Table of Contents
Reference
Interagency Agreement to Refer Violations of ERISA to the Department of Labor
ERISA (Statute)
Section 3 Definitions (Selected)
Section 206 [Excerpt] Pledging by Participant of Vested Interest
Section 401 Coverage
Section 402 Establishment of Plan
Section 403 Establishment of Trust
Section 404 Fiduciary Duties
Section 405 Co-Fiduciary Liability
Section 406 Prohibited Transactions
Section 407 Investment in Sponsor Securities and Real Estate
Section 408 Statutory Exemptions from Prohibited Transactions
Section 409 Liability for Breach of Fiduciary Duty
Section 410 Exculpatory Provisions
Section 411 Prohibition Against Certain Persons Holding Certain Positions
Section 412 Bonding of Fiduciaries
Section 413 Limitation on Actions
Section 502 Civil Money Penalties
Summary of ERISA Regulations, Opinions, and Court Decisions
Section 3 Definitions (Selected)
Section 4 Plans Covered
Section 404 Fiduciary Duties
Section 405 Co-Fiduciary Liability
Section 406 Prohibited Transactions
Section 407 Investment in Sponsor Securities and Real Estate
Section 408 Statutory Exemptions from Prohibited Transactions
Section 410 Exculpatory Provisions
Section 412 Bonding of Fiduciaries
Internal Revenue Code
72(p) Loans to Plan Participants Treated as Distributions
72(p)-1 Participant Loans Treated as Distributions – IRS Guidelines
408(h) Custodial Accounts
408(m) Investment in Collectibles by IRA and Self-Directed Accounts
408(q) Deemed Individual Retirement Accounts
409(e) Qualifications for Tax Credit ESOPs – Voting Rights
417 Special Rules for Survivor Annuity Requirements
4975 Tax on Prohibited Transactions
Regulations
54.4975-11 ESOP Requirements
54.4975-12 "Qualified Employer Security" Defined
2510.3-101 Plan Assets (Pension and Welfare Benefits Administration Regulation)
2520.103-5 CIF Reports to Plan Administrators
2550.404a-1 Investment Duties (Prudence Regulation)
2550.404a-2 Safe Harbor for Automatic Rollovers
2550.404b-1 Indicia of Ownership
2550.404c-1 ERISA Section 404(c) Plans
2550.404c-5 Fiduciary Relief for Investments in Qualified Default Investment Alternatives
2550 Default Investment Alternatives Under Participant Directed Individual Account Plans
29 CFR Parts 2550 and 2578 Amendments to Safe Harbor
Cross Trading Statutory Exemption
DOL - Delinquent Filer Voluntary Compliance Program
Employer Securities and Real Property
2550.407a-1 General
2550.407a-2 Employer Securities and Real Property - Acquisition
2550.407d-5 "Qualifying" Employer Security - Defined
2550.407d-6 "Employee Stock Ownership Plan" - Defined
2550.408b-1 Loans to Plan Participants and Beneficiaries
2550.408b-2 Services or Office Space Class Exemption
2550.408b-3 Loans to Employee Stock Ownership Plans
2550.408b-4 Investment in Own-Bank Interest-Bearing Deposits
2550.408b-6 Ancillary Services by Banks or Similar Financial Institutions
2550.408c-2 Compensation for Services
2550.408e Qualifying Employer Securities and Real Estate
2570.30 - 52 Individual and Class Prohibited Transaction Exemption Requests (Replaces ERISA Procedure 75-1)
Explanatory Preamble
IRS Revenue Rulings
50-60 Valuation of Non-Traded Assets
Revenue Bulletin 2003-37
Revenue Bulletin 2003-13
Roth and Deemed Individual Retirement Account Participation in Group Trusts Described in Revenue Ruling 81-100
IRS Self-Correction Program Frequently Asked Questions
IRS Voluntary Correction Program Frequently Asked Questions
IRS Revenue Ruling Notice 2007-6
IRS Revenue Ruling Notice 2007-7
IRS Interpretive Letter
Prohibited Transaction Class Exemptions
75-1 Securities Transactions
77-3 Investment in Mutual Funds by In-House Employee Benefit Plans
77-4 Investment in Advised or Affiliated Mutual Funds
80-26 Interest-Free Loans (Including Overdrafts)
80-50 Collective Investment Funds
80-83 Purchase of Securities Where Issuer May Use Proceeds To Reduce or Retire Indebtedness To Parties in Interest
81-6 Securities Lending
81-8 Short-term Investments & Repurchase Agreements
82-63 Securities Lending Compensation
82-87 Residential Mortgage Loans
84-14 Qualified Professional Asset Managers (QPAMs)
86-128 Securities Transactions Involving Employee Benefit Plans and Broker-Dealers
91-38 Bank Collective Investment Funds
91-55 American Eagle Gold Coins Permitted as IRA Investment
93-33 Receipt of Services by Individuals for Whose Benefit IRAs or Retirement Plans for Self-Employed Individuals are Established
94-20 Foreign Exchange
96-23 In-House Professional Asset Managers
97-11 Relationship Brokerage
97-41 Collective Investment Fund Conversion Transactions
98-54 Foreign Exchange Transactions Executed Pursuant to Standing Instructions
2000-14 Amendment to PTE 80-26 for Certain Interest Free Loans to Employee Benefit Plans
2002-12 Cross-Trading of Securities
2002-13 Amendment to Clarify the Term "Plan"
2002-51 Voluntary Fiduciary Correction Program
2003-39 Release of Claims and Extenstions of Credit in Connection with Litigation
2004-16 Mandatory Distributions (108KB PDF file - PDF Help)
2006-06 Abandoned Individual Account Plans
2006-16 Loans of Securities by Plans
Interpretive Bulletins
75-2 Interpretive Bulletins Relating to the Employee Retirement Income Security Act of 1974
75-3 Interpretive bulletin relating to investments by employee benefit plans in securities of registered investment companies
75-4 Interpretive bulletin relating to indemnification of fiduciaries
75-6 Interpretive bulletin relating to section 408(c)(2) of the Employee Retirement Income Security Act of 1974
75-8 Questions and answers relating to fiduciary responsibility under the Employee Retirement Income Security Act of 1974
94-1 ETIs: Economically Targeted Investments (Social Investing)
94-2 Proxy Voting and Investment Policies
94-3 In-Kind Contributions to Plans
95-1 Interpretive bulletin relating to the fiduciary standard under ERISA when selecting an annuity provider
96-1 Participant Investment Education for 404(c) Individual Account Plans
Technical Bulletins
86-1 Soft Dollars and Directed Commissions for Securities Transactions
Advisory Opinions/Individual Exemptions
77-46 Diversification Applicability to Insured and Uninsured Deposits
79-49 Payment of Fiduciary Fee to Bank Sponsor of Plan
80-OCC Investment in Fiduciary Bank/Holding Company Securities
85-36A Loans Intended to Benefit Union Members/Employers
86-FRB Cash Sweeps and Related Fees ("Plotkin Letter")
88-02A Cash Sweeps for Non-Discretionary Accounts into Non-Affiliated Mutual Funds
88-09A Investment in Fiduciary Bank/BHC Treasury Stock
88-18A Self-Directed IRA Loans to Company Where IRA Grantor/Beneficiary is Insider
88-28 Investment in Fiduciary Bank/BHC Stock in Initial Public Offering
89-03 Self-Directed IRA Purchases of Employer Stock from Employer
92-23A Investment in Fiduciary Bank/BHC Stock
93-13A Investment in Affiliated Mutual Funds
93-24A Float Management
93-26A Investment in Affiliated Mutual Funds by IRA and Keogh Accounts
94-41A Escheating
94-OCC Collective Investment Fund Conversions to Mutual Funds
96-OCC Investments in Derivatives
97-15A Acceptance of Mutual Fund 12b-1 Fees; Letter to Frost National Bank; Discretionary and Non-Discretionary Accounts
97-16A Acceptance of Mutual Fund 12b-1 Fees; Letter to Aetna Life Insurance and Annuity Company; Non-Discretionary Accounts
98-06A Investment of In-House Employee Benefit Plans into Proprietary Mutual Funds
1999-03A Purchase of Mortgage-Backed Securities Representing Interests in a Trust Fund for which an Affliate of the Fiduciary Serves as a Sub-Servicer
1999-05A Application of Plan Assets Regulation to Certain Mortgage Pool Certificates Offered by Freddie Mac
1999-13A Treatment of QDROs Believed to be Questionable
2000-10A Whether allowing the owner of an IRA to direct the IRA to invest in a limited partnership, in which relatives and the IRA owner in his individual capacity are partners, will violate section 4975 of the Code
2001-01A The application of Title I of ERISA to the payment by plans of expenses relating to tax-qualification
2001-09A How Financial Services Firms Can Provide Asset Allocation Advice
2001-10A Application of ERISA Secs. 408(b)(2) and 408(b)(6) to the provision of trustee services by Laurel Trust Company
2002-04A Application of Sec. 408(e) of ERISA to certain transactions between a plan and various personal trusts and estates
2002-05A Whether the prohibition in PTE 77-4 (42 FR 18732, April 8, 1977) on sales commission payments would apply to commissions paid by a plan to an independent broker
2002-08A Whether indemnification and limitation of liability provisions in a plan's service provider contract would violate the fiduciary provisions of ERISA
2002-14A Guidance concerning the selection of annuity providers in connection with distributions
2003-02A Regarding the application of ERISA to the provision of overdraft protection services
2003-09A Whether a trust company’s receipt of 12b-1 and subtransfer fees from mutual funds
2003-11A Whether delivery of a Profile (as described in Rule 498 under the Securities Act of 1933)
2003-15A Whether a limited partnership in which employee benefit plans invest would be deemed a party in interest with respect to the plans
2004-02A Time and Order of Issuance of Domestic Relations Orders
2004-05A Whether the execution of a securities transaction between a plan and party in interest through an alternative trading system
2004-7A Non-depository, state chartered trust company
2004-09A Concerning the application of the prohibited transaction provisions under section 4975(c) of the IRC
2005-04A Whether a plan may invest in a mutual fund
2005-09A Whether in-kind investments in a bank collective investment fund are covered by ERISA section 408(b)(8)
2006-01A Whether a lease by a company (LLC) 49% owned by an IRA to a company (S)
2006-06A Whether the prohibition on the payment of sales commissions in PTE 77-3 applies to the payment of 12b-1 Fees
2006-08A Whether a fiduciary of a defined benefit plan may, consistent with the requirements of section 404 of ERISA
2006-09A This advisory opinion concludes that a self-directed IRA‘s investment in notes of a corporation
2007-01A Whether transactions between a broker-dealer and a separate account managed by a QPAM
2007-02A Whether the 10% test applicable to pooled investment vehicles
DOL Field Assistance Bulletins
2002-01 ESOP Refinance Transactions
2002-02 Plan Amendments Made by Multiemployer Trustees
2002-03 Disclosure and Other Obligations Relating to "Float"
2003-01 Participant Loans to Corporate Directors and Officers
2003-02 Application of Participant Contribution Requirements to Multiemployer Defined Contribution Pension Plans
2003-03 Allocation of Expenses in a Defined Contribution Plan
2004-01 Health Savings Accounts
2004-02 Fiduciary Duties and Missing Participants in Terminated Defined Contribution Plans
2004-03 Fiduciary Responsibilities of Directed Trustees
2006-01 The Distribution to Plans of Settlement Proceeds Relating to Late Trading and Market Timing
2006-02 Health Savings Accounts - Q&As
2006-03 Periodic Benefit Statements - Pension Protection Act of 2006
2007-01 Statutory Exemption for Investment Advice
2007-02 ERISA Coverage of IRC §403(b) Tax-Sheltered Annuity Programs
2007-03 Periodic Pension Benefit Statements For Non-Participant Directed Individual Account Plans
2007-04 Supplemental health insurance coverage as excepted benefits under HIPAA and related legislation excepted benefits under sections 732(c)(3) and 733(c)(4) of ERISA?
2008-01 Fiduciary Responsibility for Collection of Delinquent Contributions
DOL Interpretive Letter
2002-01 Receipt of Fees from Mutual Fund Distributors and Investment Advisors
ERISA Procedures
76-1 Advisory Opinion Requests: Establishes procedures for requesting ERISA opinions from Labor Department
Voluntary Correction Programs
Voluntary Fiduciary Correction Program FAQs
Participant Notice Voluntary Correction Program
Prohibited Transaction Class Exemption 2002-51
Publications
794 IRS Determination Letters
Example - IRS Determination Letter
US Treasury Notice 2004-8 - Abusive Roth IRA Transaction
Miscellaneous Laws
Pension Protection Act of 2006
Economic Growth and Tax Relief Reconciliation Act of 2001
Tax Relief and Health Care Act of 2006
Medicare Prescription Drug Improvement Act of 2003
Reference |
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Interagency Agreement to Refer Violations of ERISA to the Department of LaborInteragency Referral Agreement for ERISA Violations INTERAGENCY AGREEMENT Procedures for Cooperation Between the Federal Financial Institution Regulatory Agencies and the Department of Labor in the Enforcement of the Employee Retirement Income Security Act of 1974 The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency and Office of Thrift Supervision (the federal financial institution regulatory agencies) as part of their supervision of the institutions regulated by them, conduct examinations and perform other functions which occasionally disclose possible violations of the Employee Retirement Income Security Act of 1974 (ERISA). The Department of Labor (DOL) is charged with the administration, interpretation and enforcement of standards of conduct and responsibility of fiduciaries of employee benefit plans under ERISA. Section 3004(b) of ERISA provides that the Secretary of Labor may utilize the facilities or services of any department, agency, or establishment of the United States, with the lawful consent of such department, agency, or establishment, and each department, agency or establishment of the United States is authorized and directed to cooperate with the Secretary of Labor and, to the extent permitted by law, to provide such information and facilities as the Secretary may request for his assistance in the performance of his functions under ERISA. This agreement is executed pursuant to that authority.
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Section 3 Definitions (Selected)ERISA Section 3 For purposes of this subchapter:
Editor's Note: Also see "Disqualified Person" definition, Internal Revenue Code § 4975(e)(2). The Secretary, after consultation and coordination with the Secretary of the Treasury, may by regulation prescribe a percentage lower than 50 percent for subparagraph (E) and (G) and lower than 10 percent for subparagraph (H) or (I). The Secretary may prescribe regulations for determining the ownership (direct or indirect) of profits and beneficial interests, and the manner in which indirect stock holdings are taken into account. Any person who is a party in interest with respect to a plan to which a trust described in section 501(c)(22) of Title 26 is permitted to make payments under section 1403 of this title shall be treated as a party in interest with respect to such trust. Editor's Note: Also see "Family Member" definition, Internal Revenue Code § 4975(e)(6). Editor's Note: Also see "Fiduciary" definition, Internal Revenue Code § 4975(e)(3). (B) If any money or other property of an employee benefit plan is invested in securities issued by an investment company registered under the Investment Company Act of 1940 [15 USCA 80a-1 et seq.], such investment shall not by itself cause such investment company or such investment company's investment adviser or principal underwriter to be deemed to be a fiduciary or a party in interest as those terms are defined in this subchapter, except insofar as such investment company or its investment adviser or principal underwriter acts in connection with an employee benefit plan covering employees of the investment company, the investment adviser, or its principal underwriter. Nothing contained in this subparagraph shall limit the duties imposed on such investment company, investment adviser, or principal underwriter by any other law. For purposes of this paragraph, a qualified disability benefit is a disability benefit provided by a plan which does not exceed the benefit which would be provided for the participant if he separated from the service at normal retirement age. For purposes of this paragraph, the early retirement benefit under a plan shall be determined without regard to any benefit under the plan which the Secretary of the Treasury finds to be a benefit described in section 1054(b)(1)(G) of this title. The accrued benefit of an employee shall not be less than the amount determined under section 1054(c)(2)(B) of this title with respect to the employee's accumulated contribution. (B) The term "church plan" does not include a plan - (C) For purposes of this paragraph - (D) (i) If a plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501 of Title 26 fails to meet one or more of the requirements of this paragraph and corrects its failure to meet such requirements within the correction period, the plan shall be deemed to meet the requirements of this paragraph for the year in which the correction was made and for all prior years. (ii) If a correction is not made within the correction period, the plan shall be deemed not to meet the requirements of this paragraph beginning with the date on which the earliest failure to meet one or more of such requirements occurred. (iii) For purposes of this subparagraph, the term "correction period" means - (B) For purposes of this paragraph - The term "single employer plan" means a plan which is not a multiemployer plan. Section 206 [Excerpt] Pledging by Participant of Vested InterestERISA Section 206 In accordance with section 1056(d)(1)-(2) of this title:
Section 401 CoverageERISA Section 401
402 Establishment of PlanERISA Section 402
403 Establishment of TrustERISA Section 403
Except as provided in subsection (b) of this section, all assets of an employee benefit plan shall be held in trust by one or more trustees. Such trustee or trustees shall be either named in the trust instrument or in the plan instrument described in section 1102(a) of this title or appointed by a person who is a named fiduciary, and upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan, except to the extent that - 404 Fiduciary DutiesERISA Section 404
Except as authorized by the Secretary by regulation, no fiduciary may maintain the indicia of ownership of any assets of a plan outside the jurisdiction of the district courts of the United States. In the case of a pension plan which provides for individual accounts and permits a participant or beneficiary to exercise control over the assets in his account, if a participant or beneficiary exercises control over the assets in his account (as determined under regulations of the Secretary) - 405 Co-Fiduciary LiabilityERISA Section 405
In addition to any liability which he may have under any other provision of this part, a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances: (B) No trustee shall be liable under this subsection for following instructions referred to in section 1103(a)(1) of this title. 406 Prohibited TransactionsERISA Section 406 Editor's Note: Also see Prohibited Transaction provisions of Internal Revenue Code § 4975(c)(1).
A transfer of real or personal property by a party in interest to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes or if it is subject to a mortgage or similar lien which a party-in-interest placed on the property within the 10-year period ending on the date of the transfer. 407 10 Percent Limitation on Employer Securities and Employer Real PropertyERISA Section 407
Editor's Note: See DOL ERISA Regulation 2550.408e: Qualifying Employer Securities and Real Estate. (B) Subparagraph (A) of this paragraph shall not apply to any plan which on any date after December 31, 1974; and before January 1, 1985, did not hold employer securities or employer real property (or both) the aggregate fair market value of which determined on such date exceeded 10 percent of the greater of - (B) Not later than December 31, 1976, the Secretary shall prescribe regulations which shall have the effect of requiring that a plan divest itself of 50 percent of the holdings of employer securities and employer real property which the plan would be required to divest before January 1, 1985, under paragraph (2) or subsection (c) of this section (whichever is applicable). For purposes of this section - (B) Notwithstanding subparagraph (A), a plan shall be treated as an eligible individual account plan with respect to the acquisition or holding of qualifying employer real property or qualifying employer securities only if such plan explicitly provides for acquisition and holding of qualifying employer securities or qualifying employer real property (as the case may be). In the case of a plan in existence on September 2, 1974, this subparagraph shall not take effect until January 1, 1976. (C) The term "eligible individual account plan" does not include any individual account plan the benefits of which are taken into account in determining the benefits payable to a participant under any defined benefit plan. After December 17, 1987, in the case of a plan other than an eligible individual account plan, an employer security described in subparagraph (A) or (C) shall be considered a qualifying employer security only if such employer security satisfies the requirements of subsection (f)(1) of this section. Editor's Note: Also see "ESOP" definition, Internal Revenue Code § 4975(e)(7). 408 Statutory Exemptions from Prohibited TransactionsERISA Section 408
The Secretary shall establish an exemption procedure for purposes of this subsection. Pursuant to such procedure, he may grant a conditional or unconditional exemption of any fiduciary or transaction, or class of fiduciaries or transactions, from all or part of the restrictions imposed by sections 1106 and 1107(a) of this title. Action under this subsection may be taken only after consultation and coordination with the Secretary of the Treasury. An exemption granted under this section shall not relieve a fiduciary from any other applicable provision of this chapter. The Secretary may not grant an exemption under this subsection unless he finds that such exemption is - Editor's Note: See DOL Regulation 2570.30 through .52, which replaced DOL ERISA Procedure 75-1. Before granting an exemption under this subsection from section 1106(a) or 1107(a) of this title, the Secretary shall publish notice in the Federal Register of the pendency of the exemption, shall require that adequate notice be given to interested persons, and shall afford interested persons opportunity to present views. The Secretary may not grant an exemption under this subsection from section 1106(b) of this title unless he affords an opportunity for a hearing and makes a determination on the record with respect to the findings required by paragraphs (1), (2), and (3) of this subsection. Editor's Note: Also see participant loan provisions of Internal Revenue Code § 4975(d)(1) and DOL Regulation 2550.408b-1. Editor's Note: Also see ancillary services provisions of Internal Revenue Code § 4975(d)(2). Editor's Note: Also see ESOP loan provisions of Internal Revenue Code § 4975(d)(3). If the plan gives collateral to a party in interest for such loan, such collateral may consist only of qualifying employer securities (as defined in section 1107(d)(5) of this title). Editor's Note: Also see deposit provisions of Internal Revenue Code § 4975(d)(4). Editor's Note: Also see bank ancillary services provisions of Internal Revenue Code § 4975(d)(6). Such ancillary services shall not be provided at more than reasonable compensation. Editor's Note: Also see collective investment fund provisions of Internal Revenue Code § 4975(d)(8). Sections 1106 and 1107 of this title shall not apply to the acquisition or sale by a plan of qualifying employer securities (as defined in section 1107(d)(5) of this title) or acquisition, sale or lease by a plan of qualifying employer real property (as defined in section 1107(d)(4) of this title) - 409 Liability for Breach of Fiduciary DutyERISA Section 409
410 Exculpatory ProvisionsERISA Section 410
411 Prohibition Against Certain Persons Holding Certain PositionsERISA Section 411
Notwithstanding the preceding provisions of this subsection, no corporation or partnership will be precluded from acting as an administrator, fiduciary, officer, trustee, custodian, counsel, agent, or employee of any employee benefit plan or as a consultant to any employee benefit plan without a notice, hearing, and determination by such court that such service would be inconsistent with the intention of this section. 412 Bonding of FiduciariesERISA Section 412
The amount of such bond shall be fixed at the beginning of each fiscal year of the plan. Such amount shall be not less than 10 per centum of the amount of funds handled. In no case shall such bond be less than $1,000 nor more than $500,000, except in the case of a plan that holds employer securities, in which case the maximum amount of such bond shall be $1,000,000. The Secretary, however, after due notice and opportunity for hearing to all interested parties, and after consideration of the record, may prescribe an amount in excess of $500,000, subject to the 10 per centum limitation of the preceding sentence. For purposes of fixing the amount of such bond, the amount of funds handled shall be determined by the funds handled by the person, group, or class to be covered by such bond and by their predecessor or predecessors, if any, during the preceding reporting year, or if the plan has no preceding reporting year, the amount of funds to be handled during the current reporting year by such person, group, or class, estimated as provided in regulations of the Secretary. Such bond shall provide protection to the plan against loss by reason of acts of fraud or dishonesty on the part of the plan official, directly or through connivance with others. Any bond shall have as surety thereon a corporate surety company which is an acceptable surety on Federal bonds under authority granted by the Secretary of the Treasury pursuant to sections 9304-9308 of Title 31. Any bond shall be in a form or of a type approved by the Secretary, including individual bonds or schedule of blanket forms of bonds which cover a group or class. Nothing in any other provision of law shall require any person, required to be bonded as provided in subsection (a) of this section because he handles funds or other property of an employee benefit plan, to be bonded insofar as the handling by such person of the funds or other property of such plan is concerned. When, in the opinion of the Secretary, the administrator of a plan offers adequate evidence of the financial responsibility of the plan, or that other bonding arrangements would provide adequate protection of the beneficiaries and participants, he may exempt such plan from the requirements of this section. 413 Limitation on ActionsERISA Section 413 No action may be commenced under this subchapter with respect to a fiduciary's breach of any responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of -
502 Civil Money PenaltiesERISA Section 502
the Secretary shall assess a civil penalty against such fiduciary or other person in an amount equal to 20 percent of the applicable recovery amount.
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Section 3 Definitions (Selected)ERISA Section 3 Section-by-Section Interpretations Regulations, Advisory Opinions, Court Cases, Opinion Letters,and Class Exemptions
10-27-94
See the discussion of the term "party in interest" at page 323 of the Congressional Conference Report. [Plans] Two or more multi-employer plans or multiple employer plans are not parties in interest or disqualified persons with respect to each other merely because they are maintained by the same plan sponsors. However, a multi-employer plan or a multiple employer plan may be a party in interest or a disqualified person with respect to another multiemployer plan or multiple employer plan for other reasons (for example, one plan providing services to another). Final PTE 76-1; AO 77-47.
The Congressional Conference Report does not discuss the term "relative." The brother of a fiduciary is not a relative under Section 3(15) and, therefore, is not a party in interest under Section 3(14)(F). AO 77-05.
The Congressional Conference Report does not discuss the definition of the term "adequate consideration." DOL ERISA Regulation 2510.3-18(b) was proposed in 1988 but has not yet been adopted. It provided guidance on how thinly-traded securities should be valued.
See the discussion of the term "fiduciary" at page 323 of the Congressional Conference Report.
See coverage of this provision on pages 296-297 of the Congressional Conference Report. The principles of Section 3(21)(B) are restated in IB 75-3, which also states that if an investment company, its investment adviser or its principal underwriter is a fiduciary or party in interest for a reason other than the investment in the securities of the investment company, such a person remains a fiduciary or party in interest regardless of Section 3(21)(B).
Page 302 of the Congressional Conference Report discusses the term investment manager. Section 4 Plans Covered
These provisions are discussed on pages 255-256 of the Congressional Conference Report. Section 404 Fiduciary Duties
All the fiduciary responsibilities imposed by Section 404(a)(1) are discussed at pages 302-305 of the Congressional Conference Report. (Friend v. Sanwa Bank California, CA 9, No. 92-55641, 9-13-94).
Investments in collectibles are generally prohibited by Section 408(m) of the Internal Revenue Code and PTE 91-55. The safe harbor rule requires a fiduciary in connection with any particular investment or investment course of action - The court evaluated the reasonableness of the trustees' actions under the standard set by the U.S. Supreme Court, in the Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101 (1989) case. Reasonableness is judged by whether: Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995).
This provision is discussed on page 317 of the Congressional Conference Report.
Page 306 of the Congressional Conference Report explains this provision. Refer to DOL ERISA Regulation 2550.404b-1.
This provision is explained on pages 305-306 of the Congressional Conference Report. See DOL ERISA Regulation 404c-1, which exempts fiduciaries from certain ERISA liability if plans meet certain conditions and participants direct their own investments. The courts ruled that (1) the duty of prudent inquiry may have been breached by total reliance on insurance rating services, (2) plan fiduciaries did not release material information to plan participants, (3) the participants' control over their investments may release the fiduciaries from investment liability, and (4) the case was remanded back to the District Court so plan participants may pursue their claims [3rd Circuit Court of Appeals, In Re Unisys Savings Plan Litigation (Meinhardt v. Unisys Corp.), 74 F.3d 420 (3d. Cir. 1996)]. Section 405 Co-Fiduciary Duties
Pages 299-300 of the Congressional Conference Report discuss co-fiduciary liability provisions.
The allocation of trustee duties are discussed on pages 300-301 of the Congressional Conference Report.
General fiduciary duty allocation provisions are covered on page 302 of the Congressional Conference Report.
Investment manager appointment provisions are covered on pages -301-302 of the Congressional Conference Report. Section 406 Prohibited Transactions
Investments in collectibles are generally prohibited by Section 408(m) of the Internal Revenue Code and PTE 91-55. These prohibited transaction provisions are discussed on pages 306-309 and 316-320 of the Congressional Conference Report. DOL ERISA Regulation 2510.3-101 defines plan assets. Section 406 provides that a transfer of real or personal property by a party in interest to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or a lien that the plan assumes or it is subject to a mortgage or similar lien that a party in interest placed on the property within the ten year period ending on the date of the transfer. The transfer of an option to purchase a condominium by a party in interest to the plan followed by the exercise of the option by the plan may also constitute a violation of Section 406(a)(1)(A). AO 81-69A. However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1), and 406(b)(2) for the investment of plan assets in the deposits of certificates of deposit of a bank that is a plan fiduciary or party in interest, if the requirements of DOL ERISA Regulations Section 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the banks in which deposits may be made. The specifications may be made in the plan by amendment retroactive to November 1, 1977. AO 79-25.
The prohibited transaction provisions are discussed on pages 306-309 and 316-320 of the Congressional Conference Report.
This prohibition is covered on page 309 of the Congressional Conference Report. No regulations have been issued yet. However, the regulations under Section 408(b)(2) amplify this prohibition. Where a firm is an investment manager to individual employee benefit plans, the initial appointment of that firm as investment manager of a master trust and/or trustees of the master trust by independent plan fiduciaries would not cause the investment manager or trustees to violate Section 406(b)(1) or (2) as long as those persons exercise none of the authority, control or responsibility that makes them fiduciaries to cause the plan to make such appointments. However, the potential for a prohibited act of self-dealing in violation of ERISA Section 406(b)(1) may be prospectively avoided through the careful application, in effect as well as in form, of Example (7) of ERISA Regulations Section 2550.408(b)-2(f) (for example, the trustee must physically absent himself from all consideration of the matter and cannot any of his authority or control to influence the plan's decision.) WSB 79-20. The Department of Labor ruled that the receipt of brokerage commissions by a plan fiduciary from a transaction involving assets held by the fiduciary as agent for the plan would not constitute a violation of ERISA if the fiduciary had no right, title or interest in the proceeds passed to the fiduciary, the commissions were returned to the plan in the ordinary course of business, and the fiduciary does not benefit in any manner from the holding of the money. AO 81-90A. However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1) and 406(b)(2) for the investment of plan assets in the deposits or certificates of deposit of a bank that is a plan fiduciary or party in interest, if the requirements of ERISA Regulations Section 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the banks in which deposits may be made. The specifications may be made to the plan by amendment retroactive to November 1, 1977. AO 79-25. Moreover, it does not appear that the manager would be acting on behalf of or representing a person whose interests are adverse to the plan merely because it enters into an incentive fee arrangement. However, the Department notes that incentive fee arrangements could, under certain facts and circumstances, violate both Sections 406(a) and 406(b), as well as Section 404(a). Thus, the plan fiduciary must act prudently in deciding to enter into an incentive compensation arrangement with an investment manager, as well as the negotiation of the specific formula under which the compensation will be paid. The Department's position is that the fiduciary, prior to a decision to enter into an incentive compensation arrangement, must fully understand the compensation formula and the risks associated with this manner of compensation and have all relevant information pertaining thereto available to it. Further, the plan fiduciary must be capable of periodically monitoring the actions taken by the manager in the performance of its investment duties. AO 86-20A; accord AO 86-21A.
Page 309 of the Congressional Conference Report covers the above provision. No regulations have been issued yet. However, the regulations under Section 408(b)(2) and two prohibited transaction class exemptions amplify this prohibition. General Discretionary Rule - An ERISA plan may not invest in the stock of a fiduciary bank if the bank has discretion over the transaction. The discretionary retention of such stock would also be prohibited. Non-discretionary purchases, sales, and retentions are permitted. DOL notes the duty of undivided loyalty owed under § 406(b), but the conflict of interest which may occur if a sale of bank stock would be in the best interests of a plan, but such a sale (or the news of such a sale) might lower the price of the bank's stock. See 1980 letter from DOL to OCC. However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1) and 406(b)(2) for the investment of plan assets in the deposits or certificates of deposit of a bank that is a plan fiduciary or party in interest if the requirements of ERISA Regulations Section 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the banks in which deposits may be made. The specifications may be made to the plan by amendment retroactive to November 1, 1977. AO 79-25. Further, the mere selection of the manager to provide investment management services to a plan where the payment of compensation for such services is to be made by the plan sponsor receiving such services would not constitute a per se violation of Section 406(b)(1), but such violation could occur in the course of the committee's deliberations to invest in the fund and the concomitant retention of the plan manager. Accordingly, a ruling that the arrangement is exempt from Section 406(b)(1) cannot be made. Generally, a fiduciary's decision to retain an affiliate service provider whose fees will be paid by the plan sponsor will not involve an adversity of interest as contemplated by Section 406(b)(2) of the act. If, for example, a fiduciary of the plan, in negotiating a service contract on behalf of the plan, also acts on behalf of a person and causes that person to benefit from such a decision at the expense of any kind to the plan, the decision to retain the service provider would result in a violation of Section 406(b)(2). Accordingly, the decision to retain the manager to service the plan investments in the fund would not, in itself, constitute a violation of Section 406(b)(2); but because it is inherently factual in nature, no opinions can be rendered thereon. AO 83-44A. The court noted that under Section 408(c)(3), a plan trustee can also serve as the director of an employer association and perform all of the duties required of a person holding each of these positions. The court also indicated that, where a trustee acts pursuant to Section 405(a)(3) to remedy a breach of fiduciary duty that such trustee believes to have been committed by another plan fiduciary, the trustee is not acting in violation of Section 406(b)(2) regardless of the trustee's motivation. Curren v. Freitag, 432 F.Supp. 668 (S.D.Ill. 1977). See also N.L.R.B. v. Construction and General Laborers Union Local 110, 577 F.2d 16 (8th Cir. 1978), cert. denied, 439 U.S. 1070 (1979) (union trustee and secretary-treasurer of union).
The above section is explained on page 309 of the Congressional Conference Report. No regulations have been issued yet. However, the regulations under Section 408(b)(2) amplify this prohibition.
This provision is explained on page 308 of the Congressional Conference Report. Section 407 Investment in Sponsor Securities and Real Estate
Pages 316-320 of the Congressional Conference Report explains the employer security and real property provisions.
Pages 316-320 of the Congressional Conference Report explains this employer security and real property provision.
Pages 316-320 of the Congressional Conference Report explains the employer security and real property provisions.
Pages 316-320 of the Congressional Conference Report explain the employer security and real property provisions. [Bonds] A plan's holding of debentures issued by an employer may constitute a loan or extension of credit to the employer, which, if the conditions of Section 414(c)(1) are met, would be exempt until June 30, 1984 from the restrictions of Section 407(a). WSB 79-69.
Pages 316-320 of the Congressional Conference Report explains the above employer security and real property provision.
Pages 316-320 of the Congressional Conference Report explain the employer security and real property provisions.
Pages 316-320 of the Congressional Conference Report explain the definition of the term employer security.
Pages 316-320 of the Congressional Conference Report explain the definition of the term employer real property.
The term eligible individual account plan is covered at pages 316-320 of the Congressional Conference Report.
Pages 316-320 of the Congressional Conference Report explain the definition of the term qualifying employer real property.
Pages 316-320 of the Congressional Conference Report explain the definition of the term qualifying employer security. DOL ERISA Regulation 2550.407d-5 merely restates the statutory provisions.
The term ESOP is covered at pages 316-320 of the Congressional Conference Report. Refer to DOL ERISA Regulation 2550.407d-6. These regulations contain several requirements relating to ESOPs. An ESOP must also meet such other requirements as the Secretary of the Treasury may prescribe by regulation under Section 4975(e)(7) of the Internal Revenue Code.
"Affiliate" is discussed on pages 316-320 of the Congressional Conference Report.
The above provision is covered at pages 316-320 of the Congressional Conference Report.
These employer security provisions are discussed at pages 316-320 the Congressional Conference Report. No regulations have been issued under Section 407(e), but regulations have been issued under Section 407(d)(5). ERISA Regulation 2550.407d-5.
408 Statutory Exemptions to Prohibited Transactions
The above exemption procedure is discussed on pages 309-311 of the Congressional Conference Report. See DOL ERISA Regulation 2570.30 through .52. The regulation covers who may file for an exemption, where applications must be filed, the information to be included with an application, rights and procedures to a conference, publication and notification of interested persons, and the effect of an exemption. See also Revenue Procedure 75-26. Even though the terms of a transaction may be fair to the plan, if it constitutes a prohibited transaction under Section 406, the transaction constitutes a per se violation of ERISA without a Section 408 exemption. Approval of the transaction by a Taft-Hartley umpire is not sufficient. Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979).
Participant loans are discussed on pages 311-316 of the Congressional Conference Report. Also refer to Section 72(p) of the Internal Revenue Code, which imposes additional restrictions on loans to plan participants. [Note that the Department of Labor in December 1987 issued regulations under Section 408(b)(1) defining "reasonable rate of interest" consistent with prior decisions under Section 404(a)(2)(B), for example, endorsing the market or prevailing rate of interest.] AO 81-12A.
General ancillary services are covered on pages 311-316 of the Congressional Conference Report. Refer to DOL ERISA Regulation 2550.408b-2.
ESOP loans are covered in pages 311-316 of the Congressional Conference Report. Regulations have been issued under Section 408(b)(3). See DOL ERISA Regulation 2550.408b-3.
Deposits with fiduciaries are discussed on pages 311-316 of the Congressional Conference Report. Refer to DOL ERISA Regulation 2550.408b-4. However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1) and 406(b)(2) for the investment of plan assets in the deposits or certificates of deposit of a bank that is a plan fiduciary or party in interest, if the requirements of DOL ERISA Regulation 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the bank(s) in which deposits may be made. The specifications may be made in the plan by amendment retroactive to November 1, 1977. AO 79-25. In response to an FDIC telephone inquiry, the DOL Office of (ERISA) Regulations and Interpretations staff indicated informally that the arrangement was deemed to comply with Section 408(b)(4) of the Act, DOL ERISA Regulation 2550.408b-4, and AO 79-25. The DOL staff indicated DOL would take a rather liberal view of the various documentation that would constitute the plan document(s). [10-27-94.]
The Congressional Conference Report explains this statutory exemption at pages 311-316.
Bank ancillary services are discussed on pages 311-316 of the Congressional Conference Report. Regulations have been issued under Section 408(b)(6). DOL ERISA Regulation 2550.408b-6.
The Congressional Conference Report explains this statutory exemption at pages 311-316.
The use of a fiduciary's collective investment funds is covered in pages 311-316 of the Congressional Conference Report.
The Congressional Conference Report explains this statutory exemption at pages 311-316.
The Congressional Conference Report does not explain Section 408(c)(1).
The Congressional Conference Report does not explain this interpretation. Regulations have been issued under Section 408(c)(2). DOL ERISA Regulation 2550.408c-2. IB 75-6, relating to Section 408(c)(2), has been superseded by the regulation cited above.
The Congressional Conference Report does not explain this interpretation.
The Congressional Conference Report does not explain this exception to the scope of the exemptions.
The Congressional Conference Report explains this employer security and real property exemption at pages 316-320. See DOL ERISA Regulation 2550.408e.
Section 410 Exculpatory Provisions
The Congressional Conference Report discusses the exculpatory provision proIf an investment manager or managers hibition. Indemnification agreements are not prohibited if the fiduciary who may be indemnified under the agreement remains responsible and liable for his acts or omissions with the indemnifying party merely satisfying the fiduciary liability. For example, an employer or union may agree to indemnity a plan fiduciary under Section 410(a). Also, a fiduciary can agree to indemnity his employees who perform fiduciary functions for a plan. However, a plan cannot agree to indemnify a fiduciary for a breach of fiduciary duty. IB 75-4.
The Congressional Conference Report discusses the fiduciary insurance provisions of Section 410(b) at pages 320-321. No regulations have been issued interpreting Section 410(b). However, in a news release issued on March 4, 1975, the Department of Labor stated that fiduciary insurance purchased by a plan that provides for recourse by the insurer against the fiduciary but that also permits the fiduciary to pay an additional premium to obtain coverage against the insurer's recourse is not prohibited under Section 410(b). Section 410(b) does not require plans to maintain fiduciary insurance. AO 76-03. Section 412 Bonding of Fiduciaries
The Congressional Conference Report discusses the bonding requirements of ERISA. |
Internal Revenue Code |
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72(p) Loans to Plan Participants Treated as DistributionsSection 72(p) As Amended through 1988 (P.L. 100-647)
For purposes of clause (ii) the present value of the nonforfeitable accrued benefit shall be determined without regard to any accumulated deductible employee contributions (as defined in subsection (O)(5)(b)). 72(p)-1 Participant Loans Treated as Distributions – IRS GuidelinesSection 72(p)-1 Section 72(p) was added by section 236 of the Tax Equity and Fiscal Responsibility Act of 1982 (96 Stat. 324), and amended by the Technical Corrections Act of 1982 (96 Stat. 2365), the Deficit Reduction Act of 1984 (98 Stat. 494), the Tax Reform Act of 1986 (100 Stat. 2085), and the Technical and Miscellaneous Revenue Act of 1988 (102 Stat. 3342). Section 72(p)-1 was added on July 31, 2000 [Federal Register Volume 65, Number 147].
Refer to response to question # 22 (a) through (c)(2) below for applicability dates. Sec. 1.72(p)-1 Loans treated as distributions. The questions and answers in this section provide guidance under section 72(p) pertaining to loans from qualified employer plans (including government plans and tax-sheltered annuities and employer plans that were formerly qualified). The examples included in the questions and answers in this section are based on the assumption that a bona fide loan is made to a participant from a qualified defined contribution plan pursuant to an enforceable agreement (in accordance with paragraph (b) of Q&A-3 of this section), with adequate security and with an interest rate and repayment terms that are commercially reasonable. (The particular interest rate used, which is solely for illustration, is 8.75 percent compounded annually.) In addition, unless the contrary is specified, it is assumed in the examples that the amount of the loan does not exceed 50 percent of the participant's nonforfeitable account balance, the participant has no other outstanding loan (and had no prior loan) from the plan or any other plan maintained by the participant's employer or any other person required to be aggregated with the employer under section 414(b), (c) or (m), and the loan is not excluded from section 72(p) as a loan made in the ordinary course of an investment program as described in Q&A-18 of this section. The regulations and examples in this section do not provide guidance on whether a loan from a plan would result in a prohibited transaction under section 4975 of the Internal Revenue Code or on whether a loan from a plan covered by Title I of the Employee Retirement Income Security Act of 1974 (88 Stat. 829) (ERISA) would be consistent with the fiduciary standards of ERISA or would result in a prohibited transaction under section 406 of ERISA. The questions and answers are as follows: Q-1: In general, what does section 72(p) provide with respect to loans from a qualified employer plan? A-1: (a) Loans. Under section 72(p), an amount received by a participant or beneficiary as a loan from a qualified employer plan is treated as having been received as a distribution from the plan (a deemed distribution), unless the loan satisfies the requirements of Q&A-3 of this section. For purposes of section 72(p) and this section, a loan made from a contract that has been purchased under a qualified employer plan (including a contract that has been distributed to the participant or beneficiary) is considered a loan made under a qualified employer plan. (b) Pledges and assignments. Under section 72(p), if a participant or beneficiary assigns or pledges (or agrees to assign or pledge) any portion of his or her interest in a qualified employer plan as security for a loan, the portion of the individual's interest assigned or pledged (or subject to an agreement to assign or pledge) is treated as a loan from the plan to the individual, with the result that such portion is subject to the deemed distribution rule described in paragraph (a) of this Q&A-1. For purposes of section 72(p) and this section, any assignment or pledge of (or agreement to assign or to pledge) any portion of a participant's or beneficiary's interest in a contract that has been purchased under a qualified employer plan (including a contract that has been distributed to the participant or beneficiary) is considered an assignment or pledge of (or agreement to assign or pledge) an interest in a qualified employer plan. However, if all or a portion of a participant's or beneficiary's interest in a qualified employer plan is pledged or assigned as security for a loan from the plan to the participant or the beneficiary, only the amount of the loan received by the participant or the beneficiary, not the amount pledged or assigned, is treated as a loan. Q-2: What is a qualified employer plan for purposes of section 72(p)? A-2: For purposes of section 72(p) and this section, a qualified employer plan means-
Q-3: What requirements must be satisfied in order for a loan to a participant or beneficiary from a qualified employer plan not to be a deemed distribution? A-3: (a) In general. A loan to a participant or beneficiary from a qualified employer plan will not be a deemed distribution to the participant or beneficiary if the loan satisfies the repayment term requirement of section 72(p)(2)(B), the level amortization requirement of section 72(p)(2)(C), and the enforceable agreement requirement of paragraph (b) of this Q&A-3, but only to the extent the loan satisfies the amount limitations of section 72(p)(2)(A). (b) Enforceable agreement requirement. A loan does not satisfy the requirements of this paragraph unless the loan is evidenced by a legally enforceable agreement (which may include more than one document) and the terms of the agreement demonstrate compliance with the requirements of section 72(p)(2) and this section. Thus, the agreement must specify the amount and date of the loan and the repayment schedule. The agreement does not have to be signed if the agreement is enforceable under applicable law without being signed. The agreement must be set forth either-- (3) In such other form as may be approved by the Commissioner. Q-4: If a loan from a qualified employer plan to a participant or beneficiary fails to satisfy the requirements of Q&A-3 of this section, when does a deemed distribution occur? A-4: (a) Deemed distribution. For purposes of section 72, a deemed distribution occurs at the first time that the requirements of Q&A-3 of this section are not satisfied, in form or in operation. This may occur at the time the loan is made or at a later date. If the terms of the loan do not require repayments that satisfy the repayment term requirement of section 72(p)(2)(B) or the level amortization requirement of section 72(p)(2)(C), or the loan is not evidenced by an enforceable agreement satisfying the requirements of paragraph (b) of Q&A-3 of this section, the entire amount of the loan is a deemed distribution under section 72(p) at the time the loan is made. If the loan satisfies the requirements of Q&A-3 of this section except that the amount loaned exceeds the limitations of section 72(p)(2)(A), the amount of the loan in excess of the applicable limitation is a deemed distribution under section 72(p) at the time the loan is made. If the loan initially satisfies the requirements of section 72(p)(2)(A), (B) and (C) and the enforceable agreement requirement of paragraph (b) of Q&A-3 of this section, but payments are not made in accordance with the terms applicable to the loan, a deemed distribution occurs as a result of the failure to make such payments. See Q&A-10 of this section regarding when such a deemed distribution occurs and the amount thereof and Q&A-11 of this section regarding the tax treatment of a deemed distribution. (b) Examples. The following examples illustrate the rules in paragraph (a) of this Q&A-4 and are based upon the assumptions described in the introductory text of this section:
Q-5: What is a principal residence for purposes of the exception in section 72(p)(2)(B)(ii) from the requirement that a loan be repaid in five years? A-5: Section 72(p)(2)(B)(ii) provides that the requirement in section 72(p)(2)(B)(i) that a plan loan be repaid within five years does not apply to a loan used to acquire a dwelling unit which will within a reasonable time be used as the principal residence of the participant (a principal residence plan loan). For this purpose, a principal residence has the same meaning as a principal residence under section 121. Q-6: In order to satisfy the requirements for a principal residence plan loan, is a loan required to be secured by the dwelling unit that will within a reasonable time be used as the principal residence of the participant? A-6: A loan is not required to be secured by the dwelling unit that will within a reasonable time be used as the participant's principal residence in order to satisfy the requirements for a principal residence plan loan. Q-7: What tracing rules apply in determining whether a loan qualifies as a principal residence plan loan? A-7: The tracing rules established under section 163(h)(3)(B) apply in determining whether a loan is treated as for the acquisition of a principal residence in order to qualify as a principal residence plan loan. Q-8: Can a refinancing qualify as a principal residence plan loan? A-8: (a) Refinancings. In general, no, a refinancing cannot qualify as a principal residence plan loan. However, a loan from a qualified employer plan used to repay a loan from a third party will qualify as a principal residence plan loan if the plan loan qualifies as a principal residence plan loan without regard to the loan from the third party. (b) Example. The following example illustrates the rules in paragraph (a) of this Q&A-8 and is based upon the assumptions described in the introductory text of this section:
Q-9: Does the level amortization requirement of section 72(p)(2)(C) apply when a participant is on a leave of absence without pay? A-9: (a) Leave of absence. The level amortization requirement of section 72(p)(2)(C)does not apply for a period, not longer than one year (or such longer period as may apply under section 414(u)), that a participant is on a bona fide leave of absence, either without pay from the employer or at a rate of pay (after income and employment tax withholding) that is less than the amount of the installment payments required under the terms of the loan. However, the loan (including interest that accrues during the leave of absence) must be repaid by the latest date permitted under section 72(p)(2)(B) (e.g., the suspension of payments cannot extend the term of the loan beyond 5 years, in the case of a loan that is not a principal residence plan loan) and the amount of the installments due after the leave ends (or, if earlier, after the first year of the leave or such longer period as may apply under section 414(u)) must not be less than the amount required under the terms of the original loan. (b) Military service. See section 414(u)(4) for special rules relating to military service. (c) Example. The following example illustrates the rules of paragraph (a) of this Q&A-9 and is based upon the assumptions described in the introductory text of this section:
Q-10: If a participant fails to make the installment payments required under the terms of a loan that satisfied the requirements of Q&A-3 of this section when made, when does a deemed distribution occur and what is the amount of the deemed distribution? A-10: (a) Timing of deemed distribution. Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)(C) and, accordingly, results in a deemed distribution at the time of such failure. However, the plan administrator may allow a cure period and section 72(p)(2)(C) will not be considered to have been violated if the installment payment is made not later than the end of the cure period, which period cannot continue beyond the last day of the calendar quarter following the calendar quarter in which the required installment payment was due. (b) Amount of deemed distribution. If a loan satisfies Q&A-3 of this section when made, but there is a failure to pay the installment payments required under the terms of the loan (taking into account any cure period allowed under paragraph (a) of this Q&A-10), then the amount of the deemed distribution equals the entire outstanding balance of the loan (including accrued interest) at the time of such failure. (c) Example. The following example illustrates the rules in paragraphs (a) and (b) of this Q&A-10 and is based upon the assumptions described in the introductory text of this section:
Q-11: Does section 72 apply to a deemed distribution as if it were an actual distribution? A-11: (a) Tax basis. If the employee's account includes after-tax contributions or other investment in the contract under section 72(e), section 72 applies to a deemed distribution as if it were an actual distribution, with the result that all or a portion of the deemed distribution may not be taxable. (b) Section 72(t) and (m). Section 72(t) (which imposes a 10 percent tax on certain early distributions) and section 72(m)(5) (which imposes a separate 10 percent tax on certain amounts received by a 5-percent owner) apply to a deemed distribution under section 72(p) in the same manner as if the deemed distribution were an actual distribution. Q-12: Is a deemed distribution under section 72(p) treated as an actual distribution for purposes of the qualification requirements of section 401, the distribution provisions of section 402, the distribution restrictions of section 401(k)(2)(B) or 403(b)(11), or the vesting requirements of Sec. 1.411(a)-7(d)(5) (which affects the application of a graded vesting schedule in cases involving a prior distribution)? A-12: No; thus, for example, if a participant in a money purchase plan who is an active employee has a deemed distribution under section 72(p), the plan will not be considered to have made an in-service distribution to the participant in violation of the qualification requirements applicable to money purchase plans. Similarly, the deemed distribution is not eligible to be rolled over to an eligible retirement plan and is not considered an impermissible distribution of an amount attributable to elective contributions in a section 401(k) plan. See also Sec. 1.402(c)-2, Q&A-4(d) and Sec. 1.401(k)-1(d)(6)(ii). Q-13: How does a reduction (offset) of an account balance in order to repay a plan loan differ from a deemed distribution? A-13: (a) Difference between deemed distribution and plan loan offset amount.
