing services to the plan and its insured participants. One of the commentators noted that under the laws and relevant interpretations of at least one State --Florida --it is currently illegal for an insurer to fail to pay a commission on arrangements for, and deliveries of, insurance or annuity contracts in that state, including those contracts sold for plans by captive insurers.

Upon consideration of the comments, the Department has determined that, for the reasons described in the notice of proposed exemption, the final exemption should not permit, on a class basis, payments of commissions in connection with sales of insurance contracts to plans maintained by affiliates of insurance companies. However, the effective date of this condition has been postponed until January 1, 1982, so as to give insurance companies, agents, and plan fiduciaries time to seek relief from any applicable state laws and to adjust their contractual commitments and practices to comply with the exemption's prohibition.8 However, where warranted by the circumstances and merits of a particular case, the Department is notifying certain affected applicants that if they so choose, their individual cases will be kept open and considered for possible additional exemptive relief.

The Department wishes to express its intent that for sales made after December 31, 1981, the "no more than adequate consideration" requirement of condition (b) should be applied with due regard to any cost economies produced as a result of the absence of any commissions.

E. Percentage of Premiums Test: The 50 percent of premiums receipts condition adopted herein for taxable years of the selling insurance company beginning after December 31, 1981, generally represents a major relaxation of the five percent test imposed by section 408(b)(5)(B) of the Act and section 4975(d)(5)(B) of the Code. This premiums receipts test is designed to ensure that the captive insurance company is in the business of selling insurance to the public and is substantially dependent upon insurance customers that are unrelated to the insurer and its affiliates for premium revenues. To the extent that an insurance company is not established as a separate entity within a controlled group primarily for the purpose of providing insurance to affiliated companies and their plans, it would be contrary to ordinary business practices, and unnecessarily restrictive, to require a plan to secure its funding contracts through purchases from an unrelated insurer. In addition, the Department believes that the presence of significant independent customer business will enhance the financial soundness of the insurer and safeguard the plan against less-than-arm's-length transactions.

In light of the above, the Department has considered and rejected comments that would have removed any percentage of premiums test from the exemption, or that would have permitted the 50 percent test to be applied on an aggregate basis to the total premiums and annuity considerations received by all companies in an affiliated insurance group. The Department recognizes and appreciates the fact, articulated by a number of commentators, that as a result of industry tradition and state regulation, and because of premium tax considerations, small insurance companies are often established as an integral part of a larger controlled group. However, in imposing prospective condition (d), the Department is reducing to an objective test its expectation (and that of Congress, as expressed in section 408(b)(5) of the Act) that the captive insurer will be making sales to plans within the affiliated group and their employers in the ordinary course of its business as an insurance company which makes its products available, and in fact does a substantial amount of business, in the general market. Accordingly, condition (d) requires that, as a percentage of direct premiums and annuity considerations received for all lines of insurance sold by the company, no more than 50 percent be derived from sales of products covered by the exemption.

A minor change has been made to condition (d) to make clear that the premium and annuity considerations which are excluded from the numerator and denominator are only those which arise from sales to a plan which the insurance company alone maintains. Thus, premiums received by an insurance company from sales to a plan which is maintained by both the insurance company and a more than 50 percent owner of the insurance company are included in determining whether the 50 percent of premiums test has been satisfied.

The Department notes that in calculating the percentage of premiums, both the numerator and denominator of the fraction should reflect all premiums and annuity considerations paid to the insurer by the plan and by the employer maintaining the plan. This would include insurance purchased for non-plan risks.

Several commentators indicated that some employee benefit plans are "experience rated". Under this practice, premiums paid by the plan, or its sponsoring employer, for any year may subsequently be refunded based on the actual losses experienced under the plan. In accordance with requests that the prospective premiums test reflect such "return" premiums, the Department has modified condition (d) so that the total receipts in both the numerator and denominator of the fraction are to be reduced by the amount of the refund, but only in the (subsequent) year paid or credited to the plan or its sponsoring employer.

F. Reinsurance: In a footnote to the proposed class exemption, the Department and the Service indicated that the proposed relief was not intended to cover reinsurance arrangements to the extent they are prohibited transactions.9 Nevertheless, several commentators requested that the exemption be broadened to include reinsurance, or that clarification be provided as to when such a transaction is a prohibited transaction.

