Coronavirus (COVID-19) News and Resources
Coronavirus (COVID-19) Webcasts
Subscribe to Free Daily Newsletters
Post a Job

Featured Jobs

Retirement Plan Administrator

SPS
(Telecommute)

SPS logo

Retirement Plan Administrator

Steidle Pension Solutions, LLC
(Lebanon NJ)

Steidle Pension Solutions, LLC logo

Senior Plan Consultant

Jocelyn Pension Consulting
(Telecommute / San Rafael CA / Boulder CO)

Jocelyn Pension Consulting logo

Director of Regulatory Affairs

Health Plans Inc
(Westborough MA)

Health Plans Inc logo

Retirement Plan Consultant

DWC - The 401(k) Experts
(Telecommute)

DWC - The 401(k) Experts logo

Free Daily News and Jobs

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Get the BenefitsLink app LinkedIn
Twitter
Facebook
[Federal Register: April 7, 2006 (Volume 71, Number 67)]
[Notices]
[Page 17917-17920]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ap06-99]

-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application Number D-11046]


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: Adoption of Amendment to PTE 80-26.

-----------------------------------------------------------------------

SUMMARY: This document amends PTE 80-26, a class exemption that permits
parties in interest with respect to employee benefit plans to make
certain interest free loans to such plans, provided that the conditions
of the exemption are met. The amendment affects 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: Effective Date: The amendment to PTE 80-26 is effective December
15, 2004.

FOR FURTHER INFORMATION CONTACT: Christopher Motta, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, (202) 693-8540 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION: On December 15, 2004, notice was published
in the Federal Register (69 FR 75088) 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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    The amendment to PTE 80-26 adopted by this notice was proposed by
the Department 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\
---------------------------------------------------------------------------

    \2\ Section 102 of the Reorganization Plan No. 4 of 1978 (5
U.S.C. App. at 214 (2000 ed.) 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.
---------------------------------------------------------------------------

    The notice of pendency gave interested persons an opportunity to
comment or to request a hearing on the proposed amendment. The
Department received two comment letters, and no requests for a public
hearing. Upon consideration of the comments received, the Department
has determined to grant the proposed amendment, with one minor
modification. The modification and the comments are discussed below.
    For the sake of convenience, the entire text of PTE 80-26, as
amended, has been reprinted in this notice.

Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether
the regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f), the order defines a
``significant regulatory action'' as an action that is likely to result
in a rule (1) Having an annual effect on the economy of $100 million or
more, or adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.
    This amendment has been drafted and reviewed in accordance with
Executive Order 12866, section 1(b), Principles of Regulation. The
Department has determined that this amendment is not a ``significant
regulatory action'' under Executive Order 12866, section 3(f).
Accordingly, it does not require an assessment of potential costs and
benefits under section 6(a)(3) of that order.

Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public
can provide the requested data in the desired format and clearly
understand the Department's collection instruction; and that the
Department properly assesses the impact of its collection requirements
on respondents and minimizes the reporting burden (time and financial
resources) imposed on the public.
    Currently, EBSA is soliciting comments concerning the information
collection request (ICR) included in this Notice of Adoption of
Amendment to PTE 80-26 (for certain interest-free loans to employee
benefit plans). A copy of the ICR may be obtained by contacting Susan
G. Lahne, Office of Policy and Research, U.S. Department of Labor,
Employee Benefits Security Administration, 200 Constitution Avenue,
NW., Room N-5618, Washington, DC are not toll-free numbers. Comments
should be sent to the Office of Information and Regulatory Affairs,
Office of Management and Budget, Room 10235, New Executive Office
Building, Washington, DC 20503; Attention: Desk Officer for the
Employee Benefits Security

[[Page 17918]]