(b) Plan loan offset. In the event of a plan loan offset, the amount of the account balance that is offset against the loan is an actual distribution for purposes of the Internal Revenue Code, not a deemed distribution under section 72(p). Accordingly, a plan may be prohibited from making such an offset under the provisions of section 401(a), 401(k)(2)(B) or 403(b)(11) prohibiting or limiting distributions to an active employee. See Sec. 1.402(c)-2, Q&A-9(c), Example 6. See also Q&A-19 of this section for rules regarding the treatment of a loan after a deemed distribution. Q-14: How is the amount includible in income as a result of a deemed distribution under section 72(p) required to be reported? A-14: The amount includible in income as a result of a deemed distribution under section 72(p) is required to be reported on Form 1099-R (or any other form prescribed by the Commissioner). Q-15: What withholding rules apply to plan loans? A-15: To the extent that a loan, when made, is a deemed distribution or an account balance is reduced (offset) to repay a loan, the amount includible in income is subject to withholding. If a deemed distribution of a loan or a loan repayment by benefit offset results in income at a date after the date the loan is made, withholding is required only if a transfer of cash or property (excluding employer securities) is made to the participant or beneficiary from the plan at the same time. See Secs. 35.3405-1, f-4, and 31.3405(c)-1, Q&A-9 and Q&A-11, of this chapter for further guidance on withholding rules. Q-16: If a loan fails to satisfy the requirements of Q&A-3 of this section and is a prohibited transaction under section 4975, is the deemed distribution of the loan under section 72(p) a correction of the prohibited transaction? A-16: No, a deemed distribution is not a correction of a prohibited transaction under section 4975. See Secs. 141.4975-13 and 53.4941(e)-1(c)(1) of this chapter for guidance concerning correction of a prohibited transaction. Q-17: What are the income tax consequences if an amount is transferred from a qualified employer plan to a participant or beneficiary as a loan, but there is an express or tacit understanding that the loan will not be repaid? A-17: If there is an express or tacit understanding that the loan will not be repaid or, for any reason, the transaction does not create a debtor-creditor relationship or is otherwise not a bona fide loan, then the amount transferred is treated as an actual distribution from the plan for purposes of the Internal Revenue Code, and is not treated as a loan or as a deemed distribution under section 72(p). Q-18: If a qualified employer plan maintains a program to invest in residential mortgages, are loans made pursuant to the investment program subject to section 72(p)? A-18: (a) Residential mortgage loans made by a plan in the ordinary course of an investment program are not subject to section 72(p) if the property acquired with the loans is the primary security for such loans and the amount loaned does not exceed the fair market value of the property. An investment program exists only if the plan has established, in advance of a specific investment under the program, that a certain percentage or amount of plan assets will be invested in residential mortgages available to persons purchasing the property who satisfy commercially customary financial criteria. A loan will not be considered as made under an investment program if-
(b) Paragraph (a)(3) of this Q&A-18 shall not apply to a plan which, on December 20, 1995, and at all times thereafter, has had in effect a loan program under which, but for paragraph (a)(3) of this Q&A-18, the loans comply with the conditions of paragraph (a) of this Q&A-18 to constitute residential mortgage loans in the ordinary course of an investment program. (c) No loan that benefits an officer, director, or owner of the employer maintaining the plan, or their beneficiaries, will be treated as made under an investment program. (d) This section does not provide guidance on whether a residential mortgage loan made under a plan's investment program would result in a prohibited transaction under section 4975, or on whether such a loan made by a plan covered by Title I of ERISA would be consistent with the fiduciary standards of ERISA or would result in a prohibited transaction under section 406 of ERISA. See 29 CFR 2550.408b-1. Q-19: If there is a deemed distribution under section 72(p), is the interest that accrues thereafter on the amount of the deemed distribution an indirect loan for income tax purposes? A-19: (a) General rule. Except as provided in paragraph (b) of this Q&A-19, a deemed distribution of a loan is treated as a distribution for purposes of section 72. Therefore, a loan that is deemed to be distributed under section 72(p)ceases to be an outstanding loan for purposes of section 72, and the interest that accrues thereafter under the plan on the amount deemed distributed is disregarded in applying section 72 to the participant or beneficiary. Even though interest continues to accrue on the outstanding loan (and is taken into account for purposes of determining the tax treatment of any subsequent loan in accordance with paragraph (b) of this Q&A-19), this additional interest is not treated as an additional loan (and, thus, does not result in an additional deemed distribution) for purposes of section 72(p). However, a loan that is deemed distributed under section 72(p) is not considered distributed for all purposes of the Internal Revenue Code. See Q&A-11 through Q&A-16 of this section. (b) Exception for purposes of applying section 72(p)(2)(A) to a subsequent loan. In the case of a loan that is deemed distributed under section 72(p) and that has not been repaid (such as by a plan loan offset), the unpaid amount of such loan, including accrued interest, is considered outstanding for purposes of applying section 72(p)(2)(A) to determine the maximum amount of any subsequent loan to the participant or beneficiary. Q-20: May a participant refinance an outstanding loan or have more than one loan outstanding from a plan? A-20: [Reserved] Q-21: Is a participant's tax basis under the plan increased if the participant repays the loan after a deemed distribution? A-21: (a) Repayments after deemed distribution. Yes, if the participant or beneficiary repays the loan after a deemed distribution of the loan under section 72(p), then, for purposes of section 72(e), the participant's or beneficiary's investment in the contract (tax basis) under the plan increases by the amount of the cash repayments that the participant or beneficiary makes on the loan after the deemed distribution. However, loan repayments are not treated as after-tax contributions for other purposes, including sections 401(m) and 415(c)(2)(B). (b) Example. The following example illustrates the rules in paragraph (a) of this Q&A-21 and is based on the assumptions described in the introductory text of this section:
Q-22: When is the effective date of section 72(p) and the regulations in this section? A-22: (a) Statutory effective date. Section 72(p) generally applies to assignments, pledges, and loans made after August 13, 1982.
408(h) Custodial AccountsSection 408(h) For purposes of this section, a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in subsection (n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof. 408(m) Investment in Collectibles by IRA and Self-Directed AccountsSection 408(m) As Amended through 1988 (P.L. 100-647) Editor's Note: Also see PTE 91-55, which permits IRA accounts to hold US American Eagle gold coins.
408(q) Deemed Individual Retirement AccountsSection 408(q)
409(e) Qualifications for Tax Credit ESOPs – Voting RightsSection 409(e) As Amended through 1997 (P.L. 105-34)
417 Special Rules for Survivor Annuity RequirementsSection 417 Section. 417. Definitions and special rules for purposes of minimum survivor annuity requirements
Source - (Added Pub. L. 98-397, title II, Sec. 203(b), Aug. 23, 1984, 98 Stat. 1441; amended Pub. L. 99-514, title XI, Sec. 1139(b), title XVIII, Sec. 1898(b)(1)(A), (4)(A), (5)(A), (6)(A), (8)(A), (9)(A), (10)(A), (11)(A), (12)(A), (15)(A), (B), Oct. 22, 1986, 100 Stat. 2487, 2944, 2945, 2947-2951; Pub. L. 100-647, title I, Sec. 1018(u)(9), Nov. 10, 1988, 102 Stat. 3590; Pub. L. 101-239, title VII, Sec. 7862(d)(1)(A), Dec. 19, 1989, 103 Stat. 2433; Pub. L. 103-465, title VII, Sec. 767(a)(2), Dec. 8, 1994, 108 Stat. 5038; Pub. L. 104-188, title I, Sec. 1451(a), Aug. 20, 1996, 110 Stat. 1815; Pub. L. 105-34, title X, Sec. 1071(a)(2), Aug. 5, 1997, 111 Stat. 948.) 4975 Tax on Prohibited TransactionsSection 4975 As Amended through July 22, 1998 (P.L. 105-206) (a) Initial taxes on disqualified person
There is hereby imposed a tax on each prohibited transaction. (b) Additional taxes on disqualified person In any case in which an initial tax is imposed by subsection (a) on a prohibited transaction and the transaction is not corrected within the taxable period, there is hereby imposed a tax equal to 100 percent of the amount involved. The tax imposed by this subsection shall be paid by any disqualified person who participated in the prohibited transaction (other than a fiduciary acting only as such).
Except as provided in subsection (f)(6), the prohibitions provided in subsection (c) shall not apply to -
(e) Definitions
(f) Other definitions and special rules For purposes of this section -
This section shall not apply -
In the case of a plan which invests in any security issued by an investment company registered under the Investment Company Act of 1940, the assets of such plan shall be deemed to include such security but shall not, by reason of such investment, be deemed to include any assets of such company. (h) Notification of Secretary of Labor Before sending a notice of deficiency with respect to the tax imposed by subsection (a) or (b), the Secretary shall notify the Secretary of Labor and provide him a reasonable opportunity to obtain a correction of the prohibited transaction or to comment on the imposition of such tax.
Source - (Added Pub. L. 93-406, title II, Sec. 2003(a), Sept. 2, 1974, 88 Stat. 971; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 95-600, title I, Sec. 141(f)(5), (6), Nov. 6, 1978, 92 Stat. 2795; Pub. L. 96-222, title I, Sec. 101(a)(7)(C), (K), (L)(iv)(III), (v)(XI), Apr. 1, 1980, 94 Stat. 198-201; Pub. L. 96-364, title II, Sec. 208(b), 209(b), Sept. 26, 1980, 94 Stat. 1289, 1290; Pub. L. 96-596, Sec. 2(a)(1)(K),(L), (2)(I), (3)(F), Dec. 24, 1980, 94 Stat. 3469, 3471; Pub. L. 97-448, title III, Sec. 305(d)(5), Jan. 12, 1983, 96 Stat. 2400; Pub. L. 98-369, div. A, title IV, Sec. 491(d)(45), (46), (e)(7), (8), July 18, 1984, 98 Stat. 851-853; Pub. L. 99-514, title XI, Sec. 1114(b)(15)(A), title XVIII, Sec. 1854(f)(3)(A), 1899A(51), Oct. 22, 1986, 100 Stat. 2452, 2882, 2961; Pub. L. 101-508, title XI, Sec. 11701(m), Nov. 5, 1990, 104 Stat. 1388-513; Pub. L. 104-188, title I, Sec. 1453(a), 1702(g)(3), Aug. 20, 1996, 110 Stat. 1817, 1873; Pub. L. 104-191, title III, Sec. 301(f), Aug. 21, 1996, 110 Stat. 2051; Pub. L. 105-34, title II, Sec. 213(b), title X, Sec. 1074(a), title XV, Sec. 1506(b)(1), 1530(c)(10), title XVI, Sec. 1602(a)(5), Aug. 5, 1997, 111 Stat. 816, 949, 1065, 1079, 1094; Pub. L. 105-206, title VI, Sec. 6023(19), July 22, 1998, 112 Stat. 825.) |
Regulations | |||||
---|---|---|---|---|---|
54.4975-11 ESOP RequirementsInternal Revenue Service Originally issued September 2, 1977 (42 FR 44393) As revised through January 9, 1979 (44 FR 1978)
54.4975-12 "Qualified Employer Security" DefinedInternal Revenue Service Originally Issued September 2, 1977 (42 FR 44394)
2510.3-101 "Plan Assets" Defined (Pension and Welfare Benefits Administration Regulation)Department of Labor Originally issued November 13, 1986 (51 FR 41280) Subsection (e) amended for a technical correction December 31, 1986 (51 FR 47226)
An entity is a "real estate operating company" for the period beginning on an initial valuation date described in paragraph (d)(5)(i) and ending on the last day of the first "annual valuation period" described in paragraph (d)(5)(ii) (in the case of an entity that is not a real estate operating company immediately before the determination) or for the 12-month period following the expiration of an annual valuation period described in paragraph (d)(5)(ii) (in the case of an entity that is a real estate operating company immediately before the determination) if: 2520.103-5 CIF Reports to Plan AdministratorsDepartment of Labor Transmittal and certification of information to plan administrator for annual reporting purposes. (Collective Investment Fund Reporting to Plan Administrators) Originally issued September 10, 1978 (43 FR 10140)
2550.404a-1 Investment Duties (Prudence Regulation)Department of Labor Originally issued June 26, 1979 (44 FR 37225) The technical corrections of 4-4-78 and the amendment of 3-1-89 contained no changes to this regulation.
Editor's Note: Also refer to Interpretive Bulletin 94-1, dealing with the prudence of social ("economically targeted" or ETI) investments. Also see DOL ERISA Regulation 404c-1, which exempts fiduciaries from certain ERISA liability if plans meet certain conditions and participants direct their own investments.
Final Regulation
For purposes of this section: Explanatory Preamble For further information contact: Paul R. Antsen, Office of Fiduciary Standards, Pension and Welfare Benefit Programs, U.S. Department of Labor, Washington, D.C. 20216, (202) 522-8971, or Gregor B. McCurdy, Plan Benefits Security Division, Office of the Solicitor, U.S. Department of Labor, Washington, D.C. 20216. (202) 523-9141. Supplemantary information: On April 25, 1978, notice was published in the Federal Register (43 FR 17480)1 that the Department had under consideration a proposal to adopt a regulation, 29 C.F.R. 2550.404a-1, under section 404(a)(1)(B) of the Act, relating to the investment duties of a fiduciary of an employee benefit plan. Section 404(a)(1)(B) of the Act provides, in part, that a fiduciary shall discharge his duties with respect to an employee benefit plan with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims (the "Prudence" rule).2 Public comments were received, in response to the proposal, that generally supported the tentative views of the Department reflected therein, although many suggestions for specific revisions were offered. A few comments opposed the adoption of the proposed or of any, regulation concerning these matters. Among the reasons given in opposition to the adoption of the proposed regulation were: (1) that the courts, rather than the Department, should determine how the "prudence" rule is to be interpreted, (2) that the Department's views regarding the requirements of the "Prudence" rule, as reflected in the proposed regulation, are incorrect, (3) that it is impractical to attempt to define "prudence" by regulation; and (4) that the proposal did not accomplish its stated objectives. The Department has considered the comments opposing adoption of the regulation, but has not been persuaded that the interpretation of the requirements of the "prudence" rule set forth below is incorrect. It believes, moreover, that adoption of a regulation concerning the investment duties of fiduciaries under the "prudence" rule is appropriate because such a regulation would provide guidance for many plan fiduciaries in an important area of their responsibilities under the Act. Counsel for one group of interested persons, while supporting the proposed regulation in principle, asked that they be given an opportunity to express their views at a public hearing on the proposed regulation. They also suggested that the regulation should, in any event, be republished to give interested persons additional opportunity for comment. The Department has considered these requests, but has determined that neither a public hearing nor republication of a proposed regulation is necessary or appropriate. Accordingly, after consideration of all the written comments received, the Department has determined to adopt the proposed regulation as modified and set forth below. Discussion of the Regulation The legislative history of the Act indicates that the common law of trusts, which forms the basis for and is federalized and codified in part 4 of Title I of the Act, should, nevertheless, not be mechanically applied to employee benefit plans.3 The "prudence" rule in the Act sets forth a standard built upon, but that should and does depart from, traditional trust law in certain respects. The Department is of the opinion that (1) generally, the relative riskiness of a specific investment or investment course of action does not render such investment or investment course of action either per se prudent or per se imprudent, and (2) the prudence of an investment decision should not be judged without regard to the role that the proposed investment or investment course of action plays with the overall plan portfolio. Thus, although securities Issued by a small or new company may be a riskier investment than securities issued by a "blue chip" company, the investment in the former company may be entirely proper under the Act's prudence" rule. Accordingly, paragraph (b)(1) of the regulation, as adopted, provides generally that, with respect to an investment or investment course of action taken pursuant to a fiduciary's investment duties, the requirements of the "prudence" rule have been satisfied if the fiduciary has acted in a manner consistent with appropriate consideration of the facts and circumstances that the fiduciary knows or should know are relevant, including the role that the investment or investment course of action plays in that portion of the plan's investment portfolio with respect to which the fiduciary has investment duties. Paragraph (b), as adopted, has been modified in response to certain comments received on the regulation as originally proposed. As a general observation, the comments received by the Department indicated that many commentators were uncertain of the scope of the proposed regulation. In particular, some commentators appear to have viewed the various factors and conditions set forth in the proposal as a statement of requirements that must necessarily be met in order to satisfy the requirements of the "Prudence" rule. In this regard, it should be noted that the regulation reflects the views of the Department as to a manner of satisfying the requirements of the "prudence" rule, and does not purport to impose any additional requirements or constraints upon plan fiduciaries. It should also be noted that the Department does not view compliance with the provisions of the regulation as necessarily constituting the exclusive method for satisfying the requirements of the "prudence" rule. Rather, the regulation is in the nature of a "safe harbor" provision; it is the opinion of the Department that fiduciaries who comply with the provisions of the regulation will have satisfied the requirements of the "prudence" rule, but no opinion is expressed in the regulation as to the status of activities undertaken or performed that do not so comply. With regard to more particular matters, a number of comments suggested that one condition of the proposal - that a fiduciary give appropriate consideration to "all" relevant facts and circumstance - could be read as establishing an impossible standard, especially for fiduciaries of small plans, because (1) no fiduciary has unlimited resources to develop all the information that one might deem to be relevant to a particular investment decision, and (2) no fiduciary can be expected to consider all the relevant facts and circumstances, whether or not of material significance. Because section 404(a)(1)(B) of the Act provides that it is the fiduciary's duties with respect to the plan which must be discharged in accordance with the "prudence" rule, it appears to the Department that the scope of those duties will determine, in part, the factors which should be considered by a plan fiduciary in a given case. The nature of those duties will, of course, depend on the facts and circumstances of the case, including the nature of the arrangement between the fiduciary and the plan. For that reason, the regulation, as adopted, does not distinguish among classes of fiduciaries with respect to what particular duties may be involved. The Department recognizes, however, that a fiduciary should be required neither to expend unreasonable effort in discharging his duties. nor to consider matters outside the scope of those duties. Accordingly, the regulation has been modified to provide that consideration be given to those facts and circumstances which take into account the scope of his investment duties, the fiduciary knows or should know are relevant to the particular investment decision involved. The scope of the fiduciary's inquiry in this respect, therefore, is limited to those facts and circumstances that a prudent person having similar duties and familiar with such matters would consider relevant. Several commentators asserted that the regulation, in recognition of the Act's provisions permitting delegation of investment duties to, and allocation among, several fiduciaries, should permit a fiduciary who is responsible for the management of plan assets to rely on information supplied by appropriate other plan fiduciaries, and to act in accordance with policies and instructions supplied by those persons in making decisions on the investment of plan assets. Those comments, generally, addressed the situation where several investment managers are involved in managing the assets of a plan, each being responsible for a portion of the plan's investment portfolio.4 Under those circumstances, it would not, in the view of the commentators, be appropriate to require a fiduciary who is responsible for only a portion of the plan's portfolio to take into consideration facts and circumstances relating to the balance of the portfolio in making an investment decision. The Department agrees, in part, with those comments. Accordingly, paragraph (b)(1) of the regulation as adopted also provides that such a fiduciary need give appropriate consideration to the role the proposed investment or investment course of action plays in that portion only, of the plan's investment portfolio, with respect to which the fiduciary has investment duties. However, the Department cannot state that, under the foregoing circumstances, a fiduciary is entitled blindly to rely upon instructions or policies established by other plan fiduciaries. Similarly, the regulation does not provide, as requested by one commentator, that the assets of a pooled investment fund may be invested in accordance with its published investment objectives and policies without requiring that consideration be given to the particular needs of any individual plan that has an interest in the fund. It would appear that where authority to manage part (or all) of the assets of a plan has been delegated to one or more investment managers pursuant to section 402(c)(3) of the Act, the primary responsibility for determining that the delegation is appropriate rests with the named fiduciary or fiduciaries effecting the delegation. Nevertheless, the Department considers that each such manager's investment duties, under section 404(a)(1)(B) of the Act, includes (among other things) a duty not to act in accordance with a delegation of plan investment duties to the extent that the manager either knows or should know that the delegation involves a breach of fiduciary responsibility.5 Once the manager has considered factors otherwise necessary to assure himself that the delegation of investment authority and related specific instructions are appropriate, he may, in exercising such authority and carrying out such instructions, rely upon information provided to him in accordance with the provisions of new paragraph (b)(3) of the regulation. That paragraph provides that an investment manager responsible for the management of all or part of a plan's assets pursuant to an appointment described in section 402(c)(3) of the Act may, for purposes o f complying with the provisions of the regulation, rely upon certain information supplied to him by or at the direction of the appointing fiduciary, provided that the manager neither knows or should know that the information is incorrect. Paragraph (b)(1) of the proposed regulation also been revised in order to make clear that the fiduciary's acts do not satisfy the "prudence" rule solely because the fiduciary had previously given consideration to relevant facts and circumstances. Some comments questioned whether, under the regulation as originally proposed, a fiduciary might be deemed to be "immunized" once he had given such consideration, not withstanding the nature of his subsequent acts. The regulation, as adopted, provides that it is the "investment" or "investment course of action" in question that will satisfy the requirements of the prudence rule if the criteria set forth in the regulation are met. Paragraph (b)(2) of the regulation sets forth factors that are to be included, to the extent applicable, in an evaluation of an investment or investment course of action if a fiduciary wishes to rely on the provisions of the regulation. They are: (1) the composition of the portfolio with regard to diversification; (2) the liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan; and (3) the projected return of the portfolio relative to the objectives of the plan. These factors are adopted substantially as proposed, except that the first factor has been revised, in response to questions raised by some of the comments, to make clear that the word "diversification" is to be given its customary meaning as a mechanism for reducing the risk of large losses; that factor, as originally proposed, referred to "diversification of risk." The second factor has also been modified in order to make clear that its principal subject matter is all anticipated cash requirements of the plan, and not solely those arising by reason of payment of benefits. A fourth factor set forth in the proposal which related to the "volatility" of the portfolio, has been eliminated as a factor specifically to be considered because, although paragraph (b)(2) as adopted sets forth factors which must be considered in all cases in order to comply with the provisions of the regulation6, the reference to volatility may be read, according to some comments, as suggesting that only certain portfolio management techniques are appropriate. Moreover, as discussed more fully below, the subject of risk and opportunity for gain - which subsumes consideration of "volatility" in some respects - is now addressed in subparagraph (A) of paragraph (b)(2). A former fifth factor, which read "the prevailing and projected economic conditions of the entities in which the plan has invested and proposes to invest," is also deal t with in that subparagraph. Several commentators suggested that inclusion of that fifth factor in the regulation would be contrary to the intent of the proposal because it focuses attention on the individual investment, rather than on the aggregate plan portfolio. Others objected to its inclusion on the ground that it is antithetical to the theory of operation of certain "passive" investment media (such as "index" funds) that acquire portfolios designed to match the performance of various investment indices and that, accordingly, have little or no discretion in altering the composition of their portfolios.7 The regulation, however, is not intended to suggest either that any relevant or material attributes of a contemplated investment may properly be ignored or disregarded, or that a particular plan investment should be deemed to be prudent solely by reason of the propriety of the aggregate risk/return characteristics of the plan's portfolio. Rather, it is the Department's view that an investment reasonably designed - as a part of the portfolio - to further the purposes of the plan, and that is made upon appropriate consideration of the surrounding facts and circumstances, should not be deemed to be imprudent merely because the investment, standing alone, would have, for example, a relatively high degree of risk. The Department also believes that appropriate consideration of an investment to further the purposes of the plan must include consideration of the characteristics of the investment itself. Accordingly, paragraph (b)(2) of the regulation provides that, for purposes of paragraph (b)(1), "appropriate consideration" shall include a determination by the fiduciary that the particular investment or investment course of action is reasonably designed, as part of the portfolio for which the fiduciary is responsible, to further the purposes of the plan, taking into account the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action.8 In the case of "passive" investment funds, referred to above, it would seem that, to the extent the fund manager is managing plan assets,9 the investments made by the fund, as well as the plan's investment in the fund, must meet the requirements of the "prudence" rule. However, to the extent that an index fund, including the screen or filter process described above at note 7, is reasonably designed to fulfill the fund manager's fiduciary obligations with respect to a plan whose assets are managed therein, such manager, acting in accordance with the fund's objective and its filter or screen process, generally would be in compliance with the provisions of the "prudence" rule, as described in the regulation, with respect to that plan. The terms "investment duties" and "investment course of action" are defined in paragraphs (c)(1) and (2) of the regulation. No comments were received regarding these definitions, and they have been adopted substantially in the form proposed. New paragraph (c)(3) has been added, defining the term "plan" to mean an employee benefit plan to which Title I of the Act applies. Discussion of Certain other Comments Counsel for one group of commentators characterized the factors set forth in paragraph (b)(2) as relating solely to the "investment merit" of a particular investment or investment course of action. Because, in the view of those commentators, the prudence of the acquisition or retention of a contract Issued by an insurance company may involve factors besides "investment merit", they suggested that the regulation should contain a separate provision that would set forth two factors to be considered by a fiduciary, in evaluating the prudence of the acquisition or retention of such a contract: the risks assumed, and the services provided, by the insurance company. The Department is unable to concur with the commentators' view that the regulation as proposed dealt only with matters of "investment merit" as narrowly perceived in the comment. The Department agrees that such factors as the risk to be assumed and the services to be provided under a contract are pertinent to any investment decision involving such contract. The regulation as adopted specifically provides that, in order to come within the scope of the regulation, a fiduciary shall consider the facts and circumstances the fiduciary knows or should know are relevant to the investment decision, and that the factors set forth in paragraph (b)(2) are not intended to be exclusive. Accordingly, the Department believes that it is unnecessary to set forth additional factors with respect to insurance contracts or other specific types of investment. Two commentators suggested that the Department clarify that the adoption of the regulation would not result in fiduciaries being required to invest in expensive systems or analyses to make investment decisions. Under the "prudence" rule, the standard to which a fiduciary is held in the proper discharge of his investment duties is defined, in part, by what a prudent person acting in a like capacity and familiar with such matters would do. Thus, for example, it would not seem necessary for a fiduciary of a plan with assets of $50,000 to employ, in all respects, the same investment management techniques as would a fiduciary of a plan with assets of $50,000,000. Numerous comments were received with respect to the factors set forth in paragraph (b)(2). Several persons requested that the Department clarify or define terms such as "diversification of risk". "risk," "volatility" and "liquidity." For example, some persons asked what specific measurements of volatility, risk and liquidity should be utilized by fiduciaries in making investment decisions for a plan. The Department believes that, in view of the modifications (discussed above) made in the regulation as adopted, it is neither necessary nor appropriate for the regulation to contain such definitions. Several commentators asserted that certain specific types of investments such as, for example, investment in small or recently formed companies, or nonincome producing investments that are not securities (such as, for example, certain precious metals and objects of art) have not been viewed with favor, traditionally, as trust investments. Those comments urged that the regulation specify the extent to which such investments are permissible under the "prudence" rule. Other commentators made reference to the traditional principle that trust investments should be income producing, and suggested that the appropriate measure of investment "return" should be defined to mean 'total return" - that is, an aggregate return computed without regard to whether a contributing factor thereto consists of income or capital items. Although the Department considers that defining "return" would be beyond the appropriate scope of this regulation, it believes that the "prudence" rule does not require that every plan investment produce current income under all circumstances. As indicated above and in the preamble to the proposed regulation, the Department believes that the universe of investments permissible under the "prudence" rule is not necessarily limited to those permitted at common law. However, the Department does not consider it appropriate to include in the regulation any list of investments, classes of investment, or investment techniques that might be permissible under the "prudence" rule. No such list could be complete; moreover, the Department does not intend to create or suggest a "legal list" of investments for plan fiduciaries. The preamble to the proposed regulation stated (as does this preamble) that the risk level of an investment does not alone make the investment per se prudent or per se imprudent. Comments were received which asserted that such proposition is inappropriate and would promote irresponsibility on the part of plan fiduciaries. Other commentators not only agreed with the proposition, but also suggested that it should be incorporated in the regulation. The Department believes that both of these concerns are addressed by the modifications, discussed above, made to paragraph (b)(2) of the regulation as adopted. The Department has determined that this regulation is not a "significant regulation" as defined in the Department's guidelines (44 FR 5570, January 26, 1979) implementing Executive Order 12044. Statutory Authority The regulation set forth below is adopted pursuant to the authority contained in section 505 of the Act (Pub. L. 93-406, 88 Stat. 894 (29 USC 1135)). Although the regulation is an "interpretative rule" within the meaning of 5 USC 553(d), the effective date of the regulation is July 23, 1979, consistent with the statement of the Department, in connection with the regulation as proposed. that such regulation would be effective 30 days after its adoption. Final Regulation Accordingly, Part 2550 of Chapter XXV of Title 29 of the Code of Federal) Regulations is amended by inserting in the appropriate place to read 2550.404a-1. Signed at Washington, D.C, this 20th day of June 1979. Ian D. Lanoff, Administrator Pension and Welfare Benefit Programs Labor-Management Services Administration United States Department of Labor Footnotes
2550.404a-2 Safe Harbor for Automatic RolloversDepartment of Labor Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974 Automatic Rollover Safe Harbor SUMMARY: Section 657 of the EGTRRA of 2001 amended IRC Section 401(a)(31)(B) to require qualfied imployer plans to automatically rollover involuntary cash outs of more than $1,000 (but less than $5,000) if the participant failed to affirmatively elect any other plan options. This final regulation will affect employee pension benefit plans, plan sponsors, administrators and fiduciaries, service providers, and plan participants and beneficiaries. DATES: Effective Date: This final regulation is effective March 28, 2005. Applicability Date: This final regulation shall apply to the rollover of mandatory distributions made on or after March 28, 2005. Subchapter F—Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974 The following new section is added to part 2550 to read as follows: § 2550.404a–2 Safe Harbor for Automatic Rollovers to Individual Retirement Plans.
A fiduciary that meets the conditions of paragraph (c) or paragraph (d) of this section is deemed to have satisfied his or her duties under section 404(a) of the Act with respect toboth the selection of an individual retirement plan provider and the investment of funds in connection with the rollover of mandatory distributions described in those paragraphs to an individual retirement plan, within the meaning of section 7701(a)(37) of the Code. With respect to an automatic rollover of a mandatory distribution described in section 401(a)(31)(B) of the Code, a fiduciary shall qualify for the safe harbor described in paragraph (b) of this section if: A fiduciary shall qualify for the protection afforded by the safe harbor described in paragraph (b) of this section with respect to a mandatory distribution of one thousand dollars ($1,000) or less described in section 411(a)(11) of the Code, provided there is no affirmative distribution election by the participant and the fiduciary makes a rollover distribution of such amount into an individual retirement plan on behalf of such participant in accordance with the conditions described in paragraph (c) of this section, without regard to the fact that such rollover is not described in section 401(a)(31)(B) of the Code. This section shall be effective and shall apply to any rollover of a mandatory distribution made on or after March 28, 2005. Signed at Washington, DC, this 20th day of September, 2004. 2550.404b-1 Indicia of OwnershipDepartment of Labor Originally issued October 4, 1977 (42 FR 54124) Amended January 6, 1981 (46 FR 1267) ERISA 404(b) requires that plan assets be maintained within the jurisdiction of US District Courts. With the advent of international investments, this is often impractical. This regulation provides a means to keep investments at certain types of non-US custodians. A special provision deals with Canada.
2550.404c-1 ERISA Section 404(c) PlansDepartment of Labor Originally issued October 4, 1977 (42 FR 54124) Amended January 26, 1981 (46 FR 1267)
For purposes of this paragraph (e)(3), the term "control" means, with respect to a person other than an individual, the power to exercise a controlling influence over the management or policies of such person. Plan participants and beneficiaries are permitted to give investment instructions during the first week of each month with respect to the equity fund and at any time with respect to other investments. The plan provides for the pass-through of voting, tender and similar rights incidental to the holding in the account of a participant or beneficiary of an ownership interest in the equity fund or any other investment alternative available under the plan. Plan A meets the requirements of paragraphs (b)(2)(i)(B)(1) and (2) of this section regarding the provision of investment information. Note: The regulation imposes no additional obligation on the administrator to furnish or make available materials relating to the companies in which the equity fund invests (e.g., prospectuses, proxies, etc.). 2550.404c-5 Fiduciary Relief for Investments in Qualified Default Investment AlternativesDepartment of Labor (a) In general.
(b) Fiduciary relief.
(c) Conditions. With respect to the investment of assets in the individual account of a participant or beneficiary, a fiduciary shall qualify for the relief described in paragraph (b)(1) of this section if:
(d) Notice. The notice required by paragraph (c)(3) of this section shall be written in a manner calculated to be understood by the average plan participant and shall contain the following:
(e) Qualified default investment alternative. For purposes of this section, a qualified default investment alternative means an investment alternative available to participants and beneficiaries that:
(f) Preemption of State laws.
[72 FR 60478, Oct. 24, 2007; 73 FR 23350, Apr. 30, 2008] 2550 Default Investment Alternatives Under Participant Directed Individual Account Plans
29 CFR Parts 2550 and 2578 Amendments to Safe HarborUS Department of Labor 29 CFR Parts 2550 and 2578 Amendments to Safe Harbor for Distributions From Terminated Individual Account Plans and Termination of Abandoned Individual Account Plans To Require Inherited Individual Retirement Plans for Missing Nonspouse Beneficiaries Final Rule Employee Benefits Security Administration 29 CFR Parts 2550 and 2578 Amendments to Safe Harbor for Distributions From Terminated Individual Account Plans and Termination of Abandoned Individual Account Plans To Require Inherited Individual Retirement Plans for Missing Nonspouse Beneficiaries AGENCY: Employee Benefits Security Administration ACTION: Interim final rule with request for comments. SUMMARY: This document contains an interim final rule amending regulations under the Employee Retirement Income Security Act of 1974 (ERISA or the Act) that provide guidance and a fiduciary safe harbor for the distribution of benefits on behalf of participants or beneficiaries in terminated and abandoned individual account plans. The Department is amending these regulations to reflect changes enacted as part of the Pension Protection Act of 2006, Public Law 109–280, to the Internal Revenue Code of 1986 (the Code), under which a distribution of a deceased plan participant’s benefit from an eligible retirement plan may be directly transferred to an individual retirement plan established on behalf of the designated nonspouse beneficiary of such participant. Specifically, the amended regulations require as a condition of relief under the fiduciary safe harbor that benefits for a missing, designated nonspouse beneficiary be directly rolled over to an individual retirement plan that fully complies with Code requirements. This interim final rule will affect fiduciaries, plan service providers, and participants and beneficiaries of individual account pension plans. DATES: Effective and Applicability Dates: The amendments made by this rule are effective March 19, 2007. This interim final rule is applicable to distributions made on or after March 19, 2007. Comment Date: Written comments must be received by April 2, 2007. SUPPLEMENTARY INFORMATION: A. Background This interim final rule amends two regulations under ERISA that facilitate the termination of individual account plans, including abandoned individual account plans, and the distribution of benefits from such plans. The first regulation, codified at 29 CFR 2550.404a–3, provides plan fiduciaries of terminated plans and qualified termination administrators (QTAs) of abandoned plans with a fiduciary safe harbor for making distributions on behalf of participants or beneficiaries who fail to make an election regarding a form of benefit distribution, commonly referred to as missing participants or beneficiaries. The second regulation, codified at 29 CFR 2578.1, establishes a procedure for financial institutions holding the assets of an abandoned individual account plan to terminate the plan and distribute benefits to the plan’s participants or beneficiaries, with limited liability.[FN1] Appendices to these two regulations contain model notices for notifying participants or beneficiaries of the plan’s termination and distribution options. The safe harbor regulation provides that both a fiduciary and a QTA will be deemed to have satisfied ERISA’s prudence requirements under section 404(a) of the Act if the conditions of the safe harbor are met with respect to the distribution of benefits on behalf of missing participants from terminated individual account plans.[FN2] In general, the regulation provides that a fiduciary or QTA qualifies for the safe harbor if a distribution is made to an individual retirement plan within the meaning of section 7701(a)(37) of the Code. See§ 2550.404a–3(d)(1)(i). However in April 2006, when the Department published this safe harbor regulation, a distribution of benefits from an individual account plan to a nonspouse beneficiary was not considered an eligible rollover distribution under the provisions of section 402(c) of the Code and, therefore, could not be rolled over into an individual retirement plan.[FN3] As a result, the safe harbor regulation mandated, among other requirements, the distribution of benefits on behalf of a missing nonspouse beneficiary to an account that was not an individual retirement plan. See § 2550.404a– 3(d)(1)(ii). Consequently, such distributions were subject to income tax and mandatory tax withholding in the year distributed into the account.[FN4] The Pension Protection Act changed the characterization of certain distributions from tax exempt plans and trusts to permit such distributions to qualify for eligible rollover distribution treatment.[FN5] Section 829 of the Pension Protection Act amended section 402(c) of the Code to permit the direct rollover of a deceased participant’s benefit from an eligible retirement plan to an individual retirement plan established on behalf of a designated nonspouse beneficiary.[FN6] These rollover distributions would not trigger immediate income tax consequences and mandatory tax withholding for the nonspouse beneficiary. In light of the Pension Protection Act’s changes to the Code allowing a rollover distribution on behalf of a nonspouse beneficiary into an inherited individual retirement plan with the resulting deferral of income tax consequences, the Department is amending the regulatory safe harbor for distributions from a terminated individual account plan, including an abandoned plan, at 29 CFR 2550.404a–3. These amendments require that a deceased participant’s benefit be directly rolled over to an inherited individual retirement plan established to receive the distribution on behalf of a missing, designated nonspouse beneficiary. These amendments eliminate the prior safe harbor condition that required a distribution on behalf of a missing nonspouse beneficiary to be made only to an account other than an individual retirement plan. See§ 2550.404a–3(d)(1)(ii). Therefore, when these amendments become applicable, a distribution on behalf of a missing nonspouse beneficiary would satisfy this condition of the safe harbor only if directly rolled into an individual retirement plan that satisfies the requirements of new section 402(c)(11) of the Code.[FN7] Conforming changes are made to the content requirements of the mandated participant and beneficiary termination notice and its model notice under the safe harbor. The amendments to 29 CFR 2578.1 also make conforming changes to the content of the required participant and beneficiary termination notice and model notice for abandoned plans. Concurrently with publication of this rule, the Department is publishing proposed amendments to PTE 2006–06,[FN8] which, when finalized, will clarify that the exemption provides relief to a QTA that designates itself or an affiliate as the provider of an inherited individual retirement plan for a missing, designated nonspouse beneficiary pursuant to the exemption’s conditions.As noted in the preamble to the proposed amendments, however, the Department interprets PTE 2006–06 as currently available to the QTA for its self-selection as an inherited individual retirement plan provider subject to the conditions of the exemption. 29 CFR Part 2550 29 CFR Part 2578 Title 29—Labor PART 2550—RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY 1. The authority citation for part 2550 continues to read as follows: Authority: 29 U.S.C. 1135; and Secretary of Labor’s Order No. 1–2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2550.401b–1 also issued under sec. 102, Reorganization Plan No. 4 of 1978, 43 FR 47713 (Oct. 17, 1978), 3 CFR, 1978 Comp. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), 3 CFR, 1978 Comp. 332. Sec. 2550.401c–1 also issued under 29 U.S.C. 1101. Sec. 2550.404c–1 also issued under 29 U.S.C. 1104. Sec. 2550.407c–3 also issued under 29 U.S.C. 1107. Sec. 2550.404a–2 also issued under 26 U.S.C. 401 note (sec. 657, Pub. L. 107–16, 115 Stat. 38). Sec. 2550.408b–1 also issued under 29 U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp. p. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978 Comp. 332, Sec. 2550.412–1 also issued under 29 U.S.C. 1112. 2. Amend § 2550.404a–3 by revising (d)(1)(ii), (d)(1)(iii)(C), (d)(2)(ii)(A), (d)(2)(iii), (d)(2)(iv), (d)(3), (e)(1)(iv), (e)(1)(v), (e)(1)(vi) to read as follows: § 2550.404a–3 Safe Harbor for Distributions from Terminated Individual Account Plans. Subchapter G—Administration and Enforcement Under the Employee Retirement Income Security Act of 1974 PART 2578—RULES AND REGULATIONS FOR ABANDONED PLANS 3. The authority citation for part 2578.1 continues to read as follows: Authority: 29 U.S.C. 1135; 1104(a); 1103(d)(1). 4. Amend § 2578.1 by revising (d)(2)(vi)(A)(5)(ii), (d)(2)(vi)(A)(5)(iii), (d)(2)(vi)(A)(6), (d)(2)(vi)(A)(7), (d)(2)(vi)(A)(8) to read as follows: § 2578.1 Termination of Abandoned Individual Account Plans Footnotes: [1] Under § 2578.1(d)(2)(vii)(B), a QTA is directed to make distributions in accordance with the safe harbor regulation. [2] 71 FR 20830 n. 21. [3] See 26 CFR 1.402(c)–2, Q&A–12. [4] 71 FR 20828 n.14. [5] Section 829 of the Pension Protection Act. [6] Section 829 of the Pension Protection Act requires that the individual retirement plan established on behalf of a nonspouse beneficiary must be treated as an inherited individual retirement plan within the meaning of Code§ 408(d)(3)(C) and must be subject to the applicable mandatory distribution requirements of Code§ 401(a)(9)(B). [7] See also I.R.S. Notice 2007–07 (January 10, 2007). [8] 71 FR 20856 (April 21, 2006). Cross Trading Statutory ExemptionUS Department of Labor 29 CFR Parts 2550 Statutory Exemption for Cross-Trading of Securities AGENCY: Employee Benefits Security Administration, Department of Labor ACTION: Interim final rule with request for comments. SUMMARY: This document contains an interim final rule that implements the content requirements for the written cross-trading policies and procedures required under section 408(b)(19)(H) of the Employee Retirement Income Security Act of 1974 (ERISA or the Act). Section 611(g) of the Pension Protection Act of 2006, Public Law 109–280, 120 Stat. 780, 972, amended section 408(b) of ERISA by adding a new subsection (19) that exempts the purchase and sale of a security between a plan and any other account managed by the same investment manager if certain conditions are satisfied. Among other requirements, section 408(b)(19)(H) stipulates that the investment manager must adopt, and effect cross-trades in accordance with, written cross-trading policies and procedures that are fair and equitable to all accounts participating in the cross-trading program. This interim final rule would affect employee benefit plans, investment managers, plan fiduciaries and plan participants and DATES: Effective Date: This interim final rule is effective April 13, 2007. Subchapter F, part 2550 of title 29 of the Code of Federal Regulations is amended as follows: SUBCHAPTER F—FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PART 2550—RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY
§ 2550.408b–19 Statutory exemption for cross-trading of securities. (a) In General.
(b) Policies and Procedures.
(c) Definitions. For purposes of this section:
Signed at Washington, DC, this 6th day of February, 2007. [FR Doc. E7–2290 Filed 2–9–07; 8:45 am] DOL - Delinquent Filer Voluntary Compliance ProgramApril 27, 1995 (60 FR 20874)
Agency: Department of Labor, Employee Benefits Security Administration Action: Grant of Class Exemption Effective Date: March 28, 2002 ProgramSection 1 - Delinquent Filer Voluntary Compliance (DFVC) Program The DFVC Program is intended to afford eligible plan administrators (described in Section 2 of this Notice) the opportunity to avoid the assessment of civil penalties otherwise applicable to administrators who fail to file timely annual reports for plan years beginning on or after January 1, 1988. Eligible administrators may avail themselves of the DFVC Program by complying with the filing requirements and paying the civil penalties specified in Section 3 or Section 4, as appropriate, of this Notice. Section 2 - Scope, Eligibility and Effective Date
Section 3 - Plan Administrators Filing Annual Reports
Section 4 - Plan Administrators Filing Notices for Apprenticeship and Training Plans and Statements for "Top Hat" Plans
Section 5 - Waiver of Right to Notice, Abatement of Assessment and Plan Status
Signed at Washington, DC, this 25th day of March, 2002. Ann L. Combs, [FR Doc. 02-7514 Filed 3-27-02; 8:45 am] |
Employer Securities and Real Property |
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2550.407a-1 GeneralDepartment of Labor Originally issued September 20, 1977 (42 FR 47201)
Regulation published in Federal Register September 20, 1977 (42 FR 47201) and amended November 22, 1977 (42 FR 59842). Codified to 29 C.F.R. 2550.407a-1. 2550.407a-2 Employer Securities and Real Property - AcquisitionDepartment of Labor Originally issued September 20, 1977 (42 FR 47201)
2550.407d-5 "Qualifying" Employer Security - DefinedDepartment of Labor Originally issued September 2, 1977 (42 FR 44388)
2550.407d-6 "Employee Stock Ownership Plan" - DefinedDepartment of Labor Originally issued September 2, 1977 (42 FR 44388)
2550.408b-1 Loans to Plan Participants and BeneficiariesDepartment of Labor Originally issued July 20, 1989 (54 FR 30520)
The Internal Revenue Code (the Code) contains parallel provisions to section 408(b)(1) of the Act. Effective, December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978) transferred the authority of the Secretary of the Treasury to promulgate regulations of the type published herein to the Secretary of Labor. Therefore, all references herein to section 408(b)(1) of the Act should be read to include reference to the parallel provisions of section 4975(d)(1) of the Code. Section 1114(b)(15)(B) of the Tax Reform Act of 1986 amended section 408(b)(1)(B) of ERISA by deleting the phrase "highly compensated employees, officers or shareholders" and substituting the phrase "highly compensated employees (within the meaning of section 414(q) of the Internal Revenue Code of 1986)." Thus, for plans with participant loan programs which are subject to the amended section 408(b)(1)(B), the requirements of this regulation should be read to conform with the amendment. Section 408(b)(1) of the Act does not contain an exemption from acts described in section 406(b)(3) of the Act (prohibiting fiduciaries from receiving consideration for their own personal account from any party dealing with a plan in connection with a transaction involving plan assets). If a loan from a plan to a participant who is a party in interest with respect to that plan involves an act described in section 406(b)(3), such an act constitutes a separate transaction which is not exempt under section 408(b)(1) of the Act. The provisions of section 408(b)(1) are further limited by section 408(d) of the Act (relating to transactions with owner-employees and related persons). Example (1): Plan P authorizes the trustee to establish a participant loan program in accordance with section 408(b)1) of the Act. Pursuant to this explicit authority, the trustee establishes a written program which contains all of the information required by section 2550.408b-1(d)(2). Loans made pursuant to this authorization and the written loan program will not fail under section 408(b)(1)(C) of the Act merely because the specific provisions regarding such loans are contained in a separate document forming part of the plan. The specific provisions describing the loan program whether contained in the plan or in a written document forming part of a plan, do affect the rights and obligations of the participants and beneficiaries under the plan and, therefore, must in accordance with section 102(a)(1) of the Act, be disclosed in the plan's summary plan description. 2550.408b-2 Services or Office Space Class ExemptionDepartment of Labor Originally issued June 24, 1977 (42 FR 32390)
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2550.408b-3 Loans to Employee Stock Ownership Plans
Department of Labor
Regulation 2550.408b-3
29 C.F.R. 2550.408b-3
Originally issued September 2, 1977 (42 FR 44385)
Technical corrections September 13, 1977 (42 FR 45907)
Amended April 30, 1984 (49 FR 18295)
- Definitions. When used in this section, the terms listed below have the following meanings:
- ESOP. The term "ESOP" refers to an employee stock ownership plan that meets the requirements of section 407(d)(6) of the Employee Retirement Income Security Act of 1974 (the Act) and 29 C.F.R. 2550.407d-6. It is not synonymous with "stock bonus plan." A stock bonus plan must, however, be an ESOP to engage in an exempt loan. The qualification of an ESOP under section 401(a) of the Internal Revenue Code (the Code) and 26 C.F.R. 54.4975-11 will not be adversely affected merely because it engages in a non-exempt loan.
- Loan. The term "loan" refers to a loan made to an ESOP by a party in interest or a loan to an ESOP which is guaranteed by a party in interest. It includes a direct loan of cash, a purchase-money transaction, and an assumption of the obligation of the ESOP. "Guarantee" includes an unsecured guarantee and the use of assets of a party in interest as collateral for a loan, even though the use of assets may not be a guarantee under applicable state law. An amendment of a loan in order to qualify as an exempt loan is not a refinancing of the loan or the making of another loan.
- Exempt Loan. The term "exempt loan" refers to a loan that satisfies the provisions of this section. A "non-exempt loan" is one that fails to satisfy such provisions.
- Pubicly traded. The term "publicly traded" refers to a security that is listed on a national securities exchange registered under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) or that is quoted on a system sponsored by a national securities association registered under section 15A(b) of the Securities Exchange Act (15 U.S.C. 78o).
- Qualifying Employer Security. The term "qualifying employer security" refers to a security described in 29 C.F.R. 2550.407d-5.