In Interpretive Bulletin 75-210 the Department took the position that if a plan purchases an insurance contract or policy which funds benefits through the insurer's general account, the assets in such general account are not considered to be plan assets. Therefore, a subsequent transaction involving the general asset account between a party in interest and the insurance company will not, solely because the plan has been issued such a contract or policy of insurance, be a prohibited transaction. In the above Interpretive Bulletin the Department noted, however, that if a plan purchases an insurance policy from an insurance company pursuant to an arrangement or understanding that the insurance company would make a loan to the employer maintaining the plan, that the transaction would involve a prohibited use of plan assets for the benefit of a party in interest under section 406(a)(1)(D) of the Act. Thus, it is the Department's view that if a plan purchases an insurance contract from a company that is unrelated to the employer pursuant to an agreement, arrangement or understanding, written or oral, under which it is expected that the unrelated company will subsequently reinsure all or part of the risk related to such insurance with an insurance company which is a party in interest of the plan, the purchase of the insurance contract would be a prohibited transaction. Section 406(a)(1)(D) of the Act (section 4975©(1)(D) of the Code) prohibits the direct or indirect transfer to, or use by or for the benefit of, a party in interest (or disqualified person) of any assets of the plan; section 406(b)(1) of the Act (section 4975©(1)(E) of the Code) prohibits a fiduciary from dealing with the assets of the plan in his own interest or for his own account; and section 406(b)(3) of the Act (section 4975©(1)(F) of the Code) prohibits a fiduciary from receiving any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving plan assets.

The Department has received several applications for exemption under which a plan or its employer would contract with an unrelated company for insurance, and that unrelated company would, pursuant to an arrangement or understanding, reinsure part or all of the risk with an insurance company affiliated with the employer maintaining the plan. These transactions may involve payments of one or more commissions in connection with the primary sale and placement of reinsurance, and the presence of either the insurer or reinsurer outside the purview of regulation by any of the state insurance departments. The Department continues to believe that it would not be appropriate to cover these various types of reinsurance transactions within the scope of this class exemption. Instead, affected applicants for individual exemptions will be notified that their requests will be kept open and considered based on the merits of the individual case.

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption granted under section 408(a) of the Act and section 4975©(2) of the Code does not relieve a fiduciary or other disqualified person/party in interest with respect to a plan to which the exemption is applicable from certain other provisions of the Act 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 the Act which, among other things, require a fiduciary to discharge his/her duties respecting the plan solely in the interest of the plan's participants and beneficiaries and in a prudent fashion in accordance with section 404(a)(1)(B) of the Act; nor does it affect the requirement of section 401(a) of the Code that a 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)(3) of the Act and section 4975©(1)(F) of the Code.

(3) The exemption set forth herein is supplemental to, and not in derogation of, any other provisions of the Act and the Code, including statutory 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.

(4) The class exemption is applicable to a particular transaction only if the transaction satisfies the conditions specified in the class exemption.

Exemption

In accordance with section 408(a) of the Act and section 4975©(2) of the Code, and based upon the entire record including the written comments submitted in response to the notice of May 26, 1978, the Department makes the following determinations:

(a) The class exemption set forth herein is administratively feasible;

(b) It is in the interests of plans and of their participants and beneficiaries; and

© It is protective of the rights of participants and beneficiaries of plans.

Accordingly, the following exemption is hereby granted under the authority of section 408(a) of the Act and section 4975©(2) of the Code and in accordance with the procedures set forth in ERISA Procedure 75-1.

I. Effective January 1, 1975, the restrictions of sections 406(a), 406(b) (1) and (2), and 407(a) of the Act and the taxes imposed by section 4975 (a) and (b) of the Code, by reason of section 4975©(1) (A) through (E) of the Code, shall not apply to the sale by an insurance company which is a party in interest or disqualified person with respect to an employee benefit plan, of life insurance, health insurance, annuities and contracts described in section 801(g) of the Code if the following conditions are met:

(a) The insurance company making the sale --

(1) Is a party in interest or disqualified person with respect to the plan by reason of a stock or partnership (including a joint venture) affiliation with the employer establishing or maintaining the plan that is described in section 3(14) (E) or (G) of the Act and section 4975(e)(2) (E) or (G) of the Code.