Administration. Although comments may be submitted through June 6, 2006
OMB requests that comments be received within 30 days of publication of
the Notice of Amendment to PTE 80-26 to ensure their consideration. The
Department and OMB are particularly interested in comments that:
     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;
     Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
     Enhance the quality, utility, and clarity of the
information to be collected; and
     Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriated
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., by
permitting electronic submission of responses.
    As proposed on December 15, 2004, the amendment to PTE 80-26 did
not contain any information collection as defined under the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA). Therefore, the
Department did not submit an information collection request (ICR) to
the Office of Management and Budget (OMB) in connection with the
proposal. In response to public comments on the proposal, the final
amendment to PTE 80-26 adopted by this notice adds a condition to
availability of the exemption that requires any loan with a duration of
more than sixty days to be made pursuant to a written loan agreement
that contains all of the material terms applicable to such loan.
    The Department believes that it is a usual and customary business
practice, generally within the business community and especially with
respect to employee benefit plans, to evidence the creation of a loan
agreement that involves an employee benefit plan as a party through a
written document that sets forth the terms of the loan. Therefore the
Department believes that the addition of this condition to the
exemption does not impose any appreciable additional paperwork burden
under the PRA. However, the Department has submitted an ICR for OMB
control number 1210-0091 to OMB in connection with the adoption of the
amendment to the PTE because the condition newly added to the exemption
constitutes an information collection within the meaning of the PRA.

Discussion of the Proposed Exemption and the Comments Received

    On December 15, 2004, the Department proposed to remove the three-
day duration limit that applied to loans engaged in under PTE 80-26 for
a purpose incidental to the ordinary operation of a plan. The
Department recognizes that broadening the scope of the exemption in
this manner would greatly benefit plans facing liquidity problems. The
Department believes that plans will be adequately protected regarding
such loans, i.e., loans for a purpose incidental to the ordinary
operation of a plan where such loans have durations that exceed three
days, to the extent the conditions of the class exemption, as amended
herein, have been met. Accordingly, the Department has determined that
the effective date of the amendment will be December 15, 2004; the date
the proposed amendment was published in the Federal Register.
    One of the commenters recommended that the class exemption
expressly require that loans with durations that exceed a certain
number of days be in writing. This commenter expressed concern that the
removal of the three-day limit without additional conditions will raise
the potential for abuse of a plan's assets.
    For example, the commenter describes a scenario in which a plan
sponsor pays certain expenses on behalf of a plan without intending to
be repaid. Years later, the plan sponsor seeks to re-characterize such
payment as a ``loan'' covered by PTE 80-26, and, thereafter, causes the
plan to ``repay'' the plan sponsor in reliance on the relief provided
by the class exemption. The commenter states that the situation
described above may arise where a plan sponsor experiences a change in
personnel, including the plan's fiduciaries, and the ``new'' plan
fiduciaries are unsure whether the payment by the plan sponsor was
originally intended to be a loan covered by PTE 80-26. According to the
commenter, it is also possible that a plan sponsor may seek to re-
characterize a payment the sponsor previously made on behalf of a plan,
notwithstanding the sponsor's full awareness that such payment was not
intended to be repaid by the plan.
    The commenter states that, in the above situations, the Department
may have difficulty demonstrating that the payments by the plan sponsor
are not loans covered by PTE 80-26. The commenter recommends that the
class exemption contain a condition expressly requiring that all loans
of extended durations be made in writing, and that such written loan
agreements exist at the time the plan enters into the loans.
    As noted in the preamble to the proposed class exemption, section
404 of ERISA requires, among other things, that a fiduciary act
prudently and discharge his or her duties respecting the plan solely in
the interest of the participants and beneficiaries of the plan.
Accordingly, a plan fiduciary would violate section 404 of ERISA if
such fiduciary transferred plan assets to the plan sponsor in the
absence of specific written proof or other objective evidence
demonstrating that the plan originally intended to enter into a loan
transaction with the plan sponsor. In this regard, a written loan
agreement executed at the time of the loan transaction and demonstrable
evidence that the plan was experiencing liquidity problems, would
alleviate the uncertainty regarding whether the parties actually
entered into a loan or other extension of credit. Of course, any
attempt to re-characterize past payments as loans after the fact would
be outside the scope of relief provided by the exemption.
    With regards to the commenter's suggestion that the Department may
have difficulty demonstrating that certain payments by a plan sponsor
are not ``loans'' covered by PTE 80-26, the Department notes that the
party seeking to take advantage of an administrative exemption, and not
the Department, has the burden of demonstrating that the conditions of
the exemption have been met. However, in light of the commenter's
concern, the Department has determined to require that loans with
durations that exceed sixty days be made pursuant to a written loan
agreement that contains all of the material terms that are applicable
to such loan. This requirement will apply prospectively to loans with
durations of 60 days or longer where such loans involve the payment of
a plan's ordinary operating expenses. Loans with durations of 60 days
or longer that are engaged in for a purpose incidental to the ordinary
operation of the plan will be subject to the requirement effective
December 15, 2004.
    Another commenter sought clarification regarding section IV(e) of
the proposed amendment.\3\ This condition provides that loans described