- Statutory Exemption.
- Scope. Section 408(b)(3) of the Act provides an exemption from the prohibited transaction provisions of sections 406(a) and 406(b)(1) of the Act (relating to fiduciaries dealing with the assets of plans in their own interest or for their own account) and 406(b)(2) of the Act (relating to fiduciaries in their individual or in any other capacity acting in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries). Section 408(b)(3) does not provide an exemption from the prohibitions of section 406(b)(3) of the Act (relating to fiduciaries receiving consideration for their own personal account from any party dealing with a plan in connection with a transaction involving the income or assets of the plan).
- Special scrutiny of transaction. The exemption under section 408(b)(3) includes within its scope certain transactions in which the potential for self-dealing by fiduciaries exists and in which the interests of fiduciaries may conflict with the interests of participants. To guard against these potential abuses, the Department of Labor will subject these transactions to special scrutiny to ensure that they are primarily for the benefit of participants and their beneficiaries. Although the transactions need not be arranged and approved by an independent fiduciary, fiduciaries are cautioned to scrupulously exercise their discretion in approving them. For example, fiduciaries should be prepared to demonstrate compliance with the net effect test and the arm's-length standard under paragraphs (c)(2) and (3) of this section. Also, fiduciaries should determine that the transaction is truly arranged primarily in the interest of participants and their beneficiaries rather than, for example, in the interest of certain selling shareholders.
- Primary benefit requirement.
- In General. An exempt loan must be primarily for the benefit of the ESOP participants and their beneficiaries. All the surrounding facts and circumstances, including those described in paragraphs (c)(2) and (3) of this section, will be considered in determining whether such loan satisfies this requirement. However, no loan will satisfy such requirement unless it satisfies the requirements of paragraphs (d), (e) and (f) of this section.
- Net effect on plan assets. At the time that a loan is made, the interest rate for the loan and the price of securities to be acquired with the loan proceeds should not be such that plan assets might be drained off (Emphasis added).
- Arm's-length standard. The terms of a loan, whether or not between independent parties, must, at the time the loan is made, be at least as favorable to the ESOP as the terms of a comparable loan resulting from arm's-length negotiations between independent parties.
- Use of loan proceeds. The proceeds of an exempt loan must be used, within a reasonable time after their receipt, by the borrowing ESOP only for any or all of the following purposes:
- To acquire qualifying employer securities.
- To repay such loan.
- To repay a prior exempt loan. A new loan, the proceeds of which are so used, must satisfy the provisions of this section. Except as provided in paragraphs (i) and (j) of this section or as otherwise required by applicable law, no security acquired with the proceeds of an exempt loan may be subject to a put, call, or other option, or buy-sell or similar arrangement while held by and when distributed from a plan, whether or not the plan is then an ESOP.
- Liability and collateral of ESOP for loan. An exempt loan must be without recourse against the ESOP. Furthermore, the only assets of the ESOP that may be given as collateral on an exempt loan are qualifying employer securities of two classes: those acquired with the proceeds of the exempt loan and those that were used as collateral on a prior exempt loan repaid with the proceeds of the current exempt loan. No person entitled to payment under the exempt loan shall have any right to assets of the ESOP other than:
- Collateral given for the loan,
- Contributions (other than contributions of employer securities) that are made under an ESOP to meet its obligations under the loan, and
- Earnings attributable to such collateral and the investment of such contributions.
- Default. In the event of default upon an exempt loan, the value of plan assets transferred in satisfaction of the loan must not exceed the amount of default. If the lender is a party in interest, a loan must provide for a transfer of plan assets upon default only upon and to the extent of the failure of the plan to meet the payment schedule of the loan. For purposes of this paragraph, the making of a guarantee does not make a person a lender.
- Reasonable rate of interest. The interest rate of a loan must not be in excess of a reasonable rate of interest. All relevant factors will be considered in determining a reasonable rate of interest, including the amount and duration of the loan, the security and guarantee (if any) involved, the credit standing of the ESOP and the guarantor (if any), and the interest rate prevailing for comparable loans. When these factors are considered, a variable interest rate may be reasonable.
- Release from encumbrance.
- General rule. In general, an exempt loan must provide for the release from encumbrance of plan assets used as collateral for the loan under this paragraph. For each plan year during the duration of the loan, the number of securities released must equal the number of encumbered securities held immediately before release for the current plan year multiplied by a fraction. The numerator of the fraction is the amount of principal and interest paid for the year. The denominator of the fraction is the sum of the numerator plus the principal and interest to be paid for all future years. See Section 2550.408b-3(h)(4). The number of future years under the loan must be definitely ascertainable and must be determined without taking into account any possible extensions or renewal periods. If the interest rate under the loan is variable, the interest to be paid in future years must be computed by using the interest rate applicable as of the end of the plan year. If collateral includes more than one class of securities, the number of securities of each class to be released for a plan year must be determined by applying the same fraction to each class.
- Special rule. A loan will not fail to be exempt merely because the number of securities to be released from encumbrance is determined solely with reference to principal payments. However, if release is determined with reference to principal payments only, the following three additional rules apply. The first rule is that the loan must provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for 10 years. The second rule is that interest included in any payment is disregarded only to the extent that it would be determined to be interest under standard loan amortization tables. The third rule is that subdivision (2) is not applicable from the time that, by reason of a renewal, extension, or refinancing, the sum of the expired duration of the exempt loan, the renewal period, the extension period, and the duration of a new exempt loan exceeds 10 years.
- Caution against plan disqualification. Under an exempt loan, the number of securities released from encumbrance may vary from year to year. The release of securities depends upon certain employer contributions and earnings under the ESOP. Under 26 C.F.R. 54.4975-11(d)(2) actual allocations to participants' accounts are based upon assets withdrawn from the suspense account. Nevertheless, for purposes of applying the limitations under section 415 of the Code to these allocations, under 26 C.F.R. 54.4975-11(a)(8)(ii) contributions used by the ESOP to pay the loan are treated as annual additions to participants' accounts. Therefore, particular caution must be exercised to avoid exceeding the maximum annual additions under section 415 of the Code. At the same time, release from encumbrance in annually varying numbers may reflect a failure on the part of the employer to make substantial and recurring contributions to the ESOP which will lead to loss of qualification under section 401(a) of the Code. The Internal Revenue Service will observe closely the operation of ESOPs that release encumbered securities in varying annual amounts, particularly those that provide for the deferral of loan payments or for balloon payments. See 26 C.F.R. 54.4975-7(b)(8)(iii).
- Illustration. The general rule under paragraph (h)(1) of this section operates as illustrated in the following example:
Example. Corporation X establishes an ESOP that borrows $750,000 from a bank. X guarantees the loan which is for 15 years at 5% interest and is payable in level annual amounts of $72,256.72. Total payments on the loan are $1,083,850.80. The ESOP uses the entire proceeds of the loan to acquire 15,000 shares of X stock which is used as collateral for the loan. The number of securities to be released for the first year is 1,000 shares, i.e., 15,000 shares x $72,256.72/$1,083,850.80 = 15,000 shares x 1/15. The number of securities to be released for the second year is 1,000 shares, i.e., 14,000 shares x $72,256.72/$1,011,594.08 = 14,000 shares x 1/14. If all loan payments are made as originally scheduled, the number of securities released in each succeeding year of the loon will also be 1,000.
- Right of first refusal. Qualifying employer securities acquired with proceeds of an exempt loan may, but need not, be subject to a right of first refusal. However, any such right must meet the requirements of this paragraph. Securities subject to such right must be stock or an equity security, or a debt security convertible into stock or an equity security. Also, they must not be publicly traded at the time the right may be exercised. The right of first refusal must be in favor of the employer, the ESOP, or both in any order of priority. The selling price and other terms under the right must not be less favorable to the seller than the greater of the value of the security determined under 26 C.F.R. 54.4975-11(d)(5), or the purchase price and other terms offered by a buyer, other than the employer or the ESOP, making a good faith offer to purchase the security. The right of first refusal must lapse no later than 14 days after the security holder gives written notice to the holder of the right that an offer by a third party to purchase the security has been received.
- Put option. A qualifying employer security acquired with the proceeds of an exempt loan by an ESOP after September 30, 1976, must be subject to a put option if it is not publicly traded when distributed or if it is subject to a trading limitation when distributed. For purposes of this paragraph, a "trading limitation" on a security is a restriction under any Federal or State securities law or any regulation thereunder, or an agreement (not prohibited by this section) affecting the security which would make the security not as freely tradable as one not subject to such restriction. The put option must be exercisable only by a participant, by the participant's donee(s), or by a person (including an estate or its distributes) to whom the security passes by reason of a participant's death. (Under this paragraph "participant" means a participant and the beneficiaries of the participant under the ESOP.) The put option must permit a participant to put the security to the employer. Under no circumstances may the put option bind the ESOP. However, it may grant the ESOP an option to assume the rights and obligations of the employer at the time that the put option is exercised. If it is known at the time a loan is made that Federal or state law will be violated by the employer's honoring such option, the put option must permit the security to be put, in a manner consistent with such law, to a third party (e.g., an affiliate of the employer or a shareholder other than the ESOP) that has substantial net worth at the time the loan is made and whose net worth is reasonably expected to remain substantial.
- Duration of put option.
- General rule. A put option must be exercisable at least during a 15-month period which begins the date the security subject to the put option is distributed by the ESOP.
- Special rule. In the case of a security that is publicly traded without restriction when distributed but ceases to be so traded within 15 months after distribution, the employer must notify each security holder in writing on or before the tenth day after the date the security ceases to be so traded that for the remainder of the 15-month period the security is subject to a put option. The number of days between the tenth day and the date on which notice is actually given, if later than the tenth day, must be added to the duration of the put option. The notice must inform distributee(s) of the terms of the put options that they are to hold. The terms must satisfy the requirements of paragraphs (j) through (i) of this section.
- Other put option provisions.
- Manner of exercise. A put option is exercised by the holder notifying the employer in writing that the put option is being exercised.
- Time excluded from duration of put option. The period during which a put option is exercisable does not include any time when a distributee is unable to exercise it because the party bound by the put option is prohibited from honoring it by applicable Federal or state law.
- Price. The price at which a put option must be exercisable is the value of the security, determined in accordance with paragraph (d)(5) of 26 C.F.R. 54.4975-11.
- Payment terms. The provisions for payment under a put option must be reasonable. The deferral of payment is reasonable if adequate security and a reasonable interest rate are provided for any credit extended and if the cumulative payments at any time are no less than the aggregate of reasonable periodic payments as of such time. Periodic payments are reasonable if annual installments, beginning with 30 days after the date the put option is exercised, are substantially equal. Generally, the payment period may not end more than 5 years after the date the put option is exercised. However, it may be extended to a date no later than the earlier of 10 years from the date the put option is exercised or the date the proceeds of the loan used by the ESOP to acquire the security subject to such put option are entirely repaid.
- Payment restrictions. Payment under a put option may be restricted by the terms of a loan, including one used to acquire a security subject to a put option, made before November 1, 1977. Otherwise, payment under a put option must not be restricted by the provisions of a loan or any other arrangement, including the terms of the employer's articles of incorporation, unless so required by applicable state law.
- Other terms of loan. An exempt loan must be for a specific term. Such loan may not be payable at the demand of any person, except in the case of default.
- Status of paln as ESOP. To be exempt, a loan must be made to a plan that is an ESOP at the time of such loan. However, a loan to a plan formally designated as an ESOP at the time of the loan that fails to be an ESOP because it does not comply with section 401 (a) of the Code or 26 C.F.R. 54.4975-11 will be exempt as of the time of such loan if the plan is amended retroactively under section 401(b) of the Code or 26 C.F.R. 54.4975-11(a)(4).
- Special rules for certain loans.
- Loans made before January 1, 1976. A loan made before January 1, 1976, or made afterwards under a binding agreement in effect on January 1, 1976 (or under renewals permitted by the terms of such an agreement on that date) is exempt for the entire period of such loan if it otherwise satisfies the provisions of this section for such period, even though it does not satisfy the following provisions of this section:
- The last sentence of paragraph (d);
- Paragraphs (e), (f), and (h)(1) and (2); and
- Paragraphs (i) through (m), inclusive.
- Loans made after December 31, 1975, BUT BEFORE November 1, 1977. A loan made after December 31, 1975, but before November 1, 1977, or made afterwards under a binding agreement in effect on November 1, 1977, (or under renewals permitted by the terms of such an agreement on that date) is exempt for the entire period of such loan if it otherwise satisfies the provisions of this section for such period even though it does not satisfy the following provisions of this section:
- Paragraph (f);
- The three provisions of paragraph (h)(2): and
- Paragraph (i).
- Release rule. Notwithstanding paragraphs (o)(1) and (2) of this section, if the proceeds of a loan are used to acquire securities after November 1, 1977, the loan must comply by such date with the provisions of paragraph (h) of this section.
- Default rule. Notwithstanding paragraphs (o)(1) and (2) of this section, a loan by a party in interest other than a guarantor must satisfy the requirements of paragraph (f) of this section. A loan will satisfy these requirements if it is retroactively amended before November 1, 1977, to satisfy these requirements.
- Put option rule. With respect to a security distributed before November 1, 1977, the put option provisions of paragraphs (j), (k), and (l) of this section will be deemed satisfied as of the date the security is distributed if by December 31, 1977, the security is subject to a put option satisfying such provisions. For purposes of satisfying such provisions, the security will be deemed distributed on the date the put option is issued. However, the put option provisions need not be satisfied with respect to a security that is not owned on November 1, 1977, by a person in whose hands a put option must be exercisable.
The payments made with respect to an exempt loan by the ESOP during a plan year must not exceed an amount equal to the sum of such contributions and earnings received during or prior to the year less such payments in prior years. Such contributions and earnings must be accounted for separately in the books of account of the ESOP until the loan is repaid.
2550.408b-4 Investment in Own-Bank Interest-Bearing Deposits
Department of Labor
Regulation 2550.408b-4
29 C.F.R. 2550.408b-4
Originally issued June 24, 1977 (42 FR 32392)
- In General.
- (1) Plan Covering Own Employees.
- The investment is expressly authorized by a provision of the plan or trust instrument, or
- The investment is expressly authorized (or made) by a fiduciary of the plan (other than the bank or similar financial institution or any of its affiliates) who has authority to make such investments, or to instruct the trustee or other fiduciary with respect to investments, and who has no interest in the transaction which may affect the exercise of such authorizing fiduciary's best judgment as a fiduciary so as to cause such authorization to constitute an act described in Section 406(b) of the Act.
- Must name such bank or similar financial institution, and
- Must state that such bank or similar financial institution may make investments in deposits which bear a reasonable rate of interest in itself (or in an affiliate).
- Definitions.
- The term "bank or similar financial institutions" . . . includes a bank (as defined in Section 581 of the Code), a domestic building and loan association (as defined in Section 7701(a)(19) of the Code).
- A person is an "affiliate" of a bank or similar financial institution if such person and such bank or similar financial institution would be treated as members of the same controlled group of corporations or as members of two or more trades or businesses under common control within the meaning of Section 414(b) or (c) of the Code and regulations thereunder.
- The term "deposits" includes any account, temporary or otherwise, upon which a reasonable rate of interest is paid, including a certificate of deposit issued by a bank or similar financial institution.
Section 408(b)(4) of the Employee Retirement Income Security Act of 1974 (the Act) exempts from the prohibition of Section 406 of the Act the investment of all or a part of a plan's assets in deposits bearing a reasonable rate of interest in a bank or similar financial institution supervised by the United States or a State, even though such bank or similar financial institution is a fiduciary or other party in interest with respect to the plan, if the conditions of either Part 2550.408b-4(b)(1) or Part 2550.408b-4(b)(2) are met.
Section 408(b)(4) provides an exemption from Section 406(b)(1) of the Act (relating to fiduciaries dealing with the assets of plans in their own interest or for their own account) and 406(b)(2) of the Act (relating to fiduciaries in their individual or in any other capacity acting in any transaction involving the plan on behalf of a party -- or representing a party -- whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries), as well as Section 406(a)(1), because Section 408(b)(4) contemplates a bank or similar financial institution causing a plan for which it acts as a fiduciary to invest plan assets in its own deposits if the requirements of Section 408(b)(4) are met.
However, it does not provide an exemption from Section 406(b)(3) of the Act (relating to fiduciaries receiving consideration for their own personal account from any part dealing with a plan in connection with a transaction involving the assets of the plan). The receipt of such consideration is a separate transaction not described in the statutory exemption. Section 408(b)(4) does not contain an exemption from other provisions of the Act, such as Section 404, or other provisions of law which may impose requirements or restrictions relating to the transactions which are exempt under Section 408(b)(4) of the Act. See, for example, Section 401 of the Internal Revenue Code of 1954 (Code). The provisions of Section 408(b)(4) of the Act are further limited by Section 408(d) of the Act (relating to transactions with owner-employees and related persons).
Such investment may be made if the plan is one which covers only the employees of the bank or similar financial institution, the employees of any of its affiliates, or the employees of both.
(2) Other Plans.
Such investment may be made if -
Any authorization to make investments contained in a plan or trust instrument will satisfy the requirement of express authorization for investments made prior to November 1, 1977.
Effective November 1, 1977, in the case of a bank or similar financial institution that invests plan assets in deposits in itself or its affiliates under an authorization contained in a plan or trust instrument, such authorization -
(3) Example.
B, a bank, is the trustee of plan P's assets. The trust instruments give the trustees the right to invest plan assets in its discretion. B invests in the certificates of deposit of bank C, which is a fiduciary of the plan by virtue of performing certain custodial and administrative services. The authorization is sufficient for the plan to make such an investment under Section 408(b)(4). Further, such authorization would suffice to allow B to make investments in deposits in itself prior to November 1, 1977. However subsequent to October 31, 1977, B may not invest in deposits in itself, unless the plan or trust instrument authorizes it to invest in deposits of B.
Note: Also refer to ERISA Section 408(b)(4), "Investment in Own-Bank Interest-Bearing Deposits".
2550.408b-6 Ancillary Services by Banks or Similar Financial Institutions
Department of Labor
Regulation 2550.408b-6
29 C.F.R. 2550.408b-6
Originally issued June 24, 1977 (42 FR 32392)
Technical corrections of July 18, 1977 (42 FR 36823) did not contain any changes to this regulation.
- In General.
- Conditions. Such service must be provided -
- At not more than reasonable compensation;
- Under adequate internal safeguards which assure that the provision of such service is consistent with sound banking and financial practice, as determined by Federal or State supervisory authority; and
- Only to the extent that such service is subject to specific guidelines issued by the bank or similar financial institution which meet the requirements of 2550.408b-6(c).
- Specific guidelines. (Reserved)
Section 408(b)(6) of the Employee Retirement Income Security Act of 1974 (the Act) exempts from the prohibitions of section 406 of the Act the provision of certain ancillary services by a bank or similar financial institution (as defined in 2550.408b-4(c)(1)) supervised by the United States or a State to a plan for which it acts as a fiduciary if the conditions of 2550.408b-6(b) are met. Such ancillary services include services which do not meet the requirements of section 408(b)(2) of the Act because the provision of such services involves an act described in section 406(b)(1) of the Act (relating to fiduciaries dealing with the assets of plans in their own interest or for their own account) by the fiduciary bank or similar financial institution or an act described in section 406(b)(2) of the Act (relating to fiduciaries in their individual or in any other capacity acting in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries). Section 408(b)(6) provides an exemption from sections 406(b)(1) and (2) because section 408(b)(6) contemplates the provision of such ancillary services without the approval of a second fiduciary (as described in 2550.408b-2(e)(2)) if the conditions of 2550.408b-6(b) are met. Thus, for example, plan assets held by a fiduciary bank which are reasonably expected to be needed to satisfy current plan expenses may be placed by the bank in a non-interest-bearing checking account in the bank if the conditions of 2550.408b-6(b) are met, notwithstanding the provisions of section 408(b)(4) of the Act (relating to investments in bank deposits). However, section 408(b)(6) does not provide an exemption for an act described in section 406(b)(3) of the Act (relating to fiduciaries receiving consideration for their own personal account from any party dealing with a plan in connection with a transaction involving the assets of the plan). The receipt of such consideration is a separate transaction not described in section 408(b)(6). Section 408(b)(6) does not contain an exemption from other provisions of the Act, such as section 404, or other provisions of law which may impose requirements or restrictions relating to the transactions which are exempt under section 408(b)(6) of the Act. See, for example, section 401 of the Internal Revenue Code of 1954. The provisions of section 408(b)(6) of the Act are further limited by section 408(d) of the Act (relating to transactions with owner-employees and related persons).
2550.408c-2 Compensation for Services
Department of Labor
Regulation 2550.408c-2
29 C.F.R. 2550.408c-2
Originally issued June 24, 1977 (42 FR 32393)
- In General. Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (the Act) refers to the payment of reasonable compensation by a plan to a party in interest for services rendered to the plan. Section 408(c)(2) of the Act and Section 2550.408c-2(b)(1) through 2550.408c-2(b)(4) clarify what constitutes reasonable compensation for such services.
- General Rule. Generally, whether compensation is "reasonable" under sections 408(b)(2) and 408(c)(2) of the Act depends on the particular facts and circumstances of each case.
- Payments to certain fiduciaries. Under sections 408(b)(2) and 408(c)(2) of the Act, the term "reasonable compensation" does not include any compensation to a fiduciary who is already receiving full-time pay from an employer or association of employers (any of whose employees are participants in the plan) or from an employee organization (any or whose members are participants in the plan), except for the reimbursement of direct expenses properly and actually incurred and not otherwise reimbursed. The restrictions of this paragraph (b)(2) do not apply to a party in interest who is not a fiduciary.
- Certain expenses not direct expenses. An expense is not a direct expense to the extent it would have been sustained had the service not been provided or if it represents an allocable portion of overhead costs.
- Expense advances. Under sections 408(b)(2) and 408(c)(2) of the Act, the term "reasonable compensation" , as applied to a fiduciary or an employee of a plan, includes an advance to such a fiduciary or employee by the plan to cover direct expenses to be properly and actually incurred by such person in the performance of such person's duties with the plan if:
- The amount of such advance is reasonable with respect to the amount of the direct expense which is likely to be properly and actually incurred in the immediate future (such as during the next month) and
- The fiduciary or employee accounts to the plan at the end of the period covered by the advance for the expenses properly and actually incurred.
- Excessive compensation. Under sections 408(b)(2) and 408(c)(2) of the Act, any compensation which would be considered excessive under 26 C.F.R. 1.162-7 (Income Tax Regulations relating to compensation for personal services which constitutes an ordinary and necessary trade or business expense) will not be "reasonable compensation". Depending upon the facts and circumstances of the particular situation, compensation which is not excessive under 26 C.F.R. 1.162-7 may, nevertheless, not be "reasonable compensation" within the meaning of sections 408(b)(2) and 408(c)(2) of the Act.
2550.408e Qualifying Employer Securities and Real Estate
Department of Labor
Regulation 2550.408e
29 C.F.R. 2550.408e
Acquisition or Sale of Qualifying Employer Securities and Acquisition/Sale/Lease of Qualifying Employer Real Estate
Originally issued August 1, 1980 (45 FR 51197)
- In General. Section 408(e) of the Employee Retirement Income Security Act of 1974 (the Act) exempts from the prohibitions of section 406(a) and 406(b)(1) and (2) of the Act any acquisition or sale by a plan of qualifying employer securities (as defined in section 407(d)(5) of the Act), or any acquisition, sale or lease by a plan of qualifying employer real property (as defined in section 407(d)(4) of the Ac) if certain conditions are met. The conditions are that:
- The acquisition, sale or lease must be for adequate consideration (which is defined in paragraph (d) of this section);
- No commission may be charged directly or indirectly to the plan with respect to the transaction; and
- In the case of an acquisition or lease of qualifying employer real property, or an acquisition of qualifying the securities, by a plan other than an eligible individual account plan (as defined in section 407(d)(3) of the Act), the acquisition or lease must comply with the requirements of section 407(a) of the Act.
- Acquisition. For purposes of section 408(e) and this section, an acquisition by a plan of qualifying employer securities or qualifying employer real property shall include, but not be limited to, an acquisition by purchase, by the exchange of plan assets, by the exercise of warrants or rights, by the conversion of a security, by default of a loan where the qualifying employer security or qualifying employer real property was security for the loan, or in connection with the contribution of such securities or real property to the plan. However, an acquisition of a security shall not be deemed to have occurred if a plan acquires the security as a result of a stock dividend or stock split.
- Sale. For purposes of section 408(e) and this section, a sale of qualifying employer real property or qualifying employer securities shall include any disposition for value.
- Adequate consideration. For purposes of section 408(e) and this section, adequate consideration means:
- In the case of a marketable obligation, a price not less favorable to the plan than the price determined under section 407(e)(1) of the Act and
- In all other cases, a price not less favorable to the plan than the price determined under section 3(18) of the Act.
- Commission. For purposes of section 408(e) and this section, the term "commission" includes any fee, commission or similar charge paid in connection with a transaction, except that the term "commission" does not include a charge incurred for the purpose of enabling the appropriate plan fiduciaries to evaluate the desirability of entering into a transaction to which this section would apply, such as an appraisal or investment advisory fee.
2570.30 - 52 Individual and Class Prohibited Transaction Exemption Requests (Replaces ERISA Procedure 75-1)
Department of Labor
Regulation 2570.30 through .52
29 C.F.R. 2570.30 through .52
Originally issued August 10, 1990 (55 FR 32847)
§ .35 Amended through April 12, 1991 (56 FR 14861)
Agency: Pension and Welfare Benefits Administration, Labor.
Action: Final regulation and removal of interim final regulation.
Summary: This document contains a final regulation that describes the procedures for filing and processing applications for exemptions from the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA), the Internal Revenue Code of 1986 (the Code), and the Federal Employees' Retirement System Act of 1986 (FERSA). At this time, the Department is also removing an interim regulation which describes the exemption procedures under FERSA because such regulation is superseded by the final regulation contained herein. The Secretary of Labor is authorized to grant exemptions from the prohibited transaction provisions of ERISA, the Code, and FERSA and to establish an exemption procedure to provide for such exemptions. The final regulation updates the description of the Department of Labor's procedures to reflect changes in the Department's exemption authority and to clarify the procedures by providing a more comprehensive description of the prohibited transaction exemption process.
Note: In 1995, the Labor Department also issued a booklet, Exemption Procedures Under Federal Pension Law, explaining how to obtain ERISA exemptions. The text of the exemption request procedure is included in the booklet. The free booklet is available from the Division of Public Affairs; Pension and Welfare Benefits Administration; U.S. Department of Labor; 200 Constitution Avenue, NW; Washington, DC 20210; phone 202/219-8921.
Effective Date: This regulation is effective September 10, 1990, and applies to all exemption applications filed at any time on or after that date.
Explanatory Preamble
For Further Information Contact: Miriam Freund, Office of Exemption Determinations, Pension and Welfare Benefits Administration, U.S. Department of Labor, Washington, DC 20210, (202) 523-8194, or Susan Rees, Plan Benefits Security Division, Office of the Solicitor, U.S. Department of Labor, Washington, DC 20210, (202) 523-9141.
Supplementary Information: Public reporting burden for this collection of information is estimated to average 28.5 hours per response, including the time for reviewing the instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing the burden, to Director, Office of Information Management, U.S. Department of Labor, 200 Constitution Avenue NW., Room N-1301, Washington, DC 20210; and to the Office of Information and Regulatory Affairs, Attn: OMB Desk Officer for PWBA, Office of Management and Budget, Room 3001, Washington, DC 20503.
Section 406 of ERISA prohibits certain transactions between employee benefit plans and "Parties in interest" (as defined in section 3(14) of ERISA). In addition, sections 406 and 407(a) of ERISA impose restrictions on plan investments in "employer securities" (as defined in section 407(d)(1) of ERISA) and "employer real property" (as defined in section 407(d)(2) of ERISA). Most of the transactions prohibited by section 406 of ERISA are likewise prohibited by section 4975 of the Code, which imposes an excise tax on those transactions to be paid by each "disqualified person" (defined in section 4975(e)(2) of the Code in virtually the same manner as the term "party in interest") who participates in the transactions.
Both ERISA and the Code contain various statutory exemptions from the. prohibited transaction rules. In addition, section 408(a) of ERISA authorizes the Secretary of Labor to grant administrative exemptions from the restrictions of ERISA sections 406 and 407(a) while section 4975(c)(2) of the Code a authorizes the Secretary of the Treasury or his delegate to grant exemptions from the prohibitions of Code section 4975(c)(1). Sections 408(a) of ERISA and 4975(c)(2) of the Code direct the Secretary of Labor and the Secretary of the Treasury, respectively, to establish procedures to carry out the purposes of these sections.
Under section 3003(b) of ERISA, the Secretary of Labor and the Secretary of the Treasury are directed to consult and coordinate with each other with respect to the establishment of rules applicable to the granting of exemptions from the Prohibited transaction restrictions of ERISA and the Code. Under section 3004 of ERISA, moreover, the Secretaries are authorized to develop jointly rules appropriate for the efficient administration of ERISA. Pursuant to these provisions, the Secretaries jointly issued an exemption procedure on April 28, 1975 (ERISA Proc. 75-1, 40 FR 18471. also issued as Rev. Proc. 75-26, 1975-1 C.B. 722). Under these procedures, a person seeking an exemption under both section 408(a) of ERISA and section 4975(c)(2) of the Code was obliged to file an exemption application with the Rules and Regulations of the Internal Revenue Service as well as with the Department of Labor.
Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1918, effective on December 31, 1978), transferred the authority of the Secretary of the Treasury to issue exemptions under section 4975 of the Code, with certain enumerated exceptions, to the Secretary, of Labor. As a result, the Secretary of Labor now possesses authority under section 4975(c)(2) of the Code, as well as under section 408(a) of ERISA, to issue individual and class exemptions from the prohibited transaction rules of ERISA and the Code. The Secretary has delegated this authority, along with most of his other responsibilities under ERISA, to the Assistant Secretary for Pension and Welfare Benefits. See Secretary of Labor's Order 1-87, 52 FR 13139 (April 21, 1987).
FERSA also contains prohibited transaction rules that are applicable to parties in interest with respect to the Federal Thrift Savings Fund established by ERISA, and the Secretary of Labor is directed to prescribe, by regulation, a procedure for granting administrative exemptions from certain of those prohibited transactions. See 5 USC 8477(c)(3).
On June 28, 1988, the Department published a proposed rule in the Federal Register (53 FR 24422) updating ERISA Procedure 75-1 to reflect the changes made by Reorganization Plan No. 4 and extending the procedure to applications for exemptions from the FERSA prohibited transaction rules. In addition, the proposed regulation codified various procedures developed by PWBA since the adoption of ERISA Proc. 75-1. Formal adoption of those procedures will facilitate review of exemption applications. These new procedures also fill in some of the gaps left in ERISA Proc. 75-1. thereby providing a more detailed description both of the steps to be taken by applicants in applying for exemptions and the steps normally taken by the Department in processing such applications. Finally, the proposed regulation modified some of the procedures described in ERISA Proc. 75-1 to better serve the needs of the administrative exemption program as demonstrated by the Department's experience with the program over the previous fourteen years. These amendments were intended to promote the prompt and fair consideration of all exemption applications.
The notice of proposed rulemaking gave interested persons an opportunity to comment on the proposal. In response, the Department received three letters of comment regarding several aspects of the proposed regulation. The following discussion summarizes the proposed regulation and the issues raised by the commentators and explains the Department's reasons for adopting the provisions of the final regulation.
The Scope of the Regulation
As explained in the notice of proposed rulemaking, the regulation establishes new procedures to replace ERISA Proc. 75-1. These new procedures reflect changes in the Department of Labor's exemption authority effected by Reorganization Plan No. 4 of 1978. Thus, the procedures apply to all applications for exemption which the Department has authority to issue under section 408(a) of ERISA, or, as a result of Reorganization Plan No. 4, under section 4975(c)(2) of the Code. The procedures reflect current practice under which the Department generally treats any exemption application filed solely under section 408(a) of ERISA or solely under section 4275(c)(2) of the Code as an application for exemption filed under both of these sections if the application relates to a transaction prohibited under corresponding provisions of both ERISA and the Code. The grant of an exemption by the Department in such instances protects disqualified persons covered by the exemption from the excise taxes otherwise assessable under section 4975(a) and (b) of the Code.
However, the procedures do not apply to applications for exemption reserved to the jurisdiction of the Secretary of the Treasury by Reorganization Plan No. 4. To ascertain the correct procedures for filing and processing applications for these exemptions, applicants should consult the Internal Revenue Service.
The Department has also concluded that it is appropriate to apply the procedures provided here to exemption applications filed under FERSA, as well as those filed under ERISA or the Code, as provided by proposed § 2570.30, which has been adopted without change in the final regulation. Although the prohibited transaction provisions of FERSA and the scope of the Department's exemptive authority under FERSA differ somewhat from that under ERISA and the Code, administrative exemption matters under FERSA are likely to involve many of the issues as are presented by similar matters involving private plans. Thus, adopting uniform procedures should help assure uniform administration of the exemption programs.
Applications for Exemption under FERSA
On December 29, 1988, the Department published an interim regulation in the Federal Register (29 C.F.R. part 2585, 53 FR 52088) describing the procedures for filing and processing applications for exemptions from the prohibited transaction provisions of FERSA. For such applications, the interim regulation adopted the procedures then currently followed (pursuant to ERISA Proc. 75-1) by applicants for exemptions from the prohibited transaction provisions of ERISA and the Code. The interim final regulation was effective commencing December 29, 1988 until the effective date of the final regulation contained herein for all prohibited transaction exemption applications (under ERISA, the Code and FERSA).1
Section 2585.12 of the interim regulation provides that this regulation shall expire on the effective date of the revised prohibited transaction exemption procedure, published in proposed form on June 28, 1988, 53 FR 24422, and that the Department will publish a document removing these interim regulations when it adopts final regulations based on the published proposal. Accordingly, this notice of final rulemaking removes the interim regulations, as of September 10, 1990, the effective date of the final regulation contained herein.
In regard to FERSA exemption applications, the Department received a comment relating to the adoption of ERISA class exemptions for FERSA purposes. This comment suggested that the final regulation clarify that the Department will follow the procedure authorized under section 8477(c)(3)(E) of FERSA, which permits the Secretary of Labor to determine that an exemption granted for any class of fiduciaries or transactions under section 408(a) of ERISA shall constitute an exemption for FERSA purposes upon publication of notice in the Federal Register without affording interested parties opportunities to present their views (in writing or at a hearing).
The procedures described in the preceding paragraph was not used in conjunction with the Department's adoption for FERSA purposes of a number of specific class exemptions under ERISA (for example, Prohibited Transaction Exemptions (PTE) 75-1, 78-19, 80-26, 80-51, 82-63 and 86-128). In that instance, the Department published in the Federal Register both a notice of proposed adoption of class exemptions under ERISA (53 FR 38105, September 29, 1988), which invited the public to submit written comments or requests for a hearing on the proposed adoption, and also a notice of final adoption of these class exemptions (PTE T88-1, 53 FR 52838, December 29, 1988). In this regard, the Department notes that, with respect to ERISA class exemptions which may be proposed in the future and which may also be relevant under FERSA, the Department will solicit the views of the Executive Director of the Federal Retirement Thrift Investment Board in advance of the publication of the proposed exemption to determine whether such exemption should also be proposed for FERSA purposes.
Also regarding FERSA exemption applications, the Department received another comment requesting clarification that the mere existence of routine audit activity conducted by the Department pursuant to the requirements of section 8477(g) of FERSA2 will not provide a basis for denial of, or failure to consider, an application for exemption under FERSA. It is the view of the Department that those audits conducted by the Department in carrying out its responsibilities in connection with its regular program of compliance audits under FERSA section 8477(g) would not constitute an "investigation" for purposes of § 2570.33(a)(2) and 2570.37(b) of the regulation3 or an "examination" for purposes of § 2570.35(a)(7).4 The Department would not, however, be precluded from denying, or failing to consider, an application based on an investigation prompted by information arising as a result of such a routine audit.
Definitions
Section 2570.31 of the proposed regulation defined the following terms for purposes of the exemption procedures: affiliate, class exemption, Department, exemption transaction, individual exemption, and party in interest. No comments were received regarding these definitions which are adopted in the final regulation as proposed. However, the Department has added to this section a definition of the term "pooled fund" in response to a comment requesting that a special rule be added to the final regulation regarding information to be furnished in exemption applications relating to plans affected by an exemption transaction undertaken by a pooled investment vehicle. (This comment is discussed in more detail below.)
Who May Apply for Exemptions
Section 2570.32(a) of the proposed regulation provided that exemption proceedings may be initiated by the Department either on its own motion or upon the application of: (1) Any party in interest to a plan which is or may be a party to the exemption transaction, (2) any plan which is a party to the exemption transaction, or (3) an association or organization representing parties in interest who may be parties to an exemption transaction covering a class of parties in interest or a class of transactions.
One of the comments received recommended modifying this paragraph of the regulation to permit an exemption application to be filed by any fiduciary or prospective fiduciary with respect to plan assets under such fiduciary's management or control, regardless of whether such fiduciary either represents a specific plan with respect to the exemption application or would be a party to the exemption transaction. The commentator clarified his comment by explaining that he intended this category of applicants to cover prospective fiduciaries, such as persons creating and/or managing a new investment vehicle in which plans are expected to participate if the requested exemption is granted, but in which no plans participate at the time the exemption application is filed. The commentator noted that in the past the Department has granted individual exemptions to institutional investment managers in connection with their investment management of individual plans' investment accounts or pooled investment funds in which several unidentified plans may participate.
In the Department's view, the reference in proposed § 2570.32(a)(1) to "any party in interest to a plan who is or may be a party to the exemption transaction" includes the prospective fiduciaries mentioned by the commentator. Therefore, § 2570.32(a) is adopted in the final regulation without change.
Section 2570.32(b) and (c) of the proposed regulation set forth simplified rules relating to representation of applicants by third parties. No comments were received regarding these paragraphs, which are adopted in the final regulation without change.
Applications the Department Will Not Ordinarily Consider
Section 2570.33(a) of the proposed regulation described the circumstances under which the Department will not ordinarily consider the merits of an exemption application. Thus, this paragraph provided that the Department will not ordinarily consider an incomplete application. In this regard, the Department emphasizes that applicants should not file exemption applications until they have compiled all the information required by § 2570.34 and, if applicable, § 2570.35, and can submit this information in an organized and comprehensive fashion together with all necessary supporting documents and statements. In addition, the proposal made it clear that the Department ordinarily will not consider applications that involve a transaction, or a party in interest with respect to such transaction, that is the subject of an ERISA enforcement action or investigation. In certain cases, however, the Department may exercise its discretion to consider exemption applications in these categories where, for example, deficiencies in the exemption application are merely technical, or where an enforcement matter is clearly unrelated to the exemption transaction.
One comment was received specifically regarding investigations, and it is discussed above under the heading "Applications for Exemption under FERSA." In addition, the Department has amended § 2570.33(a)(2) (relating to certain investigations and enforcement actions) to conform to a similar revision to § 2570.35(a)(7) (discussed below) made in response to two other comments received regarding the proposed requirement to include information in an application concerning certain investigations, examinations, litigation, or continuing controversy involving specified Federal agencies with respect to any plan or party in interest involved in the exemption transaction. The effect of these amendments is to expand the proposed regulation in order to broaden the scope of exemption applications which the Department will ordinarily consider.
No comments were received on paragraphs (b) and (c) of proposed § 2570.33, which are adopted without change in the final regulation. These paragraphs relate to the Department's written explanation to an applicant whose exemption application the Department has decided not to consider, and to applications for individual exemption relating to transaction(s) covered by a class exemption under consideration by the Department.
Exemption Application Contents - General Information
As previously noted in the proposed regulation, the Department's experience to date with the administrative exemption program suggests that the program's efficiency could be increased and applicants can receive more timely treatment of their applications for exemption if the quality of exemption applications filed were improved. In the past, applications have been incomplete, have omitted or misstated facts or legal analyses needed to justify requests for exemptive relief, and in some cases have been so poorly drafted that the details of the transactions for which exemptive relief is sought ("exemption transactions") are unclear. The time and effort required to deal with such deficient applications and to obtain accurate and complete information about exemption transactions have contributed to processing delays. Moreover, in many exemption applications, the discussion of the substantive basis for the exemption does not take adequate account of positions adopted by the Department with respect to other similar applications.
The proposed regulation attempted to address these problems in a number of ways. First, the proposal required that applicants provide more complete information in their applications about exemption transactions and about the plans and the parties in interest involved in those transactions. The Department's experience suggests that this additional information is very helpful, and often essential, for a complete understanding of the exemption transaction and of the context surrounding it, and that the omission of such additional information in exemption applications will delay review of these applications on their merits.
For the same reason the proposed regulation required filing with the exemption copies of the relevant portions of documents. By filing comprehensive applications with necessary supporting documentation, applicants can do much to facilitate the Department's review of requested exemptions and to expedite the exemption process as a whole.
To further expedite the exemption process, the proposed regulation required that an applicant include with his application a statement explaining why the requested exemption satisfies requirements set forth in sections 408(a) of ERISA and 4975(c)(2) of the Code and 5 USC 84711(c)(3)(C) that an exemption be:
- Administratively feasible;
- In the interests of the plan and of its participants and beneficiaries; and
- Protective of the rights of the plan's participants and beneficiaries.
This requirement is not new. Under ERISA Proc. 75-1, applicants have been required to include with their applications statements explaining why a requested exemption satisfies the statutory prerequisites for an exemption. Too often, however, applicants have attempted to satisfy this requirement with generalizations and perfunctory assurances about the benefits to be reaped by plans and their participants and beneficiaries from the proposed exemption.
The Department will not seek out reasons to grant an exemption that has not been adequately justified by an applicant. Indeed, the Department considers that it is the responsibility of applicants to demonstrate clearly that exemptions they are requesting meet statutory criteria. Accordingly, under both the proposed and the final regulation, applicants are expected to review the statutory criteria for granting administrative exemptions and explain with as much specificity as possible why a requested exemption would pose no administrative problems, what benefits affected plans and their participants and beneficiaries can expect to receive from it, and what conditions word be attached to protect the rights of participants and beneficiaries of affected plans.5
Under ERISA Proc. 75-1, applicants have been given the option, but have not been required, to submit a draft of the proposed exemption. Both the proposed and the final regulation preserve this option. However, while not requiring the submission of a draft of the proposed exemption, the Department recommends that applicants include in their exemption applications draft language which defines the scope of the requested exemption, including the specific conditions under which the proposed exemption would apply. A draft which explains the exemption requested in a clear and concise manner and focuses on what the applicant considers to be the essential features of the exemption transaction and the critical safeguards supporting the requested relief is likely to facilitate the process of review. Obviously, the degree of detail necessary to describe the proposed exemption adequately will vary depending on the complexity of the transaction and the kind of relief requested.
Section 2570.34 of the proposed regulation listed the information that is required in every exemption application, whether it be an application for individual or class exemption. In addition, the information specified in § 2570.35 of the regulation must be included in applications for individual exemptions. Some specific items of information are described below.
Shared Representation
Section 2570.34(a)(3) of the proposed regulation required each exemption application to disclose whether the same person will represent both the plan and the parties in interest involved in an exemption transaction in matters relating to the application. The proposal noted that such shared representation may raise questions under the exclusive purpose and prudence requirements of sections 403(b) and 404(a) of ERISA and under the prohibited transaction provisions of section 406 of ERISA and section 4975(c)(1) of the Code. No comments have been received regarding this subparagraph, which is adopted as proposed.
Third-Party Declarations
Section 2570.34(b)[5)(iii) of the proposed regulation required a declaration under penalty of perjury to accompany specialized statements from third-party experts submitted to support an exemption application, such as appraisals, analyses of market conditions, or opinions of independent fiduciaries. Specifically, the proposal required a declaration under penalty of perjury that to the best of the expert's knowledge and belief, the representations made in the specialized statement are true and correct. This declaration was to be dated and signed by the expert who prepared the statement.
One of the commenters urged deletion of this requirement and expressed concern that it would cause additional expense to applicants because new third-party statements would be required once the appraiser, engineer, financial specialist, or other expert became aware of their intended use as part of an exemption application. The commentator advised subsequently that such experts either may be reluctant to provide any sort of attestation because of unknown liabilities which may arise by using the expert's report as part of an exemption application, or may seek an additional, and perhaps substantial, fee for furnishing an attestation due to the unknown liabilities.
In this regard the Department notes that, with respect to any matter within the jurisdiction of any department or agency of the United States, it is a crime, punishable by a fine of up to $10,000 and/or imprisonment of up to five years, for anyone knowingly and willfully to falsify, conceal or cover up by any trick, scheme or device a material fact; to make any false, fictitious, or fraudulent statements or representations; or to make or use any false writing or document knowing the same contains any false, fictitious, or fraudulent statement or entry (18 USC 1001). It is the view of the Department that this provision applies to applicants for exemptions under ERISA, the Code, or FERSA, to fiduciaries (independent or otherwise) representing the plan in an exemption, transaction, and to third-party experts who prepare statements or reports that such experts know will be included in exemption applications.
Nevertheless, the Department recognizes that third-party experts, such as appraisers, bankers, financial analysts, and other specialized consultants usually do not function as fiduciaries with respect to a plan if such experts authority, responsibility, or contact with respect to the plan is limited to providing an opinion which may be included in an exemption application, and which will be considered by plan fiduciaries who will decide what, if any, action they will take on behalf of the plan based upon such opinion. The Department believes that such experts need not be held to the same degree of accountability regarding exemption applications covering transactions where a plan fiduciary has the authority and responsibility to make decisions on behalf of a plan. Thus, the Department has decided to modify proposed § 2570.34(b)(5)(iii) to provide that a statement of consent, rather than a declaration under penalty of perjury, is required from each such expert which acknowledges that his or her statement is being submitted to the Department as part of an exemption application. The Department believes that such a consent statement from a third-party expert will not require an applicant to obtain a new report from the expert because the expert's consent statement may refer to his or her previously issued report. (However, the Department may require an updated report in any case if the substantive information contained in a report submitted with an exemption application is out of date.)
Conversely, where an independent fiduciary represents the plan in an exemption transaction, that fiduciary is subject to all of the responsibilities imposed by part 4 of subtitle B of title A of ERISA. None of the comments received questioned the need for such a fiduciary to provide the declaration under penalty of perjury required under the proposed regulation, and the Department has decided to retain this proposed requirement for such plan fiduciaries in the final regulation. As a result, the Department has modified § 2570.34(b)(5)(ii) and has added § 2570.34(b)(5)(iv) to clarify that a declaration is required for such plan fiduciaries.
Pooled Funds
One comment suggested that § 2570.35 of the proposed regulation be modified to provide a special rule regarding information to be included in an application for an individual exemption involving a pooled investment fund, such as a pooled separate account maintained by an insurance company or a collective investment fund maintained by another financial institution. The commentator pointed out that, as proposed, § 2570.35 would require information to be submitted regarding each plan participating in a pooled investment fund, resulting in the submission of an overwhelming volume of information unrelated to the exemption transaction. However, the commentator recognized that information regarding certain plans may be relevant to the exemption application in view of the potential for conflicts of interest involving such plans. Such plans would include any plan maintained for employees of the sponsor or other fiduciary of the pooled investment fund, and a plan whose participation in the pooled fund exceeded a specified percentage of the total fund assets.
The Department agrees with this comment and, accordingly, has added a new paragraph (c) to § 2570.35, which contains a special rule for applications for individual exemptions involving pooled funds [as defined in § 2570.31(g)]. Subparagraph (1) of § 2570.35(c) excepts such applications from including certain information otherwise required relating to among other things: reportable events under section 4043 of ERISA, notice of intent to terminate a plan (section 4041 of ERISA), the number of participants and beneficiaries of each plan participating in the pooled fund, and the percentage of each such plan's assets involved in the exemption transaction.
Subparagraph (2) of the special rule provides that certain information otherwise required by § 2570.35(a) and (b) of the regulation must be furnished by reference to the pooled fund rather than the plans participating in such fund. This information pertains to: Identifying information; any prior violations of the Code's exclusive benefit rule or of the prohibited transaction provisions of the Code, ERISA or FERSA, any prior applications for exemption from such prohibited transaction provisions; any lawsuits or criminal actions regarding conduct with respect to any employee plan; any criminal convictions described in section 411 of ERISA; any investigation or continuing controversy with specified Federal agencies regarding compliance with ERISA, Code provisions relating to employee plans, or FERSA provisions relating to the Federal Thrift Savings Fund; whether the exemption transaction has been consummated and, if so, certain related information regarding correction of the prohibited transaction and payment of excise taxes; the identification of persons with investment discretion over any assets involved in the exemption transaction and each such person's relationship to the parties in interest involved in the exemption transaction; investments involving certain parties in interest, the fair market value of the pooled fund; the identity of the person who will pay the costs of the exemption application, notifying interested persons, and the fee of any independent fiduciary involved in the exemption transaction; and an analysis of the facts relevant to the exemption transaction as reflected in documents submitted with the application. The pooled fund, rather than participating plans, must also furnish copies of all relevant documents, including, for example, the most recent financial statements of the pooled fund.
Subparagraph (3) of the special rule requires information to be furnished with pooled fund exemption applications with respect to: the aggregate number of plans expected to participate in the pooled fund, and the limits (if any) imposed by the pooled fund on the amount or percentage of each participating plan's assets that may be invested in the pooled fund.
Subparagraph (4) of § 2570.35(c) contains additional requirements for applications for individual exemptions involving pooled funds. These requirements apply to plans whose investments in the pooled fund represent more than 20% of the pooled fund's total assets6 and those plans covering employees of the pooled fund's sponsor, and other fiduciaries with discretion over pooled fund assets. The Department believes that additional information is warranted in those situations where the potential for decision making that may inure to the benefit of a fiduciary or other party in interest is increased. For each of these plans, the additional requirements provide for the furnishing of certain individual plan information described in 2570.35(a), in addition to the information required under § 2570.35(c)(2) and (c)(3). The Department believes this information is necessary for its determination as to whether sufficient protections are incorporated into the exemption transaction.