(2) Is licensed to sell insurance in at least one of the United States or in the District of Columbia, and

(3) Has obtained a Certificate of Compliance from the insurance commissioner of its domiciliary state within the 18 months prior to the date when the transaction is entered into or when such certificates were last made available by the domiciliary state, if earlier.

(b) The plan pays no more than adequate consideration for the insurance contracts or annuities.

II. Effective January 1, 1982, the restrictions of sections 406(a), 406(b) (1) and (2), and 407(a) of the Act and the taxes imposed by section 4975 (a) and (b) of the Code, by reason of section 4975©(1) (A) through (E) of the Code, shall not apply to the sale, in any taxable year, by an insurance company which is a party in interest or disqualified person with respect to an employee benefit plan, of life insurance, health insurance or annuities and contracts described in section 801(g) of the Code if the following conditions are met:

(a) The insurance company making the sale --

(1) Is a party in interest or disqualified person with respect to the plan by reason of a stock or partnership (including a joint venture) affiliation with the employer establishing or maintaining the plan that is described in section 3(14) (E) or (G) of the Act and section 4975(e)(2) (E) or (G) of the Code,

(2) Is licensed to sell insurance in at least one of the United States or in the District of Columbia,

(3) Has obtained a Certificate of Compliance from the insurance commissioner of its domiciliary state within the 18 months prior to the date when the transaction is entered into or when such certificates were last made available by the domiciliary state, if earlier, and

(4)(i) Has undergone a financial examination (within the meaning of the law of its domiciliary state) by the insurance commissioner of such state within 5 years prior to the end of the year preceding the year in which the sale occurred, or

(ii) Has undergone an examination by an independent certified public accountant for its last completed taxable year.

(b) The plan pays no more than adequate consideration for the insurance contracts or annuities.

© No commissions are paid with respect to a sale of such contracts after December 31, 1981.

(d) For taxable years of the insurance company making the sale beginning after December 31, 1981, the gross premiums and annuity considerations received in that taxable year by such insurance company for life and health insurance or annuity contracts for all employee benefit plans (and their employers) with respect to which such insurance company is a party in interest or disqualified person by reason of a relationship to such employers described in section 3(14) (E) or (G) of the Act and section 4975(e)(2) (E) or (G) of the Code do not exceed 50 percent of the gross premiums and annuity considerations received for all lines of insurance in that taxable year by such company. For purposes of this condition (d):

(1) The term "gross premiums and annuity considerations received" means the total of premiums and annuity considerations received, reduced (in both the numerator and denominator of the fraction) by experience refunds paid or credited in that taxable year by the insurer.

(2) All premiums and annuity considerations written by the insurance company that makes the sale for plans which it alone maintains are to be excluded from both the numerator and the denominator of the fraction.

Signed at Washington, D.C., this 31st day of July, 1979.

Ian D. Lanoff,

Administrator for Pension and Welfare Benefit Programs, Labor-Management Services Administration.

1 Formerly the American Mutual Insurance Alliance.

2 Exemption Application No. D-461.

3 Exemption Application No. D-391.

4 Section 408(b)(5)(B) of the Act and section 4975(d)(5)(B) of the Code.

5 PTE 77-9 would be available, for example, if the insurer is not the trustee of the plan purchasing the contracts or its administrator, or an "affiliate" of such trustee or administrator as such term is defined in that exemption.

6 The Department notes that under section 412© of the Act a plan may not acquire fidelity insurance from certain related persons, and that the Department does not have the authority under section 408(a) to provide relief from such restrictions.

7 See e.g. PTE 77-3, 42 FR 18734 (1977).

8 The Department notes that the term "sale" as used throughout the exemption, includes renewals of existing contracts. Accordingly, the prohibition on the payment of commissions will apply not only to new sales transactions that are entered into with the captive insurer after December 31, 1981, but to payments of renewal commissions after such date, as well.

9 Accordingly, individual applicants seeking coverage for reinsurance transactions were specifically notified that such transactions were not within the scope of the pending class exemption, and that their applications would be considered on an indi vidual basis. A request for a public hearing with respect to the inclusion of reinsurance in the class exemption was denied.

10 29 CFR 2509.75-2 (1975).

[Guest ak]

Janet:

Thanks so much. Really appreciate it.