[[Page 17919]]

in section 408(b)(3) of ERISA or section 4975(d)(3) of the Code are not
covered by the class exemption.\4\ The commenter states that, since
section IV(e) only references sections 408(b)(3) of ERISA and
4975(d)(3) of the Code which generally refer to exemptive relief for
loans involving ESOPs, but not the regulations promulgated under those
exemptions which more narrowly define the types of ESOP loans that are
eligible for exemptive relief under those exemptions, section IV(e) may
be interpreted as precluding relief for any loan from a party in
interest to an ESOP.\5\
---------------------------------------------------------------------------

    \3\ Section IV(e) of the proposed amendment was incorrectly
identified therein as section IV(3). This error has been corrected
in this adopted amendment.
    \4\ Section 408(b)(3) of ERISA provides a statutory exemption
from the prohibitions set forth in section 406 of ERISA for ``a loan
to an employee stock ownership plan.'' Section 4975(d)(3) provides a
statutory exemption from the prohibitions set forth in section 4975
of the Code for ``any loan to a leveraged employee stock ownership
plan'' if certain conditions are met.
    \5\ See 29 CFR 2550.408b-3 and 26 CFR 54.4975-7(b). Among other
things, the regulations limit relief under the statutory exemptions
to loans that relate to the acquisition of qualifying employer
securities by an ESOP.
---------------------------------------------------------------------------

    In response to the comment, the Department has revised section
IV(e) of the proposed amendment to more accurately reflect the
Department's intent. In this regard, the Department intended that
section IV(e) of PTE 80-26 would preclude relief for loans involving
ESOPs to the extent that such loans relate to the acquisition by the
ESOP of employer securities. The Department is therefore revising
section IV(e) of PTE 80-26 to provide that loans described in section
408(b)(3) of ERISA and the regulations promulgated thereunder, or
section 4975(d)(3) of the Code and the regulations promulgated
thereunder, are not covered by the class 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) In accordance with section 408(a) of ERISA and section
4975(c)(2) of the Code, the Department makes the following
determinations:
    (i) The amendment set forth herein is administratively feasible,
    (ii) The amendment set forth herein is in the interests of the plan
and its participants and beneficiaries,
    (iii) The amendment set forth herein is protective of the rights of
participants and beneficiaries of the plan;
    (4) The amendment is applicable to a particular transaction only if
the transaction satisfies the conditions specified in the exemption;
and
    (5) The amendment 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.

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 amends PTE 80-
26 as set forth below:

Section I. Retroactive General Exemption

    Effective January 1, 1975 until December 14, 2004 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
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

[[Page 17920]]

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

    Effective as of December 15, 2004, 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;
    (e) The loan is not described in section 408(b)(3) of ERISA and the
regulations promulgated thereunder (29 CFR 2550.408b-3) or section
4975(d)(3) of the Code and the regulations promulgated thereunder (26
CFR 54.4975-7(b)); and
    (f)(1) Any loan described in section IV(b)(1) that is entered into
on or after April 7, 2006 and that has a term of 60 days or longer must
be made pursuant to a written loan agreement that contains all of the
material terms of such loan.
    (2) Any loan described in (b)(2) of this paragraph that is entered
into for a term of 60 days or longer must be made pursuant to a written
loan agreement that contains all of the material terms of such loan.

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 3rd day of April, 2006.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. E6-5075 Filed 4-6-06; 8:45 am]

BILLING CODE 4510-29-P
© 2020 BenefitsLink.com, Inc.