The Department further notes that the decision by the fiduciaries of certain plans to invest in a pooled fund may involve a separate prohibited transaction, apart from any prohibited transaction which may be entered into by the pooled fund itself In this regard, the Department notes that the information required to be submitted on behalf of such plans is to be provided in accordance with the general rule contained in § 2570.35, rather than the special rule for pooled funds.
Finally, the Department believes that the special rule for pooled funds is less burdensome to applicants than the rules set forth in the proposed regulation. As noted by a commentator, the proposed regulation would have required the submission of voluminous amounts of material, as information would have to be submitted on behalf of each plan investing in a pooled fund. The final regulation limits the amount of material to be submitted since it requires only information relating to the pooled fund and, where applicable, certain plans investing in the pooled fund. In addition, the Department believes that its ability to analyze and process applications for exemption involving pooled funds will be enhanced by this special rule. In this regard, the Department believes that the final regulation eliminates a significant amount of material that otherwise would have been required.
Lawsuits, Certain Criminal Convictions, Investigations, Examinations, Continuing Controversies, etc.
Sections 2570.35(a)(5), (6), and (7) of the proposed regulation required exemption applications to disclose information regarding whether the applicant or any of the parties to the exemption transaction is or has been, within a specified number of years past, a defendant in any lawsuit or criminal action concerning conduct as a fiduciary or other party in interest with respect to any employee benefit plan (§ 2570.35(a)(5)(b) convicted of a crime described in section 411 of ERISA (§ 2570.35(a)(6)), or under investigation or examination or engaged in litigation or a continuing controversy with certain Federal agencies (§ 2570.35(a)(7)). Proposed § 2570.35(a)(7) also required disclosure of whether any plan affected by the exemption transaction has been under such investigation, examination, litigation, or any controversy, and further required the applicant to submit copies of all correspondence with the specified Federal agencies regarding substantive issues involved in such investigation, etc.
Two of the comments urged deletion of the disclosure requirements of proposed § 2570.35(a)(5) and (7) on the basis that such disclosure is difficult, costly, and almost always irrelevant to the exemption transaction.
The Department continues to believe that the proposed disclosure is relevant to the exemption transaction. With regard to § 2570.35(a)(5) (relating to lawsuits or certain criminal actions), the Department views the disclosure required as directly concerning the conduct of the applicant and other parties in interest participating in the exemption transaction. The Department believes that such information is necessary in evaluating the credibility and integrity of such parties, some of whom may possess substantial discretion regarding the exemption transaction or may make representations upon which the Department must rely in determining whether the statutory criteria for an exemption have been satisfied. In addition, the proposed disclosure assists the Department in ensuring that the exemption contains appropriate safeguards.
Further, the Department does not agree that the disclosure required by § 2570.35(a)(5) imposes any "significant" burdens on applicants. The Department believes that prudent fiduciaries would in the normal course of carrying out their responsibilities, ascertain such information about the parties they intend to deal with in investment and other plan transactions. However, the Department has determined that it would be appropriate to modify proposed § 2570.35(a)(5) in the final regulation to limit disclosure to the applicant or any of the parties in interest involved in the exemption transaction.
Regarding the disclosure required by proposed § 2570.35(a)(7) (relating to, investigations, examinations, litigation, and continuing controversy by or with the specified Federal agencies), the Department believes that such information is necessary to ensure that the Department's exemption activities do not compromise its enforcement efforts. Although the Department is most interested in information involving investigations, etc. that are directly related to the subject exemption transactions and the participating parties, the Department believes, nevertheless, that its exemption staff, and not the applicants, should determine which investigations, examinations, etc., are relevant.
One of the comments further suggested that it is inappropriate to require applicants to disclose matters which have resulted in no formal allegations of violations of law. The Department notes, however, that the affected parties may include, as part of their disclosure, any qualification or explanations they deem appropriate for consideration by the Department, including information on the final disposition of any matter;
Another commentator suggested that disclosure under § 2570.35(a)(7) be limited to a reference to the investigation or litigation without requiring submission of copies of "all correspondence" involved in the investigation. In this regard, the Department notes that the proposed regulation did not require submission of copies of all correspondence, but only of correspondence relating to the, substantive issues involved in the investigation, examination, litigation, or controversy. Specifically, the Department intended to require submission of copies of correspondence containing only that information directly relevant to determining whether or not the requested exemption should be granted. After considering the comment, the Department has modified § 2570.35(a)(7) to clarify that the phrase "substantive issues" refers to issues related to compliance with the provisions of parts 1 and 4 of subtitle B of title I of ERISA (reporting and disclosure (part 1) and fiduciary responsibility (part 4)), section 4975 of the Code, or sections 8477 or 8478 of FERSA (fiduciary responsibilities, liability and penalties (section 8477) and bonding (section 8478). Copies of correspondence relating to any of these substantive issues is necessary in order for the Department to determine the effect the requested exemption may have on the Department's enforcement activities in each case under investigation, examination, etc.
One of the comments noted that proposed § 2570.35(a)(5), (6) and (7) required the disclosure of information regarding any parties to the exemption transaction and suggested limiting the disclosure to fiduciaries authorizing the transaction and any parties in interest involved in the exemption transaction. This comment pointed out that investment transactions may involve multiple parties, many of wham are neither plan fiduciaries nor parties in interest. After due consideration, the Department agrees with this suggestion and, accordingly, has modified § 2570.35(a)(5), (6) and (7) to limit the required disclosure to any parties in interest involved in the exemption transaction. The Department rates that this group includes, among others, the fiduciary authorizing the exemption transaction.
See the heading "Applications for Exemption under FERSA," above, regarding modification to proposed § 2570.35(a)(7) as applicable to the Federal Thrift Savings Plan established by FERSA.
Party-in-Interest Investments
Proposed § 2570.35(a)(16) required an application for individual exemption to disclose information regarding any plan investments in loans to, property leased to, or securities issued by, any party in interest involved in the exemption transaction. One of the comments suggested deletion of this requirement due to the difficulty of identifying such investments in view of the "look-through" rule contained in the Department's plan asset regulation (29 C.F.R. 2510.101). This comment suggested that the proposed disclosure may invoke many transactions, by an entity whose underlying assets include "plan assets," which are totally unrelated to the exemption transaction. The comment further indicated that this disclosure would be burdensome for exemption transactions involving numerous parties in interest, such as those involving pooled funds.
The Department agrees that, for exemption applications involving pooled funds, furnishing the proposed disclosure could be burdensome inasmuch as such applications generally do not relate to specific plans. Accordingly, the Department has adopted a special rule for applications for individual exemption involving pooled funds, discussed above (under the heading "Pooled Funds"), which limits this type of disclosure to the pooled fund and to certain plans participating therein.
Regarding exemption applications involving specific individual plans, it appears to the Department that the information to be disclosed under proposed § 2570.35(a)(16) must be maintained, in any event, to satisfy the annual reporting requirements of section 103 of ERISA, as well as the recordkeeping requirements of section 107. Therefore, the Department believes that this disclosure requirement should not impose any additional burdens on the applicant. The information to be disclosed will enable the Department to determine whether the exemption transaction, in conjunction with other plan investments involving parties in interest, would unduly concentrate the plan's assets in such investments so as to raise questions under the fiduciary responsibility provisions of section 404 of ERISA. For these reasons, the Department has decided to adopt § 2570.35(a)(16) as proposed, subject to the special rule for applications for individual exemption involving pooled funds in § 2570.35(c).
Costs Related to the Exemption Application
Proposed § 2570.35(a)(18) and (19) required the exemption application to identify the person who will bear the costs of the exemption application, of notifying interested persons, and of the fee charged by any independent fiduciary involved in the exemption transaction. The preamble to the proposed regulation noted that a plan's payment of the expenses associated with the filing or processing of an exemption application raises questions under the fiduciary responsibility and the prohibited transaction restrictions to the extent that any party in interest benefits from the transaction for which an exemption is sought (see section 406(a)(1)(D) of ERISA).
One of the commentators requested that the Department provide a more specific discussion of when it believes such questions will be raised. The comment states that, in many cases, it is appropriate for the plan to pay the expenses attributable to obtaining an exemption, and that an independent fiduciary's fees are generally paid by the plan receiving such fiduciary's services in order to ensure that such fiduciary conducts its activities in a totally independent manner and without any potential influence from persons other than the plan paying such fees.
The proposed disclosure of who pays the fees for an exemption application is intended to enable the Department to review the appropriateness of such payment by a plan in the context of a specific exemption request. Such disclosure is also intended to aid the exemption staff in evaluating whether the economic merits of the transaction, taking into account the costs attributable to the exemption application, support a finding that the proposed transaction is in the interests of the plan and its participants and beneficiaries. While the Department agrees that there may be certain instances in which it would be appropriate for a plan to pay all or part of the costs attendant with obtaining an exemption, such as where it is necessary to ensure the independence of an independent fiduciary or third-party expert, the Department believes that the propriety of such payments by a plan is an inherently factual determination which can be made only on a case-by-case basis.
In this regard, the Department notes that, when evaluating the propriety of the payment by a plan of certain expenses, plan fiduciaries must first consider the general fiduciary responsibility provisions of sections 403 and 404 of ERISA. Section 403(c)(1) provides, in part, that the assets of an employee benefit plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. Similarly, section 404(a)(1)(A) requires, in part, that a fiduciary of a plan discharge his duties for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan. Thus, a payment that is not a distribution of benefits to participants or beneficiaries of a plan would not be consistent with the requirements of sections 403(c)(1) and 404(a)(1)(A) unless it was used to defray a reasonable expense of administering the plan.
In addition, section 406(a)(1)(D) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest of any assets of the plan. It is the responsibility of appropriate plan fiduciaries to determine whether a particular expense is a reasonable administrative expense under sections 403(c)(1) and 404(a)(1)(A) of ERISA or whether plan payment of an expense would constitute a prohibited use of plan assets for the benefit of a party in interest under section 406(a)(1)(D) of ERISA.
Copies of Documents
Section 2570.35(b)(1) of the proposed regulation required each application for individual exemption to include true copies of all documents bearing on the exemption transaction, such as contracts, deeds, agreements, instruments, and relevant portions of plan documents, including trust agreements.
One comment objected to this requirement on the grounds that having to assemble the required documents is time consuming, costly, and unnecessary if the exemption application properly describes all pertinent plan provisions and other documents in sufficient detail to allow the Department to evaluate the merits of the exemption transaction. In this regard, the Department notes that the documents with respect to which copies are requested are all documents which would be readily available to the parties to the exemption transaction. Accordingly, the Department does not believe that there would be a significant burden in either compiling the documents or in transmitting copies to the Department. Further, the Department notes that it is not uncommon for representations contained in an exemption application to be inconsistent with the provisions of the governing documents or for the latter to contain provisions with respect to which clarifications or other representations are needed in order for the requested exemption to be proposed. On the basis of the Department's experience with exemptions, scrutiny of the relevant documents is, in the large majority of cases, a necessary prerequisite to a complete understanding of the exemption transaction and the implications for affected plans and parties in interest. Moreover, in the Department's experience, the inclusion of copies of the requested documents, as part of the exemption application, has expedited the processing of the requested exemption.
For these reasons, the final regulation adopts proposed § 2570.35(b)(1) without change. However, the Department wishes to clarify three points regarding this requirement. -
- First, for exemption transactions in which identical documents will be executed by more than one party, the submission of only one specimen document will satisfy the requirements of this paragraph.
- Second, in the case of exemption transactions which are proposed, copies of the documents relating to the proposed transaction need not be executed or dated when they are submitted with the exemption application if the documents are complete in every other respect. In this regard, the Department strongly encourages requesting an administrative exemption before entering into a prohibited transaction because of the ability to incorporate all of the necessary safeguards into the transaction. By contrast, such safeguards cannot be put into place after a prohibited transaction has occurred.
- Third, only copies of documents need be submitted. The Department may not be able to return original documents and, therefore, urges that only true copies of documents be submitted.
Where To File an Application
Although no comments were received regarding this section, which is adopted as proposed, the Department wishes to advise applicants that including the room number of the Division of Exemptions in the address will generally expedite its delivery. The current room number of the Division of Exemptions, Room N-5671, is not included in the regulation to avoid the need to amend the regulation every time the room, number of the Division changes.
Duty To Amend and Supplement Information
The proposed regulation contained the requirement established in ERISA Proc. 75-1 that an applicant promptly notify the Division of Exemptions if he discovers that any material fact or representation contained in his application, or in any supporting documents or testimony, was inaccurate or if any such fact or representation changes. However, the proposed regulation added the requirement that an applicant notify the Division of Exemptions when anything occurs that may affect the continuing accuracy of such facts or representations.
Two comments received indicated confusion as to the expiration date of the duty to update information submitted as part of an exemption application. Accordingly, the final Regulation clarifies § 2570.37(a) and (b) to indicate that such duty applies only during the pendency of the exemption application and expires after the exemption is granted. The Department also wishes to clarify that, in § 2570.37(a), the phrase "continuing accuracy of any such fact or representation" refers to future events or changes known before the exemption is granted that will render inaccurate facts stated or representations made before such grant. The Department wishes to note that exemptions are granted only to transactions as described. Therefore, if an exemption is granted and the transaction is not as described in some material aspect, the exemption does not take effect or protect parties in interest from liability for the transaction. See § 2570.49 of the regulation.
Tentative Denial Letters
Although ERISA Proc. 75-1 established no procedures to be followed by the Department in denying exemption applications or by applicants in responding to such denials, the Department has developed procedures over the years to notify applicants first to the tentative and, later, of the final denial of their applications. In large part, the proposed regulation codified these procedures.
Under the proposed regulation, the Department may decide to deny an exemption request at any of a number of stages in the review process. For example, it may decide after its initial review of an application that the requested exemption does not satisfy the statutory criteria set forth in sections 408(a) of ERISA and 4975(c)(2) of the Code. In that event, the Department will send a tentative denial letter to the applicant pursuant to § 2570.38 of the regulation. That letter will inform the applicant of the Department's tentative decision to deny the application and of the reasons therefore. Under § 2570.38, an applicant has 20 days from the date of this letter to request a conference with the Department and/or to notify the Department of his intern to submit additional information in writing to support the application. If the Department receives no request for a conference and no notice of intent to submit additional information within that time, it will send the applicant a final denial letter pursuant to § 2570.41 of the regulation.
One of the comments received suggested that: (1) The final regulation should clarify that the Department's exemption staff may request applicants to provide additional information before a tentative denial letter is issued, and (2) rather than a "short statement" of the reasons for a tentative denial, the tentative denial letter should provide a detailed explanation of the basis for the Department's decision. Regarding the first suggestion, the comment indicates that it is unreasonable to expect an applicant to anticipate, when the exemption application is filed, all of the material which the Department may find pertinent to its consideration of an exemption application.
As stated above (under the heading "Exemption Application Contents - General Information), the Department's view is that the applicant bears the responsibility to demonstrate clearly that the requested exemption meets the statutory criteria. While nothing in the proposed regulation would preclude the Department's exemption staff from exercising its discretion and contacting an applicant for a clarification or additional information, the Department anticipates that such contact will be limited to exemption applications which, upon initial review, meet the essential requirements of the regulation. It is not administratively feasible to expect the Department's exemption staff to solicit information in every case. Moreover, such a procedure would, in effect, shift the burden of developing the exemption application from the applicant to the exemption staff.
Similarly, the imposition of a requirement that tentative denial letters detail all the reasons for the denial would, in effect, shift the analytical burden from the applicant to the Department. As with the circumstances under which additional information is solicited from applicants, the Department believes that the degree of detail required for a tentative denial letter should be left to the discretion of the exemption staff. The Department believes that a general statement of the reasons for a tentative denial is sufficient inasmuch as the issuance of a tentative denial letter does not terminate the exemption proceedings. Rather, the tentative denial letter offers the applicant the opportunity to have a conference and/or to submit additional information for consideration. In addition, a requirement to issuer a comprehensive and detailed tentative denial letter in most cases would significantly increase the time required to conclude a final action.
For these reasons, the Department has decided to adopt proposed § 2570.38 without change.
Opportunities To Submit Additional Information
Section 2570.39 of the proposed regulation provided that if an applicant wishes to submit additional information in support of a tentatively denied exemption application, he may notify the Department of his intention to do so within the prescribed 20-day period either by telephone or by letter. After issuing such a notice, an applicant has 30 days from the date of the notice to furnish additional information to the Department. If an applicant notifies the Department of his intent to submit additional information but requests no conference, and subsequently fails to submit the promised information within the prescribed 30-day period, the Department will issue the applicant a final denial letter pursuant to § 2570.41 of the regulation. However, an applicant who realizes that he will be unable to submit his additional information within the allotted time may avoid receiving a final denial letter by withdrawing his application before the end of the 30-day period pursuant to § 2570.44.
As an alternative to withdrawing his application, an applicant who, for reasons beyond his control, is unable to meet the 30-day deadline may request an extension of time for filing additional information, pursuant to § 2570.39 of the regulation. However, the Department will grant such extensions of time only in unusual circumstances.
No comments were received on this section of the proposed regulation which is adopted without change in the final regulation.
Conferences
Section 2570.40 of the proposed regulation described the procedures regarding conferences on exemption applications which the Department has tentatively decided to deny. Under this proposed section, an applicant is entitled to only one conference with respect to any exemption application, and is also given 20 days after the date of any conference to submit to the Department in writing any additional data or arguments discussed at the conference but not previously or adequately presented in writing. Under the proposal, an applicant is deemed to have waived his right to a conference if he fails, without good cause, to appear for a scheduled conference or to schedule a conference for any of the times proposed by the Department within the 45-day period following the receipt of his request for a conference.
Proposed § 2570.40 is adopted without change in the final regulation. The only comment received regarding this proposed section suggested that the Department continue its practice of informally consulting with applicants on exemption applications in addition to holding conferences. In this regard, the Department will continue to informally contact applicants as it deems appropriate.
Final Denial Letters
Proposed § 2570.41 is adopted without change in the final regulation. No comments were received on this section which specifies the circumstances in which the Department may issue a final denial letter denying a requested exemption. In most cases, the same procedure will also be followed in denying exemptions that the Department has already proposed through publication of a notice of proposed exemption in the Federal Register. However, in cases where the Department holds a hearing on an exemption, § 2570.41(a)(3) of the proposed regulation allowed the Department to issue a final denial letter without first issuing a tentative denial letter and without providing the applicant with the opportunity for a conference. In the Department's view, where a hearing on a proposed exemption is conducted, the applicant and other proponents of the exemption have adequate opportunity to present their views and other evidence in support of the exemption.
Notice of Proposed Exemption
The proposed regulation did not significantly alter the procedures established by ERISA Proc. 75-1 for granting an exemption. Under § 2570.42 of the regulation, the Department will publish a notice of proposed exemption in the Federal Register if, after reviewing an exemption application and any additional information submitted by an applicant, the Department tentatively concludes that the requested exemption satisfies the statutory criteria for the granting of an exemption and that the requested exemption is otherwise appropriate. This proposed section also described the contents of the notice of proposed exemption.
No comments were received on proposed § 2570.42, which is adopted without change in the final regulation.
Notifying Interested Persons
Like ERISA Proc. 75-1, the proposed regulation required applicants to provide notice to interested persons in the event that the Department decides to propose the exemption. Section 2570.34 of the proposal required an applicant to submit with his application a description of the interested persons to whom notice will be provided and a description of the manner in which the applicant proposed to provide notice. That section also required an applicant to provide an estimate of the time he will need to furnish notice to interested persons following publication of a notice of proposed exemption.
Section 2570.43 of the proposed regulation provided guidance on methods an applicant may use to notify interested persons of a proposed exemption and indicated what must be included in the notice. In addition to the Notice of Proposed Exemption published in the Federal Register, the applicant must include in the notification to interested persons a supplemental statement. Section 2570.43 also stated that, once the Department has published a notice of proposed exemption, the applicant must notify the interested persons described in his application in the manner indicated in the application unless the Department has informed the applicant beforehand that it considers the method of notification described in the application to be inadequate. Where the Department has so informed an applicant, it will also secure from the applicant an agreement to provide notice in the time and manner and to the persons designated by the Department. After furnishing notification, an applicant must provide the Department with a declaration under penalty of perjury certifying that notice was given to the persons and in the manner and time specified in his application or the superseding agreement with the Department.
One of the comments received concerning notification requested clarification that, in the case of a pooled fund, the notification requirement would be satisfied if the notice to interested persons is furnished to the appropriate fiduciary of each of the plans participating in the pooled fund, but not to all participants and beneficiaries of such plans.
In the Department's view, the individuals or organizations that will constitute "interested persons" depends on the nature of the exemption being requested. For this reason, the proposed regulation did not attempt to delineate the term "interested persons" for purposes of the notification requirements of § 2570.43. As previously noted, the applicant is required to include, as part of the exemption application, a description of the interested persons to whom the applicant intends to provide notice (§ 2570.34(b)(2)(i)). If the Department finds that either the method of providing notice or the persons to whom the applicant proposes to provide notice is inadequate, the Department will, pursuant to § 2570.43, secure an agreement from the applicant on the appropriate method of providing the notice and/or the scope of the notice to be provided. The Department believes that this approach provides the flexibility necessary to accommodate the varied types of exemption applications, as well as circumstances unique to a particular applicant.7
Accordingly, the Department has decided to adopt § 2570.43 as proposed. However, subparagraph (b)(2) of this section has been modified to insert references to the Code and FERSA and to reflect the current room number of the Division of Exemptions in a footnote to that section. Paragraph (d), of this section has also been modified to clarify that the declaration accompanying the statement to be furnished to the Department regarding the notice to, interested persons must be made under penalty of perjury, as stated in the preamble to the proposed regulation (53 FR 24422, at 24425, June 28,1988).
Withdrawal and Reinstatement of Exemption Applications
Section 2570.44 of the proposed regulation permitted an applicant to withdraw his application at any time and to reinstate the application later. Reinstatement may be requested without resubmitting any information or materials previously furnished if no more than two years has elapsed from the withdrawal date. The request for reinstatement must be accompanied by any additional information that was outstanding at the time of withdrawal.
No comments were received on the proposed section, which is adopted in the final regulation without change.
Requests for Reconsideration of Final Denials
Under § 2570.45 of the proposed regulation, after the Department has issued a final denial letter on an exemption, it will not reconsider an application covering the same transaction unless the applicant presents significant new facts or arguments in support of the exemption which, for good reason, the applicant could not have submitted for consideration during the Department's initial review of the exemption. An applicant must present the significant new facts or arguments in a request for reconsideration within 180 days after the issuance of the final denial letter.
Proposed § 2570.45 also stated that only one request for reconsideration of any finally denied application will be considered by the Department. Although no comments were received on this section of the proposed regulation, the Department has modified this section in the final regulation to clarify that the Department will not limit the number of requests for reconsideration of final denials based solely on the applicant's failure to respond timely to a tentative denial letter or to furnish additional information timely (i.e., within the time frames provided under § 2570.38(b) or 2570.39(e), respectively).
The Department has also clarified in the final regulation that the declaration required under § 2570.45(c) must be made under penalty of perjury. This clarification is consistent with the requirement of § 2570.34(b)(5) that every original exemption application must be accompanied by a similar declaration under penalty of perjury. The Department intends that the same type of declaration should accompany both an original exemption application and request for reconsideration of a final denial based on the merits of such an application.
Hearings
Section 408(a) of ERISA precludes the Department from granting an exemption from the fiduciary self-dealing prohibitions of section 406(b) unless the Department affords an opportunity for a hearing and makes a determination on the record with respect to the three statutory criteria established for granting an exemption.8 Because these provisions specify that an opportunity for a hearing must be given before an exemption from these prohibitions is granted, but not before such an exemption is denied, the Department interprets these provisions to mean that only opponents of such an exemption must be given an opportunity for a hearing. Moreover, the Department has concluded that it must provide a hearing on the record to opponents of such a proposed exemption only where it appears that there are material factual issues relating to the proposed exemption that cannot be fully explored without such a hearing. Indeed, in the Department's experience, such hearings are not useful where the only issues to be decided are matters of law or where material factual issues can be adequately explored by less costly and more expeditious means, such as written submissions. Accordingly, under § 2570.46 of the proposed regulation, the Department requires that persons who may be adversely affected by the grant of an exemption from the fiduciary self-dealing prohibitions offer some evidence of the existence of issues that can be fully examined only at a hearing before it will grant a request for a hearing. Where persuasive evidence of the existence of such issues is offered, however, the Department will grant the requested hearing.
Under § 2570.47 of the proposed regulation, the Department may schedule a hearing on its own motion if it determines that a hearing would be useful in exploring issues relevant to the requested exemption. Under the proposed procedures, if the Department decides to conduct a hearing on an exemption under either § 2570.46 or § 2570.47, the applicant must notify interested persons of the hearing in the manner prescribed by the Department. Ordinarily, such notice may be provided by furnishing interested persons with a copy of the notice of hearing published by the Department in the Federal Register within 10 days of its publication. After furnishing notice, the applicant must submit to the Department a declaration under penalty of perjury certifying that notice has been provided in the manner prescribed.
Any testimony or other evidence offered at a hearing held under either § 2570.46 or § 2570.47 becomes part of the administrative record to be used by the Department in making its final decision on an exemption application.
No comments were received on proposed § 2570.46 and 2570.47, which are adopted without change in the final regulation.
Grant of Exemption
Section 2570.48 of the proposed regulation provided that if, after considering all of an applicant's submissions, together with any comments received from interested persons and the record of any hearing held in connection with a requested exemption, the Department determines that the exemption should be granted, it will publish a notice in the Federal Register granting the exemption. This proposed section also described the contents of the grant notice.
No comments were received on proposed § 2570.48, which is adopted without change in the final regulation.
Limits on the Effect of Exemptions
Notwithstanding the duty to amend and supplement exemption applications provided under § 2570.37, the Department expressly conditions every exemption on the accuracy and completeness of the facts and representations provided by an applicant in support of the exemption. Therefore, as indicated under § 2570.49 of the proposed regulation, an exemption does not take effect or protect parties in interest from liability unless the material facts and representations contained in the application or in any other materials, documents, or testimony submitted by the applicant in support of the application were true and complete Thus, for example, in the case of a continuing exemption transaction such as a loan or a lease, if any of the material facts described in the application were to change after the exemption is granted, the exemption would cease to apply as of the date of such change even though, pursuant to § 2570.37, the applicant would not be obligated to notify the Department of such change. In the event of any such change, the parties in interest involved in the exemption transaction may apply for a new exemption to protect themselves from liability on or after the date of such change. Such an application should be submitted before such change occurs (see the discussion of prospective, versus retroactive, exemptions under the heading "Copies of Documents," above).
No comments were received on proposed § 2570.49, which is adopted without change in the final regulation.
Revocation or Modification of Exemptions
Section 2570.50 of the proposed regulation described the circumstances under which the Department may revoke or modify a previously granted exemption and the rights afforded to the applicant and to other interested persons in the event such revocation or modification is proposed. This section also provided that ordinarily such revocation or modification will be prospective only. Under this proposed section, one of the circumstances permitting the Department to modify or revoke an exemption was a change in policy which calls into question the continuing validity of the Department's original conclusions regarding the granted exemption.
Two of the comments objected to permitting a change in policy as grounds for revoking or modifying a granted exemption. The commentators argued that disturbing transactions already reviewed and approved by the Department would inject an unneeded element of uncertainty into the exemption process. Moreover, concern was expressed that the revocation of an exemption could severely disrupt an applicant's business and impose great financial hardship. A commentator suggested that the final regulation include a prohibition against revocation of an exemption until the affected party in interest is given both written notice of the facts or conduct which may warrant the revocation and an opportunity to demonstrate compliance with the requirements of the exemption.9
Proposed § 2570.50 is intended to provide the Department with the flexibility to undertake appropriate action in those cases where, subsequent to the grant of an exemption, potentially abusive practices or changes in the regulatory environment of an industry are identified which would cause the Department to reconsider its policy with respect to whether the exemption transactions continue to satisfy the statutory criteria under section 408(a) of ERISA.
With regard to the procedural issues raised by one of the comments, the Department notes that paragraph (b) of proposed § 2570.50 provides for notice to interested persons by publication in the Federal Register, notice to the applicant of the proposed revocation or modification, and an opportunity for the interested persons and the applicant to submit comments on the proposed revocation or modification.
After careful consideration of the comments, the Department has decided to adopt § 2570.50 as proposed. However the Department has clarified paragraph (b) to provide that the notice of proposed revocation or modification given to the applicant must be in writing.
Public Inspection and Copies
Section 2570.51 of the proposed regulation provided that the public may examine and copy any exemption application and all correspondence and documents submitted in regard thereto and may receive photocopies of all or any portion of such administrative record for a specified charge per page. For this reason, the Department cannot honor requests to keep confidential any information submitted regarding an exemption application. Therefore, none of the information submitted in regard to a requested exemption should be material that the applicant or other sender does not wish to disclose to the public.
No comments were received on proposed § 2570.51, which is adopted without change in the final regulation.
Executive Order 12291 Statement
The Department has determined that this regulatory action would not constitute a "major rule" as that term is used in Executive Order 12291 because the action would not result in: an annual effect on the economy of $100 million; a major increase in costs or prices for consumers, individual industries, government agencies, or geographical regions; or significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in the domestic or export markets.
Regulatory Flexibility Act Statement
The Department has determined that this regulation would not have a significant economic impact on small plans or other small entities. As stated previously, this regulation would do little more than describe procedures that reflect practices already in place for filing and processing applications for exemptions from the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974. the Internal Revenue Code of 1986, and the Federal Employee Retirement System Act of 1986.
Paperwork Reduction Act
This regulation modifies current collection of information requirements. It does so largely by codifying requests for facts and opinions that are routinely addressed to applicants for exemptions under current procedures. Accordingly, the regulation will not increase the paperwork burden for applicants. The regulation has been approved by the Office of Management and Budget under the provisions of the Paperwork Reduction Act of 1980 (Pub. L. 96-511). The final regulation is assigned control number 1210-0060.
Authority
The final regulation set forth herein is issued pursuant to the authority granted in sections 408(a) (Pub. L. 93-406, 88 Stat. 883, 29 USC 1108(a)) and 505 (Pub. L. 93-406, 88 Stat. 894, 29 USC 1135) of ERISA, under Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), under 5 USC 8477(c)(3), and under Secretary of Labor's Order No. 187 (52 FR 13139, April 21, 1987).
List of Subjects in 29 C.F.R. Part 2570
Administrative practice and procedure, Employee benefit plans, Employee Retirement Income Security Act, Federal Employees' Retirement System Act, Party in interest, Pensions, Prohibited transactions.
For the reasons set out in the preamble, parts 2570 and 2585 of chapter XXV of title 29 of the Code of Federal Regulations are amended as follows:
Part 2570 - [Amended]
- The authority for part 2570 is revised to read as follows:
- By adding in the appropriate place the following new subpart B to part 2570.
Authority: 29 USC 1108(a), 1135; Reorganization Plan No. 4 of 1978; 5 USC 8477(c)(3); Secretary of Labor's Order No. 187.
Subpart A is also issued under 29 USC 1132(i).
Subpart B - Procedures for Filing and Processing Prohibited Transaction Exemption Applications
Sections.
2570.30 Scope of rules.
2570.31 Definitions.
2570.32 Persons who may apply for exemptions.
2570.33 Applications the Department will not ordinarily consider.
2570.34 Information to be included in every exemption application.
2570.35 Information to be included in applications for individual exemptions only.
2570.36 Where to file an application.
2570.37 Duty to amend and supplement exemption applications.
2570.38 Tentative denial letters.
2570.39 Opportunities to submit additional information.
2570.40 Conferences.
2570.41 Final denial letters.
2570.42 Notice of proposed exemption.
2570.43 Notification of interested persons by applicant.
2570.44 Withdrawal of exemption applications.
2570.45 Requests for reconsideration.
2570.46 Hearings in opposition to exemptions from restrictions on fiduciary self-dealing.
2570.47 Other hearings.
2570.46 Decision to grant exemptions.
2570.49 Limits on the effect of exemptions.
2570.50 Revocation or modification of exemptions.
2570.51 Public inspection and copies.
2570.52 Effective date.
Subpart B - Procedures for Filing and Processing Prohibited Transaction Exemption Applications
§ 2570.30 Scope of rules.
- (1) The rules of procedure set forth in this subpart apply to all applications for exemption which the Department has authority to issue under:
- Section 408(a) of the Employee Retirement Income Security Act of 1974 (ERISA);
- Section 4975(c)(2) of the Internal Revenue Code of 1986 (the Code) (see Reorganization Plan No. 4 of 1978); or
- The Federal Employees' Retirement System Act of 1986 (FERSA) (5 USC 8477(c)(3)).
- The Department will generally treat any exemption application which is filed solely under section 408(a) of ERISA or solely under section 4975(c)(2) of the Code as an exemption filed under both section 408(a) and section 4975(c)(2) if it relates to a transaction that would be prohibited by ERISA and by the corresponding provisions of the Code.
- The procedures set forth in this subpart represent the exclusive means by which the Department will issue administrative exemptions. The Department will not issue exemptions upon oral request alone. Likewise, the Department will not grant exemptions orally. An applicant for an administrative exemption may request and receive oral advice from Department employees in preparing an exemption application. However, such advice does not constitute part of the administrative record and is not binding on the Department in its processing of an exemption application or in its examination or audit of a plan.
§ 2570.31 Definitions.
For purposes of these procedures, the following definitions apply:
- An affiliate of a person means -
- Any person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the person;
- Any director of, relative of, or partner in, any such person;
- Any corporation, partnership, trust, or unincorporated enterprise of which such person is an officer, director, or a 5 percent or more partner or owner; and
- Any employee or officer of the person who -
- Is highly compensated (as defined in section 4975(e)(2)(H) of the Code), or
- Has direct or indirect authority, responsibility, or control regarding the custody, management, or disposition of plan assets.
- A class exemption is an administrative exemption, granted under section 408(a) of ERISA, section 4975(c)(2) of the Code, and/or 5 USC 8477(c)(3), which applies to any parties in interest within the class of parties in interest specified in the exemption who meet the conditions of the exemption.
- Department means the U.S. Department of Labor and includes the Secretary of Labor or his delegate exercising authority with respect to prohibited transaction exemptions to which this subpart applies.
- Exemption transaction means the transaction or transactions for which an exemption is requested.
- An individual exemption is an administrative exemption, granted under section 408(a) of ERISA, section 4975(c)(2) of the Code, and/or 5 USC 8477(c)(3), which applies only to the specific parties in interest named or otherwise defined in the exemption.
- A party in interest means a person described in section 3(14) of ERISA or 5 USC 8477(a)(4) and includes a disqualified person, as defined in section 4975(e)(2) of the Code.
- Pooled fund means an account or fund for the collective investment of the assets of two or more unrelated plans, including (but not limited to) a pooled separate account maintained by an insurance company and a common or collective trust fund maintained by a bank or similar financial institution.
§ 2570.32 Persons who may apply for exemptions.
- The Department may initiate exemption proceedings on its own motion. In addition, the Department will initiate exemption proceedings upon the application of -
- Any party in interest to a plan who is or may be a party to the exemption transaction;
- Any plan which is a party to the exemption transaction; or
- In the case of an application for an exemption covering a class of parties in interest or a class of transactions, in addition to any person described in paragraphs (a)(1) and (a)(2) of this section, an association or organization representing parties in interest who may be parties to the exemption transaction.
- An application by or for a person described in paragraph (a) of this section, may be submitted by the applicant or by his authorized representatives. If the application is submitted by a representative of the applicant, the representative must submit proof of his authority in the form of
- A power of attorney; or
- A written certification from the applicant that the representation is authorized.
- If the authorized representative of an applicant submits an application for an exemption to the Department together with proof of his authority for file the application as required by paragraph (b) of this section, the Department will direct all correspondence and inquiries concerning the application to the representative unless requested to do otherwise by the applicant.
§ 2570.33 Applications the Department will not ordinarily consider.
- The Department will not ordinarily consider:
- An application that fails to include all the information required by § 2570.34 and 2570.35, or otherwise fails to conform to the requirements of these procedures; or
- An application for exemption involving a transaction or transactions which are the subject of an investigation for possible violations of part 1 or 4 of subtitle B of title I of ERISA or section 8477 or 8478 of FERSA or an application for an exemption involving a party in interest who is the subject of such an investigation or who is a defendant in an action by the Department or the Internal Revenue Service to enforce the above-mentioned provisions of ERISA or FERSA.
- If for any reason the Department decides not to consider an exemption application, it will inform the applicant of that decision in writing and of the reasons therefore.
- An application for an individual exemption relating to a specific transaction or transactions will ordinarily not be considered separately if the Department is considering a class exemption relating to the same type of transaction or transactions.
§ 2570.34 Information to be included in every exemption application.
- All applications for exemptions must contain the following information:
- The name(s) of the applicant(s);
- A detailed description of the exemption transaction and the parties in interest for whom an exemption is requested, including a description of any larger integrated transaction of which the exemption transaction is a part;
- Whether the affected plan(s) and any parties in interest will be represented by the same person with regard to the exemption application;
- Reasons a plan would have for entering into the exemption transaction;
- The prohibited transaction provisions from which exemptive relief is requested and the reason why the transaction would violate each such provision;
- Whether the exemption transaction is customary for the industry or class involved;
- Whether the exemption transaction is or has been the subject of an investigation or enforcement action by the Department or by the Internal Revenue Service; and
- The hardship or economic loss, if any, which would result to the person or persons on behalf of whom the exemption is sought, to affected plans and to their participants and beneficiaries from denial of the exemption.
- All applications for exemption must also contain the following:
- A statement explaining why the requested exemption would be -
- Administratively feasible;
- In the interests of affected plans and their participants and beneficiaries; and
- Protective of the rights of participants and beneficiaries of affected plans.
- With respect to the notification of interested persons required by § 2570.43:
- A description of the interested person(s) to whom the applicant intends to provide notice;
- The manner in which the applicant will provide such notice; and
- An estimate of the time the applicant will need to furnish notice to all interested persons following publication of a notice of the proposed exemption in the Federal Register.
- If an advisory opinion has been requested with respect to any issue relating to the exemption transaction -
- A copy of the letter concluding the Department's action on the advisory opinion request; or
- If the Department has not yet concluded its action on the request:
- A copy of the request or the date on which it was submitted together with the Department’s correspondence control number as indicated in the acknowledgment letter; and
- An explanation of the effect of a favorable advisory opinion upon the exemption transaction.
- If the application is to be signed by anyone other than an individual party in interest seeking exemptive relief on his own behalf, a statement which -
- Identifies the individual, who will be signing the application and his position with the applicant; and
- Explain briefly the basis of his familiarity with the matters discussed in the application.
- (i) A declaration in the following form: Under penalty of perjury, I declare that I am familiar with the matters discussed in this application and to the best of my knowledge and belief, the representations made in this application are true and correct.
- The applicant himself in the case of an individual party in interest seeking exemptive relief on his own behalf;
- A corporate officer or partner where the applicant is a corporation or partnership;
- A designated officer or official where the applicant is an association, organization or other unincorporated enterprise;
- The plan fiduciary who has the authority, responsibility, and control with respect to the exemption transaction where the applicant is a plan.
- An application for exemption may also include a draft of the requested exemption which defines the transaction and parties in interest for which exemptive relief is sought and the specific conditions under which the exemption would apply.
(ii) This declaration must be dated and signed by:
(iii) Specialized statements from third party experts, such as appraisals or analyses of market conditions, submitted to support an application for exemption must also be accompanied by a statement of consent from such expert acknowledging that he or she knows that his or her statement is being submitted to the Department as part of an application for exemption.
(iv) For those applications requiring an independent fiduciary to represent the plan in the exemption transaction, each statement submitted by said independent fiduciary must contain a signed and dated declaration under penalty of perjury that, to the best of said fiduciary's knowledge and belief the representations made in such statement are true and correct.
§ 2570.35 Information to be included in applications for Individual exemptions only.
- Except as provided in paragraph (c) of this section, every application for an individual exemption must include, in addition to the information specified in § 2570.34, the following information:
- The name, address, telephone number, and type of plan or plans to which the requested exemption applies;
- The Employer Identification Number (EIN) and the plan number (PN) used by such plan or plans in all reporting and disclosure required by the Department;
- Whether any plan or trust affected by the requested exemption has ever been found by the Department, the Internal Revenue Service, or by a court to have violated the exclusive benefit rule of section 401(a) of the Code, or to have engaged in a prohibited transaction under section 503(b) of the Code or corresponding provisions of prior law, section 4975(c)(1) of the Code, section 406 or 407(a) of ERISA, or 5 USC 8477(c)(3);
- Whether any relief under section 408(a) of ERISA, section 4975(c)(2) of the Code, or 5 USC 8477(c)(3) has been requested by, or provided to, the applicant or any of the parties on behalf of whom the exemption is sought and, if so, the exemption application number or the prohibited transaction exemption number;
- Whether the applicant or any of the parties in interest involved in the exemption transaction is currently, or has been within the last five years, a defendant in any lawsuit or criminal action concerning such person's conduct as a fiduciary or party in interest with respect to any plan;
- Whether the applicant or any of the parties in interest involved in the exemption transaction has within the last 13 years, been convicted of any crime described in section 411 of ERISA.
- Whether, within the last five years, any plan affected by the exemption transaction or any party in interest involved in the exemption transaction has been under investigation or examination by, or has been engaged in litigation or a continuing controversy with, the Department, the Internal Revenue Service, the Justice Department, the Pension Benefit Guaranty Corporation, or the Federal Retirement Thrift Investment Board involving compliance with provisions of FERSA, provisions of the Code relating to employee benefit plans, or provisions of FERSA relating to the Federal Thrift Savings Fund. If so, the applicant must submit copies of all correspondence with the Department, the Internal Revenue Service, the Justice Department, the Pension Benefit Guaranty Corporation, or the Federal Retirement Thrift Investment Board regarding the substantive issues involved in the investigation, examination, litigation, or controversy which relate to compliance with the provisions of part 1 or 4 of subtitle B of title I of ERISA, section 4975 of the Code, or section 8477 or 8478 of FERSA. For this purpose, the term "examination" does not include routine audits conducted by the Department pursuant to section 8477(g) of FERSA;
- Whether any plan affected by the requested exemption has experienced a reportable event under section 4043 of ERISA;
- Whether a notice of intent to terminate has been filed under section 4041 of ERISA respecting any plan affected by the requested exemption;
- Names, addresses, and taxpayer identifying numbers of all parties in interest involved in the subject transaction;
- The estimated number of participants and beneficiaries in each plan affected by the requested exemption as of the date of the application;
- The percentage of the fair market value of the total assets of each affected plan that is involved in the exemption transaction;
- Whether the exemption transaction has been consummated or will be consummated only if the exemption is granted;
- If the exemption transaction has already been consummated:
- The circumstances which resulted in plan fiduciaries causing the plan to engage in the subject transaction before obtaining an exemption from the Department;
- Whether the transaction has been terminated;
- Whether the transaction has been corrected as defined in Code section 4975(f)(5);
- Whether Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, has been filed with the Internal Revenue Service with respect to the transaction; and
- Whether any excise taxes due under section 4975(a) and (b) of the Code by reason of the transaction have been paid.
- The name of every person who has investment discretion over any assets involved in the exemption transaction and the relationship of each such person to the parties in interest involved in the exemption transaction and the affiliates of such parties in interest;
- Whether or not the assets of the affected plan(s) are invested in loans to any party in interest involved in the exemption transaction, in property leased to any such party in interest, or in securities issued by any such party in interest, and, if such investments exist, a statement for each of these three types of investments which indicates:
- The type of investment to which the statement pertains;
- The aggregate fair market value of all investments of this type as reflected in the plan's most recent annual report;
- The approximate percentage of the fair market value of the plan's total assets as shown in such annual report that is represented by all investments of this type; and
- The statutory or administrative exemption covering these investments, if any.
- The approximate aggregate fair market value of the total assets of each affected plan;
- The person(s) who will bear the costs of the exemption application and of notifying interested persons; and
- Whether an independent fiduciary is or will be involved in the exemption transaction and, if so, the names of the persons who will bear the cost of the fee payable to such fiduciary.
- Each application for an individual exemption must also include:
- True copies of all contracts, deeds, agreements, and instruments, as well as relevant portions of plan documents, trust agreements, and any other documents bearing on the exemption transaction;
- A discussion of the facts relevant to the exemption transaction that are reflected in these documents and an analysis of their bearing on the requested exemption; and
- A copy of the most recent financial statements of each plan affected by the requested exemption.
- Special rule for applications for individual exemption involving pooled funds:
- The information required by paragraphs (a)(8) through (12) of this section is not required to be furnished in an application for individual exemption involving one or more pooled funds;
- The information required by paragraphs (a)(1) through (7) and (a)(13) through (19) of this section and by paragraphs (b)(1) through (3) of this section must be furnished by reference to the pooled fund, rather than to the plans participating therein. (For purposes of this paragraph, the information required by paragraph (a)(16) of this section relates solely to other pooled fund transactions with, and investments in, parties in interest involved in the exemption transaction which are also sponsors of plans which invest in the pooled fund.);
- The following information must also be furnished -
- The estimated number of plans that are participating (or will participate) in the pooled fund; and
- The minimum and maximum limits imposed by the pooled fund (if any) on the portion of the total assets of each Plan that may be invested in the pooled fund.
- Additional requirements for applications for individual exemption involving pooled funds in which certain plans participate.
- This paragraph applies to any application for individual exemption involving one or more pooled funds in which any plan participating therein -
- Invests an amount which exceeds 20% of the total assets of the pooled fund, or
- Covers employees of -
- The party sponsoring or maintaining the pooled fund, or any affiliate of such party, or
- Any fiduciary with investment discretion over the pooled fund's assets, or any affiliate of such fiduciary.
- The exemption application must include, with respect to each plan described in paragraph (c)(4)(i) of this section, the information required by paragraphs (a)(1) through (3), (a)(5) through (7), (a)(10), (a)(12) through (16), and (a)(18) and (19) of this section. The information required by this paragraph must be furnished by reference to the plan's investment in the pooled fund (e.g., the names, addresses and taxpayer identifying numbers of all fiduciaries responsible for the plan's investment in the pooled fund (§ 2570.35(a)(10), the percentage of the assets of the plan invested in the pooled fund [§ 2570.35(a)(12)], whether the plan's investment in the pooled fund has been consummated or will be consummated only if the exemption is granted [§ 2570.35(a)(13), etc.).
- The information required by paragraph (c)(4) of this section is in addition to the information required by paragraphs (c)(2) and (3) of this section relating to information furnished by reference to the pooled fund.
- The special rule and the additional requirements described in paragraphs (c)(1) through (4) of this section do not apply to an individual exemption request solely for the investment by a plan in a pooled fund. Such an application must provide the information required by paragraphs (a) and (b) of this section.
§ 2570.36 Where to file an application.
The Department's prohibited transaction exemption program is administered by the Pension and Welfare Benefits Administration (PWBA). Any exemption application governed by these procedures should be mailed or otherwise delivered to: Exemption Application, PWBA, Office of Exemption Determinations, Division of Exemptions, US Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
§ 2570.37 Duty to amend and supplement exemption applications.
- During the pendency of his exemption application, an applicant must promptly notify the Division of Exemptions in writing, if he discovers that any material fact or representation contained in his application or any documents or testimony provided in support of the application is inaccurate, if any such fact or representation changes during this period, or if, during the pendency of the application, anything occurs that may affect the continuing accuracy of any such fact or representation.
- If, at any time during the pendency of his exemption application, an applicant or any other party in interest who would participate in the exemption transaction becomes the subject of an investigation or enforcement action by the Department, the Internal Revenue Service, the Justice Department, the Pension Benefit Guaranty Corporation, or the Federal Retirement Thrift Investment Board involving compliance with provisions of ERISA, provisions of the Code relating to employee benefit plans, or provisions of FERSA relating to the Federal Thrift Savings Fund, the applicant must promptly notify the Division of Exemptions.
- The Department may require an applicant provide documentation it considers necessary to verify any statements contained in the application or in supporting materials or documents.
§ 2570.38 Tentative denial letters.
- If, after reviewing an exemption file, the Department concludes that it will not grant the exemption. it will notify the applicant in writing of its tentative denial of the exemption application. At the same time, the Department will provide a short statement of the reasons for its tentative denial.
- An applicant will have 20 days from the date of a tentative denial letter to request a conference under § 2570.40 of these procedures and/or to notify the Department of its intent to submit additional information in writing, under § 2570.39 of these procedures. If the Department does not receive a request for a conference or a notification of intent to submit additional information within that time, it will issue a final denial letter pursuant to § 2570.41.
- The Department need not issue a tentative denial letter to an applicant before issuing a final denial letter where the Department has conducted a hearing on the exemption pursuant to either § 2570.46 or § 2570.47 of these procedures.
§ 2570.39 Opportunities to submit additional information.
- An applicant may notify the Department of its intent to submit additional information supporting an exemption application either by telephone or by letter sent to the address, furnished in, the applicant's tentative denial letter. At the same time, the applicant should indicate generally the type of information that he will submit.
- An applicant will have 30 days from the date of the notification discussed in paragraph (a) of this section to submit in writing all of the additional information he intends to provide in support of his application. All such information must be accompanied by a declaration under penalty of perjury attesting to the truth and correctness of the information provided, which is dated and signed by a person qualified under § 2570.34(b)(5) of these procedures to sign such a declaration.
- If, for reasons beyond his control, an applicant is unable to submit in writing all the additional information he intends to provide in support of his application within the 30-day period described in paragraph (b) of this section, he may request an extension of time to furnish the information. Such requests must be made before the expiration of the 30-day period and will be granted only in unusual circumstances and for limited periods of time.
- If an applicant is unable to submit all of the additional information he intends to provide in support of his exemption application within the 30-day period specified in paragraph (b) of this section or within any additional period of time granted to him pursuant to paragraph (c) of this section, the applicant may withdraw the exemption application before expiration of the applicable time period and reinstate it later pursuant to § 2570.44 of these procedures.
- The Department will issue without further notice the final denial letter, denying the requested exemption pursuant to § 2570.41 of these procedures where -
- The Department has not received the additional information that the applicant indicated he would submit within the 30-day period described in paragraph (b) of this section, or within any additional period of time granted pursuant to paragraph (c) of this section;
- The applicant did not request a conference pursuant to § 2570.38(b) of these procedures; and
- The applicant has not withdrawn his application as permitted by paragraph (d) of this section.
§ 2570.40 Conferences.
- Any conference between the Department and an applicant pertaining to a requested exemption will be held in Washington, DC, except that a telephone conference will be held at the applicant's request.
- An applicant is entitled to only one conference with respect to any exemption application. An applicant will not be entitled to a conference, however, where the Department has held a hearing on the exemption under either § 2570.46 or § 2570.47 of these procedures.
- Insofar as possible, conferences will be scheduled as joint conferences with all applicants present where:
- More than one applicant has requested an exemption with respect to the same or similar types of transactions;
- The Department is considering the applications together as a request for a class exemption;
- The Department contemplates not granting the exemption; and
- More than one applicant has requested a conference.
- The Department will attempt to schedule a conference under this section for a mutually convenient time during the 45-day period following the later of -
- The date the Department receives the applicant's request for a conference, or
- The date the Department notifies the applicant, after reviewing additional information submitted pursuant to § 2570.39, that it is still not prepared to propose the requested exemption. If the applicant is unable to attend a conference at any of the times proposed by the Department during this 45-day period or if the applicant fails to appear for a scheduled conference, he will be deemed to have waived his right to a conference unless circumstances beyond his control prevent him from scheduling a conference or attending a scheduled conference within this period.
- Within 20 days after the date of any conference held under this section, the applicant may submit to the Department a written record of any additional data, arguments, or precedents discussed at the conference but not previously or adequately presented in writing.
§ 2570.41 Final denial letters.
- The Department will issue a final denial letter denying a requested exemption where:
- The conditions for issuing a final denial letter specified in § 2570.38(b) or § 2570.39(e) of these procedures are satisfied;
- After issuing a tentative denial letter under § 2570.38 of this part and considering the entire record in the case, including all written information submitted pursuant to § 2570.39 and § 2570.40(e) of these procedures, the Department decides not to propose an exemption or to withdraw an exemption already proposed; or
- After proposing an exemption and conducting a hearing on the exemption under either § 2570.46 or § 2570.47 of this part and after considering the entire record in the case, including the record of the hearing, the Department decides to withdraw the proposed exemption.
§ 2570.42 Notice of proposed exemption.
If the Department tentatively decides, based on all the information submitted by an applicant, that the exemption should be granted, it will publish a notice of proposed exemption in the Federal Register. The notice will:
- Explain the exemption transaction and summarize the information received by the Department in support of the exemption;
- Specify any conditions under, which the exemption is proposed;
- Inform interested persons of their right to submit comments in writing to the Department relating to the proposed exemption and establish a deadline for receipt of such comments;
- If the proposed exemption includes relief from the prohibitions of section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 8477(c)(2) of FERSA, inform interested persons of their right to request a hearing under § 2570.46 of this part and establish a deadline for receipt of requests for such hearings.
§ 2570.43 Notification of Interested persons by applicant.
- If, as set forth in the exemption application, the notification that an applicant intends to provide to interested persons upon publication of a notice of proposed exemption in the Federal Register is inadequate, the Department will so inform the applicant and will secure the applicant's written agreement to provide what it considers to be adequate notice under the circumstances.
- If a notice of proposed exemption is published in the Federal Register in accordance with § 2570.42 of this part, the applicant must notify interested persons of the pendency of the exemption in the manner and time period specified in the application or in any superseding agreement with the Department. Any such notification must include:
- A copy of the notice of proposed exemption; and
- A supplemental statement in the following form:
- You are hereby notified that the United States Department of Labor is considering granting an exemption from the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974, the Internal Revenue Code of 1986, or the Federal Employees' Retirement System Act of 1986. The exemption under consideration is explained in the enclosed Notice of Proposed Exemption. As a person who may be affected by this exemption, you have the right to comment on the proposed exemption by [date].
- [If you may be adversely affected by the grant of the exemption, you also have the right to request a hearing on the exemption by [date].]
- Comments or requests for a hearing should be addressed to: Office of Exemption Determinations, Pension and Welfare Benefits Administration, Room ---,
- US Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210, Attention: Application No. ---,
- The Department will make no final decision on the proposed exemption until it reviews all comments received in response to the enclosed notice. If the Department decides to hold a hearing on the exemption before making its final decision, you will be notified of the time and place of the hearing.
- The method used to furnish notice to interested persons must be reasonably calculated to ensure that interested persons actually receive the notice. In all cases, personal delivery and delivery by first-class mail will be considered reasonable methods of furnishing notice.
- After furnishing the notice required by this section, an applicant must provide the Department with a statement confirming that notice was furnished to the persons and in the manner and time designated in its exemption application or in any superseding agreement with the Department. This statement must be accompanied by a declaration under penalty of perjury attesting to the truth of the information provided in the statement and signed by a person qualified under § 2570.34(b)(5) of these procedures to sign such a declaration. No exemption will be granted until such a statement and its accompanying declaration have been furnished to the Department.
§ 2570.44 Withdrawal of exemption applications.
- An applicant may withdraw his application for an exemption at any time by informing the Department, either orally or in writing, of his intent to withdraw.
- Upon receiving an applicant's notice of intent to withdraw an application for an individual exemption, the Department will confirm by letter the applicant's withdrawal of the application and will terminate all proceedings relating to the application. If a notice of proposed exemption has been published in the Federal Register, the Department will publish a notice withdrawing the proposed exemption.
- Upon receiving an applicant's notice of intent to withdraw an application for a class exemption or for an individual exemption that is being considered with other applications as a request for a class exemption, the Department will inform any other applicants for the exemption of the withdrawal. The Department will continue to process other applications for the same exemption. If all applicants for a particular class exemption withdraw their applications, the Department may either terminate all proceedings relating to the exemption or propose the exemption on its own motion.
- If, following the withdrawal of an exemption application, an applicant decides to reapply for the same exemption, he may submit a letter to the Department requesting that the application be reinstated and referring to the application number assigned to the original application. If, at the time the original application was withdrawn, any additional information to be submitted to the Department under § 2570.39 of these procedures was outstanding, that information must accompany the letter requesting reinstatement of the application. However, the applicant need not resubmit information previously furnished to the Department in connection with a withdrawn application unless reinstatement of the application is requested more than two years after the date of its withdrawal.
- Any request for reinstatement of a withdrawn application submitted in accordance with paragraph (d) of this section, will be granted by the Department, and the Department will take whatever steps remained at the time the application was withdrawn to process the application.
§ 2570.45 Requests for reconsideration.
- The Department will entertain one request for reconsideration of an exemption application that has been finally denied pursuant to § 2570.41(a)(2) or (a)(3) of this part if the applicant presents in support of the application significant new facts or arguments which for good reason could not have been submitted for the Department's consideration during its initial review of the exemption application.
- A request for reconsideration of a previously denied application must be made within 180 days after the issuance of the final denial letter and must be accompanied by a copy of the Department's final letter denying the exemption and a statement setting forth the new information and/or arguments that provide the basis for reconsideration.
- A request for reconsideration must also be accompanied by a declaration under penalty of perjury attesting to the truth of the new information provided, which is signed by a person qualified under § 2570.34(b)(5) of these procedures to sign such a declaration.
- If, after reviewing a request for reconsideration, the Department decides that the facts and arguments presented do not warrant reversal of its original decision to deny the exemption, it will send a letter to the applicant reaffirming that decision.
- If, after reviewing a request for reconsideration, the Department decides, based on the new facts and arguments submitted, to reconsider its denial letter, it will notify the applicant of its intent to reconsider the application in light of the new information provided. The Department will then take wherever steps remained at the time it issued its final denial letter to process the exemption application
- If, at any point during its subsequent processing of the application, the Department decides again that the exemption is unwarranted, it will issue a letter affirming its final denial.
§ 2570.46 Hearings in opposition to exemptions from restrictions on fiduciary self-dealing.
- Any interested person who may be adversely affected by an exemption which the Department proposes to grant from the restrictions of section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 8477(c)(2) of FERSA may request a hearing before the Department within the period of time specified in the Federal Register notice of the proposed exemption Any such request must state:
- The name, address, and telephone number of the person making the, request;
- The nature of the person's interest in the exemption and the manner in which the person would be adversely affected by the exemption; and
- A statement of the issues to be addressed and a general description of the evidence to be presented at the hearing.
- The Department will grant a request for a hearing made in accordance with paragraph (a) of this section where a hearing is necessary to fully explore material factual issues identified by the person requesting the hearing. However, the Department may decline to hold a hearing where:
- The request for the hearing does not meet the requirements of paragraph (a);
- The only issues identified for exploration at the hearing are matters of law; or
- The factual issues identified can be fully explored through the submission of evidence in written form.
- An applicant for an exemption must notify interested persons in the event that the Department schedules a hearing on the exemption. Such notification must be given in the form, time, and manner prescribed by the Department. Ordinarily, however, adequate notification can be given by providing to interested persons a copy of the notice of hearing published by the Department in the Federal Register within 10 days of its publication, using any of the methods approved in § 2570.43(c) of this part.
- After furnishing the notice required by paragraph (c) of this section, an applicant must submit a statement confirming that notice was given in the form, manner, and time prescribed. This statement must be accompanied by a declaration under penalty of perjury attesting to the truth of the information provided in the statement, which is signed by a person qualified under § 2570.34(b)(5) of these procedures to sign such a declaration.
§ 2570.47 Other hearings.
- In its discretion, the Department may schedule a hearing on its own motion where it determines that issues relevant to the exemption can be most fully or expeditiously explored at a hearing.
- An applicant for an exemption must notify interested persons of any hearing on an exemption scheduled by the Department in the manner described in § 2570.46(c). In addition, the applicant must submit a statement subscribed as true under penalty of perjury like that required in § 2570.46(d).
§ 2570.48 Decision to grant exemptions.
- If, after considering all the facts and representations submitted by an applicant in support of an exemption application, all the comments received in response to a notice of proposed exemption, and the record of any hearing held in connection with the proposed exemption, the Department determines that the exemption should be granted, it will publish a notice in the Federal Register granting the exemption.
- A Federal Register notice granting an exemption will summarize the transaction or transactions for which exemptive relief has been granted and will specify the conditions under which such exemptive relief is available.
§ 2570.49 Limits on the effect of exemptions.
- An exemption does not take effect or protect parties in interest from liability with respect to the exemption transaction unless the material facts and representations contained in the application and in any materials and documents submitted in support of the application were true and complete.
- An exemption is effective only for the period of time specified and only under the conditions set forth in the exemption.
- Only the specific parties to whom an exemption grants relief may rely on the exemption. If the notice granting an exemption does not limit exemptive relief to specific parties, all parties to the exemption transaction may rely on the exemption.
§ 2570.50 Revocation or modification of exemptions.
- If, after an exemption takes effect, changes in circumstances, including changes in law or policy, occur which call into question the continuing validity of the Department's original conclusions concerning the exemption, the Department may take steps to revoke or modify the exemption.
- Before revoking or modifying an exemption, the Department will publish a notice of its proposed action in the Federal Register and provide interested persons with an opportunity to comment on the proposed revocation or modification. In addition, the Department will give the applicant at least 30 days notice in writing of the proposed revocation or modification and the reasons therefore and will provide the applicant with the opportunity to comment on the revocation or modification.
- Ordinarily the revocation modification of an exemption will have prospective effect only.
§ 2570.51 Public Inspection and copies.
- The administrative record of each exemption application will be open to public inspection and copying at the Public Disclosure Branch, PWBA, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
- Upon request, the staff of the Public Disclosure Branch will furnish photocopies of an administrative record, or any specified portion of that record, for a specified charge per page.
§ 2570.52 Effective Date.
This regulation is effective with respect to all applications for exemptions filed with the Department under section 408(a) of ERISA, section 4975(c)(2) of the Code, or 5 USC 8477(c)(3) at any time on or after September 10, 1990. Applications for exemptions under section 408(a) of ERISA and/or section 4975 of the Code filed before September 10, 1990, are governed by ERISA Procedure 75-1. Applications for exemption under 5 USC 8477(c)(3) filed before September 10, 1990, but after December 29, 1988 are governed by part 2585 of chapter XXV of title 29 of the Code of Federal Regulations, (section 29 C.F.R. part 2585 as revised July 1, 1990). Applications under 5 USC 8477(c)(3) filed before December 29, 1988 are governed by ERISA Procedure 75-1.
Part 2585 [Removed)
3. The regulations in part 2585 of chapter XXV of title 29 of the Code of Federal Regulations are removed.
Signed at Washington, DC, this 27th day of July, 1990.
David G. Ball, Assistant Secretary for Pension and Welfare Benefits
U.S. Department of Labor.
Footnotes to Preamble:
- Under section 111 of the FERSA Technical Corrections Act of 1986 (Pub.L. 99-566, October 27, 1986), the Department's existing exemption procedures were made applicable to exemption applications under FERSA until the earlier of the date of publication of final regulations adopting an exemption procedure or December 31, 1988.
- Section 8477(g) of FERSA requires the Secretary of Labor to establish a program to carry out audits to determine the level of compliance with the requirements of this section relating to fiduciary responsibilities and prohibited activities of fiduciaries with respect to the Thrift Savings Fund of the Federal Employees' Retirement System. The Department has interpreted section 8477(g) to mean that the Department has a continuing responsibility to audit the Thrift Savings Fund established by FERSA.
- These sections, relate, in pertinent part, to the Department's nonconsideration of exemption applications which are the subject of an investigation for possible violations of FERSA or which involve a party in interest who is the subject of such an investigation (§ 2570.33(a)(2)); and to the notification of the Division of Exemptions of certain investigations initiated after the filing of an exemption application (§ 2570.37(b)).
- This section of the regulation requires certain exemption applications to include copies of correspondence relating to investigations, examinations, litigation, and continuing controversies with specified Federal agencies.
- The Department must find that the statutory criteria are satisfied before granting a prohibited transaction exemption. The legislative history of ERISA makes it clear, however, that the Department has broad discretion in determining whether or not to grant an exemption. H.R. Rep. 1280, 93 Cong., 2d Sess. 311 (1974).
- See section 1(e) of PTE 84-14 (49 FR 9494, March 13, 1984) the class exemption involving qualified professional asset managers [QPAM] (See page 5-).
- The Department notes that the form of the notice is prescribed under § 2570.43(b) of the regulation.
- Section 4975(c)(2) of the Code and 5 USC 8477(c)(3)(D) (added by FERSA) contain similar hearing requirements. The following discussion of the hearing requirements of section 408(a) of ERISA is equally applicable to those statutory provisions.
- This comment compares the revocation of an exemption to the revocation of a license granted by an agency of the United States Government pursuant to 5 USC 558(c). The Department is expressing no opinion herein as to the applicability of 5 USC 558(c) to the revocation of prohibited transaction exemptions under ERISA, the Code, or FERSA.
Footnotes to Regulation:
- The applicant will write in this space the date of the last day of the time period specified in the notice of proposed exemption.
- To be added in the case of an exemption that provides relief from section 406(b) of ERISA or corresponding sections of the Code or FERSA.
- The applicant will fill in the room number of the Division of Exemptions. As of the date of this final regulation, the room number of the Division of Exemptions was N-5671.
- The applicant will fill in the exemption application number, which is stated in the notice of proposed exemption, as well as in all correspondence from the Department to the applicant regarding the application.
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50-60 Valuation of Non-Traded AssetsInternal Revenue Code As Modified by 65-193 In valuing the stock of closely held corporations, or the stock of corporations where market quotations are not available, all other available financial data, as well as all relevant factors affecting the fair market value must be considered for estate tax and gift tax purposes. No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such stock. However, the general approach, methods, and factors which must be considered in valuing such securities are outlined. Revenue Ruling 54-77, C.B. 1954-1, 187, superseded. Section 1. Purpose. The purpose of this Revenue Ruling is to outline and review in general the approach, methods and factors to be considered in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes. The methods discussed herein will apply likewise to the valuation of corporate stocks on which market quotations are either unavailable or are of such scarcity that they do not reflect the fair market value. Sec. 2. Background and Dfinitions
Sec. 3. Approach to Valuation
Sec. 4. Factors to Consider
With profit and loss statements of this character available, the appraiser should be able to separate recurrent from nonrecurrent items of income and expense, to distinguish between operating income and investment income, and to ascertain whether or not any line of business in which the company is engaged is operated consistently at a loss and might be abandoned with benefit to the company. The percentage of earnings retained for business expansion should be noted when dividend-paying capacity is considered. Potential future income is a major factor in many valuations of closely-held stocks, and all information concerning past income which will be helpful in predicting the future should be secured. Prior earnings records usually are the most reliable guide as to the future expectancy, but resort to arbitrary five-or-ten-year averages without regard to current trends or future prospects will not produce a realistic valuation. If, for instance, a record of progressively increasing or decreasing net income is found, then greater weight may be accorded the most recent years' profits in estimating earning power. It will be helpful, in judging risk and the extent to which a business is a marginal operator, to consider deductions from income and net income in terms of percentage of sales. Major categories of cost and expense to be so analyzed include the consumption of raw materials and supplies in the case of manufacturers, processors and fabricators; the cost of purchased merchandise in the case of merchants; utility services; insurance; taxes; depletion or depreciation; and interest. Sec. 5. Weight to be Accorded Various Factors The valuation of closely held corporate stock entails the consideration of all relevant factors as stated in section 4. Depending upon the circumstances in each case, certain factors may carry more weight than others because of the nature of the company's business. To illustrate:
Sec. 6. Capitalization Rates In the application of certain fundamental valuation factors, such as earnings and dividends, it is necessary to capitalize the average or current results at some appropriate rate. A determination of the proper capitalization rate presents one of the most difficult problems in valuation. That there is no ready or simple solution will become apparent by a cursory check of the rates of return and dividend yields in terms of the selling prices of corporate shares listed on the major exchanges of the country. Wide variations will be found even for companies in the same industry. Moreover, the ratio will fluctuate from year to year depending upon economic conditions. Thus, no standard tables of capitalization rates applicable to closely held corporations can be formulated. Among the more important factors to be taken into consideration in deciding upon a capitalization rate in a particular case are: (1) the nature of the business; (2) the risk involved; and (3) the stability or irregularity of earnings. Sec. 7. Average of Factors Because valuations cannot be made on the basis of a prescribed formula, there is no means whereby the various applicable factors in a particular case can be assigned mathematical weights in deriving the fair market value. For this reason, no useful purpose is served by taking an average of several factors (for example, book value, capitalized earnings and capitalized dividends) and basing the valuation on the result. Such a process excludes active consideration of other pertinent factors, and the end result cannot be supported by a realistic application of the significant facts in the case except by mere chance. Sec. 8. Restrictive Agreements Frequently, in the valuation of closely held stock for estate and gift tax purposes, it will be found that the stock is subject to an agreement restricting its sale or transfer. Where shares of stock were acquired by a decedent subject to an option reserved by the issuing corporation to repurchase at a certain price, the option price is usually accepted as the fair market value for estate tax purposes. See Rev. Rul. 54-76, C.B. 1954-1, 194. However, in such case the option price is not determinative of fair market value for gift tax purposes. Where the option, or buy and sell agreement, is the result of voluntary action by the stockholders and is binding during the life as well as at the death of the stockholders, such agreement may or may not, depending upon the circumstances of each case, fix the value for estate tax purposes. However, such agreement is a factor to be considered, with other relevant factors, in determining fair market value. Where the stockholder is free to dispose of his shares during life and the option is to become effective only upon his death, the fair market value is not limited to the option price. It is always necessary to consider the relationship of the parties, the relative number of shares held by the decedent, and other material facts, to determine whether the agreement represents a bona fide business arrangement or is a device to pass the decedent's shares to the natural objects of his bounty for less than an adequate and full consideration in money or money's worth. In this connection see Rev. Rul. 157 C.B. 1953-2, 255, and Rev. Rul. 189, C.B. 1953-2, 294. Sec. 9. Effect on Other Documents Revenue Ruling 54-77, C.B. 1954-1, 187, is hereby superseded. Revenue Bulletin 2003-37Internal Revenue Bulletin: 2003-37 Catch-Up Contributions for Individuals Age 50 or Older Final regulations implementing "Catch-Up" contribution provisions for Section 401(k) plans, Section 408(p) Simple IRA plans, Section 408(k) Simplified Employee Pensions (SEPs), Section 403(b) tax-sheltered annuity contracts, and Section 457 governmental plans. September 15, 2003 T. D. 9072 26 CFR Part 1 Agency: Internal Revenue Service (IRS), Treasury Action: Final regulations Summary: This document contains final regulations that provide guidance concerning the requirements for retirement plans providing catch-up contributions to individuals age 50 or older pursuant to the provisions of section 414(v). These final regulations affect section 401(k) plans, section 408(p) SIMPLE IRA plans, section 408(k) simplified employee pensions, section 403(b) tax-sheltered annuity contracts, and section 457 eligible governmental plans, and affect participants eligible to make elective deferrals under these plans or contracts. Dates: Effective Date: These final regulations are effective on July 8, 2003. Applicability Date: These final regulations are applicable to contributions in taxable years beginning on or after January 1, 2004. Supplementary information: Background This document contains amendments to the Income Tax Regulations (26 CFR Part 1) under sections 402(g) and 414(v) of the Internal Revenue Code (Code). Section 414(v), added by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (Public Law 107-16; 115 Stat. 38), effective for years beginning after December 31, 2001, permits an individual age 50 or older to make additional elective deferrals each year, up to a dollar limit, if certain requirements provided under that section are satisfied. Under section 414(v)(3), these additional elective deferrals are not subject to certain otherwise applicable limitations on elective deferrals and are excluded from consideration for certain nondiscrimination tests. Under section 414(v)(4), catch-up contributions generally must be made available to all catch-up eligible individuals who participate under any plan maintained by the employer that provides for elective deferrals. Adoption of Amendments to the Regulations 26 CFR part 1 is amended as follows: Part 1-Income Taxes Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 Par. 2. Section 1.402(g)-2 is added to read as follows: §1.402(g)-2 Increased limit for catch-up contributions.
Par. 3. Section 1.414(v)-1 is added to read as follows: §1.414(v)-1 Catch-up contributions.
Robert E. Wenzel, Approved June 27, 2003. Pamela F. Olson, Note: (Filed by the Office of the Federal Register on July 7, 2003, 8:45 a.m., and published in the issue of the Federal Register for July 8, 2003, 68 F.R. 40510) Revenue Bulletin 2003-13Deemed Individual Retirement Accounts "Deemed IRAs" were created under the Economic Growth and Tax Relief Reconciliation Act of 2001 when it added Section 408(q) to the Internal Revenue Code. Section 408q permits employees to make either regular IRA and/or Roth IRA contributions to an individual retirement account (IRA) within a qualified employer plan. Part III. Administrative, Procedural, and Miscellaneous Section 1. Purpose This revenue procedure provides guidance for employers that want to amend their plans qualified under § 401(a) of the Internal Revenue Code to include "deemed IRAs" described in § 408(q). The revenue procedure also provides a sample plan amendment that may be used, in conjunction with IRA language, to amend a qualified plan to provide for deemed IRAs. Section 2. Background
Section 3. Required language for deemed IRAs
Drafting Information The principal author of this revenue procedure is Roger Kuehnle of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue procedure, please contact Employee Plans' taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday. Mr. Kuehnle can be reached at 202-283-9888 (not a toll-free number). Appendix Sample Plan Amendment (The following sample plan amendment may be adopted only by plans trusteed by a person eligible to act as a trustee of an IRA under § 408(a)(2) and plans that designate an insurance company to issue annuity contracts under § 408(b). Additional language that satisfies § 408 or 408A must also be added to the plan.) Section - Deemed IRAs
(Adoption agreement provisions) Section of the plan, Deemed IRAs: (check one)
Roth and Deemed Individual Retirement Account Participation in Group Trusts Described in Revenue Ruling 81-100Internal Revenue Code Part I Section 501 - Exemption From Tax on Corporations, Certain Trusts, Etc. Purpose This revenue ruling extends the ability to participate in group trusts described in Revenue Ruling 81-100, 1981-1 C.B. 326, to eligible governmental plans under § 457(b) of the Internal Revenue Code and clarifies the ability of Roth individual retirement accounts described in § 408A and deemed individual retirement accounts described in § 408(q) to participate in these group trusts. In addition, this revenue ruling provides related model language for eligible governmental plans under § 457(b). Issue Whether the assets of eligible governmental plan trusts described in § 457(b) may be pooled with the assets of a group trust described in Revenue Ruling 81-100, without affecting the tax status of the eligible governmental plan trust or the group trust (including its current participants). Law and analysis Section 501(a) provides, in part, that a trust described in § 401(a) is exempt from income tax. Section 401(a)(1) provides that a trust or trusts created or organized in the United States and forming a part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of its employees or their beneficiaries is qualified under § 401(a) if contributions are made to the trust or trusts by the applicable employer, or employees, or both for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated in accordance with such plan. Section 401(a)(2) provides, in part, that under each trust instrument it must be impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the plan and the trust or trusts, for any part of the corpus or income of the trust, to be used for or diverted to purposes other than for the exclusive benefit of the employees or their beneficiaries. Section 401(a)(24) provides that any group trust that otherwise meets the requirements of § 401(a) will not fail to satisfy such requirements due to the participation or inclusion of a plan or governmental unit described in § 818(a)(6) in the group trust. Section 818(a)(6) provides, in part, that for these purposes the trust of a pension plan contract includes a governmental plan within the meaning of § 414(d) and an eligible deferred compensation plan within the meaning of § 457(b). Section 401(f) provides that a custodial account, an annuity contract and certain other contracts issued by an insurance company will be treated as a qualified trust if the custodial account or contract would, except for the fact that it is not a trust, constitute a qualified trust under § 401, and, if the assets in any such custodial account are held by a bank or another person who demonstrates that he will hold the assets in a manner consistent with the requirements of § 401. Section 408(e) provides for the exemption from taxation of an individual retirement account that meets the requirements of § 408. Section 408(a)(5) provides that the assets of an individual retirement account may not be commingled with other property except in a common trust fund or common investment fund. Section 408A provides that, except as otherwise provided in § 408A, a Roth IRA is treated for purposes of the Code as an individual retirement plan, which includes an individual retirement account that meets the requirement of § 408. Consequently, a Roth IRA that is an individual retirement account is exempt from tax under § 408(e). Section 408(q) provides, in part, that if a qualified employer plan, as defined in § 408(q)(3)(A), elects to allow employees to make voluntary employee contributions to a separate account established under the plan and, under the terms of the qualified employer plan, the account meets the requirements of § 408 or 408A for an individual retirement account, then that account is treated as an individual retirement account (deemed individual retirement account), and not as a qualified employer plan. An individual retirement account described in § 408(q) is exempt from taxation under § 408(e). Rev. Rule. 81-100 holds that if certain requirements are satisfied, a group trust is exempt from taxation under § 501(a) with respect to its funds that equitably belong to participating trusts described in § 401(a) and also is exempt from taxation under § 408(e) with respect to its funds that equitably belong to individual retirement accounts that satisfy the requirements of § 408. Also, the status of individual trusts as qualified under § 401(a), or as meeting the requirements of § 408 and as being exempt from tax under § 501(a) or § 408(e), are not affected by the pooling of their funds in a group trust. Section 457 provides that compensation deferred under an eligible deferred compensation plan of an eligible employer that is a State or political subdivision, agency, or instrumentality thereof (an eligible governmental plan) and any income attributable to the amounts deferred, is includible in gross income only in the taxable year in which it is paid to the plan participant or beneficiary. Section 457(g)(1) requires an eligible governmental plan under § 457(b) to hold all assets and income of the plan in a trust for the exclusive benefit of participants and their beneficiaries. Section 457(g)(2) provides, in part, that a trust described in § 457(g)(1) is treated as an organization exempt from federal income tax under § 501(a). Section 457(g)(3) provides that custodial account and contracts described in § 401(f) are treated as trusts under rules similar to the rules under § 401(f). This revenue ruling extends the holding of Revenue Ruling 81-100 to eligible governmental plans described in § 457(b). Therefore, if the requirements below are satisfied, the funds from qualified plan trusts, individual retirement accounts (including a Roth individual retirement account described in § 408A and a deemed individual retirement account described in § 408(q)) that are tax-exempt under § 408(e), and eligible governmental plan trusts described in § 457(b) and § 457(g) may be pooled without adversely affecting the tax status of the group trust or the tax status of the separate trusts. Holding The assets of eligible governmental plan trusts described in § 457(b) may be pooled with the assets of a group trust described in Revenue Ruling 81-100 without affecting the tax status of the eligible governmental plan trust or the group trust (including its current participants). Accordingly, under Revenue Ruling 81-100 and this revenue ruling, if the five criteria below are satisfied, a trust that is part of a qualified retirement plan, an individual retirement account (including a Roth individual retirement account described in § 408A and a deemed individual retirement account described in § 408(q)) that is exempt from taxation under § 408(e), or an eligible governmental plan under § 457(b) may pool its assets in a group trust without adversely affecting the tax status of any of the separate trusts or the group trust. For this purpose, a trust includes a custodial account that is treated as a trust under § 401(f), under § 408(h), or under § 457(g)(3).
Model Amendments There are two model amendments set forth below. One is for those group trusts that have received favorable determination letters from the Service that the group trust satisfies Revenue Ruling 81-100. The other is for those trusts of eligible governmental plans under § 457(b) that have received a letter ruling from the Service (in each instance issued prior to July 12, 2004).
Effect on other Documents Revenue Ruling 81-100 is clarified and modified. Drafting Information The principal author of this revenue ruling is Dana A. Barry of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact the Employee Plans' taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday (a toll free call). Ms. Barry may be reached at (202) 283-9888 (not a toll-free call). IRS Self-Correction Program Frequently Asked Questions
Agency: Internal Revenue Service IRS Self-Correction Program Frequently Asked Questions Guidance. These frequently asked questions and answers are provided for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided. Is there a way to attain IRS approval prior to audit regarding the appropriate way to correct a failure under the SCP? The SCP is a voluntary employer-initiated program that does not involve IRS approval; therefore, the IRS will not approve a Plan Sponsor's method of correction prior to audit. However, Rev. Proc. 2003-44 sets forth General Correction Principles designed to assist a plan sponsor in determining the appropriate method of correction for a failure. In addition, Appendix A and Appendix B of Rev. Proc. 2003-44 provide plan sponsors with sample correction methods for certain failures. To the extent the plan sponsor applies the applicable correction method set forth in either of these appendices, the correction is deemed to be reasonable and appropriate correction for the failure. Upon examination, the IRS has the right to review whether the taxpayer made the correct determination that such failure(s) were eligible under the SCP as well as whether the correction method is acceptable. What practices and procedures are required to be in place in order for a plan to be eligible for relief under the SCP? The IRS is concerned that the practices and procedures of a plan foster compliance with the requirements of the Code.
If a plan sponsor discovers a failure of the Actual Deferral Percentage (ADP), Actual Deferral Percentage (ACP), or Multiple Use tests in the plan sponsor's profit-sharing plan, may the failures be corrected under the SCP? Yes. A failure of the ADP, ACP or Multiple Use Tests is treated as an Operational Failure for purposes of EPCRS. Under Code section 401(k) and (m), a Plan Sponsor has until the end of the plan year following the plan year in which an excess contribution or excess aggregate contribution was made to correct the failure; under the SCP, the two-year correction period applicable to Significant Operational Failures does not begin under the expiration of the statutory correction period. (Note that the Multiple Use Test has been repealed for plan years beginning after 12/31/01.) Example - In 2004, a Plan Sponsor discovers that in 2003, when testing the contributions made in its section 401(k) plan during 2003 for the ADP test, mistakes were made in determining the correct amount of compensation that should have been taken into account under the test. When the ADP test was rerun with the correct data, the plan sponsor discovers that the ADP test was failed. Assuming the other eligibility requirements of Self-Correction Program are satisfied, if the ADP failure is a Significant Operation Failure, the plan sponsor may correct the failure to satisfy the ADP test by the end of the 2006 plan year. If the ADP failure is an Insignificant Operational Failure, the plan sponsor has even longer to correct the failure, and may correct even upon audit of the plan. What are Insignificant Operational Failures under the SCP? The SCP permits Plan Sponsors to correct significant Operational Failures within two years of the year in which the failure occurred, provided the other requirements of the SCP are satisfied. A number of factors are considered in determining whether Operational Failures are insignificant. These include, but are not limited to:
This is not an exclusive list and no single factor is determinative. Failures will not be considered significant merely because they occur in more than one year. In addition, the IRS will apply these factors in a way so as to not preclude small businesses from being eligible for the SCP merely because of their size. When correcting Significant Operational Failures, what actions must be taken by a plan sponsor by the end of the two-year correction period in order to be entitled to relief under the SCP? In general, correction must be completed by the end of the two-year correction period in order for a plan to be entitled to relief under the SCP. However, where a Plan Sponsor substantially completes correction within the correction period, the plan sponsor will not lose the relief provided under the SCP merely because correction wasn't completed during the correction period. There are two circumstances under which correction is considered to have been substantially completed: First, where,
Second, where,
In addition, a Plan Sponsor will not be considered to have failed to fully correct within the correction period where a plan sponsor takes reasonable action to find but has not located all current and former participants and beneficiaries to whom additional benefits are due. Reasonable action includes the use of the Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94-22, 1994-1 C.B. 608) or the Social Security Administration Reporting Service. If an individual is later located, the additional benefits must be provided to the individual at that time. If correction of an Operational Failure is being implemented through adoption of a plan amendment, the required application for a determination letter must be submitted within the two-year correction period in order for correction to be considered to have been timely implemented. Assume a plan sponsor discovers a vesting problem in which the plan terms were not followed, should the plan sponsor use SCP or the Voluntary Correction Program to correct the problem? The decision of whether to use the SCP or Voluntary Correction Program to correct an Operational Failure depends on a number of factors, including: (1) the type of failure involved, (2) the practices and procedures under the plan, (3) whether, if the failure is an Operational Failure, it would be considered to be a Significant Operational Failure, (4) whether a Favorable Letter has been issued with respect to the plan, (5) whether the failure is an Egregious Failure, (6) when the failure is discovered, and (7) the amount of comfort the Plan Sponsor has with respect to the method used to correct the failure. Although the SCP does not require the payment of a fee or notification to the IRS, it is limited to correcting Operational Failures that are not egregious. In addition, if the failure is a Significant Operational Failure, the Plan Sponsor must complete correction of the failure within two years of the year in which the failure occurred. Although a plan sponsor does not necessarily get assurance that the correction method employed under the SCP is acceptable to the IRS, the IRS has provided several examples of failures and acceptable correction methods under Appendix A and Appendix B in Rev. Proc. 2003-44. If a plan sponsor corrects a failure listed in Appendix A or Appendix B in accordance with the method of correction method set forth in the appendix, the plan sponsor may be assured that the IRS will find that correction method to be acceptable. In this example, an Operational Failure, a vesting failure, has occurred. Appendix B, section 2.03 provides examples of acceptable correction methods for a vesting failure. Therefore, if there are acceptable practices and procedures under the plan (see Q&A 2 above), and the failure is an Insignificant Operational Failure, the Plan Sponsor may use the SCP to correct the failure at any time, even if the plan is Under Examination. Further, if the plan sponsor uses one of the correction methods under Appendix B of the revenue procedure, it will have assurance that the plan would be entitled to relief under the SCP with respect to its correction method. If, however, the failure is a Significant Operational Failure, the plan would be entitled to relief under the SCP only if the failure is identified and corrected within the two-year correction period under the SCP. Also, if the failure is a Significant Operational Failure, the plan would be eligible for relief under the SCP only if a Favorable Letter has been issued with respect to the plan. If the failure would be considered an Egregious Failure, it would be eligible for correction under the Voluntary Correction Program but not under the SCP. IRS Voluntary Correction Program Frequently Asked Questions
Agency: Internal Revenue Service IRS Voluntary Compliance Program Frequently Asked Questions Guidance. The frequently asked questions and answers provided below are for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided. Is there an application form that plan sponsors must use to apply under the VCP? There is no application form applicable to the VCP; however, the IRS provides Sample Submission Formats in Appendix D of Rev. Proc. 2003-44, which facilitate the submission process. The IRS also provides a Checklist designed to assist the Plan Sponsor and their representatives in preparing a submission that contains the information and documents required under each of those programs. The checklist must be completed, signed, and dated by the employer, plan sponsor, or the plan sponsor's representative, and should be placed on top of the submission. What is the mailing address for applications submitted under the VCP? All VCP submissions and accompanying determination letter applications (if applicable) should be mailed to the following address:
Some employers have very little involvement in their employees' 403(b) plans. Who should file a VCP application in these cases? The employer is the only one who can submit an application to correct failures under the VCP. Although insurers and custodians may have some liability to the employer, they have no liability under the VCP. The employer is responsible for identifying the failures, correcting the failures, and insuring that necessary changes are made to administrative procedures for operating the 403(b) plan. When necessary for correction, the employer must secure the cooperation of the providers prior to submitting an application under the VCP. For a VCP submission, what information must the plan sponsor supply with respect to correction of the failures? The letter from the Plan Sponsor or the plan sponsor's representative must contain a detailed description of the method for correcting the failures that the plan sponsor has implemented or proposes to implement.
If a plan with a Plan Document Failure is submitted under the VCP, is the plan sponsor required to concurrently submit an application for a determination letter? "Yes. Anytime a Plan Sponsor is required to file for a determination letter in association with a VCP application, whether it be for the correction of a Plan Document Failure, Demographic Failure, or correction of an Operational Failure by plan amendment, if the amendment is other than the adoption of an amendment designated by the IRS as a model amendment or the adoption of a prototype or volume submitter plan for which the Plan Sponsor has reliance on the plan's opinion or advisory letter (see Rev. Proc. 2003-6, 2003-1 I.R.B. 191), the plan sponsor is required to submit a determination letter application with the appropriate user fee at the same time and to the same address that the VCP submission is sent. Is there an avenue for plan sponsors to negotiate correction under the VCP on an anonymous basis? Yes. Rev. Proc. 2003-44, section 10.11 sets forth the provisions of the Anonymous Submission procedure. The Anonymous Submission procedure permits Plan Sponsors to submit Qualified Plans, 403(b) Plans, SEPs, and Simple IRA Plans under VCP without initially identifying the applicable plan(s) or applicant. The submission requirements relating to VCP apply to anonymous submissions on the same terms they apply to submissions in which the plan and plan sponsor are identified. However, information identifying the plan or the Plan Sponsor may be excluded from the submission until the IRS and the plan representative reach agreement with respect to all aspects of the submission. Until the plan(s) and Plan Sponsor are identified to the IRS, an anonymous submission does not preclude an examination of the Plan Sponsor or its plan(s). Thus, a plan submitted under the Anonymous Submission procedure that comes Under Examination prior to the date the plan(s) and Plan Sponsor(s) identifying materials are received by the IRS will no longer be eligible under VCP. Should a plan sponsor that discovers a Plan Document Failure in a plan that has been submitted for a determination letter raise the issue to the Employee Plans agent working the determination letter application? If the Plan Sponsor knows about the failure prior to submitting a determination letter application, the plan sponsor should submit under the VCP and include the determination letter application with the VCP submission. If the failure is identified and voluntarily raised by the taxpayer to the Employee Plans Agent or Specialist assigned to the determination letter application, the taxpayer will be given an opportunity to perfect a VCP submission and have the issue resolved under the VCP. What happens if the IRS and plan sponsor fail to reach resolution regarding the appropriate correction of a failure? Under the VCP, if resolution cannot be reached (for example, where information is not timely provided to the IRS or because agreement cannot be reached on correction or a change in administrative procedures), the compliance fee will not be returned, and the case may be referred to the appropriate EP office for examination consideration. May a plan sponsor receive an extension of the 150-day correction period under the VCP? In appropriate circumstances, a Plan Sponsor will be granted an extension of the 150-day correction period under VCP. The plan sponsor should submit a written request explaining the reason for the request to the agent working the case. The request must be made prior to the expiration of the 150-day correction period. Can trust assets be used for the payment of the fee or sanction under the VCP? As a rule, fees or sanctions should be paid by parties other than the trust. Exceptions are allowed only in very narrow circumstances. Has the IRS established a program to verify that plan sponsors are correcting failures in accordance with Compliance Statements that have been issued under the VCP? Yes, the IRS has established a verification program. The program is not an examination of the Plan Sponsor books and records. The IRS checks available information from the plan sponsor to insure that all corrections were made in accordance with the terms of the compliance statement. If necessary corrections or administrative changes were not timely made, the plan may be referred to EP Examinations. Are matters relating to excise taxes resolved under the EPCRS? The correction programs are not available for events for which the Code provides tax consequences other than plan disqualification (such as the imposition of an excise tax or additional income tax). For example, funding deficiencies (failures to make the required contributions to a plan subject to § 412), prohibited transactions, and failures to file the Form 5500 cannot be corrected under the correction programs. However, it should be noted that excise taxes and additional taxes, to the extent applicable, are not waived merely because the underlying failure has been corrected or because the taxes result from the correction. Thus, for example, the excise tax on certain excess contributions under § 4979 is not waived under these correction programs, even though the underlying Qualification Failure is corrected under the EPCRS. Under Audit CAP, excise taxes that are reportable on the Form 5330 (e.g., prohibited transactions) may be resolved by the agent securing a Form 5330 providing for 100% of the tax and interest outstanding. The agent may, in his or her discretion, recommend to the Service Center waiver of the failure to file and/or failure to pay penalty, under IRC §6651. Section 4974(d) provides for waiver of the minimum distribution excise tax under certain circumstances. As part of VCP, if the failure involves the failure to satisfy the minimum required distribution requirements of § 401(a)(9), in appropriate cases, the IRS will waive the excise tax under § 4974 applicable to plan participants. The waiver will be included in the compliance statement issued by the IRS. The Plan Sponsor, as part of the submission, must request the waiver and in cases where the participant subject to the excise tax is an owner-employee as defined in § 401(c)(3), or a 10 percent owner of a corporation, the Plan Sponsor must also provide an explanation supporting the request for the waiver. Assume a plan sponsor discovers a vesting problem in which the plan terms were not followed, should the plan sponsor use the Self-Correction Program or the VCP to correct the problem? The decision of whether to use the SCP or Voluntary Correction Program to correct an Operational Failure depends on a number of factors, including: (1) the type of failure involved, (2) the practices and procedures under the plan, (3) whether, if the failure is an Operational Failure, it would be considered to be a Significant Operational Failure, (4) whether a Favorable Letter has been issued with respect to the plan, (5) whether the failure is an Egregious Failure, (6) when the failure is discovered, and (7) the amount of comfort the Plan Sponsor has with respect to the method used to correct the failure. Although the SCP does not require the payment of a fee or notification to the IRS, it is limited to correcting Operational Failures that are not egregious. In addition, if the failure is a Significant Operational Failure, the Plan Sponsor must complete correction of the failure within two years of the year in which the failure occurred. Although a plan sponsor does not necessarily get assurance that the correction method employed under the SCP is acceptable to the IRS, the IRS has provided several examples of failures and acceptable correction methods under Appendix A and Appendix B in Rev. Proc. 2003-44. If a plan sponsor corrects a failure listed in Appendix A or Appendix B in accordance with the method of correction method set forth in the appendix, the plan sponsor may be assured that the IRS will find that correction method to be acceptable. In this example, an Operational Failure, a vesting failure, has occurred. Appendix B, section 2.03 provides examples of acceptable correction methods for a vesting failure. Therefore, if there are acceptable practices and procedures under the plan, and the failure is an Insignificant Operational Failure, the Plan Sponsor may use the SCP to correct the failure at any time, even if the plan is Under Examination. Further, if the plan sponsor uses one of the correction methods under Appendix B of the revenue procedure, it will have assurance that the plan would be entitled to relief under the SCP with respect to its correction method. If, however, the failure is a Significant Operational Failure, the plan would be entitled to relief under the SCP only if the failure is identified and corrected within the two-year correction period under the SCP. Also, if the failure is a Significant Operational Failure, the plan would be eligible for relief under the SCP only if a Favorable Letter has been issued with respect to the plan. If the failure would be considered an Egregious Failure, it would be eligible for correction under the Voluntary Correction Program but not under the SCP. |
IRS Revenue Ruling Notice 2007-6
IRS Revenue Ruling Notice 2007-6
Cash Balance and Other Hybrid Defined Benefit Pension Plans
Notice 2007-6
- PURPOSE
- BACKGROUND
- TRANSITIONAL GUIDANCE
- Section 411(a)(13)(C): Definition of statutory hybrid plan.
- In general. A statutory hybrid plan described in § 411(a)(13)(C)(i) and (ii) is a plan that is either a lump sum based plan or a plan that has a similar effect to a lump sum based plan. For purposes of this notice, the term lump sum based plan means a defined benefit plan under the terms of which the accumulated benefit of a participant is expressed as the balance of a hypothetical account maintained for the participant or as the current value of the accumulated percentage of the participant’s final average compensation, and includes a plan under which the accrued benefit under the terms of the plan is calculated as the actuarial equivalent of such a hypothetical account balance or accumulated percentage. Whether a plan is a lump sum based plan is determined based on how the accumulated benefit of a participant is expressed under the terms of the plan, and does not depend on whether the plan provides for an optional form of benefit in the form of a lump sum payment.
- Similar effect to a lump sum based plan.
- Section 411(a)(13): Special rules for the application of §§ 411(a)(2), 411(c), and 417(e).
- In general. Section 411(a)(13)(A) provides special rules with respect to§§ 411(a)(2), 411(c), and 417(e) for benefits expressed as the balance of a hypothetical account maintained for a participant or as the current value of the accumulated percentage of a participant’s final average compensation under a lump sum based plan. Specifically, with respect to such benefits, a lump sum based plan is not treated as failing to meet the requirements of § 411(a)(2), or the requirements of§§ 411(c) and 417(e) with respect to such benefits derived from employer contributions, solely because the present value of such benefits of any participant is, under the terms of the plan, equal to the amount expressed as the balance in the hypothetical account or as the accumulated percentage of the participant’s final average compensation. Section 411(a)(13)(A) does not apply to benefits under a statutory hybrid plan that are expressed neither as the balance of a hypothetical account maintained for a participant nor as the current value of the accumulated percentage of a participant’s final average compensation.
- Effective date. Section 411(a) (13)(A) is effective for distributions made after August 17, 2006. The Service expects to issue regulations shortly interpreting the effective date of § 411(a)(13)(A).
- Section 411(d)(6) relief. In the case of a lump sum based plan that provides for a single-sum distribution to a participant that exceeds the participant’s hypothetical account balance or accumulated percentage of final average compensation, the plan may be amended to eliminate the excess for distributions made after August 17, 2006, under the rules of section 1107 of PPA 2006. Because such an amendment is made pursuant to section 701 of PPA 2006, section 1107 of PPA 2006 applies to the amendment if the amendment satisfies the requirements specified in section 1107. Thus, if the amendment is adopted on or before the last day of the first plan year beginning on or after January 1, 2009 (January 1, 2011, for a governmental plan), and the plan is operated as if such amendment were in effect as of the first date the amendment is effective, then the amendment does not violate section 411(d)(6) with respect to distributions made after the later of August 17, 2006, or the effective date of the amendment.
- Section 4980F. Pursuant to this notice, in the case of an amendment described in section B(3) of this part III, a notice required under § 4980F (and the parallel provision at section 204(h) of ERISA)must be provided at least 30 days before the date the amendment is first effective. Thus, if an amendment described in section B(3) of this part III that significantly reduces the rate of future benefit accrual for purposes of § 4980F is adopted retroactively (i.e., is adopted after the effective date of the amendment) as an amendment under the rules of section 1107 of PPA 2006, then the notice required under § 4980F must be provided at least 30 days before the earliest date on which the plan is operated in accordance with the amendment.
- Vesting. See § 411(a)(13)(B) for a special 3-year vesting schedule for statutory hybrid plans.
- Section 411(b)(5)(A)(iv): Scope of rule.
- Section 411(b)(5)(B)(i): Market rate of return.
-
Future guidance on market rate of return. During
2007, Treasury and the Service expect to issue guidance
that addresses the market rate of return rules at
§ 411(b)(5)(B)(i), including the special rule regarding preservation of capital under§ 411(b)(5)(B)(i)(II) and the minimum rate of return rules in the second sentence of § 411(b)(5)(B)(i)(I). The guidance is also expected to address the extent to which § 411(d)(6) relief provided under section 1107 of PPA 2006 applies to an amendment to a statutory hybrid plan that changes the plan’s interest crediting rate where such amendment is adopted after August 17, 2006. - Safe harbor. Pending further guidance, a market rate of return for purposes of § 411(b)(5)(B)(i) includes the rate of interest on long-term investment grade corporate bonds (as described in§ 412(b)(5)(B)(ii)(II) prior to amendment by PPA 2006 for plan years beginning prior to January 1, 2008, and the third segment rate described in § 430(h)(2)(C)(iii) for subsequent plan years) or the rate of interest on 30-year Treasury securities (as described in § 417(e)(3) prior to amendment by PPA 2006). In addition, a market rate of return for purposes of § 411(b)(5)(B)(i) includes the sum of any of the standard indices and the associated margin for that index as described in part IV of Notice 96–8.
- Certain plan termination requirements. See § 411(b)(5)(B)(vi) for required plan terms related to termination of a statutory hybrid plan.
- Section 411(b)(5)(B)(ii)—(iv): Special rules for conversion amendments.
- In general. Section 411(b)(5)(B)(ii) provides that if a conversion amendment is adopted with respect to a plan after June 29, 2005, the plan is treated as failing to meet the requirements of§ 411(b)(1)(H) unless the requirements of§ 411(b)(5)(B)(iii) are met with respect to each individual who was a participant in the plan immediately before the adoption of the conversion amendment.
- Requirements of § 411(b)(5)(B)(iii). Subject to § 411(b)(5)(B)(iv), § 411(b)(5) (B)(iii) is satisfied with respect to any participant if the accrued benefit of the participant under the terms of the plan as in effect after the conversion amendment is not less than the sum of—
- Requirements of § 411(b)(5)(B)(iv). Under § 411(b)(5)(B)(iv), a plan must credit the accumulation account or similar account for purposes of the accrued benefit described in part IIIE(2)(ii) of this notice with the amount of any early retirement benefit or retirement-type subsidy for the plan year in which the participant retires if, as of such time, the participant has met the age, years of service, and other requirements under the plan for entitlement to such benefit or subsidy. For this purpose, the date on which a participant retires means the annuity starting date for the participant’s benefit.
- Effective date. Section 411(b)(5) (B)(ii) applies to a conversion amendment that is adopted after, and takes effect after, June 29, 2005. See section 701(e)(5) of PPA 2006 for a special election with respect to § 411(b)(5)(B)(ii).
- Safe harbor for conversions related to mergers and acquisitions.
- Future guidance on conversions related to mergers and acquisitions. In accordance with section 702 of PPA 2006, the Service expects to issue regulations not later than August 17, 2007, regarding an amendment to convert a defined benefit plan into a hybrid defined benefit plan with respect to a group of employees who become employees by reason of amerger, acquisition, or similar transaction.
- Safe harbor. Pending further guidance, a plan amendment described in part IIIE that is also described in part IIIF(1) of this notice is not treated as failing to meet the requirements of § 411(b)(1)(H) if the benefit of each participant under the plan as amended is not less than the sum of:
- DETERMINATION LETTERS
- Age discrimination.
- In general. Except as provided in part IVA(2) of this notice, a moratorium plan will be reviewed as to whether accruals under the plan that relate to service performed by the participant after the conversion violate § 411(b)(1)(H). For this purpose, a moratorium plan will not be treated as failing to satisfy the requirements of § 411(b)(1)(H) merely because a moratorium plan that is frontloaded provides that interest credits through normal retirement age are accrued in the year of the related hypothetical allocation.
- Pre-6/30/05 conversions. For purposes of processing a determination letter application for a moratorium plan, the plan will not be reviewed as to whether the conversion of the plan satisfies the requirements of § 411(b)(1)(H) if the amendment that results in the conversion was adopted prior to June 30, 2005. Therefore, determination letters issued to moratorium planswill not consider, andmay not be relied on with respect to, whether such a conversion satisfies the requirements of§ 411(b)(1)(H), as in effect prior to the addition of § 411(b)(5) by PPA 2006, including the effect of any wearaway.
- Post-6/29/05 conversions. In the case of a moratorium plan that involves a conversion of the plan to a statutory hybrid plan pursuant to an amendment that is adopted after June 29, 2005, the conversion must satisfy the requirements of § 411(b)(5)(B)(ii) (described in part IIIE of this notice).
- Distributions before August 18, 2006.
- Terminating plans.
- COMMENTS REQUESTED AND FUTURE REGULATIONS
- Identification of when two or more amendments, or the coordination of two or more defined benefit plans, have the effect of a conversion into a statutory hybrid plan.
- The definition of market rate of return for purposes of § 411(b)(5)(B)(i), including the following related issues:
- The impact of the minimum rate of return rules in the second sentence of § 411(b)(5)(B)(i)(I) on the definition of market rate of return.
- The impact of the preservation of capital rule in § 411(b)(5)(B)(i)(II) on the definition of market rate of return.
- The application of § 411(d)(6) to an amendment to the interest crediting rate specified in a statutory hybrid plan, and the circumstances under which the § 411(d)(6) relief provided under section 1107 of PPA 2006 should apply to such an amendment.
- Application of the special rules for hybrid plans in the case of a plan in which only certain participants’ accrued benefits, or only a portion of a participant’s accrued benefit, is determined by reference to a hypothetical account balance or an accumulated percentage of final average compensation, including plans in which the benefit payable under one plan is offset by the benefit provided under another plan.
- The application of qualification requirements other than §§ 411(b)(1)(H) and 417(e) to a defined benefit plan under which the accrued benefit is calculated as an accumulated percentage of the participant’s final average compensation (commonly referred to as a pension equity plan or PEP), including the treatment of interest credited with respect to terminated vested participants.
- The definition of a recognized index or methodology for purposes of § 411(b)(5)(E) and whether there are any types of indexed plans that should not be treated as statutory hybrid plans other than those described in part IIIA(2)(i) above.
- DRAFTING INFORMATION
This notice announces that the Service is beginning to process determination letter and examination cases in which an application for a determination letter or a plan under examination involves an amendment to change a traditional defined benefit plan into a cash balance plan and provides related guidance. This notice also provides transitional guidance on the requirements of §§ 411(a)(13) and 411(b)(5) of the Internal Revenue Code (Code), as added by section 701(b) of the Pension Protection Act of 2006, Public Law 109–280 (PPA 2006), which was enacted on August 17, 2006. This guidance generally relates to cash balance plans and other hybrid defined benefit pension plans and to amendments that convert defined benefit pension plans to hybrid defined benefit pension plans. This notice also requests comments on certain issues raised by §§ 411(a)(13) and 411(b)(5).
A defined benefit pension plan generally must satisfy the minimum vesting standards of § 411(a) and the accrual requirements of § 411(b) in order to be qualified under § 401(a). Both sections have been modified by section 701(b) of PPA 2006, which added §§ 411(a)(13) and 411(b)(5) to the Code. Section 411(a)(13)(A) provides that a plan described in § 411(a)(13)(C) is not treated as failing to meet either (i) the requirements of § 411(a)(2) (subject to a special vesting rule in § 411(a)(13)(B) with respect to benefits derived from employer contributions), or (ii) the requirements of§ 411(c) or § 417(e) with respect to benefits derived from employer contributions, solely because the present value of the accrued benefit (or any portion thereof) of any participant is, under the terms of the plan, equal to the amount expressed as the balance in a hypothetical account or as an accumulated percentage of the participant’s final average compensation. A plan is described in§ 411(a)(13)(C)(i) if the plan is a defined benefit plan under which the accrued benefit (or any portion thereof) of a participant is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant’s final average compensation. Under § 411(a)(13)(C)(ii), the Secretary is to issue regulations that treat any defined benefit plan (or any portion of such a plan) that has an effect similar to a plan described in§ 411(a)(13)(C)(i) as if it were described in § 411(a)(13)(C)(i). For purposes of this notice, a plan described either in § 411(a)(13)(C)(i) or in regulations or other guidance issued pursuant to§ 411(a)(13)(C)(ii) is referred to as a statutory hybrid plan. Section 411(b)(1)(H)(i) provides that a defined benefit plan fails to comply with § 411(b) if, under the plan, an employee’s benefit accrual is ceased, or the employee’s rate of benefit accrual is reduced, because of the attainment of any age. Section 411(b)(5)(A), as added by section 701(b)(1) of PPA 2006, generally provides that a plan will not be treated as failing to meet the requirements of§ 411(b)(1)(H)(i) if a participant’s benefit accrued to date, as determined as of any date under the terms of the plan, would be equal to or greater than that of any similarly situated, younger individual who is or could be a participant. For purposes of this notice, a participant’s benefit accrued to date is referred to as the participant’s accumulated benefit. Under§ 411(b)(5)(A)(iv), for purposes of the safe harbor standard of § 411(b)(5)(A), a participant’s accumulated benefit may, under the terms of the plan, be expressed as an annuity payable at normal retirement age, the balance of a hypothetical account, or the current value of the accumulated percentage of the employee’s final average compensation. Section 411(b)(5)(B) imposes several requirements on a statutory hybrid plan as a condition of satisfying § 411(b)(1)(H). First, § 411(b)(5)(B)(i) provides that a statutory hybrid plan is treated as failing to meet the requirements of § 411(b)(1)(H) if the terms of the plan provide for an interest credit (or an equivalent amount) for any plan year at a rate that is greater than a market rate of return. Second,§ 411(b)(5)(B)(ii) and (iii) contain minimum benefit rules that apply if, after June 29, 2005, an amendment is adopted that converts a defined benefit plan to a statutory hybrid plan. For purposes of this notice, such an amendment is referred to as a conversion amendment. Third,§ 411(b)(5)(B)(vi) provides a special rule for projecting variable interest crediting rates in the case of a terminating statutory hybrid plan. In addition, § 411(a)(13)(B) requires a statutory hybrid plan to provide that an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions. Section 411(b)(5)(E) provides that a plan is not treated as failing to meet the requirements of § 411(b)(1)(H) solely because the plan provides for indexing of accrued benefits under the plan. Under§ 411(b)(5)(E)(iii), indexing means, in connection with an accrued benefit, the periodic adjustment of the accrued benefit by means of the application of a recognized investment index or methodology. Section 701(a) of PPA 2006 added provisions to the Employee Retirement Income Security Act of 1974, Public Law 93–406 (ERISA) that are parallel to the above described sections of the Code that were added by section 701(b) of PPA 2006. The guidance provided in this notice with respect to the Code also applies for purposes of the parallel amendments to ERISA made by PPA 2006.1 Section 701(c) of PPA 2006 added provisions to the Age Discrimination in Employment Act of 1967, Public Law 90–202 (ADEA), that are parallel to § 411(b)(5) of the Code. Executive Order 12067 requires all Federal departments and agencies to advise and offer to consult with the Equal Employment Opportunity Commission (EEOC) during the development of any proposed rules, regulations, policies, procedures or orders oncerning equal employment opportunity. Treasury and the Service have consulted with the EEOC prior to the issuance of this notice. The amendments made by section 701 of PPA 2006 are generally effective for periods beginning on or after June 29, 2005. There are a number of special effective date rules, some of which are described in this notice. Section 701(d) of PPA 2006 provides that nothing in the amendments made by section 701 should be construed to create an inference concerning the treatment of statutory hybrid plans or conversions of plans into such plans under§ 411(b)(1)(H), or concerning the determination of whether a statutory hybrid plan fails to meet the requirements of§ 411(a)(2), 411(c), or 417(e) as in effect before such amendments solely because the present value of the accrued benefit (or any portion thereof) of any participant is equal to the amount expressed as the balance in a hypothetical account or as an accumulated percentage of the participant’s final average compensation. Section 702 of PPA 2006 requires the Secretary to prescribe regulations for the application of the provisions of section 701 of PPA 2006 in cases where the conversion of a plan to a statutory hybrid plan is made with respect to a group of employees who become employees by reason of a merger, acquisition, or similar transaction. Proposed regulations (EE–184–86, 1988–1 C.B. 881) under §§ 411(b)(1)(H) and 411(b)(2) were published by Treasury and the Service in the Federal Register on April 11, 1988 (53 F.R. 11876), as part of a package of regulations that also included proposed regulations under §§ 410(a), 411(a)(2), 411(a)(8), and 411(c) (relating to the maximum age for participation, vesting, normal retirement age, and actuarial adjustments after normal retirement age, respectively).2 Notice 96–8, 1996–1 C.B. 359, described the application of §§ 411 and 417(e), prior to the enactment of PPA 2006, to a single-sum distribution under a cash balance plan where interest credits under the plan are frontloaded (i.e., where future interest credits to an employee’s hypothetical account balance are not conditioned upon future service and thus accrue at the same time that the benefits attributable to a hypothetical allocation to the account accrue). Under the analysis set forth in Notice 96–8, in order to comply with §§ 411(a) and 417(e) in calculating the amount of a single-sum distribution under a cash balance plan, the balance of an employee’s hypothetical account must be projected to normal retirement age and converted to an annuity under the terms of the plan, and then the employee must be paid at least the present value of the projected annuity, determined in accordance with § 417(e). Under that analysis, where a cash balance plan provides frontloaded interest credits using an interest rate that is higher than the § 417(e) applicable interest rate, payment of a single-sum distribution equal to the current hypothetical account balance as a complete distribution of the employee’s accrued benefit may result in a violation of § 417(e) or a forfeiture in violation of § 411(a). In addition, Notice 96–8 proposed a safe harbor that provided that, if frontloaded interest credits are provided under a plan at a rate no greater than the sum of identified standard indices and associated margins, no violation of § 411(a) or 417(e) would result if the employee’s entire accrued benefit is distributed in the form of a single-sum distribution equal to the employee’s hypothetical account balance, provided the plan uses appropriate annuity conversion factors. On September 15, 1999, the Service’s Director, Employee Plans, issued a field directive requiring that open determination letter applications and examination cases that involved the conversion of a defined benefit plan formula into a benefit formula commonly known as a cash balance formula be submitted for technical advice with respect to the conversion’s effect on the qualified status of the plan (referred to in this notice as the 1999 Field Directive). The 1999 Field Directive identified as a cash balance formula a benefit formula in a defined benefit plan by whatever name (e.g., personal account plan, pension equity plan, life cycle plan, cash account plan, etc.) that, rather than expressing the accrued benefit as a life annuity commencing at normal retirement age, defines benefits for each employee by reference to a single-sum distribution amount. In Announcement 2003–1, 2003–1 C.B. 281, the Service announced that the cases that were the subject of the 1999 Field Directive would not be processed pending issuance of regulations addressing age discrimination.
This part III provides transitional guidance with respect to rules in §§ 411(a)(13) and 411(b)(5) that relate to statutory hybrid plans and the conversion of a defined benefit plan into a statutory hybrid plan. The transitional guidance provided in this part III applies pending the issuance of further guidance.
(i) Treated as having a similar effect. Except as provided below in part IIIA(2)(ii) of this notice, a plan that is not a lump sum based plan is treated as having a similar effect to a lump sum based plan if the plan provides that a participant’s accrued benefit (payable at normal retirement age) is expressed as a benefit that includes automatic periodic increases through normal retirement age that results in the payment of a larger amount at normal retirement age to a similarly situated participant who is younger. This includes a plan that provides for indexing of accrued benefits within the meaning of§ 411(b)(5)(E)(iii), such as a plan that expresses the accrued benefit as an indexed annuity.
(ii) Not treated as having a similar effect.(I) Plan with post-retirement adjustment. A plan described in § 411(b)(5)(E) that solely provides for post-retirement adjustment of the amounts payable to a participant is not treated as having a similar effect to a lump sum based plan.
(II) Variable annuity plan. A variable annuity plan is not treated as having a similar effect to a lump sum based plan if it has an assumed interest rate used for purposes of adjustment of amounts payable to a participant that is at least five percent. For this purpose, a variable annuity plan includes any plan which provides that the amount payable is periodically adjusted by reference to the difference between the rate of return of plan assets (or specified market indices) and the assumed interest rate.
In
applying the age discrimination test set forth in § 411(b)(5)(A)(i), a lump sum based plan may under§ 411(b)(5)(A)(iv) determine the accumulated benefit of a participant as the balance
of a hypothetical account or the current value of the accumulated
percentage of the employee’s final average compensation even if the plan defines the
participant’s accrued benefit as an annuity at normal
retirement age that is actuarially equivalent to such balance or value.
(i) the participant’s accrued benefit for years of service before the effective date of the conversion amendment, determined under the terms of the plan as in effect before the amendment, and
(ii) the participant’s accrued benefit for years of service after the effective date of the amendment, determined under the terms of the plan as in effect after the amendment.
(A) the participant’s section 411(d)(6) protected benefit (as defined in§ 1.411(d)–3(g)(14)) with respect to service before the effective date of the conversion amendment, determined under the terms of the plan as in effect before the amendment, and
(B) the participant’s section 411(d)(6) protected benefit with respect to service on and after the effective date of the conversion amendment, determined under the terms of the plan as in effect after the amendment.
For
purposes of this paragraph F(2), the benefits under clause (A) and
the benefits under clause (B) of this paragraph F(2) must each be
determined in the same manner
as if they were provided under separate plans that are independent of each
other (e.g., without any benefit offsets).
In light of the enactment of section 701 of PPA 2006, the Service is no longer applying the 1999 Field Directive and Announcement 2003–1 and is beginning to process the determination letters and examination cases that were the subject of such field directive and announcement (referred to as moratorium plans in this notice). This part IV describes certain rules that will be applied for purposes of processing moratorium plans. Qualification requirements that are not described in this part IV (e.g., the backloading rules of§ 411(b)(1)(A), (B), and (C)) continue to apply.
The Service expects to issue regulations interpreting the effective date of§ 411(a)(13)(A) (described in part IIIB(2) of this notice). Until this guidance is issued, the Service will not process a moratorium plan that does not satisfy the requirements of Notice 96–8 with respect to distributions made before August 18, 2006.
Under Title IV of ERISA, a standard termination may only occur if, when the final distribution of assets occurs, the plan is sufficient for benefit liabilities determined as of the termination date. See § 4041(b)(1)(D) of ERISA; 29 C.F.R. § 4041.8(a). The Pension Benefit Guaranty Corporation (PBGC) has informed the Service that, for purposes of Title IV of ERISA, a terminating plan with a termination date that is prior to August 18, 2006, cannot apply § 411(a)(13)(A) in determining its benefit liabilities with respect to any distributions made by the terminating plan.
Treasury
and the Service expect to issue regulations with respect to the transitional
guidance provided in this notice and the issues described in part
IIIB(2) of this
notice. These initial regulations may address some additional issues, but will
not address all of the outstanding issues relating to §§ 411(a)(13)
and 411(b)(5).
Comments are requested on the following additional issues. These comments will
be considered in conjunction with the comments received in response to the
initial
regulations in developing additional guidance.
Written comments should be submitted by April 16, 2007. Send submissions to CC:PA:LPD:DRU (Notice 2007–6), Room 5203, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, D.C. 20044. Comments may be hand delivered to CC:PA:LPD:DRU (Notice 2007–6), Room 5203, Internal Revenue Service, 1111 Constitution Avenue, NW,Washington, DC. Alternatively, comments may be submitted via the Internet at notice.comments@irscounsel.treas.gov (Notice 2007–6). All comments will be available for public inspection.
The principal authors of this notice are Kathleen J. Herrmann of the Employee Plans, Tax Exempt and Government Entities Division and Christopher A. Crouch, Lauson C. Green, and Linda S. F.Marshall of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, contact Ms. Herrmann at (202) 283–9888 and Mr. Crouch, Mr. Green, and Ms. Marshall at (202) 622–6090 (not toll-free numbers).
Footnotes
- Under section 101 of Reorganization Plan No. 4 of 1978 (43 F.R. 47713), the Secretary has interpretive jurisdiction over the subject matter addressed by this notice for purposes of ERISA.
- On December 11, 2002, Treasury and the Service issued proposed regulations (REG–209500–86; REG–164464–02, 2003–1 C.B. 262) regarding the age discrimination requirements of§ 411(b)(1)(H) that specifically addressed cash balance plans as part of a package of regulations that also addressed § 401(a)(4) nondiscrimination cross-testing rules applicable to cash balance plans (67 F.R. 76123). The 2002 proposal was intended to replace the 1988 proposal. In Announcement 2003–22, 2003–1 C.B. 847, Treasury and the Service announced the withdrawal of the 2002 proposed regulations under § 401(a)(4), and in Announcement 2004–57, 2004–2 C.B. 15, Treasury and the Service announced the withdrawal of the 2002 proposed regulations relating to age discrimination.
IRS Revenue Ruling Notice 2007-7
Internal Revenue Service 2007-7
Part III. Administrative, Procedural, and Miscellaneous
Miscellaneous Pension Protection Act Changes
- PURPOSE
- Section 303 of Pension Protection Act of 2006
- Section 826 of Pension Protection Act of 2006
- Section 828 of Pension Protection Act of 2006
- Section 829 of Pension Protection Act of 2006
- Section 845 of Pension Protection Act of 2006
- Section 904 of Pension Protection Act 2006
- Section 1102 of Pension Protection Act of 2006
- Section 1201 of Pension Protection Act of 2006
- DRAFTING INFORMATION
This notice provides guidance in the form of questions and answers with respect to certain provisions of the Pension Protection Act of 2006, P.L. 109-280 ("PPA 2006"), that are effective in 2007 or earlier. The sections of PPA 2006 addressed in this notice, which are primarily related to distributions, are § 303 (relating to interest rate assumptions for lump sum distributions), § 826 (relating to hardship distributions), § 828 (relating to early distributions to public safety employees), § 829 (relating to rollovers for nonspouse beneficiaries), § 845 (relating to distributions to pay for accident or health insurance for public safety officers), § 904 (relating to vesting of nonelective contributions), §1102 (relating to the notice and consent period for distributions), and §1201 (relating to distributions from IRAs to charitable organizations).
Section 415(b) of the Code provides limitations on annual benefits under a defined benefit plan. Under § 415(b)(2)(B), if a benefit is payable in a form other than a straight life annuity, the benefit is adjusted to an actuarially equivalent straight life annuity for purposes of determining whether the limitations of § 415(b) have been satisfied. Section 415(b)(2)(E) provides limitations on the actuarial assumptions that can be used in making the adjustment under § 415(b)(2)(B). Prior to the enactment of PPA 2006, for purposes of adjusting a benefit payable in a form that is subject to the minimum present value requirements of § 417(e)(3), § 415(b)(2)(E)(ii) provided that the interest rate assumption must not be less than the greater of the applicable interest rate as defined in § 417(e)(3) or the rate specified in the plan. However, § 101(b)(4) of the Pension Funding Equity Act of 2004, P.L. 108-218, amended § 415(b)(2)(E)(ii) to provide that, for plan years beginning in 2004 and 2005, 5.5% must be used in lieu of the applicable interest rate (as defined in § 417(e)(3)) for purposes of adjusting the benefit. Section 303(a) of PPA 2006 amended § 415(b)(2)(E)(ii) to provide that the interest rate assumption for purposes of adjusting a benefit payable in a form that is subject to the minimum present value requirements of § 417(e)(3) must not be less than the greatest of (i) 5.5%, (ii) the rate that provides a benefit of not more than 105% of the benefit that would be provided if the applicable interest rate (as defined in § 417(e)(3)) were the interest rate assumption, or (iii) the rate specified under the plan.
Q-1. What is the effective date of the changes made to § 415 of the Code by§ 303(a) of PPA 2006?
A-1. The changes to § 415 of the Code made by § 303(a) of PPA 2006 apply to distributions made in plan years beginning after December 31, 2005. However, the changes do not apply to a plan with a termination date that is on or before August 17, 2006, the date of enactment of PPA 2006.
Q-2. May a plan be amended retroactively to comply with the requirements of§ 303(a) of PPA 2006 without violating the anti-cutback rules provided in § 411(d)(6) of the Code?
A-2. Yes. Under § 1107 of PPA 2006, a plan does not violate the anti-cutback rules of § 411(d)(6) of the Code if it is amended retroactively to comply with § 303(a) of PPA 2006, provided the amendment is adopted on or before the last day of the first plan year beginning on or after January 1, 2009 (2011 in the case of a governmental plan), and the plan is operated as if such amendment were in effect as of the first date the amendment is effective.
Q-3. If a plan made a distribution in a plan year beginning in 2006 that satisfied the limitations of § 415(b) prior to the enactment of PPA 2006 but which is in excess of the limitations of § 415(b) taking into account the amendments to § 415 made by § 303(a) of PPA 2006 (a "§ 303 excess distribution"), does the distribution violate the requirements of § 415(b)?
A-3. Yes. However, three methods are available for correcting a § 303 excess distribution. First, Q&A-4 of this notice sets forth a special correction method that is available for a § 303 excess distribution made prior to September 1, 2006, provided that the correction is completed by March 15, 2007. Second, if correction is completed by December 31, 2007 (even if the § 303 excess distribution occurs after September 1, 2006), a plan may correct a § 303 excess distribution by using the correction method for a § 415(b) excess distribution described in the Employee Plans Compliance Resolution System ("EPCRS") (see section 2.04(1) in Appendix B in Rev. Proc. 2006-27, 2006-22 IRB 945) even if the plan does not meet the requirements specified in Rev. Proc. 2006- 27, including the special requirements for self correction under Part IV of Rev. Proc. 2006-27. Finally, a plan that meets the requirements of Rev. Proc. 2006-27 may correct § 303 excess distributions by using the correction method for § 415(b) excess distributions under EPCRS even after December 31, 2007. A plan that is amended retroactively to comply with § 303(a) of PPA 2006 will not fail to satisfy the requirement in§ 1107(b)(2)(A) of PPA 2006 (that the plan be operated in accordance with the terms of the amendment) merely because it made a § 303 excess distribution, provided the§ 303 excess distribution is corrected using one of these three correction methods.
Q-4. What special correction method is available to correct a § 303 excess distribution made prior to September 1, 2006?
A-4. A special correction method is available for a § 303 excess distribution made prior to September 1, 2006, provided the correction is completed by March 15, 2007. Under the special correction method, a plan may use the EPCRS correction method for a § 415(b) excess distribution (as described in section 2.04(1) in Appendix B in Rev. Proc. 2006-27, even if the plan does not otherwise meet the requirements of Rev. Proc. 2006-27, including the special requirements for self correction) with the following modifications. The excess amount (i.e., the amount by which the distribution actually made exceeds the distribution permitted using the interest assumption specified in § 415(b) as amended by PPA 2006) is not required to be returned to the plan (as otherwise required under the EPCRS correction method). Instead, a plan must issue two Forms 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) to a participant who has received a § 303 excess distribution. The first Form 1099-R should include only the amount that would have been distributed had the benefit payable been adjusted using the interest assumptions specified in § 415(b) as amended by PPA 2006. The second Form 1099-R should include only the excess amount that was distributed, and should include code" E" in box 7 to identify the amount as an excess distribution. As provided in the EPCRS correction, this excess amount is not an eligible rollover distribution, and therefore must be included in gross income in the year distributed from the plan.
An employee’s elective contributions under a cash or deferred arrangement can only be distributed upon the occurrence of certain events, one of which is the employee’s hardship. A distribution is made on account of hardship only if the distribution both is made on account of an immediate and heavy financial need of the employee and is necessary to satisfy the financial need. A distribution made for any of the expenses listed in Regulation § 1.401(k)-1(d)(3)(iii)(B) is deemed to be on account of an immediate and heavy financial need of the employee. Several of these listed expenses can be expenses of the employee’s spouse or dependents. Section 826 of PPA 2006 directs the Secretary of the Treasury to modify the rules relating to distributions from § 401(k), § 403(b), § 409A, and § 457(b) plans on account of a participant’s hardship or unforeseeable financial emergency to permit such plans to treat a participant’s beneficiary under the plan the same as the participant’s spouse or dependent in determining whether the participant has incurred a hardship or unforeseeable financial emergency.
Q-5. What changes are being made pursuant to § 826 of PPA 2006 in the rules relating to hardship distributions from § 401(k) plans and § 403(b) plans and relating to distributions on account of an unforeseeable financial emergency from a plan described in § 457(b) or § 409A?
A-5. (a) Hardship distributions from § 401(k) plans and § 403(b) plans. A § 401(k) plan that permits hardship distributions of elective contributions to a participant only for expenses described in § 1.401(k)-1(d)(3)(iii)(B) may, beginning August 17, 2006, permit distributions for expenses described in § 1.401(k)-1(d)(3)(iii)(B)(1), (3), or (5) (relating to medical, tuition, and funeral expenses, respectively) for a primary beneficiary under the plan. For this purpose, a "primary beneficiary under the plan" is an individual who is named as a beneficiary under the plan and has an unconditional right to all or a portion of the participant’s account balance under the plan upon the death of the participant. A plan that adopts these expanded hardship provisions must still satisfy all the other requirements applicable to hardship distributions, such as the requirement that the distribution be necessary to satisfy the financial need. These rules also apply to § 403(b) plans.
(b) Distributions on account of an unforeseeable financial emergency from a plan described in § 457(b) or § 409A. In applying § 457(d)(1)(A)(iii), § 1.457-6(c)(2)(i), § 409A(a)(2)(A)(vi), and Proposed Regulation § 1.409A-3(g)(3)(i), a plan described in § 457(b) or § 409A may treat a participant’s beneficiary under the plan the same as the participant’s spouse or dependent in determining whether the participant has incurred an unforeseeable financial emergency. This will be reflected in the upcoming final regulations under § 409A.
Section 72(t)(1) of the Code provides for a 10% additional tax on an early distribution from a qualified retirement plan (as defined in § 4974(c)), unless the early distribution qualifies for one of the exceptions listed in § 72(t)(2). For example,§ 72(t)(2)(A)(v) provides an exception to the 10% additional tax for distributions made to an employee who separates from service after attainment of age 55. Under§ 72(t)(3)(A), § 72(t)(2)(A)(v) does not apply to individual retirement plans. Section 828 of PPA 2006 amended § 72 of the Code by adding § 72(t)(10), which provides that in the case of a distribution to a qualified public safety employee from a governmental defined benefit plan, § 72(t)(2)(A)(v) is applied by substituting age 50 for age 55. Thus, the 10% additional tax on early distributions under § 72(t)(1) does not apply to a distribution from a governmental defined benefit plan made to a qualified public safety employee who separates from service after attainment of age 50. This exception to the 10% additional tax applies to distributions made after August 17, 2006 (the date of enactment of PPA 2006.
Q-6. Who is a qualified public safety employee?
A-6. For purposes of § 72(t)(10), the term "qualified public safety employee" means an employee of a State or of a political subdivision of a State (such as a county or city) whose principal duties include services requiring specialized training in the area of police protection, firefighting services, or emergency medical services for any area within the jurisdiction of the State or the political subdivision of the State.
Q-7. How does a qualified public safety employee qualify for the exception to the 10% additional tax under § 72(t)(10)?
A-7. In order to qualify for the exception to the 10% additional tax under§ 72(t)(10), a qualified public safety employee (i) must have received the distribution from a governmental defined benefit plan after separating from service with the employer maintaining the plan and (ii) the separation from service must have occurred during or after the calendar year in which the qualified public safety employee attained age 50. For example, a qualified public safety employee who separated from service on June 30, 2006, and attained age 50 on December 12, 2006, is eligible for the exception under § 72(t)(10) with respect to distributions made after August 17, 2006.
Q-8. What are the consequences if, before August 18, 2006, a qualified public safety employee began receiving substantially equal periodic payments that qualify for the exception to the 10% additional tax described in § 72(t)(2)(A)(iv) and then modified the periodic payments after August 17, 2006?
A-8. If the payments satisfy the requirements in Q&A-7 of this notice, payments received by the qualified public safety employee after August 17, 2006, would qualify for the exception to the 10% additional tax under § 72(t)(10). However, if the modification would result in the imposition of the recapture tax under the rules of § 72(t)(4), then the recapture tax applies to the payments made before August 18, 2006.
Q-9. Does the exception to the 10% additional tax under § 72(t)(10) apply if the qualified public safety employee rolls over distributions from a governmental defined benefit plan into an IRA or a defined contribution plan and subsequently takes an early distribution from the IRA or defined contribution plan?
A-9. No. The exception to the 10% additional tax under § 72(t)(10) applies only to amounts distributed from a governmental defined benefit plan and does not apply to distributions from a defined contribution plan or an individual retirement plan.
Q-10. How does a payer report distributions that qualify for the exception to the 10% additional tax under § 72(t)(10) on Form 1099-R?
A-10. A payer is permitted to use distribution code 2 (early distribution, exception applies) in box 7 of Form 1099-R. However, a payer is also permitted to use distribution code 1 (early distribution, no known exception) in box 7 of Form 1099-R, if the payer does not know whether the exception under § 72(t)(10) applies. For further information on reporting, see Instructions for Forms 1099-R and 5498.
Under § 402(c)(11) of the Code, which was added by § 829 of PPA 2006, if a direct trustee-to-trustee transfer of any portion of a distribution from an eligible retirement plan is made to an individual retirement plan described in § 408(a) or (b) (an "IRA") that is established for the purpose of receiving the distribution on behalf of a designated beneficiary who is a nonspouse beneficiary, the transfer is treated as a direct rollover of an eligible rollover distribution for purposes of § 402(c). The IRA of the nonspouse beneficiary is treated as an inherited IRA within the meaning of § 408(d)(3)(C). Section 402(c)(11) applies to distributions made after December 31, 2006.
Q-11. Can a qualified plan described in § 401(a) offer a direct rollover of a distribution to a nonspouse beneficiary?
A-11. Yes. Under § 402(c)(11), a qualified plan described in § 401(a) can offer a direct rollover of a distribution to a nonspouse beneficiary who is a designated beneficiary within the meaning of § 401(a)(9)(E), provided that the distributed amount satisfies all the requirements to be an eligible rollover distribution other than the requirement that the distribution be made to the participant or the participant’s spouse. (See § 1.401(a)(9)-4 for rules regarding designated beneficiaries.) The direct rollover must be made to an IRA established on behalf of the designated beneficiary that will be treated as an inherited IRA pursuant to the provisions of § 402(c)(11). If a nonspouse beneficiary elects a direct rollover, the amount directly rolled over is not includible in gross income in the year of the distribution. See § 1.401(a)(31)-1, Q&A-3 and-4, for procedures for making a direct rollover.
Q-12. Can other types of plans offer a direct rollover of a distribution to a nonspouse beneficiary?
A-12. Yes. Section 402(c)(11) also applies to annuity plans described in§ 403(a) or (b) and to eligible governmental plans under § 457(b).
Q-13. How must the IRA be established and titled?
A-13. The IRA must be established in a manner that identifies it as an IRA with respect to a deceased individual and also identifies the deceased individual and the beneficiary, for example, "Tom Smith as beneficiary of John Smith."
Q-14. Is a plan required to offer a direct rollover of a distribution to a nonspouse beneficiary pursuant to § 402(c)(11)?
A-14. No. A plan is not required to offer a direct rollover of a distribution to a nonspouse beneficiary. If a plan does offer direct rollovers to nonspouse beneficiaries of some, but not all, participants, such rollovers must be offered on a nondiscriminatory basis because the opportunity to make a direct rollover is a benefit, right, or feature that is subject to § 401(a)(4). In the case of distributions from a terminated defined contribution plan pursuant to 29 C.F.R. § 2550.404a-3(d)(1)(ii), the plan will be considered to offer direct rollovers pursuant to § 402(c)(11) with respect to such distributions without regard to plan terms.
Q-15. For what purposes is the direct rollover of a distribution by a nonspouse beneficiary treated as a rollover of an eligible rollover distribution?
A-15. Section 402(c)(11) provides that a direct rollover of a distribution by a nonspouse beneficiary is a rollover of an eligible rollover distribution only for purposes of § 402(c). Accordingly, the distribution is not subject to the direct rollover requirements of § 401(a)(31), the notice requirements of § 402(f), or the mandatory withholding requirements of § 3405(c). If an amount distributed from a plan is received by a nonspouse beneficiary, the distribution is not eligible for rollover.
Q-16. If the named beneficiary of a decedent is a trust, is a plan permitted to make a direct rollover to an IRA established with the trust as beneficiary?
A-16. Yes. A plan may make a direct rollover to an IRA on behalf of a trust where the trust is the named beneficiary of a decedent, provided the beneficiaries of the trust meet the requirements to be designated beneficiaries within the meaning of§ 401(a)(9)(E). The IRA must be established in accordance with the rules in Q&A-13 of this notice, with the trust identified as the beneficiary. In such a case, the beneficiaries of the trust are treated as having been designated as beneficiaries of the decedent for purposes of determining the distribution period under § 401(a)(9), if the trust meets the requirements set forth in § 1.401(a)(9)-4, Q&A-5, with respect to the IRA.
Q-17. How is the required minimum distribution (an amount not eligible for rollover) determined with respect to a nonspouse beneficiary if the employee dies before his or her required beginning date within the meaning of § 401(a)(9)(C)?
A-17. (a) General rule. If the employee dies before his or her required beginning date, the required minimum distributions for purposes of determining the amount eligible for rollover with respect to a nonspouse beneficiary are determined under either the 5-year rule described in § 401(a)(9)(B)(ii) or the life expectancy rule described in § 401(a)(9)(B)(iii). See Q&A-4 of § 1.401(a)(9)-3 to determine which rule applies to a particular designated beneficiary. Under either rule, no amount is a required minimum distribution for the year in which the employee dies. The rule in Q&A-7(b) of§ 1.402(c)-2 (relating to distributions before an employee has attained age 70½) does not apply to nonspouse beneficiaries.
(b) Five-year rule. Under the 5-year rule described in § 401(a)(9)(B)(ii), no amount is required to be distributed until the fifth calendar year following the year of the employee’s death. In that year, the entire amount to which the beneficiary is entitled under the plan must be distributed. Thus, if the 5-year rule applies with respect to a nonspouse beneficiary who is a designated beneficiary within the meaning of§ 401(a)(9)(E), for the first 4 years after the year the employee dies, no amount payable to the beneficiary is ineligible for direct rollover as a required minimum distribution. Accordingly, the beneficiary is permitted to directly roll over the beneficiary’s entire benefit until the end of the fourth year (but, as described in Q&A-19 of this notice, the 5-year rule must also apply to the IRA to which the rollover contribution is made). On or after January 1 of the fifth year following the year in which the employee died, no amount payable to the beneficiary is eligible for rollover.
(c) Life expectancy rule.
(1) General rule. If the life expectancy rule described in§ 401(a)(9)(B)(iii) applies, in the year following the year of death and each subsequent year, there is a required minimum distribution. See Q&A-5(c)(1) of § 1.401(a)(9)-5 to determine the applicable distribution period for the nonspouse beneficiary. The amount not eligible for rollover includes all undistributed required minimum distributions for the year in which the direct rollover occurs and any prior year (even if the excise tax under§ 4974 has been paid with respect to the failure in the prior years). See the last sentence of § 1.402(c)-2, Q&A-7(a).
(2) Special rule. If, under paragraph (b) or (c) of Q&A-4 of § 1.401(a)(9)-3, the 5-year rule applies, the nonspouse designated beneficiary may determine the required minimum distribution under the plan using the life expectancy rule in the case of a distribution made prior to the end of the year following the year of death. However, in order to use this rule, the required minimum distributions under the IRA to which the direct rollover is made must be determined under the life expectancy rule using the same designated beneficiary.
Q-18. How is the required minimum distribution with respect to a nonspouse beneficiary determined if the employee dies on or after his or her required beginning date?
A-18. If an employee dies on or after his or her required beginning date, within the meaning of § 401(a)(9)(C), for the year of the employee’s death, the required minimum distribution not eligible for rollover is the same as the amount that would have applied if the employee were still alive and elected the direct rollover. For the year after the year of the employee’s death and subsequent years, see Q&A-5 of § 1.401(a)(9)-5 to determine the applicable distribution period to use in calculating the required minimum distribution. As in the case of death before the employee’s required beginning date, the amount not eligible for rollover includes all undistributed required minimum distributions for the year in which the direct rollover occurs and any prior year, including years before the employee’s death.
Q-19. After a direct rollover by a nonspouse designated beneficiary, how is the required minimum distribution determined with respect to the IRA to which the rollover contribution is made?
A-19. Under § 402(c)(11), an IRA established to receive a direct rollover on behalf of a nonspouse designated beneficiary is treated as an inherited IRA within the meaning of § 408(d)(3)(C). The required minimum distribution requirements set forth in§ 401(a)(9)(B) and the regulations thereunder apply to the inherited IRA. The rules for determining the required minimum distributions under the plan with respect to the nonspouse beneficiary also apply under the IRA. Thus, if the employee dies before his or her required beginning date and the 5-year rule in § 401(a)(9)(B)(ii) applied to the nonspouse designated beneficiary under the plan making the direct rollover, the 5-year rule applies for purposes of determining required minimum distributions under the IRA. If the life expectancy rule applied to the nonspouse designated beneficiary under the plan, the required minimum distribution under the IRA must be determined using the same applicable distribution period as would have been used under the plan if the direct rollover had not occurred. Similarly, if the employee dies on or after his or her required beginning date, the required minimum distribution under the IRA for any year after the year of death must be determined using the same applicable distribution period as would have been used under the plan if the direct rollover had not occurred.
Code § 402(l), which was added by § 845(a) of PPA 2006, provides for an exclusion from gross income for distributions from certain retirement plans (referred to in this notice as "Eligible Government Plans") used to pay qualified health insurance premiums of an eligible retired public safety officer. The exclusion applies with respect to an eligible retired public safety officer who elects to have qualified health insurance premiums deducted from amounts distributed from an Eligible Government Plan and paid directly to the insurer. Qualified health insurance premiums include premiums for accident and health insurance or qualified long-term care insurance contracts for the eligible retired public safety officer and his or her spouse and dependents. The distribution is excluded from gross income to the extent that the aggregate amount of the distributions does not exceed the amount used to pay the qualified health insurance premiums of the eligible retired public safety officer and his or her spouse and dependents. An "Eligible Government Plan" is a governmental plan described in§ 414(d) that is either: a § 401(a), § 403(a), or § 403(b) plan; or an eligible governmental plan under § 457(b). Section 402(l) applies to distributions in taxable years beginning after December 31, 2006.
Q-20. Who is an eligible retired public safety officer for purposes of the exclusion under § 402(l)?
A-20. An employee is an eligible retired public safety officer for purposes of the exclusion under § 402(l) only if the employee is an individual who separated from service, either by reason of disability or after attainment of normal retirement age, as a public safety officer with the employer who maintains the Eligible Government Plan from which the distributions to pay qualified health insurance premiums are made. Thus, a public safety officer who retires before attainment of normal retirement age is not an eligible retired public safety officer unless the public safety officer retires by reason of disability. The terms of the Eligible Government Plan from which the participant will be receiving the distributions apply in determining whether a public safety officer has separated from service by reason of disability or after attainment of normal retirement age.
Q-21. Who is a public safety officer?
A-21. For purposes of § 402(l), the term "public safety officer" means an individual serving a public agency in an official capacity, with or without compensation, as a law enforcement officer, a firefighter, a chaplain, or as a member of a rescue squad or ambulance crew. See § 1204(9)(A) of the Omnibus Crime Control and Safe Streets Act of 1968 (42 U.S.C. 3796b(9)(A)).
Q-22. Under what circumstances are the provisions of § 402(l) available for eligible retired public safety officers?
A-22. The favorable tax treatment under § 402(l) is available only when an eligible retired public safety officer elects to have an amount subtracted from his or her distributions from an Eligible Government Plan and such amount is used to pay qualified health insurance premiums. The employer sponsoring the Eligible Government Plan is not required to offer such an election.
Q-23. Can the accident or health plan receiving the payments of qualified health insurance premiums be a self-insured plan?
A-23. No. The accident or health plan must be an accident or health insurance plan. Thus, the plan must be providing insurance issued by an insurance company regulated by a State (including a managed care organization that is treated as issuing insurance).
Q-24. Will an eligible retired public safety officer be entitled to favorable tax treatment under § 402(l) with respect to benefits attributable to service other than as a public safety officer?
A-24. Yes. Benefits attributable to service other than as a public safety officer are eligible for favorable tax treatment under § 402(l), as long as the individual separates from service as a public safety officer, by reason of disability or after attainment of normal retirement age, with the employer maintaining the Eligible Government Plan.
Q-25. If an eligible retired public safety officer dies, are amounts subtracted from distributions made to the decedent’s surviving spouse or dependents eligible for favorable tax treatment under § 402(l)?
A-25. No. Section 402(l) provides that the distribution is not includible in the gross income of an employee who is an eligible retired public safety officer. Thus, the exclusion would not extend to amounts subtracted from distributions to other distributees.
Q-26. Is an eligible retired public safety officer limited in the amount that the officer can exclude from gross income for distributions from an Eligible Government Plan used to pay qualified health insurance premiums?
A-26. Yes. The aggregate amount that is permitted to be excluded, with respect to any taxable year, from an eligible retired public safety officer’s gross income by reason of § 402(l) is limited to $3,000. For purposes of applying this $3,000 limitation, distributions with respect to the eligible retired public safety officer that are used to pay for qualified health insurance premiums from all Eligible Government Plans are aggregated.
Q-27. Are amounts used to pay qualified health insurance premiums that are excluded from gross income under § 402(l) taken into account for purposes of determining the itemized deduction for medical care expenses under § 213?
A-27. No. Amounts used to pay qualified health insurance premiums that are excluded from gross income under § 402(l) are not taken into account in determining the itemized deduction for medical care expenses under § 213.
Prior to the effective date of PPA 2006 § 904, a defined contribution plan satisfied the minimum vesting requirements of Code § 411(a) with respect to employer nonelective contributions if it maintained a 5-year vesting schedule or a 3 to 7 year vesting schedule. Section 904 of PPA 2006 amended the minimum vesting requirements to require faster vesting of employer nonelective contributions to a defined contribution plan. Under Code § 411(a)(2)(B) as amended by § 904 of PPA 2006, a defined contribution plan satisfies the minimum vesting requirements with respect to employer nonelective contributions if it has a 3-year vesting schedule or a 2 to 6 year vesting schedule. Code § 411(a)(2)(B) as amended by § 904 of PPA 2006 generally applies to contributions for plan years beginning after December 31, 2006.
Q-28. If a plan amendment changes the plan’s vesting schedule to satisfy Code § 411(a)(2)(B) as amended by § 904 of PPA 2006, is the plan amendment required to satisfy § 411(a)(10).?
A-28. Yes. A plan amendment that changes the vesting schedule must satisfy Code § 411(a)(10). Although § 411(a)(10)(B) would require a participant with at least 3 years of service to elect to have the nonforfeitable percentage of his accrued benefit determined without regard to the amendment, the plan must ensure that any such election satisfies the vesting requirements of § 411(a)(2)(B), as amended by § 904 of PPA 2006. Thus, such a participant must be provided, at all times, a vesting percentage that is no less than the minimum under a vesting schedule that satisfies § 904 and the vesting percentage determined under the plan without regard to the amendment. Under Temporary Regulation § 1.411(a)-8T, no election need be provided for any participant whose nonforfeitable percentage under the plan, as amended, at any time cannot be less than such percentage determined without regard to such amendment.
Q-29. Can a plan have separate vesting schedules for employer nonelective contributions that are and are not subject to Code § 411(a)(2)(B), as amended by § 904 of PPA 2006?
A-29. Yes. A plan can have a vesting schedule for employer nonelective contributions for plan years beginning after December 31, 2006, and another vesting schedule for other employer nonelective contributions under the plan, provided that the plan separately accounts for the contributions made under the vesting schedule in effect prior to the first day of the first plan year beginning after December 31, 2006, and the vesting schedule for employer nonelective contributions for plan years beginning after December 31, 2006, satisfies Code § 411(a)(2)(B), as amended by § 904 of PPA 2006.
Q-30. If a plan maintains a bifurcated vesting schedule, how is it determined whether a contribution is for a plan year beginning before January 1, 2007?
A-30. A contribution is for a plan year that begins before January 1, 2007, if it is allocated under the terms of the plan as of a date in that plan year and is not subject to any conditions that have not been satisfied by the end of that plan year. This applies even if the contribution is not made until the next plan year. Thus, for example, if a plan with a calendar-year plan year makes a contribution as of December 31, 2006, based on compensation and service in 2006, and the contribution is not contingent on the occurrence of an event after 2006, then the contribution is treated as made for the 2006 plan year and is not subject to Code § 411(a)(2)(B), as amended by § 904 of PPA 2006, even if it is not contributed until 2007. Forfeitures and ESOP allocations from a suspense account are treated in the same manner for this purpose.
Section 1102 of PPA 2006 makes certain changes to the notice requirements related to distributions. Section 1102(a) provides that a notice required to be provided under § 402(f), § 411(a)(11), or § 417 may be provided to a participant as much as 180 days before the annuity starting date. Section 1102(b) directs the Secretary to modify the regulations under § 411(a)(11) of the Code and § 205 of ERISA to provide that the description of a participant's right to defer a distribution must also include a description of the consequences of failing to defer receipt of a distribution. The modifications made by § 1102 apply to years beginning after December 31, 2006. However, § 1102(b)(2)(B) provides that a plan will not be treated as failing to meet the new requirements under § 1102(b) if the plan administrator makes a reasonable attempt to comply with the new requirements under that section during the period that is within 90 days of the issuance of regulations required by § 1102(b).
Q-31. How does the effective date of § 1102 operate?
A-31. The provisions of § 1102 apply to plan years that begin after December 31, 2006. This means that the new rules relating to the content of the notices apply only to notices issued in those plan years, without regard to the annuity starting date for the distributions. Similarly, the 180-day period for distributing notices applies to notices distributed in a plan year that begins after December 31, 2006. This change to the 180-day period also modifies the definition of the maximum QJSA explanation period under § 1.411(d)-3(g), which is used in applying the timing rules for the effective date of a plan amendment under the rules of § 1.411(d)-3(c) and (f) in the case of an amendment that is adopted in a plan year that begins after December 31, 2006.
Q-32. Is a plan required to revise the notice under § 411 pursuant to the modifications made by § 1102(b) before the regulations are amended to reflect the requirement?
A-32. Yes. A plan administrator is required to revise the notice under § 411 to reflect the modifications to the requirements made by § 1102(b) for notices provided in plan years beginning after December 31, 2006. However, pursuant to § 1102(b)(2)(B) of PPA 2006, a plan will not be treated as failing to meet the new requirements under § 1102(b) if the plan administrator makes a reasonable attempt to comply with the new requirements under that section in the case of a notice that is provided prior to the 90th day after the issuance of regulations reflecting the modifications required by § 1102(b).
Q-33. Is there a safe harbor available to a plan administrator that would be considered a reasonable attempt to comply with the requirement in § 1102(b)(1) that a description of a participant’s right to defer receipt of a distribution include a description of the consequences of failing to defer?
A-33. Yes. A description that is written in a manner reasonably calculated to be understood by the average participant and that includes the following information is a reasonable attempt to comply with the requirements of § 1102(b)(2)(B): (a) in the case of a defined benefit plan, a description of how much larger benefits will be if the commencement of distributions is deferred; (b) in the case of a defined contribution plan, a description indicating the investment options available under the plan (including fees) that will be available if distributions are deferred; and (c) the portion of the summary plan description that contains any special rules that might materially affect a participant’s decision to defer. For purposes of clause (a), a plan administrator can use a description that includes the financial effect of deferring distributions, as described in§ 1.417(a)(3)-1(d)(2)(i), based solely on the normal form of benefit.
Section 1201(a) of PPA 2006 adds § 408(d)(8) to the Code, which is applicable to distributions made in taxable years 2006 and 2007. Under § 408(d)(8), generally, if a distribution from an IRA owned by an individual after the individual has attained age 70½ is made directly by the trustee to certain organizations described in § 170(b)(1)(A), the distribution is excluded from gross income. The exclusion is only available to the extent that the distribution would otherwise have been includible in gross income, and§ 408(d)(8)(D) provides a special rule for determining the amount that would otherwise be includible in gross income. In addition, the exclusion applies only if the contribution would otherwise qualify for a charitable contribution deduction under § 170 (without regard to the percentage limitations of § 170(b)). A distribution that is eligible for this exclusion is called a qualified charitable distribution.
Q-34. Is there an overall limit on the amount that may be excluded from gross income for qualified charitable distributions that are made in a year?
A-34. Yes. The income exclusion for qualified charitable distributions only applies to the extent that the aggregate amount of qualified charitable distributions made during any taxable year with respect to an IRA owner does not exceed $100,000. Thus, if an IRA owner maintains multiple IRAs in a taxable year, and qualified charitable distributions are made from more than one of these IRAs, the maximum total amount that may be excluded for that year by the IRA owner is $100,000. For married individuals filing a joint return, the limit is $100,000 per individual IRA owner.
Q-35. Is the exclusion for qualified charitable distributions available for a distribution made to any organization eligible to receive charitable contributions that are deductible by the donor for income tax purposes?
A-35. No. Qualified charitable distributions may be made to an organization described in § 170(b)(1)(A), other than supporting organizations described in § 509(a)(3) or donor advised funds that are described in § 4966(d)(2).
Q-36. Is the exclusion for qualified charitable distributions available for distributions from any type of IRA?
A-36. Generally, the exclusion for qualified charitable distributions is available for distributions from any type of IRA (including a Roth IRA described in § 408A and a deemed IRA described in § 408(q)) that is neither an ongoing SEP IRA described in § 408(k) nor an ongoing SIMPLE IRA described in § 408(p). For this purpose, a SEP IRA or a SIMPLE IRA is treated as ongoing if it is maintained under an employer arrangement under which an employer contribution is made for the plan year ending with or within the IRA owner’s taxable year in which the charitable contributions would be made.
Q-37. Is the exclusion for qualified charitable distributions available for distributions from an IRA maintained for a beneficiary if the beneficiary has attained age 70½ before the distribution is made?
A-37. Yes. The exclusion from gross income for qualified charitable distributions is available for distributions from an IRA maintained for the benefit of a beneficiary after the death of the IRA owner if the beneficiary has attained age 70½ before the distribution is made.
Q-38. If a 2006 distribution satisfies all the requirements under § 408(d)(8), but it was made before August 17, 2006 (the date PPA 2006 was enacted), is the amount distributed excludable as a qualified charitable distribution?
A-38. Yes. Section 408(d)(8) is applicable to distributions made at any time in 2006. Thus, a distribution made in 2006 that satisfies the requirements under § 408(d)(8) is a qualified charitable distribution even if it was made before August 17, 2006.
Q-39. Is the amount of a qualified charitable distribution deductible as a charitable contribution under § 170?
A-39. No. For purposes of determining the amount of charitable contributions that may be deducted under § 170, qualified charitable distributions which are excluded from income under § 408(d)(8) are not taken into account. However, qualified charitable distributions must still satisfy the requirements to be deductible charitable contributions under § 170 (other than the percentage limits of § 170(b)), including the substantiation requirements under § 170(f)(8).
Q-40. Is a qualified charitable distribution subject to withholding under § 3405?
A-40. No. A qualified charitable distribution is not subject to withholding under§ 3405 because an IRA owner that requests such a distribution is deemed to have elected out of withholding under § 3405(a)(2). For purposes of determining whether a distribution requested by an IRA satisfies the requirements under § 408(d)(8), the IRA trustee, custodian, or issuer may rely upon reasonable representations made by the IRA owner.
Q-41. Is a check from an IRA made payable to a charitable organization described in § 408(d)(8) and delivered by the IRA owner to the charitable organization a direct payment to such organization?
A-41. Yes. If a check from an IRA is made payable to a charitable organization described in § 408(d)(8) and delivered by the IRA owner to the charitable organization, the payment to the charitable organization will be considered a direct payment by the IRA trustee to the charitable organization for purposes of § 408(d)(8)(B)(i).
Q-42. Will a qualified charitable distribution be taken into account in determining whether the required minimum distribution requirements of §§ 408(a)(6), 408(b)(3), and 408A(c)(5) have been satisfied?
A-42. Yes. The amount distributed in a qualified charitable distribution is an amount distributed from the IRA for purposes of §§ 408(a)(6), 408(b)(3), and 408A(c)(5).
Q-43. What are the tax consequences of a direct payment of an amount from a IRA to a charity where the transaction is intended to satisfy the requirements of § 408(d)(8) but fails to do so?
A-43. If an amount intended to be a qualified charitable distribution is paid to a charitable organization but fails to satisfy the requirements of § 408(d)(8), the amount paid is treated as (1) a distribution from the IRA to the IRA owner that is includible in gross income under the rules of § 408 or § 408A, as applicable; and (2) a contribution from the IRA owner to the charitable organization that is subject to the rules under § 170 (including the percentage limits of § 170(b)).
Q-44. Will a distribution made directly by the trustee to a § 170(b)(1)(A) organization (as permitted by § 408(d)(8)(B)(i)) be treated as a receipt by the IRA owner under § 4975(d)(9)?
A-44. Yes. The Department of Labor, which has interpretive jurisdiction with respect to § 4975(d), has advised Treasury and the IRS that a distribution made by an IRA trustee directly to a § 170(b)(1)(A) organization (as permitted by § 408(d)(8)(B)(i)) will be treated as a receipt by the IRA owner under § 4975(d)(9), and thus would not constitute a prohibited transaction. This would be true even if the individual for whose benefit the IRA is maintained had an outstanding pledge to the receiving charitable organization.
The principal author of this notice is Angelique V. Carrington of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans taxpayer assistance telephone service at (877) 829-5500 (a toll-free number) between the hours of 8:30 am and 4:30 pm Eastern Time, Monday through Friday. Ms. Carrington may be reached at (202) 283-9888 (not a toll-free number).
IRS Interpretive Letter |
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EP:R:9 IRA Annual Valuations: Partnership Valuations, Inc.February 24, 1993 Internal Revenue Service Department of the Treasury Person to Contact: Mr. Partnership Valuations, Inc. Telephone Number: Refer Reply to: Date: February 24, 1993 Dear Mr. This is in response to your letter to Martin Slate , Director of the Employee Plans Technical and Actuarial Division, dated December 24, 1992, in which you requested general information regarding valuation of assets in Individual Retirement Accounts and Individual Retirement Annuities ("IRAs"). In your letter, you posed the following questions: (1) Is an IRA required to value its assets on an annual basis? (2) Is an IRA required to value "hard to value" assets (e.g. partnerships, closely-held stock, collectibles, etc.) as well as exchange-traded securities? (3) Are non-traded asset value standards the same for IRAs as for defined benefit ("DB") plans and defined contribution ("DC") plans? (4) Who is responsible for insuring an IRA’s assets are properly valued? (5) Can a fiduciary evade its valuation responsibilities by having the client sign a release, indemnification or other instrument? Section 408(i) of the Internal Revenue Code of 1986 (the "Code") requires the trustee of an individual retirement account and the issuer of an endowment contract or an individual retirement annuity to make certain reports regarding such account, contract, or annuity to the Secretary of the Treasury and to the individual for whom such account, contract or annuity is maintained. Section 408(i) of the Code gives the Secretary authority to prescribe the manner of providing such reports and to determine the information required to be provided. Section 1.408-5 of the Income Tax Regulations provides that the trustee of an individual retirement account or the issuer of an individual retirement annuity shall make annual calendar year reports concerning the status of the account or the annuity. The information required in the annual reports by the trustees and issuers of IRAs includes: the amount of contributions, the amount of distributions, the amount of the premium paid for an endowment contract allocable to the cost of life insurance, the name and address of the trustee or issuer, and such other information as the Commissioner of Internal Revenue may require. Internal Revenue Service Form 5498, Individual Retirement Arrangement Information, is the prescribed form for satisfying the annual reporting requirements of section 408(i) of the Code and the regulations thereunder. The instructions to Form 5498 require the trustee or issuer to report the fair market value of the IRA account as of December 31 of each year. In response to your questions, first, based on the fact that the Internal Revenue Service (the "Service) requires that the fair market value of the assets as of December 31 be reported on Form 5498, an IRA is required to value its assets on an annual basis. Similarly, the requirement that fair market value be determined annually for purposes of Form 5498 necessitates the valuation of all IRA assets, including "hard to value" assets. With respect to your third question, Revenue Ruling 59-60, 1959-1 C.B. 237, as modified by Revenue Ruling 65-193, 1965-2 C.B. 370, sets forth the proper approach to use to value corporate stock for estate and gift tax purposes. Revenue Ruling 68-609, 1968-2 C.B. 327, states that the general approach, methods and factors outlined in Revenue Ruling 59-60 are equally applicable to valuations of corporate stock for income and other tax purposes. The general approach, methods and factors also apply to valuations of corporate stock in IRAs. With respect to your fourth question, the person responsible for insuring that an IRA’s assets are properly valued is the IRA trustee or issuer, because under the Service’s reporting requirements that person is responsible for reporting the correct fair market value of the assets. Finally, the IRA trustee or issuer cannot evade valuation responsibility by having the participant sign a release, indemnification or other instrument, because the trustee’s or issuer’s responsibility for valuation derives from the Service’s reporting requirements, which cannot be waived by participant action. We believe this information will be of assistance to you. This is not a ruling, however, and may not be relied upon with respect to any specific transaction. Sincerely, John G. Riddle, Jr. |
Prohibited Transaction Class Exemptions | |||||||||||||||||||||||||||||||||||||||
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75-1 Securities TransactionsSecurities Transactions (67KB PDF file - PDF Help) Also See 86-128. 77-3 Investment in Mutual Funds by In-House Employee Benefit PlansClass Exemption Involving Mutual Fund In-House Plans Requested by the Investment Company Institute
Class Exemption
Exemption Effective for transactions occurring after December 31, 1974, the restrictions of sections 406 and 407(a) of the Act and the taxes imposed by section 4975 (a) and (b) of the Code, by reason of section 4975(c)(1) of the Code, shall not apply to the acquisition or sale of shares of an open-end investment company registered under the Investment Company Act of 1940 by an employee benefit plan covering only employees of such investment company, employees of the investment adviser or principal underwriter for such investment company, or employees of any affiliated person (as defined in section 2(a)(3) of the Investment Company Act of 1940) of such investment adviser or principal underwriter, provided that the following conditions are met (whether or not such investment company, investment adviser, principal underwriter or any affiliated person thereof is a fiduciary with respect to the plan):
Signed at Washington, D.C., this 31st day of March, 1977. J. Vernon Ballard, and William E. Williams, [FR Doc. 77-10157 Filed 4-1-77; 11:44 AM] 77-4 Investment in Advised or Affiliated Mutual FundsProhibited Transaction Class Exemption 77-4
Class Exemption To Invest in Mutual Funds Affiliated With or Advised By a Fiduciary Agency: Department of Labor and Internal Revenue Service. Action: Grant of class exemption. Effective Date: Certain retroactive exemption is given for transactions between January 1, 1975 and ninety days after the exemption is granted. Prospective exemption is granted for transactions occurring ninety days after the exemption is granted. [Since the exemption was signed 3-31-77, the prospective exemption should be effective 7-1-77.] Exemption Section I - Retroactive. The Retroactive portion of this Exemption covers transactions between 1-1-75 and 7-1-77. As such, it is not reprinted here. Section II - Prospective. Effective 90 days after the date of granting of this exemption, the restrictions of section 406 of the Act and the taxes imposed by section 4975(a) and (b) of the Code, by reason of section 4975(c)(1) of the Code, shall not apply to the purchase or sale by an employee benefit plan of shares of an open-end investment company registered under the Investment Company Act of 1940, the investment adviser for which is also a fiduciary with respect to the plan (or an affiliate of such fiduciary) and is not an employer of employees covered by the plan (hereinafter referred to as "fiduciary/investment adviser"), provided that the following conditions are met:
For purposes of this paragraph, a fee shall be deemed to be prepaid for any fee period if the amount of such fee is calculated as of a date not later than the first day of such period. For purposes of this exemption, such second fiduciary will not be deemed to be independent of and unrelated to the fiduciary/investment adviser or any affiliate thereof if: If an officer, director, partner, employee or relative of such fiduciary/investment adviser or any affiliate thereof is a director of such second fiduciary, and if he or she abstains from participation in For purposes of this exemption, the term "control" means the power to exercise a controlling influence over the management or policies of a person other than an individual, and the term "relative" means a "relative" as that term is defined in section 3(15) of the Act (or a "member of the family" as that term is defined in section 4975(e)(6) of the Code), or a brother, a sister, or a spouse of a brother or a sister. Signed at Washington, D. C. this 31st day of March 1977. J. Vernon Ballard, Department of Labor. William E. Williams 80-26 Interest-Free Loans (Including Overdrafts)Prohibited Transaction Class Exemption 80-26
Class Exemption for Certain Interest Free Loans to Employee Benefit Plans Agency: Department of Labor. Action: Grant of class exemption. Summary: This class exemption permits parties in interest with respect to employee benefit plans to make interest free loans to such plans. Such loans would be prohibited by the Employee Retirement Income Security Act of 1974 (the Act) and the Internal Revenue Code of 1964 (the Code). The exemption affects all employee benefit plans, their participants and beneficiaries, and parties in interest with respect to those plans. Effective Date: January 1, 1975. 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 4975(c)(1)(B) and (D) of the Code, shall not apply to the lending of money or other extension of credit from 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:
80-50 Collective Investment FundsProhibited Transaction Class Exemption 80-51
Class Exemption Covering Collective Investment Funds Agency: Department of Labor. Action: Grant of class exemption. Summary: This exemption allows collective investment funds that are maintained by banks and in which employee benefit plans participate to engage in certain transactions provided that specified conditions are met. In the absence of this exemption, these transactions might be prohibited by the Employee Retirement Income Security Act of 1974 (the Act) and the Internal Revenue Code of 1954 (the Code). Effective Date: January 1, 1975. Exemption Note: This exemption has been replaced by PTE 91-38. 80-83 Purchase of Securities Where Issuer May Use Proceeds To Reduce or Retire Indebtedness To Parties in InterestProhibited Transaction Class Exemption 80-83
Class Exemption for Certain Transactions Involving Purchase of Securities Where Issuer May Use Proceeds To Reduce or Retire Indebtedness To Parties in Interest Agency: Department of Labor. Action: Grant of Class Exemption. Summary: This class exemption permits, under certain conditions, purchases of securities by employee benefit plans when the proceeds from the sale of such securities may be used by the issuer to reduce or retire indebtedness to persons who are parties in interest with respect to such plans. In the absence of the retroactive and prospective relief provided by this exemption, these transactions might be prohibited by the Employee Retirement Income Security Act of 1974 (the Act) and the Internal Revenue Code of 1954 (the Code). Effective Date: Section I(B) of this exemption is effective December 1, 1980. The remainder of this exemption is effective January 1, 1975. Exemption
(b) Notwithstanding any provisions of subsections (a)(2) and (b) of section 504 of the Act, the records referred to in section II(A)(2)(a) above are unconditionally available at their customary location for examination during normal business hours by: For the purposes of this paragraph, the term "control" means the power to exercise a controlling influence over the management or policies of a person other than an individual. 81-6 Securities LendingProhibited Transaction Class Exemption 81-6
Class Exemption To Permit Certain Loans of Securities by Employee Benefit Plans Agency: Department of Labor. Action: Grant of class exemption. Summary: This exemption will allow the lending of securities by employee benefit plans to banks and broker-dealers who are parties in interest with respect to such plans, if the conditions specified in the exemption are met. The exemption affects participants and beneficiaries of employee benefit plans, persons who manage the assets of such plans, and parties in interest who might engage in securities lending transactions with such plans. In the absence of this exemption, securities lending transactions between a plan and a party in interest would be prohibited by the Employee Retirement Income Security Act of 1974 (the Act) and the Internal Revenue Code of 1954 (the Code). Effective Date: January 23, 1981. For purposes solely of Prohibited Transaction Exemption 79-23 (the Grumman Corp. Pension Trust, 44 FR 31750, June 1, 1979). The final disposition of this class exemption will be deemed to occur on February 23, 1981. Amended Exemption Effective January 23, 1981, the restrictions of section 406(a)(1)(A) through (D) of the Act and the taxes imposed by section 4975(a) and (b) of the Code by reason of section 4975(c)(1)(A) through (D) of the Code shall not apply to the lending of securities that are assets of an employee benefit plan to a broker-dealer registered under the Securities Exchange Act of 1934 (the 1934 Act) or exempted from registration under section 15(a)(I) of the 1934 Act as a dealer in exempted Government securities (as defined in section 3(a)(12) of the 1934 Act) or to a bank, if:
(b) The plan receives the equivalent of all distributions made to holders of the borrowed securities during the term of the loan, including, but not limited to, cash dividends, interest payments, shares of stock as a result of stock splits and rights to purchase additional securities; Notwithstanding the foregoing, part of the collateral may be returned to the borrower if the market value of the collateral exceeds 100 percent of the market value of the borrowed securities, as long as the market value of the remaining collateral equals at least 100 percent of the market value of the borrowed securities; Notwithstanding the foregoing, the borrower may, in the event the borrower fails to return borrowed securities as described above, replace non-cash collateral with an amount of cash not less than the then current market value of the collateral, provided such replacement is approved by the lending fiduciary. If the borrower fails to comply with any condition of this exemption in the course of engaging in a securities lending transaction, the plan fiduciary who caused the plan to engage in such transaction shall not be deemed to have caused the plan to engage in a transaction prohibited by section 406(a)(1)(A) through (D) of the Act solely by reason of the borrower's failure to comply with the conditions of the exemption. For purposes of this class exemption the term "affiliate" of another person shall include: For purposes of this definition the term "control" means the power to exercise a controlling influence over the management or policies of a person other than an individual. 81-8 Short-term Investments & Repurchase AgreementsProhibited Transaction Class Exemption 81-8 [Amended on April 9, 1985 (50 FR 14043)]
Class Exemption Covering Certain Short-Term Investments Agency: Department of Labor. Action: Grant of class exemption. Summary: This exemption permits employee benefit plans to engage in transactions involving certain short-term investments notwithstanding the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (ERISA or the Act). The exemption will affect participants and beneficiaries of employee benefit plans, persons who manage the assets of such plans, and other persons who provide services to such plans. Effective Date: January 1, 1975. (Certain conditions to the availability of the exemption are effective April 23, 1981). Amended Exemption Effective January 1, 1975, the restrictions of sections 408(a)(1)(A) (B) and (D) of the Act, and the taxes imposed by reason of section 4975(c)(1)(A), (B) and (D) of the Code shall not apply to an investment of employee benefit plan assets which involves the purchase or other acquisition, holding, sale, exchange or redemption by or on behalf of an employee benefit plan of the following:
A repurchase agreement (or securities or other instruments under cover of a repurchase agreement) in which the seller of the underlying securities or other instruments is a bank which is supervised by the United States or a State; a broker-dealer registered under the Securities Exchange Act of 1934; or a dealer who makes primary markets in securities of the United States government or any agency thereof or in bankers acceptances and reports daily to the Federal Reserve Bank of New York its position with respect to these obligations, if each of the following conditions are satisfied. If a seller involved in a repurchase agreement covered by this exemption fails to comply with any condition of this exemption in the course of engaging in the repurchase agreement, the plan fiduciary who caused the plan to engage in such repurchase agreement shall not be deemed to have caused the plan to engage in a transaction prohibited by section 406(a)(1)(A) through (D) of the Act solely by reason of the seller's failure to comply with the conditions of the exemption. A certificate of deposit that is issued by a bank which is supervised by the United States or a State if neither the bank nor any affiliate of the bank has discretionary authority or control with respect to the investment of the plan assets involved in the transaction or renders investment advice (within the meaning of 29 C.F.R. 2510.3-21(c)) with respect to those assets. For purposes of this exemption the term affiliate is defined in 29 C.F.R. 2510.3-21(e). A security issued by a bank or an affiliate of the bank if: 82-63 Securities Lending CompensationProhibited Transaction Class Exemption 82-63
Class Exemption to Permit Payment of Compensation to Plan Fiduciaries for the Provision of Securities Lending Services Agency: Office of Pension and Welfare Benefit Programs, Labor. Action: Grant of class exemption. Summary: This exemption will allow certain compensation arrangements to be made for the provision by a fiduciary of securities lending services to an employee benefit plan, if the conditions specified in the exemption are met. The exemption affects participants and beneficiaries of employee benefit plans and fiduciaries who provide securities lending services to such plans. In the absence of this exemption, certain compensation arrangements for the provision of securities lending services by a plan fiduciary to an employee benefit plan would be subject to the prohibitions of section 406(b)(1) of the Employee Retirement Income Security Act of 1974 (the Act) and the taxes imposed by section 4975(a) and (b) of the Internal Revenue Code of 1954 (the Code) by reason of section 4975(c)(1)(E) of the Code. Effective Date: April 6, 1982. The Explanatory Preamble, together with the full Exemption, are available in the PREAMBLE document. Exemption
Effective April 6, 1982, the restrictions of section 406(b)(1) of the Employee Retirement Income Security Act of 1974 (the Act) and the taxes imposed by section 4975(a) and (b) of the Internal Revenue Code of 1954 (the Code) by reason of section 4975(c)(1)(E) of the Code shall not apply to the payment to a fiduciary (the "lending fiduciary") of compensation for services rendered in connection with loans of plan assets that are securities, provided that: For purposes of this exemption, the term, "affiliate" of another person means: For purposes of this paragraph, the term "control" means the power to exercise a controlling influence over the management or policies of a person other than an individual. 82-87 Residential Mortgage LoansProhibited Transaction Class Exemption 82-87
Class Exemption for Transactions Involving Certain Residential Mortgage Financing Arrangements Agency: Department of Labor. Action: Grant of class exemption. Summary: This document contains a final exemption from certain of the prohibited transactions provisions of the Employee Retirement Security Income Act of 1974 (the Act) and the Internal Revenue Code of 1954 (the Code). The exemption involves the issuance of commitments for the provision of mortgage financing to purchasers of residential dwelling units, the receipt of a fee in exchange for the issuance of such commitment, the making or purchase of loans or participation interests therein pursuant to such commitments, and the direct making, purchase, sale, exchange or transfer of mortgage loans or participation interests therein by employee benefit plans, if the conditions specified in the exemption are met. The exemption affects participants and beneficiaries of employee benefit plans involved in such transactions, certain employers who contribute to such plans and other persons who engage in the described transactions. In the absence of this exemption, certain purchase and sale transactions between the plan and parties in interest and certain extensions of credit transactions between the plan and other parties in interest would be prohibited by the Act and the Code. Effective Date: January 1, 1975. [Certain conditions, as specified herein, are applicable effective June 17, 1982.] Exemption
Accordingly, the following exemption is hereby granted under the authority of section 408(a) of the Act and section 4975(c)(2) of the Code and in accordance with the procedure set forth in ERISA Procedure 75-1. Effective January 1, 1975, the restrictions of section 406(a) of the Employee Retirement Income Security Act of 1974 (the Act) and the taxes imposed by section 4975(a) and (b) of the Internal Revenue Code of 1954 (Code) by reason of section 4975(c)(1)(A) through (D) of the Code shall not apply to the following transactions if the conditions set forth in Part II below are met: (b) Notwithstanding any provisions of subsection (a)(2) and (b) of section 504 of the Act, the records referred to in sub-paragraph (a) of this paragraph must be unconditionally available at their customary location for examination during normal business hours by: any trustee, investment manager, participant or beneficiary of the plan, or any duly authorized employee or representative of such person or of the Department or the Internal Revenue Service. For purposes of this exemption: Signed at Washington, D.C. this 13th day of May 1982. 84-14 Qualified Professional Asset Managers (QPAMs)Prohibited Transaction Class Exemption 84-14 Amendment to PTE-84-14 (80KB PDF file - PDF Help) [Amended on October 10, 1985 (50 FR 41430)]
Class Exemption 84-14 for Plan Asset Transactions Determined by Independent Qualified Professional Asset Managers Agency: Department of Labor Action: Grant of Class Exemption. Summary: This document contains a final exemption from certain prohibited transactions restrictions of the Employee Retirement Income Security Act of 1974 (ERISA) and from certain taxes imposed by the Internal Revenue Code of 1954 (the Code). The exemption permits various parties who are related to employee benefit plans to engage in transactions involving plan assets if, among other conditions, the assets are managed by persons, defined for purposes of this exemption as "qualified professional asset managers" (QPAMs), which are independent of the parties in interest and which meet specified financial standards. Additional exemptive relief is provided for employers to furnish limited amounts of goods and services in the ordinary course of business. Limited relief is also provided for leases of office or commercial space between managed funds and QPAMs or contributing employers. The exemption will affect participants and beneficiaries of employee benefit plans, the sponsoring employers of such plans, QPAMs and other persons engaging in the described transactions. Effective Date: December 21, 1982. The Explanatory Preamble for the original PTE 84-14, together with the full Amended Exemption, are available in the PREAMBLE document. The Preamble for the Amendment appears in the PREAMBLE documents, immediately following the Amended Exemption. Amended Exemption Part I. General Exemption. Effective December 21, 1982, the restrictions of ERISA section 406(a)(1)(A) through (D) and the taxes imposed by Code section 4975(a) and (b), by reason of Code section 4975(c)(I)(A) through (D), shall not apply to a transaction between a party in interest with respect to an employee benefit plan and an investment fund (as defined in section V(b)) in which the plan has an interest, and which is managed by a qualified professional asset manager (QPAM) (as defined in section V(a)), if the following conditions are satisfied:
Part II. Specific Exemptions for Employers. Effective December 21, 1982, the restrictions of sections 406(a), 406(b)(1) and 407(a) of ERISA and the taxes imposed by section 4975(a) and (b) of the Code, by reason of Code section 4975(e)(1)(A) through (E), shall not apply to:
Part III. Specific Lease Exemption for QPAMs. Effective December 21, 1982, the restrictions of section 406(a)(1)(A) through (D) and 406(b)(1) and (2) of ERISA and the taxes imposed by Code section 4975(a) and (b), by reason of Code section 4975(c)(1)(A) through (E), shall not apply to the leasing of office or commercial space by an investment fund managed by a QPAM to the QPAM, a person who is a party in interest of a plan by virtue of a relationship to such QPAM described in subparagraphs (G), (H), or (I) of ERISA section 3(14) or a person not eligible for the General Exemption of Part I by reason of section I(a), if -
Part IV. Transactions Involving Places of Public Accommodation. Effective December 21, 1982, the restrictions of section 406(a)(1)(A) through (D) and 406(b)(1) and (2) of ERISA and the taxes imposed by Code section 4975(a) and (b), by reason of Code section 4975(c)(1)(A) through (E), shall not apply to the furnishing of services and facilities (and goods incidental thereto) by a place of public accommodation owned by an investment fund managed by a QPAM to a party in interest with respect to a plan having an interest in the investment fund, if the services and facilities (and incidental goods) are furnished on a comparable basis to the general public. Part V. Definitions and General Rules. For the purposes of this exemption:
Provided that such bank, savings and loan association, insurance company or investment adviser has acknowledged in a written management agreement that it is a fiduciary with respect to each plan that has retained the QPAM. 86-128 Securities Transactions Involving Employee Benefit Plans and Broker-DealersProhibited Transaction Class Exemption 86-128 Replaces Temporary PTE 79-9, March 23, 1979 (44 FR 17819)
Class Exemption Covering Securities Transactions with Brokers Explanatory Preamble to PTE 86-128 (Excerpt) Agency: Department of Labor. Action: Grant of class exemption. Summary: This document contains an exemption which allows persons who serve as fiduciaries for employee benefit plans to effect or execute securities transactions under certain circumstances. The exemption also allows sponsors of pooled separate accounts and other pooled investment funds to use their affiliates to effect or execute securities transactions for such accounts when certain conditions are met. The exemption will replace Prohibited Transaction Exemption 79-1 and Prohibited Transaction Exemption 84-46. It affects participants and beneficiaries of, and fiduciaries with respect to, employee benefit plans which invest in securities, and other persons who engage in the described transactions. Effective Date: The later of December 18, 1986, or the date on which the Office of Management and Budget approves the information collection requests contained in this exemption under the Paperwork Reduction Act of 1980. Exemption In accordance with section 408(a) of the Act and section 4975(c)(2) of the Code, and based upon the entire record including the written comments submitted in response to the notice of January 24, 1985, the Department makes the following determinations:
Accordingly, the following exemption is hereby granted under the authority of section 408(a) of the Act and section 4975(c)(2) of the Code and in accordance with the procedures set forth in ERISA Procedure 75-1. Section I - Definitions and Special Rules The following definitions and special rules apply to this exemption:
A person is not an affiliate of another person solely because one of them has investment discretion over the other's assets. The term "control" means the power to exercise a controlling influence over the management or policies of a person other than an individual. The term "nondiscretionary trust services" means custodial services and services ancillary to custodial services, none of which services are discretionary. For purposes of this exemption, a person does not fail to be a nondiscretionary trustee solely by reason of having been delegated, by the sponsor of a master or prototype plan, the power to amend such plan. Section II - Covered Transactions Effective the later of December 18, 1986, or the date on which the Office of Management and Budget approves the information collection requests contained in this exemption under the Paperwork Reduction Act of 1980, if each condition of section III of this exemption is either satisfied or not applicable under section IV, the restrictions of section 406(b) of ERISA and the taxes imposed by sections 4975(a) and (b) of the Code by reason of section 4975(c)(1)(E) or (F) of the Code shall not apply to:
Section III - Conditions Except to the extent otherwise provided in section IV of this exemption, section II of this exemption applies only if the following conditions are satisfied:
For purposes of this paragraph (e), the words "incurred by the plan" shall be construed to mean "incurred by the pooled fund" when such person engages in covered transactions on behalf of a pooled fund in which the plan participates. The "annualized portfolio turnover ratio" is then derived by multiplying the "portfolio turnover ratio" by an annualizing factor. The annualizing factor is obtained by dividing (C) the number twelve by (D) the aggregate duration of the management period(s) expressed in months (and fractions thereof). Examples of the use of this formula are provided in section V of this exemption.
Section IV - Exceptions from conditions
Section V - Examples illustrating the use of the annualized portfolio turnover ratio described in Section III(F)(4)(ii) (Note: This section containing examples has been omitted.) Section VI - Effective dates and Transitional Rule
91-38 Bank Collective Investment FundsProhibited Transaction Class Exemption 91-38
Class Exemption Amendment to Prohibited Transaction Exemption (PTE) 80-51 Involving Bank Collective Investment Funds Agency: Pension and Welfare Benefits Administration, Labor Department. Internal Revenue Service. Action: Adoption of amendment to PTE 80-51, and redesignation as PTE 91-38. Summary: This document amends PTE 80-51, a class exemption that permits Bank Collective Investment Funds, in which employee benefit plans have an interest, to engage in certain transactions, provided specified conditions are met. The amendment affects, among others, participants, beneficiaries and fiduciaries of plans that invest in the collective investment funds, banks, and other persons engaging in the described transactions. Effective Date: The amendment to section I(a)(1)(A) of PTE 80-51 is effective as of July 1, 1990. Exemption For the sake of convenience, the entire text of PTE 80-51, as amended, has been reprinted with this notice. The Department has redesignated the exemption as PTE 91-38. Section I - Exemption for Certain Transactions Involving Bank Collective Investment Funds
(aa) Each parcel of employer real property and the improvements thereon held by the collective investment fund are suitable (or adaptable without excessive cost) for use by different tenants, and (bb) The property of the collective investment fund that is leased or held for lease to others, in the aggregate, is dispersed geographically. (aa) The bank in whose collective investment fund the security is held is not an affiliate of the issuer of the security, and (bb) If the security is an obligation of the issuer, either Section II - Excess Holdings Exemption for Employee Benefit Plans
Section III - General conditions
Section IV - Definitions and General Rules For the purposes of this exemption,
(2) In the case of a common or collective trust fund or pooled investment fund maintained by a bank or trust company that consists of separate investment accounts, each separate investment account of that fund, rather than the entire fund, shall be considered to be a separate "collective investment fund" for purposes of this exemption. 91-55 American Eagle Gold Coins Permitted as IRA InvestmentProhibited Transaction Class Exemption 91-55
Class Exemption Transactions Between Individual Retirement Accounts and Authorized Purchasers of American Eagle Coins Agency: Pension and Welfare Benefits Administration, Labor Department. Internal Revenue Service. Action: Grant of class exemption. Summary: This document contains a final class exemption from certain taxes imposed by the Internal Revenue Code of 1986 (the Code). The exemption permits purchases and sales by certain "individual retirement accounts," as defined in Code section 408 ("IRAs"), of American Eagle bullion coins ("Coins") in principal transactions from or to broker-dealers in Coins which are "authorized purchasers" of Coins in bulk quantities from the United States Mint (the "Mint") and which are also "disqualified persons," within the meaning of Code section 4975(e)(2), with respect to the IRAs. The exemption would also permit the interest-free extension of credit in connection with such purchases and sales. The exemption affects persons with an interest in the investments of IRAs, including IRA depositors and their beneficiaries, as well as persons who provide custodial services to IRAs. Effective Date: January 1, 1987. The Explanatory Preamble, together with the full Exemption, are available in the PREAMBLE document. Exemption Section I: Definitions and Special Rules The following definitions apply to this exemption:
The term "control" means the power to exercise a controlling influence over the management or policies of a person other than an individual. Section II. Covered Transactions Effective January 1, 1987, if each condition of section III of this exemption is satisfied, the taxes imposed by section 4975(a) and (b) of the Code by reason of section 4975(c)(1)(A), (B) or (D) of the Code shall not apply to -
Section III. Conditions
93-33 Receipt of Services by Individuals for Whose Benefit IRAs or Retirement Plans for Self-Employed Individuals are EstablishedAmendment to Prohibited Transaction Class Exemption 93-33 [Formerly PTE 93-2]
Class Exemption Receipt of Services by an IRA or Keogh Plan from a Bank Agency: Pension and Welfare Benefits Administration, U.S. Department of Labor. Action: Adoption of Amendment to PTE 93-33. Effective Date: The amendment is effective January 1, 1998. Exemption Accordingly, PTE 93-33 is amended 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 Part 2570, Subpart B (55 FR 32836, August 10, 1990). Section I: Covered Transactions Effective January 1, 1998, the restrictions of sections 406(a)(1)(D) and 406(b) of ERISA and the sanctions resulting from the application of section 4975 of the Code, including the loss of exemption of an individual retirement account (IRA) pursuant to section 408(e)(2)(A) of the Code, by reason of section 4975(c)(1)(D), (E) and (F) of the Code, shall not apply to the receipt of services at reduced or no cost by an individual for whose benefit an IRA, or, if self-employed, a Keogh Plan, is established or maintained, or by members of his or her family, from a bank pursuant to an arrangement in which the account balance in the IRA or Keogh Plan is taken into account for purposes of determining eligibility to receive such services, provided that each condition of Section II of this exemption is satisfied. Section II: Conditions
Section III: Definitions The following definitions apply to this exemption:
Signed at Washington, DC this 26th day of February 1999. Alan D. Lebowitz, [FR Doc. 99-5572 Filed 3-5-99] 94-20 Foreign ExchangeProhibited Transaction Class Exemption 94-20
Class Exemption Agency: Pension and Welfare Benefits Administration, Labor Department. Action: Grant of Class Exemption. Summary: This document contains a final exemption from certain prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (the Act) and from certain taxes imposed by the Internal Revenue Code of 1986 (the Code). The class exemption permits the purchase and sale of foreign currencies between an employee benefit plan and a bank or a broker-dealer or an affiliate thereof which is a party in interest with respect to such plan. The exemption affects participants and beneficiaries of employee benefit plans involved in such transactions, as well as banks and broker-dealers and their affiliates which act as dealers in foreign exchange. Effective Date: Section I(a) of PTE 94-20 is effective for transactions occurring from January 1, 1975 to June 18, 1991. Section I(b) of PTE 94-20 is effective for transactions occurring on or after June 18, 1991. The Explanatory Preamble, together with the full Exemption, are available in the PREAMBLE document. Exemption Section I. Transactions
Section II. General Conditions Section I of this exemption applies only if the following conditions of this section II are satisfied. In the case of transactions described in section I(b), all of the conditions specified in section III below must also be satisfied.
Section III. Specific Conditions Section I(b) of this exemption applies only if the conditions specified in section II above and the following conditions are satisfied:
The confirmation shall disclose the following information: The confirmation shall be issued in no event more than 5 business days after execution of the transaction. (ii) None of the persons described in subparagraphs (B) and (C) shall be authorized to examine a bank's or broker-dealer's trade secrets or commercial or financial information of a bank or broker-dealer or an affiliate thereof which is privileged or confidential. Section IV. Definitions and General Rules For purposes of this exemption.
96-23 In-House Professional Asset ManagersDepartment of Labor [Prohibited Transaction Exemption 96-23; Application Number D-09602] Class Exemption for Plan Asset Transactions Determined by In-House Asset Managers Agency: Pension and Welfare Benefits Administration, Labor. Action: Grant of class exemption. Summary: This document contains a final exemption from certain prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (ERISA or the Act) and from certain taxes imposed by the Internal Revenue Code of 1986 (the Code). The exemption permits various transactions involving employee benefit plans whose assets are managed by in-house managers (INHAMS), provided that the conditions of the exemption are met. The exemption affects participants and beneficiaries of employee benefit plans, the sponsoring employers of such plans, INHAMS, and other persons engaging in the described transactions. EFFECTIVE DATE: The effective date of the exemption is April 10, 1996. FOR FURTHER INFORMATION CONTACT: Lyssa Hall or Virginia J. Miller, Pension and Welfare Benefits Administration, Office of Exemption Determinations, U.S. Department of Labor, Washington, DC 20210, (202) 219-8971 (not a toll-free number) or Paul D. Mannina, Plan Benefits Security Division, Office of the Solicitor, (202) 219-9141 (not a toll-free number). Supplementary Information: Exemptive relief for the transactions described herein was requested in an application dated December 16, 1993 submitted by the Committee on Investment of Employee Benefit Assets (CIEBA), 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 section 2570 subpart B (55 FR 32836 August 10, 1990). On March 24, 1995, the Department published a notice in the Federal Register (60 FR 15597) of the pendency of a proposed class exemption from certain of the restrictions of sections 406 and 407(a) of ERISA and from certain taxes imposed by section 4975(a) and (b) of the Code, by reason of section 4975(c)(1) of the Code.1 The notice gave interested persons an opportunity to submit written comments or requests for a hearing on the proposed class exemption to the Department. The Department received fourteen written comments and no requests for a public hearing. Upon consideration of all of the comments received, the Department has determined to grant the proposed class exemption, subject to certain modifications. These modifications and the major comments are discussed below. Discussion of the Comments:
Under section I(a) of the proposal, the exemption would be available for a transaction involving an amount in excess of $5,000,000 notwithstanding the fact that the transaction that had been negotiated by the INHAM was subject to a veto or approval by the plan sponsor. A commenter suggested that section I(a) should be modified to permit the plan sponsor or its designee to retain the right to veto or approve any transaction, regardless of the size of the transaction. Although the exemption permits the retention of a veto power for large transactions, the exemption was developed based on the premise that independent decisionmaking was more likely to be assured if day to day transactions are negotiated and approved by an INHAM. Therefore, the Department has determined not to adopt the commenter's suggestion. A commenter is concerned that the requirement under section I(a) of the proposal that the INHAM negotiate and make the decision on behalf of the plan to enter into the transaction may foreclose a transaction where an INHAM retains a QPAM to locate and negotiate the terms of a possible plan investment. According to the commenter, it is frequently advantageous for a plan to retain a QPAM to identify investment opportunities and to negotiate the terms of these types of investments, while permitting the INHAM to perform its own "due diligence" review of each investment opportunity presented and evaluate the appropriateness of the investment for the plan's particular investment needs. The Department does not believe that it would be appropriate in the context of this exemption proceeding to modify the INHAM exemption to, in effect, permit a transaction that was previously rejected by the Department during its consideration of the final QPAM class exemption.2 A commenter questioned whether Part I of the exemption would apply to "drag along" and similar transactions that are not actually negotiated by the INHAM. According to the commenter, when a plan makes an investment in a non-publicly traded entity, both the plan and other investors want to be able to dispose of their investment at a favorable price. In order to accomplish this objective, plans and other investors may negotiate certain rights at the time they make their initial investments. One such right would be the ability of the plan to "tag along" and sell out its interest at the same price as the majority investors if the majority investors sell their interests to a third party. The converse of this right would be the ability of the majority investors to "drag along" the plan if they sell their interest to a third party. When these rights are exercised, it may turn out that the party to whom the interests are sold is a party in interest. The commenter argues that the "drag along" or similar transactions should be treated as subordinate to the initial investment transaction and, therefore, subject to the authority or general direction of the INHAM for purposes of section I(a) of the exemption. The commenter represents that, while the INHAM is not involved in selecting the party to whom the plan's interest is sold, the transaction is determined by an independent party pursuant to rights negotiated by the INHAM at arm's- length at the outset of the investment transaction. The commenter further represents that these rights would be taken into account by the INHAM in determining whether the initial investment would be prudent. It is the view of the Department that section I(a) of the exemption will be deemed satisfied in the case of "drag along" or similar transactions that are entered into pursuant to rights that were negotiated by the INHAM as part of the primary investment transaction. The Department notes, however, that it does not interpret section I(a) as exempting a "drag along" or similar transaction unless such transaction is itself subject to relief under the exemption and the applicable conditions are otherwise met. In this regard, the Department expects that any determination regarding the appropriate price to be paid for the investment would reflect the effect on the value of such investment of rights which may be exercised in the future at the discretion of unrelated third persons. One commenter requested that the Department clarify that the requirements of section I(a) would be met if an officer of the INHAM also serves as a member of the employer's investment committee or other named fiduciary under the plan. Nothing contained in section I(a) would preclude an officer of the INHAM from also serving as a member of the employer's investment committee or other named fiduciary under the plan, provided that the INHAM otherwise meets the definition set forth in section IV(a), including the requirement that the INHAM must be a separate entity that is registered as an investment adviser. A commenter requested that the Department clarify that the requirements of section I(a) will be satisfied notwithstanding the fact that the INHAM also manages assets of outside clients. In the Department's view, nothing contained in the exemption would preclude the INHAM from providing services to outside clients who have no affiliation with the INHAM. In response to a comment regarding typical investment increments used in financial transactions, the Department has revised section I(a) by replacing "an amount in excess of $5,000,000" to "$5,000,000 or more" in connection with the plan sponsor's right to veto or approve such transactions. Several commenters suggested that the Department clarify that section I(e) of the proposal would not preclude a directed trustee of a plan or a trustee with discretionary authority over plan assets not involved in the transaction from engaging in transactions with the plan. In the Department's view, a nondiscretionary trustee subject to the direction of an INHAM, and that does not otherwise render investment advice with respect to the plan assets involved in the transaction may carry out proper directions that are not contrary to ERISA with respect to the transactions covered by the class exemption. Similarly, the exemption would be available for transactions with a trustee that exercises investment discretion with respect to a portion of plan assets not involved in the transaction. Another commenter objected to the requirement in section I(e)(2) that the party in interest dealing with the plan not have discretionary authority or control with respect to the investment of the plan assets involved in the transaction and not render investment advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to those assets. According to the commenter, the first part of this condition regarding discretionary authority or control is unnecessary in view of the requirement under section I(a) that the terms of the transaction must be negotiated by the INHAM, and that the INHAM make the decision on behalf of the plan to enter into the transaction. The commenter further believed that the requirement contained in section I(e)(2) that the party in interest dealing with the plan not render "investment advice" would create uncertainty and is unnecessary in view of the limited scope of relief provided. Accordingly, the commenter requests that the Department eliminate this requirement from the final exemption. This class exemption was developed, and is being granted by the Department, based on the essential premise that broad exemptive relief from the prohibitions of section 406(a) of ERISA can be afforded for all types of service provider transactions in which a plan engages only if the INHAM independently negotiates the transaction and makes the decision on behalf of the plan to enter into the transaction. The limitations contained in section I(e)(2) were included in the proposal in order to further emphasize that the INHAM must be the decision-maker in order for transactions to be covered by the class exemption. In addition, the Department believes that, if exemptive relief were to be provided where the party in interest renders investment advice to the plan, with respect to the transaction at issue, the potential for decision making with regard to the plan assets that would inure to the benefit of a party in interest would be increased. For these reasons, the Department believes that a separate condition is warranted and has determined not to revise the exemption as requested by the commenter. Several commenters requested that the Department clarify the types of "policies and procedures" that the INHAM is required to adopt for purposes of sections I(g) and IV(f) of the proposal, and the criteria the independent auditor should apply in conducting the audit. Another commenter recommended that the audit be conducted in accordance with standards established by the American Institute of Certified Public Accountants (AICPA), and that the Department establish criteria against which the independent auditor can make a determination that the procedures are designed to operate in the manner contemplated by the exemption. In this regard, a commenter raised a related question concerning whether the proposed audit condition would require that the policies and procedures include substantive criteria regarding expected risk, gross return and expenses of a proposed transaction that the INHAM should consider. One commenter suggested that the scope of the audit should be expanded to include a determination by the auditor regarding compliance with section 404(a) of ERISA. Lastly, a commenter urged the Department to delete this requirement entirely. As noted in the preamble to the proposed exemption, the Department proposed the audit requirement in order to address the lack of independence of the INHAM. The Department continues to believe that an annual fiduciary audit is necessary to address this lack of independence and, accordingly, has determined not to delete this requirement. In this regard, it was the Department's intent that the role of the auditor would be limited to determining whether the written procedures adopted by the INHAM are designed to assure compliance with the conditions of the exemption. Since the sole purpose of the audit requirement is to assure compliance with the exemption, the Department does not believe that it would be appropriate to expand the scope of this requirement to include either determinations under section 404 of the Act or determinations regarding the appropriateness of investments entered into under the exemption. In response to the comment concerning the adoption of AICPA standards as part of the audit requirement, the Department does not believe that it would be appropriate to adopt a definition that would require compliance with standards developed by certain professional organizations. However, in consideration of the concerns expressed by the commenters, the Department has adopted a new section I(g) which specifically requires that the INHAM adopt written policies and procedures designed to assure compliance with the conditions of the exemption. (The fiduciary audit requirement, set forth in section I(g) of the proposal, has been renumbered as section I(h) under the final exemption.) The Department has also adopted a new definition, under section IV(g), that contains a list of the objective requirements of the exemption that must be described in the written policies and procedures and that must be reviewed by the auditor.3 In addition, the Department notes that, although the exemption provides flexibility with respect to the specific procedures adopted by the INHAM, it expects such procedures to be designed in a manner that assures that the INHAM's operations are consistent with the requirements of the exemption. On a related issue, another commenter noted that the role of the auditor under the exemption should be limited to determining compliance with policies and procedures designed by the INHAM and should not include a determination by the auditor as to whether the plan has developed adequate policies and procedures as required under section IV(f) of the proposal. According to the commenter, having the auditor review the adequacy of the procedures would expand the auditor's role beyond the typical role of an independent auditor. In response to the commenter, the Department has determined to modify section IV(f) to delete the requirement that the auditor make a determination regarding the adequacy of the policies and procedures adopted by the INHAM. Under the revised section IV(f)(1), the auditor would be required to review the policies and procedures for consistency with the objective requirements of the exemption. In light of the decision to revise section (IV)(f)(1), the Department has also determined to expand section IV(f)(2) to require the auditor to test for compliance with both the written policies and procedures adopted by the INHAM and the objective requirements of the exemption. In the Department's view, this revised condition will help to assure that the INHAM properly carries out its responsibilities under the exemption. A commenter noted that the proposal did not make clear the consequences on existing transactions of an unsatisfactory audit. In response to the comment, the Department notes that an adverse finding in the auditor's report would not, in itself, render the exemption unavailable for any transaction engaged in by the INHAM on behalf of the plan.4 However, if a transaction did not meet a condition of the exemption (e.g., because relief was not available for transactions with the party with whom the INHAM dealt), the exemption would not be available for that transaction, but the exemption would continue to be available for those transactions that did satisfy its conditions. Conversely, a failure to comply with the general terms of the exemption applicable to all transactions would render the exemption unavailable, regardless of whether the failure is identified in the audit. Thus, if the INHAM failed to adopt policies and procedures that complied with the requirements of section I(g) or if no audit were conducted, the exemption would not cover transactions engaged in on behalf of the plan by the INHAM. Several commenters were concerned that the exemption could be interpreted to mean that only financial accounting firms or auditing firms could conduct the fiduciary audit required under section I(g) of the proposal. According to the commenters, other types of financial service organizations may well be capable of conducting a fiduciary audit. The Department did not intend to limit eligibility to serve as independent auditors under the exemption solely to accounting or auditing firms. Accordingly, any person who otherwise possesses the requisite technical training and proficiency with ERISA's fiduciary responsibility provisions may conduct a fiduciary audit. A number of commenters also requested that we clarify the requirement that the person performing the fiduciary audit must be "independent". In the Department's view, whether an auditor is independent for purposes of the exemption would depend on the particular facts and circumstances of each case. However, the Department would not view an auditor as independent under circumstances where the auditor has a financial interest, including an ownership interest, in the INHAM , the employer, any parties dealing with the plan under the exemption, or any affiliates thereof, or otherwise receives more than a de minimis amount of its compensation from the INHAM, the employer, its affiliates, or the plan. One commenter questioned whether the auditor performing the fiduciary audit can be an entity or individual who provides other services to the plan, e.g., the firm that audits the plan in connection with preparation of the plan's annual report (Form 5500). In the Department's view, the provision of other services would not, in itself, preclude a firm from meeting the requirement under the exemption that the person performing the fiduciary audit must be independent. However, the Department notes that the provision of other services could raise questions regarding the independence of the auditor if the aggregate services result in the auditor deriving more than a de minimis amount of its compensation from the INHAM, the employer, its affiliates, or the plan. One of the commenters expressed concern about how the audit requirement would apply to the condition, contained in section I(b), that the transaction not be described in certain specified class exemptions. The commenter suggested that the auditor's role regarding this condition should be limited to a finding as to whether the transaction is of the type described in the specified class exemptions, rather than a finding regarding compliance with the terms and conditions of such class exemptions. The Department concurs with this comment. The Department believes, however, that it is the ongoing responsibility of the INHAM to determine whether a transaction is covered by one of the specified class exemptions or the INHAM exemption. A commenter suggested that the Department revise the requirement under section I(g) of the proposal that the independent auditor must have appropriate technical training and proficiency with ERISA's fiduciary responsibility provisions. According to the commenter, the most likely candidates to conduct an audit are people who have experience with ERISA's fiduciary responsibility provisions rather than technical training. On the basis of this comment, the Department has determined to modify section I(g) to provide that the independent auditor must have appropriate technical training or experience, and proficiency with ERISA's fiduciary responsibility provisions. Another commenter urged the Department to delete this requirement entirely. In response to this comment, the Department believes that the requirement that the auditor be familiar with ERISA's fiduciary responsibility provisions provides an additional protection under the class exemption. Therefore, the Department has determined not to further revise this condition. According to a commenter, the language in section IV(f)(4) of the proposal, which provides that the auditor must make recommendations in its written report, would require the auditor to go beyond its auditing role of providing findings regarding compliance. The Department concurs with this comment and, accordingly, has deleted the words "and recommendations" from section IV(f). In response to a related comment, the Department has deleted the words "among other things" from the definition of fiduciary audit in order to clarify that the definition sets out the specific steps for a fiduciary audit. The Department cautions that the auditor would be responsible for taking any actions necessary to adequately perform the steps described in the definition of fiduciary audit. A commenter suggested that the Department modify sections I(g) and IV(f) by deleting the word "fiduciary" from "fiduciary audit" wherever it appears in those sections and substituting the word "exemption" to reflect the fact that the auditor's role is to assure compliance with the policies and procedures established for purposes of the exemption and does not otherwise involve examining for compliance with ERISA's fiduciary responsibility provisions. The Department concurs with the commenter's suggestion and has modified the exemption accordingly. The following examples illustrate the types of transactions which would be covered by Part I of the exemption:
A commenter urged the Department to expand the relief provided under Part II of the proposal to permit an INHAM to select an affiliate to provide telecommunications related goods and services to any real property that may be considered an asset of the plan or to an entity in which the plan owns a controlling interest and that is managed by an INHAM. While the commenter has identified the need for exemptive relief, the Department does not believe that it has sufficient information on the record at this time to provide additional relief for a class of transactions that would otherwise violate section 406(b) of ERISA. Finally, the Department believes that adoption of the commenter's suggestion would arbitrarily favor one specific industry over another under similar circumstances. Another commenter suggested that the Department modify the definition of INHAM to permit a majority-owned subsidiary of an employer, or a direct or indirect majority-owned subsidiary of a parent organization of such an employer to serve as an INHAM. The Department does not believe that a sufficient showing has been made that the requirement that the INHAM be wholly-owned under the proposal would raise compliance problems for those persons intending to use the exemption. Accordingly, the Department has determined not to revise the final exemption as requested. Several commenters urged the Department to expand the definition of an INHAM to include an entity established by a multiemployer plan or its plan sponsor. A commenter further noted that the definition of an affiliate of the INHAM contained in sections IV(a) and IV(b) of the proposal should be broadened to include families of multiemployer plans. The Department notes that the exemption application requested relief for transactions involving the assets of single employer plans managed by in-house managers. Accordingly, the Department does not believe that it has sufficient information regarding the operation and management of multiemployer plans to make the findings necessary to grant exemptive relief. Moreover, the Department does not believe that a sufficient showing has been made by the commenters that the conditions contained in the exemption would adequately protect the interests of participants and beneficiaries of internally managed multiemployer plans. Of course, the Department would be prepared to consider additional relief upon proper demonstration that the findings can be made under section 408(a) of ERISA with respect to such plans. A commenter requested that the Department clarify that the relief provided for employee benefit plans whose assets are managed by INHAMs extends, not only to plans sponsored by affiliates of the INHAM, but also includes plans sponsored by the INHAM itself. According to the commenter, the INHAM may establish a stand-alone plan to cover its employees, or its employees may participate in a plan established and maintained by an affiliate of the INHAM. Therefore, the commenter urged that the Department adopt a definition of "plan", which would include plans maintained by the INHAM or an affiliate of the INHAM. In consideration of the concerns raised by the commenter, the Department has determined to adopt a definition of plan under section IV(h) that includes plans maintained by the INHAM and affiliates of the INHAM. The commenter further requested that the requirements under section IV(a) that the INHAM have $50 million of plan assets under management and control, and that plans maintained by affiliates of the INHAM have $250 million of aggregate plan assets also should be modified to clarify that these requirements are not intended to exclude any plan maintained by the INHAM. The requirement that the INHAM be affiliated with a plan sponsor (or group of related plan sponsors) whose plan(s) hold in the aggregate assets of at least $250 million, $50 million of which is under the direct management and control of the INHAM was imposed because the Department believes that INHAMs of large plans are more likely to have an appropriate level of expertise in financial and business matters. In this regard, the Department believes that the requirement that the INHAM have a significant dollar amount of assets under its management and control attributable to plans maintained by affiliates which are separately accountable for the operation of their respective plans provides an additional safeguard under the exemption. Accordingly, the Department has determined not to revise the $50 million requirement. However, the Department has determined that it would be appropriate to include the assets of plans maintained by the INHAM in determining compliance with the $250 million standard. Finally, a commenter requested that the $50 million requirement be revised to permit the $50 million threshold to be met during the INHAM's first fiscal year as a separate legal entity. According to the commenter, the requirement that the INHAM have in excess of $50 million of plan assets under its management and control as of the last day of its most recent fiscal year could unintentionally prevent the exemption from being immediately available for an employer's in-house management group in its first year as a separate wholly-owned subsidiary of the employer. In response to this comment, the Department has revised section IV(a)(2) to specify that an existing asset management group that is newly-incorporated as a separate subsidiary of the employer may satisfy the $50 million requirement in its initial fiscal year if the requirement is met as of the date during its initial fiscal year as a separate legal entity that responsibility for the management of such assets in excess of $50 million was transferred to it from the employer. In response to a comment, the Department has added section IV(d)(3) to the exemption in order to define "control" for purposes of determining whether or not an INHAM is "related" to a party in interest under section IV(d). General Information The attention of interested persons is directed to the following:
Exemption Accordingly, the following exemption is granted under the authority of 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, August 10, 1990). Part I - Basic Exemption Effective April 10, 1996, the restrictions of section 406(a)(1) (A) through (D) of the Act and the taxes imposed by Code section 4975 (a) and (b) of the Code, by reason of 4975(c)(1) (A) through (D), shall not apply to a transaction between a party in interest with respect to a plan (as defined in section IV(h)) and such plan, provided that an in- house asset manager (INHAM) (as defined in section IV(a)) has discretionary authority or control with respect to the plan assets involved in the transaction and the following conditions are satisfied:
Part II - Specific Exemptions Effective April 10, 1996, the restrictions of sections 406(a), 406(b)(1), 406(b)(2) and 407(a) of the Act and the taxes imposed by section 4975 (a) and (b) of the Code, by reason of Code section 4975(c)(1) (A) through (E), shall not apply to:
Part III - Places of Public Accommodation Effective April 10, 1996, the restrictions of sections 406(a)(1) (A) through (D) and 406(b) (1) and (2) of ERISA and the taxes imposed by Code section 4975 (a) and (b), by reason of Code section 4975(c)(1) (A) through (E), shall not apply to the furnishing of services and facilities (and goods incidental thereto) by a place of public accommodation owned by a plan and managed by an INHAM to a party in interest with respect to the plan, if the services and facilities (and incidental goods) are furnished on a comparable basis to the general public. Part IV - Definitions For the purposes of this exemption:
Signed at Washington,DC, 4th day of April 1996. ALAN D. LEBOWITZ U.S. Department of Labor
97-11 Relationship BrokerageRelationship Brokerage (25KB PDF file - PDF Help) Amendment #1 and Amendment #2 (28KB and 44KB PDF files - PDF Help) 97-41 Collective Investment Fund Conversion TransactionsProhibited Transaction Class Exemption 97-41
Class Exemption Conversion of Collective Investment Funds into a Registered Investment Company (Mutual Fund) Agency: Department of Labor, Pension and Welfare Benefits Administration Action: Grant of Class Exemption Effective Date: Section I of this exemption is effective for transactions occurring from October 1, 1988 until August 8, 1997. Section II of the exemption is effective for transactions occurring after August 8, 1997. Exemption Section I. Retroactive Exemption for the Purchase of Fund Shares With Assets Transferred In-Kind From a CIFF or the period from October 1, 1988 to August 8, 1997, the restrictions of sections 406(a) and 406 (b)(1) and (b)(2) of the Act and the taxes imposed by section 4975 of the Code, by reason of section 4975(c)(1) (A) through (E), shall not apply to the purchase by an employee benefit plan (the Client Plan) of shares of one or more open-end management investment companies (the Fund or Funds) registered under the Investment Company Act of 1940, in exchange for assets of the Client Plan transferred in-kind to the Fund from a collective investment fund (the CIF) maintained by a bank (the Bank) or a plan adviser (the Plan Adviser), where the Bank or Plan Adviser is the investment adviser to the Fund and also a fiduciary of the Client Plan. The transfer and purchase must be in connection with a complete withdrawal of the Client Plan's assets from the CIF, and the following conditions must be met:
Section II. Prospective Exemption for the Purchase of Fund Shares With Assets Transferred In-Kind From a CIF Effective after August 8, 1997, the restrictions of sections 406(a) and 406 (b)(1) and (b)(2) of the Act and the taxes imposed by section 4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of the Code, shall not apply to the purchase by an employee benefit plan (the Client Plan) of shares of one or more open-end management investment companies (the Fund or Funds) registered under the Investment Company Act of 1940, in exchange for assets of the Client Plan transferred in-kind to the Fund from a collective investment fund (the CIF) maintained by a bank (the Bank) or a plan adviser (the Plan Adviser), where the Bank or Plan Adviser is the investment adviser to the Fund and also a fiduciary of the Client Plan. The transfer and purchase must be in connection with a complete withdrawal of the Client Plan's assets from the CIF, and the following conditions must be met:
Section III. Availability of Prohibited Transaction Exemption (PTE) 77-4 Any purchase of Fund shares that complies with the conditions of either Section I or Section II of this class exemption shall be treated as a "purchase or sale" of shares of an open-end investment company for purposes of PTE 77-4 and shall be deemed to have satisfied paragraphs (a), (d) and (e) of section II of that exemption. 42 FR 18732 (April 8, 1977). Section IV. Definitions For purposes of this exemption:
Signed at Washington, D.C., this 1st day of August, 1997. Alan D. Lebowitz, [FR Doc. 97-21003 Filed 8-7-97; 8:45 AM] 98-54 Foreign Exchange Transactions Executed Pursuant to Standing InstructionsProhibited Transaction Class Exemption 98-54
Class Exemption Foreign Exchange Transactions Executed Pursuant to Standing Instructions Agency: Department of Labor, Pension and Welfare Benefits Administration Action: Grant of Class Exemption Effective Dates: Section II is effective for transactions occurring from June 18, 1991 to January 12, 999. Section III is effective for transactions occurring after January 12, 1999. Exemption Effective Dates: Section II is effective for transactions occurring from June 18, 1991 to January 12, 1999. Section III is effective for transactions occurring after January 12, 1999. Exemption Accordingly, the following exemption is granted under the authority of section 408(a) of the Act and section 4975(c)(2) of the Code, and in accordance with the procedures set forth in 29 ERISA Procedure 75-1 (40 FR 18471, April 28, 1975). Section I Covered Transactions
Section II Retroactive Conditions
The confirmation shall be issued in no event more than 5 business days after execution of the transaction. Section III Prospective Conditions
(2) De minimis purchase and sale transactions are executed within no more than one business day from the date that either the bank or broker-dealer receives notice from a foreign custodian that the proceeds of a sale of foreign securities denominated in foreign currency are good funds, or the direction to acquire foreign currency was received by the bank or broker-dealer, and a foreign custodian which is an affiliate of the bank or broker-dealer, provides such notice to the bank or broker-dealer within one business day of its receipt of good funds from a sale. (2) Income item conversions are executed at the next scheduled time for conversions following receipt of notice by the bank or broker-dealer from the foreign custodian that such funds are good funds. If it is the policy of the bank or broker-dealer to aggregate small amounts of foreign currency until a specified minimum threshold amount is received, then the conversion may take place at a later time but in no event more than 24 hours after receipt of notice. (3) De minimis purchase and sale transactions are executed at the next scheduled time for such transactions following receipt of either notice that the sales proceeds denominated in foreign currency are good funds, or a direction to acquire foreign currency. If it is the policy of the bank or broker-dealer to aggregate small transactions until a specified threshold amount is received, then the execution may take place at a later time but in no event more than 24 hours after receipt of either notice that the sales proceeds have been received by the foreign custodian as good funds, or a direction to acquire foreign currency. For purposes of this paragraph (g), the range of exchange rates established by the bank or broker-dealer for a particular foreign currency cannot deviate by more than three percent [above or below] the interbank bid and asked rates as displayed on Reuters or another nationally recognized independent service in the foreign exchange market, for such currency at the time such range of rates is established by the bank or broker-dealer. (2) None of the persons described in subparagraphs (B) and (C) shall be authorized to examine a bank's or broker-dealer's trade secrets or commercial or financial information of a bank or broker-dealer, which is privileged or confidential. Section IV Definitions and General Rules For purposes of this exemption,
Signed at Washington, DC this 6th day of November 1998. Alan D. Lebowitz, [FR Doc. 98-30291 Filed 11-12-98; 8:45 am] Billing Code 4510-29-P 2000-14 Amendment to PTE 80-26 for Certain Interest Free Loans to Employee Benefit PlansProhibited Transaction Class Exemption 2000-14
Class Exemption Amendment to PTE 80-26 for Certain Interest Free Loans to Employee Benefit Plans Agency: Department of Labor, Pension and Welfare Benefits Administration Action: Grant of Class Exemption Effective Date: The amendment to PTE 80-26 is effective from November 1, 1999 until December 31, 2000. Exemption 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 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:
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:
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, D.C., this 28th day of March, 2000. Ivan L. Strasfeld, [FR Doc. 00-8057 Filed 3-31-00; 8:45 AM] 2002-12 Cross-Trading of SecuritiesCross-Trading of Securities (201KB PDF file - PDF Help) 2002-13 Amendment to Clarify the Term "Plan"Amendment to Clarify the Term "Plan" (42KB PDF file - PDF Help) 2002-51 Voluntary Fiduciary Correction ProgramVoluntary Fiduciary Correction Program (58KB PDF file - PDF Help) Amendment to 2002-51 (66KB PDF file - PDF Help) 2003-39 Release of Claims and Extenstions of Credit in Connection with LitigationRelease of Claims and Extenstions of Credit in Connection with Litigation (72KB PDF file - PDF Help) 2004-16 Mandatory Distributions (108KB PDF file - PDF Help)Mandatory Distributions (108KB PDF file - PDF Help) 2006-06 Abandoned Individual Account PlansAbandoned Individual Account Plans (116KB PDF file - PDF Help) 2006-16 Loans of Securities by PlansLoans of Securities by Plans (108KB PDF file - PDF Help) |
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75-2 Interpretive Bulletins Relating to the Employee Retirement Income Security Act of 197429 CFR 2509.75-2 On February 6, 1975, the Department of Labor issued an interpretive bulletin, ERISA IB 75-2, with respect to whether a party in interest has engaged in a prohibited transaction with an employee benefit plan where the party in interest has engaged in a transaction with a corporation or partnership (withinthe meaning of section 7701 of the Internal Revenue Code of 1954) in which the plan has invested.On November 13, 1986 the Department published a final regulation dealing with the definition of "plan assets". See Sec. 2510.3-101 of this title. Under that regulation,theassets of certain entities in which plans invest would include "plan assets" for purposes of the fiduciary responsibility provisions of the Act. Section 2510.3-101 applies only for purposes of identifying plan assets on or after the effective date of that section, however, and Sec. 2510.3-101 does not apply to plan investments in certain entities that qualify for the transitional relief provided for in paragraph (k) of that section. The principles discussed in paragraph (a) of this Interpretive Bulletin continue to be applicable for purposes of identifying assets of a plan for periods prior to the effective date of Sec. 2510.3-101 and for investments that are subject to the transitional rule in Sec. 2510.3-101(k). Paragraphs (b) and (c) of this Interpretive Bulletin, however, relate to matters outside the scope of Sec. 2510.3-101, and nothing in that section affects the continuing application of the principles discussed in those parts.
[51 FR 41280, Nov. 13, 1986, as amended at 61 FR 33849, July 1, 1996] 75-3 Interpretive bulletin relating to investments by employee benefit plans in securities of registered investment companies29 CFR 2509.75-3 On March 12, 1975, the Department of Labor issued an interpretive bulletin, ERISA IB 75-3, with regard to its interpretation of section 3(21)(B) of the Employee Retirement Income Security Act of 1974. That section provides that an investment by an employee benefit plan in securities issued by an investment company registered under the Investment Company Act of 1940 shall not by itself cause the investment company, its investment adviser or principal underwriter to be deemed to be a fiduciary or party in interest "except insofar as such investment company or its investment adviser or principal underwriter acts in connection with an employee benefit plan covering employees of the investment company, the investment adviser, or its principal underwriter." The Department of Labor interprets this section as an elaboration of the principle set forth in section 401(b)(1) of the Act and ERISA IB 75-2 (issued February 6, 1975) that the assets of an investment company shall not be deemed to be assets of a plan solely by reason of an investment by such plan in the shares of such investment company. Consistent with this principle, the Department of Labor interprets this section to mean that a person who is connected with an investment company, such as the investment company itself, its investment adviser or its principal underwriter, is not to be deemed to be a fiduciary of or party in interest with respect to a plan solely because the plan has invested in the investment company's shares. This principle applies, for example, to a plan covering employees of an investment adviser to an investment company where the plan invests in the securities of the investment company. In such a case the investment company or its principal underwriter is not to be deemed to be a fiduciary of or party in interest with respect to the plan solely because of such investment.On the other hand, the exception clause in section 3(21) emphasizes that if an investment company, its investment adviser or its principal underwriter is a fiduciary or party in interest for a reason other than the investment in the securities of the investment company, such a person remains a party in interest or fiduciary. Thus, in the preceding example, since an employer is a party in interest, the investment adviser remains a party in interest with respect to a plan covering its employees. The Department of Labor emphasized that an investment adviser, principal underwriter or investment company which is a fiduciary by virtue of section 3(21)(A) of the Act is subject to the fiduciary responsibility provisions of part 4 of title I of the Act, including those relating to fiduciary duties under section 404. [40 FR 31599, July 28, 1975. Redesignated at 41 FR 1906, Jan. 13, 1976] 75-4 Interpretive bulletin relating to indemnification of fiduciaries29 CFR 2509.75-4 On June 4, 1975, the Department of Labor issued an interpretive bulletin, ERISA IB 75-4, announcing the Department's interpretation of section 410(a) of the Employee Retirement Income Security Act of 1974, insofar as that section relates to indemnification of fiduciaries. Section 410(a) states, in relevant part, that "any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy." The Department of Labor interprets this section to permit indemnification agreements which do not relieve a fiduciary of responsibility or liability under part 4 of title I. Indemnification provisions which leave the fiduciary fully responsible and liable, but merely permit another party to satisfy any liability incurred by the fiduciary in the same manner as insurance purchased under section 410(b)(3), are therefore not void under section 410(a). Examples of such indemnification provisions are:
The Department of Labor interprets section 410(a) as rendering void any arrangement for indemnification of a fiduciary of an employee benefit plan by the plan. Such an arrangement would have the same result as an exculpatory clause, in that it would, in effect, relieve the fiduciary of responsibility and liability to the plan by abrogating the plan's right to recovery from the fiduciary for breaches of fiduciary obligations. While indemnification arrangements do not contravene the provisions of section 410(a), parties entering into an indemnification agreement should consider whether the agreement complies with the other provisions of part 4 of title I of the Act and with other applicable laws. [40 FR 31599, July 28, 1975. Redesignated at 41 FR 1906, Jan. 13, 1976] 75-6 Interpretive bulletin relating to section 408(c)(2) of the Employee Retirement Income Security Act of 1974.29 CFR 2509.75-6 The Department of Labor today announced guidelines for determining when a party in interest with respect to an employee benefit plan may receive an advance for expenses to be incurred on behalf of the plan without engaging in a transaction prohibited by section 406 of the Employee Retirement Income Security Act of 1974. That section prohibits, among other things, any lending of money from a plan to a party in interest, or transfer to, or use by or for the benefit of, a party in interest of any assets of the plan, as well as any act whereby a fiduciary deals with the assets of a plan in his own interest or for his own account. However, section 408(c)(2) of the Act provides that nothing in section 406 of the Act shall be construed to prohibit the reimbursement by a plan of expenses properly and actually incurred by a fiduciary in the performance of his duties with the plan. Questions have arisen under section 408(c)(2) of the Act as to whether a plan may reimburse a party in interest in the performance of his duties with the plan and as to whether a plan might make an advance to a fiduciary or other party in interest for expenses to be incurred in the future. The Department of Labor views the relevant provisions of section 408(c)(2) as clarifying the scope of section 406 so as to permit reimbursement of fiduciaries for expenses incurred in the performance of their duties with a plan. Similarly, consistent with section 408(c)(2), section 406 is construed to permit the reimbursement by the plan of expenses properly and actually incurred by a party in interest in the performance of his duties with the plan. If a plan makes an advance to a fiduciary or other party in interest to cover expenses to be properly and actually incurred by such person in the performance of his duties with the plan, a prohibited transaction within the meaning of section 406 shall not occur when the plan makes the advance if-
It should be noted, however, that despite the reasonableness of the amount of the advance and of the expenses underlying it, the question of whether incurring such expenses was prudent, and thus whether the advance was for reasonable expenses, is to be judged pursuant to section 404 of the Act (relating to fiduciary responsibilities). [40 FR 31755, July 29, 1975. Redesignated at 41 FR 1906, Jan. 13, 1976] 75-8 Questions and answers relating to fiduciary responsibility under the Employee Retirement Income Security Act of 197429 CFR 2509.75-8 The Department of Labor today issued questions and answers relating to certain aspects of fiduciary responsibility under the Act, thereby supplementing ERISA IB 75-5 (29 CFR 2555.75-5) which was issued on June 24, 1975, and published in the Federal Register on July 28, 1975 (40 FR 31598). Pending the issuance of regulations or other guidelines, persons may rely on the answers to these questions in order to resolve the issues that are specifically considered. No inferences should be drawn regarding issues not raised which may be suggested by a particular question and answer or as to why certain questions, and not others, are included. Furthermore, in applying the questions and answers, the effect of subsequent legislation, regulations, court decisions, and interpretive bulletins must be considered. To the extent that plans utilize or rely on these answers and the requirements of regulations subsequently adopted vary from the answers relied on, such plans may have to be amended. An index of the questions and answers, relating them to the appropriate sections of the Act, is also provided. Index Key to question prefixes: D - refers to definitions; FR - refers to fiduciary responsibility.
------------------------------------------------------------------------ Note: Questions D-2, D-3, D-4, and D-5 relate to not only section 3(21)(A) of title I of the Act, but also section 4975(e)(3) of the Internal Revenue Code (section 2003 of the Act). The Internal Revenue Service has indicated its concurrence with the answers to these questions. D-2 Q: Are persons who have no power to make any decisions as to plan policy, interpretations, practices or procedures, but who perform the following administrative functions for an employee benefit plan, within a framework of policies, interpretations, rules, practices and procedures made by other persons, fiduciaries with respect to the plan:
A: No. Only persons who perform one or more of the functions described in section 3(21)(A) of the Act with respect to an employee benefit plan are fiduciaries. Therefore, a person who performs purely ministerial functions such as the types described above for an employee benefit plan within a framework of policies, interpretations, rules, practices and procedures made by other persons is not a fiduciary because such person does not have discretionary authority or discretionary control respecting management of the plan, does not exercise any authority or control respecting management or disposition of the assets of the plan, and does not render investment advice with respect to any money or other property of the plan and has no authority or responsibility to do so. However, although such a person may not be a plan fiduciary, he may be subject to the bonding requirements contained in section 412 of the Act if he handles funds or other property of the plan within the meaning of applicable regulations. The Internal Revenue Service notes that such persons would not be considered plan fiduciaries within the meaning of section 4975(e)(3) of the Internal Revenue Code of 1954. D-3 Q: Does a person automatically become a fiduciary with respect to a plan by reason of holding certain positions in the administration of such plan? A: Some offices or positions of an employee benefit plan by their very nature require persons who hold them to perform one or more of the functions described in section 3(21)(A) of the Act. For example, a plan administrator or a trustee of a plan must, be the very nature of his position, have "discretionary authority or discretionary responsibility in the administration" of the plan within the meaning of section 3(21)(A)(iii) of the Act. Persons who hold such positions will therefore be fiduciaries. Other offices and positions should be examined to determine whether they involve the performance of any of the functions described in section 3(21)(A) of the Act. For example, a plan might designate as a "benefit supervisor" a plan employee whose sole function is to calculate the amount of benefits to which each plan participant is entitled in accordance with a mathematical formula contained in the written instrument pursuant to which the plan is maintained. The benefit supervisor, after calculating the benefits, would then inform the plan administrator of the results of his calculations, and the plan administrator would authorize the payment of benefits to a particular plan participant. The benefit supervisor does not perform any of the functions described in section 3(21)(A) of the Act and is not, therefore, a plan fiduciary. However, the plan might designate as a "benefit supervisor" a plan employee who has the final authority to authorize or disallow benefit payments in cases where a dispute exists as to the interpretation of plan provisions relating to eligibility for benefits. Under these circumstances, the benefit supervisor would be a fiduciary within the meaning of section 3(21)(A) of the Act. The Internal Revenue Service notes that it would reach the same answer to this question under section 4975(e)(3) of the Internal Revenue Code of 1954. D-4 Q: In the case of a plan established and maintained by an employer, are members of the board of directors of the employer fiduciaries with respect to the plan?
A: Members of the board of directors of an employer which maintains an employee benefit plan will be fiduciaries only to the extent that they have responsibility for the functions described in section 3(21)(A) of the Act. For example, the board of directors may be responsible for the selection and retention of plan fiduciaries. In such a case, members of the board of directors exercise "discretionary authority or discretionary control respecting management of such plan" and are,
therefore, fiduciaries with respect to the plan. However, their responsibility, and, consequently, their liability, is limited to the selection and retention of fiduciaries (apart from co-fiduciary liability arising under circumstances described in section 405(a) of the Act). In addition, if the directors are made named fiduciaries of the plan, their liability may be limited pursuant to a procedure provided
for in the plan instrument for the allocation of fiduciary responsibilities among named fiduciaries or for the designation of persons other than named fiduciaries to carry out fiduciary
responsibilities, as provided in section 405(c)(2).The Internal Revenue Service notes that it would reach the same answer to this question under section 4975(e)(3) of the Internal Revenue
D-5 Q: Is an officer or employee of an employer or employee organization which sponsors an employee benefit plan a fiduciary with respect to the plan solely by reason of holding such office or
A: No, for the reasons stated in response to question D-2. The Internal Revenue Service notes that it would reach the same answer to this question under section 4975(e)(3) of the Internal Revenue FR-11 Q: In discharging fiduciary responsibilities, may a fiduciary with respect to a plan rely on information, data, statistics or analyses provided by other persons who perform purely ministerial functions for such plan, such as those persons described in D-2 above? A: A plan fiduciary may rely on information, data, statistics or analyses furnished by persons performing ministerial functions for the plan, provided that he has exercised prudence in the selection and retention of such persons. The plan fiduciary will be deemed to have acted prudently in such selection and retention if, in the exercise of ordinary care in such situation, he has no reason to doubt the competence, integrity or responsibility of such persons. FR-12 Q: How many fiduciaries must an employee benefit plan have?
A: There is no required number of fiduciaries that a plan must have. Each plan must, of course, have at least one named fiduciary who serves as plan administrator and, if plan assets are held in trust, the plan
FR-13 Q: If the named fiduciaries of an employee benefit plan allocate their fiduciary responsibilities among themselves in accordance with a procedure set forth in the plan for the allocation of responsibilities for operation and administration of the plan, to what extent will a named fiduciary be relieved of liability for acts and omissions of other named fiduciaries in carrying out fiduciary A: If named fiduciaries of a plan allocate responsibilities in accordance with a procedure for such allocation set forth in the plan, a named fiduciary will not be liable for acts and omissions of other named fiduciaries in carrying out fiduciary responsibilities which have been allocated to them, except as provided in section 405(a) of the Act, relating to the general rules of co-fiduciary responsibility, and section 405(c)(2)(A) of the Act, relating in relevant part to standards for establishment and implementation of allocation procedures. However, if the instrument under which the plan is maintained does not provide for a procedure for the allocation of fiduciary responsibilities among named fiduciaries, any allocation which the named fiduciaries may make among themselves will be ineffective to relieve a named fiduciary from responsibility or liability for the performance of fiduciary responsibilities allocated to other named fiduciaries.
FR-14 Q: If the named fiduciaries of an employee benefit plan designate a person who is not a named fiduciary to carry out fiduciary responsibilities, to what extent will the named fiduciaries be relieved of liability for the acts and omissions of such person in the A: If the instrument under which the plan is maintained provides for a procedure under which a named fiduciary may designate persons who are not named fiduciaries to carry out fiduciary responsibilities, named fiduciaries of the plan will not be liable for acts and omissions of a person who is not a named fiduciary in carrying out the fiduciary responsibilities which such person has been designated to carry out, except as provided in section 405(a) of the Act, relating to the general rules of co-fiduciary liability, and section 405(c)(2)(A) of the Act, relating in relevant part to the designation of persons to carry out fiduciary responsibilities. However, if the instrument under which the plan is maintained does not provide for a procedure for the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities, then any such designation which the named fiduciaries may make will not relieve the named fiduciaries from responsibility or liability for the acts and omissions of the persons so designated. FR-15 Q: May a named fiduciary delegate responsibility for management and control of plan assets to anyone other than a person who is an investment manager as defined in section 3(38) of the Act so as to be relieved of liability for the acts and omissions of the person to whom such responsibility is delegated?
A: No. Section 405(c)(1) does not allow named fiduciaries to delegate to others authority ordiscretion to manage or control plan assets. However, under the terms of sections 403(a)(2) and 402(c)(3) of FR-16 Q: Is a fiduciary who is not a named fiduciary with respect to an employee benefit plan personally liable for all phases of the management and administration of the plan? A: A fiduciary with respect to the plan who is not a named fiduciary is a fiduciary only to the extent that he or she performs one or more of the functions described in section 3(21)(A) of the Act. The personal liability of a fiduciary who is not a named fiduciary is generally limited to the fiduciary functions, which he or she performs with respect to the plan. With respect to the extent of liability of a named fiduciary of a plan where duties are properly allocated among named fiduciaries or where named fiduciaries properly designate other persons to carry out certain fiduciary duties, see question FR-13 and FR-14. In addition, any fiduciary may become liable for breaches of fiduciary responsibility committed by another fiduciary of the same plan under circumstances giving rise to co fiduciary liability, as provided in section 405(a) of the Act. FR-17 Q: What are the ongoing responsibilities of a fiduciary who has appointed trustees or other fiduciaries with respect to these appointments? A: At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs ofthe plan. No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure. [40 FR 47491, Oct. 9, 1975. Redesignated at 41 FR 1906, Jan. 13, 1976] 94-1 Economically Targeted Investments (Social Investing)Interpretive Bulletin 94-1 June 23, 1994 (59 FR 32606)
Interpretive Bulletin Agency: Pension and Welfare Benefits Administration, Labor Department Action: Interpretive Bulletin Summary: This document sets forth the view of the Department of Labor (the Department) concerning the legal standard imposed by sections 403 and 404 of Part 4 of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) with respect to a plan fiduciary's decision to invest plan assets in "economically targeted investments" (ETIs). ETIs are generally defined as investments that are selected for the economic benefits they create in addition to the investment return to the employee benefit plan investor. In this document, the Department states that the requirements of sections 403 and 404 do not prevent plan fiduciaries from deciding to invest plan assets in an ETI if the ETI has an expected rate of return that is commensurate to rates of return of alternative investments with similar risk characteristics that are available to the plan, and if the ETI is otherwise an appropriate investment for the plan in terms of such factors as diversification and the investment policy of the plan. Effective Date: January 1, 1975 Interpretive Bulletin Section 2509.94-1 Interpretive Bulletin Relating to the fiduciary standard under ERISA in considering economically targeted investments. This Interpretive Bulletin sets forth the Department of Labor's interpretation of sections 403 and 404 of the Employee Retirement Income Security Act of 1974 (ERISA), as applied to employee benefit plan investments in "economically targeted investments" (ETIs), that is, investments selected for the economic benefits they create apart from their investment return to the employee benefit plan. Sections 403 and 404, in part, require that a fiduciary of a plan act prudently, and to diversify plan investments so as to minimize the risk of large losses, unless under the circumstances, it is clearly prudent not to do so. In addition, these sections require that a fiduciary act solely in the interest of the plan's participants and beneficiaries and for the exclusive purpose of providing benefits to their participants and beneficiaries. The Department has construed the requirements that a fiduciary act solely in the interest of, and for the exclusive purpose of providing benefits to, participants and beneficiaries as prohibiting a fiduciary from subordinating the interests of participants and beneficiaries in their retirement income to unrelated objectives. With regard to investing plan assets, the Department has issued a regulation, at 29 C.F.R. 2550.404a-1, interpreting the prudence requirements of ERISA as they apply to the investment duties of fiduciaries of employee benefit plans. The regulation provides that the prudence requirements of section 404(a)(1)(B) are satisfied if -
This includes giving appropriate consideration to the role that the investment or investment course of action plays (in terms or such factors as diversification, liquidity and risk/return characteristics) with respect to that portion of the plan's investment portfolio within the scope of the fiduciary's responsibility. Other facts and circumstances relevant to an investment or investment course of action would, in the view of the Department, include consideration of the expected return on alternative investments with similar risks available to the plan. It follows that, because every investment necessarily causes a plan to forgo other investment opportunities, an investment will not be prudent if it would be expected to provide a plan with a lower rate of return than available alternative investments with commensurate degrees of risk or is riskier than alternative available investments with commensurate rates of return. The fiduciary standards applicable to ETIs are no different than the standards applicable to plan investments generally. Therefore, if the above requirements are met, the selection of an ETI, or the engaging in an investment course of action intended to result in the selection of ETIs, will not violate section 404(a)(1)(A) and (B) and the exclusive purpose requirements of section 403. 94-2 Voting of Proxies and Investment PoliciesInterpretive Bulletin 94-2 July 29, 1994 (59 FR 38860)
Interpretive Bulletin Agency: Department of Labor. Action: Interpretive Bulletin. Summary: This document summarizes the Department of Labor's (the Department) statements with respect to the duty of employee benefit plan fiduciaries to vote proxies appurtenant to shares of corporate stock held by their plans. In these statements, the Department has explained, among other things, that the voting of proxies is a fiduciary act of plan asset management This document also describes the Department's view of the legal standards imposed by sections 402(c)(3), 403(a) and 404(a)(1)(B) of part 4 of title I of the Employee Retirement Income Security Act of 1974 (ERISA) on the use of written statements of investment policy, including statements of proxy voting policy or guidelines. The bulletin makes clear that a named fiduciary who appoints an investment manager may, consistent with its fiduciary obligations, issue written statements of investment policy, including guidelines as to the voting of proxies by the investment manager. Moreover, an investment manager may be required to comply with such investment policies to the extent that any given investment decision (including a proxy voting decision) is consistent with the provisions of title I or title IV of ERISA. Finally, this document provides guidance concerning the appropriateness under ERISA of more active monitoring of corporate management by fiduciaries of plans that own corporate securities. Effective Date: January 1, 1975 Interpretive Bulletin This interpretive bulletin sets forth the Department of Labor's (the Department) interpretation of sections 402, 403 and 404 of the Employee Retirement Income Security Act of 1974 (ERISA) as those sections apply to voting of proxies on securities held in employee benefit plan investment portfolios and the maintenance of and compliance with statements of investment policy, including proxy voting policy. In addition, this interpretive bulletin provides guidance on the appropriateness under ERISA of active monitoring of corporate management by plan fiduciaries.
The fiduciary act of managing plan assets that are shares of corporate stock includes the voting of proxies appurtenant to those shares of stock. As a result, the responsibility for voting proxies lies exclusively with the plan trustee except to the extent that either (1) the trustee is subject to the directions of a named fiduciary pursuant to ERISA § 403(a)(1); or (2) the power to manage, acquire or dispose of the relevant assets has been delegated by a named fiduciary to one or more investment managers pursuant to ERISA § 403(a)(2). Where the authority to manage plan assets has been delegated to an investment manager pursuant to § 403(a)(2), no person other than the investment manager has authority to vote proxies appurtenant to such plan assets except to the extent that the named fiduciary has reserved to itself (or to another named fiduciary so authorized by the plan document) the right to direct a plan trustee regarding the voting of proxies. In this regard, a named fiduciary, in delegating investment management authority to an investment manager, could reserve to itself the right to direct a trustee with respect to the voting of all proxies or reserve to itself the right to direct a trustee as to the voting of only those proxies relating to specified assets or issues. If the plan document or investment management agreement provides that the investment manager is not required to vote proxies, but does not expressly preclude the investment manager from voting proxies, the investment manager would have exclusive responsibility for voting proxies. Moreover, an investment manager would not be relieved of its own fiduciary responsibilities by following directions of some other person regarding the voting of proxies, or by delegating such responsibility to another person. If, however, the plan document or the investment management contract expressly precludes the investment manager from voting proxies, the responsibility for voting proxies would lie exclusively with the trustee. The trustee, however, consistent with the requirements of ERISA § 403(a)(1), may be subject to the directions of a named fiduciary if the plan so provides. The fiduciary duties described at ERISA § 404(a)(1)(A) and (B), require that, in voting proxies, the responsible fiduciary consider those factors that may affect the value of the plan's investment and not subordinate the interests of the participants and beneficiaries in their retirement income to unrelated objectives. These duties also require that the named fiduciary appointing an investment manager periodically monitor the activities of the investment manager with respect to the management of plan assets, including decisions made and actions taken by the investment manager with regard to proxy voting decisions. The named fiduciary must carry out this responsibility solely in the interest of the participants and beneficiaries and without regard to its relationship to the plan sponsor. It is the view of the Department that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring. Thus, the investment manager or other responsible fiduciary would be required to maintain accurate records as to proxy voting. Moreover, if the named fiduciary is to be able to carry out its responsibilities under ERISA § 404(a) in determining whether the investment manager is fulfilling its fiduciary obligations in investing plans assets in a manner that justifies the continuation of the management appointment, the proxy voting records must enable the named fiduciary to review not only the investment manager's voting procedure with respect to plan-owned stock, but also to review the actions taken in individual proxy voting situations. The fiduciary obligations of prudence and loyalty to plan participants and beneficiaries require the responsible fiduciary to vote proxies on issues that may affect the value of the plan's investment. Although the same principles apply for proxies appurtenant to shares of foreign corporations, the Department recognizes that in voting such proxies, plans may, in some cases, incur additional costs. Thus, a fiduciary should consider whether the plan's vote, either by itself or together with the votes of other shareholders, is expected to have an effect on the value of the plan's investment that will outweigh the cost of voting. Moreover, a fiduciary, in deciding whether to purchase shares of a foreign corporation, should consider whether the difficulty and expense in voting the shares is reflected in their market price. The maintenance by an employee benefit plan of a statement of investment policy designed to further the purposes of the plan and its funding policy is consistent with the fiduciary obligations set forth in ERISA § 404(a)(1)(A) and (B). Since the fiduciary act of managing plan assets that are shares of corporate stock includes the voting of proxies appurtenant to those shares of stock, a statement of proxy voting policy would be an important part of any comprehensive statement of investment policy. For purposes of this document, the term "statement of investment policy" means a written statement that provides the fiduciaries who are responsible for plan investments with guidelines or general instructions concerning various types or categories of investment management decisions, which may include proxy voting decisions. A statement of investment policy is distinguished from directions as to the purchase or sale of a specific investment at a specific time or as to voting specific plan proxies. In plans where investment management responsibility is delegated to one or more investment managers appointed by the named fiduciary pursuant to ERISA § 402(c)(3), inherent in the authority to appoint an investment manager, the named fiduciary responsible for appointment of investment managers has the authority to condition the appointment on acceptance of a statement of investment policy. Thus, such a named fiduciary may expressly require, as a condition of the investment management agreement, that an investment manager comply with the terms of a statement of investment policy which sets forth guidelines concerning investments and investment courses of action which the investment manager is authorized or is not authorized to make. Such investment policy may include a policy or guidelines on the voting of proxies on shares of stock for which the investment manager is responsible. In the absence of such an express requirement to comply with an investment policy, the authority to manage the plan assets placed under the control of the investment manager would lie exclusively with the investment manager. Although a trustee may be subject to the directions of a named fiduciary pursuant to ERISA § 403(a)(1), an investment manager who has authority to make investment decisions, including proxy voting decisions, would never be relieved of its fiduciary responsibility if it followed directions as to specific investment decisions from the named fiduciary or any other person. Statements of investment policy issued by a named fiduciary authorized to appoint investment managers would be part of the "documents and instruments governing the plan" within the meaning of ERISA § 404(a)(1)(D). An investment manager to whom such investment policy applies would be required to comply with such policy, pursuant to ERISA § 404(a)(1)(D) insofar as the policy directives or guidelines are consistent with titles I and IV of ERISA. Therefore, if, for example, compliance with the guidelines in a given instance would be imprudent then the investment manager's failure to follow the guidelines would not violate ERISA § 404(a)(1)(D). Moreover, ERISA § 404(a)(1)(D) does not shield the investment manager from liability for imprudent actions taken in compliance with a statement of investment policy. The plan document or trust agreement may expressly provide a statement of investment policy to guide the trustee or may authorize a named fiduciary to issue a statement of investment policy applicable to a trustee. Where a plan trustee is subject to an investment policy, the trustee's duty to comply with such investment policy would also be analyzed under ERISA § 404(a)(1)(D). Thus, the trustee would be required to comply with the statement of investment policy unless, for example, it would be imprudent to do so in a given instance. Maintenance of a statement of investment policy by a named fiduciary does not relieve the named fiduciary of its obligations under ERISA § 404(a) with respect to the appointment and monitoring of an investment manager or trustee. In this regard, the named fiduciary appointing an investment manager must periodically monitor the investment manager's activities with respect to management of the plan assets. Moreover, compliance with ERISA § 404(a)(1)(B) would require maintenance of proper documentation of the activities of the investment manager and of the named fiduciary of the plan in monitoring the activities of the investment manager. In addition, in the view of the Department, a named fiduciary's determination of the terms of a statement of investment policy is an exercise of fiduciary responsibility and, as such, statements may need to take into account factors such as the plan's funding policy and its liquidity needs as well as issues of prudence, diversification and other fiduciary requirements of ERISA. An investment manager of a pooled investment vehicle that holds assets of more than one employee benefit plan may be subject to a proxy voting policy of one plan that conflicts with the proxy voting policy of another plan. Compliance with ERISA § 404(a)(1)(D) would require such investment manager to reconcile, insofar as possible, the conflicting policies (assuming compliance with each policy would be consistent with ERISA § 404(a)(1)(D)) and, if necessary and to the extent permitted by applicable law, vote the relevant proxies to reflect such policies in proportion to each plan's interest in the pooled investment vehicle. If, however, the investment manager determines that compliance with conflicting voting policies would violate ERISA § 404(a)(1)(D) in a particular instance, for example, by being imprudent or not solely in the interest of plan participants, the investment manager would be required to ignore the voting policy that would violate ERISA § 404(a)(1)(D) in that instance. Such an investment manager may, however, require participating investors to accept the investment manager's own investment policy statement, including any statement of proxy voting policy, before they are allowed to invest. As with investment policies originating from named fiduciaries, a policy initiated by an investment manager and adopted by the participating plans would be regarded as an instrument governing the participating plans, and the investment manager's compliance with such a policy would be governed by ERISA § 404(a)(1)(D).
94-3 In-Kind Contributions to Employee Benefit PlansInterpretive Bulletin 94-3 December 28, 1994 (59 FR 66735)
Interpretive Bulletin Agency: Pension and Welfare Benefits Administration, Department of Labor Action: Interpretive Bulletin. Summary: This document provides guidance on in-kind contributions to employee benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA) and plans under section 4975 of the Internal Revenue Code (the Code). The Supreme Court addressed certain in-kind contributions to defined benefit pensions plans in Commissioner of Internal Revenue v. Keystone Consolidated Industries, Inc., U.S. 113 S. Ct. 2006 (1993). The Court in Keystone held that an employer's contribution of unencumbered real properties to a tax-qualified defined benefit pension plan in satisfaction of the employer's funding obligation is a "sale or exchange" prohibited by section 4975(c)(1)(A) of the Code. Section 406(a)(1)(A) of ERISA is a parallel provision to section 4975(c)(1)(A) of the Code but applies to a different group of plans. This document sets forth the Department's view that in-kind contributions (for example, contributions of any property other than cash) that reduce an obligation to the plan constitute prohibited transactions under section 4975(c)(1)(A) of the Code and section 406(a)(1)(A) of ERISA. Effective Date: The guidance announced in this bulletin is effective January 1, 1975. Interpretive Bulletin Part 2509
In Commissioner of Internal Revenue v. Keystone Consolidated Industries, Inc., U.S. , 113 S. Ct. 2006 (1993), the Supreme Court held that an employer's contribution of unencumbered real property to a tax-qualified defined benefit pension plan was a sale or exchange prohibited under section 4975 of the Code where the stated fair market value of the property was credited against the employer's obligation to the defined benefit pension plan. The parties stipulated that the property was contributed to the plan free of encumbrances and the stated fair market value of the property was not challenged. 113 S. Ct. at 2009. In reaching its holding the Court construed section 4975(f)(3) of the Code (and therefore section 406(c) of ERISA), regarding transfers of encumbered property, not as a limitation but rather as extending the reach of section 4975(c)(1)(A) of the Code (and thus section 406(a)(1)(A) of ERISA) to include contributions of encumbered property that do not satisfy funding obligations. Id. at 2013. Accordingly, the Court concluded that the contribution of unencumbered property was prohibited under section 4975(c)(1)(A) of the Code (and thus section 406(a)(1)(A) of ERISA) as "at least both an indirect type of sale and a form of exchange, since the property is exchanged for diminution of the employer's funding obligation." 113 S. Ct. at 2012. Conversely, a transfer of unencumbered property to a welfare benefit plan that does not relieve the sponsor or employer of any present or future obligation to make a contribution that is measured in terms of cash amounts would not constitute a prohibited transaction under section 406(a)(1)(A) of ERISA or section 4975(c)(1)(A) of the Code. The same principles apply to defined contribution plans that are not subject to the minimum funding requirements of section 302 of ERISA or section 412 of the Code. For example, where a profit sharing or stock bonus plan, by its terms, is funded solely at the discretion of the sponsoring employer, and the employer is not otherwise obligated to make a contribution measured in terms of cash amounts, a contribution of unencumbered real property would not be a prohibited sale or exchange between the plan and the employer. If, however, the same employer had made an enforceable promise to make a contribution measured in terms of cash amounts to the plan, a subsequent contribution of unencumbered real property made to offset such an obligation would be a prohibited sale or exchange. Footnote
95-1 Interpretive bulletin relating to the fiduciary standard under ERISA when selecting an annuity providerInterpretive Bulletin 95-1 (a) Scope. This Interpretive Bulletin provides guidance concerning certain fiduciary standards under part 4 of title I of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. 1104-1114, applicable to the selection of annuity providers for the purpose of pension plan benefit distributions where the plan intends to transfer liability for benefits to the annuity provider. (b) In General. Generally, when a pension plan purchases an annuity from an insurer as a distribution of benefits, it is intended that the plan's liability for such benefits is transferred to the annuity provider. The Department's regulation defining the term ``participant covered under the plan'' for certain purposes under title I of ERISA recognizes that such a transfer occurs when the annuity is issued by an insurance company licensed to do business in a State. 29 CFR 2510.3- 3(d)(2)(ii). Although the regulation does not define the term ``participant'' or "beneficiary'' for purposes of standing to bring an action under ERISA Sec. 502(a), 29 U.S.C. 1132(a), it makes clear that the purpose of a benefit distribution annuity is to transfer the plan's liability with respect to the individual's benefits to the annuity provider. Pursuant to ERISA section 404(a)(1), 29 U.S.C. 1104(a)(1), fiduciaries must discharge their duties with respect to the plan solely in the interest of the participants and beneficiaries. Section 404(a)(1)(A), 29 U.S.C. 1104(a)(1)(A), states that the fiduciary must act for the exclusive purpose of providing benefits to the participants and beneficiaries and defraying reasonable plan administration expenses. In addition, section 404(a)(1)(B), 29 U.S.C. 1104(a)(1)(B), requires a fiduciary to act with the care, skill, prudence and diligence under the prevailing circumstances that a prudent person acting in a like capacity and familiar with such matters would use. (c) Selection of Annuity Providers. The selection of an annuity provider for purposes of a pension benefit distribution, whether upon separation or retirement of a participant or upon the termination of a plan, is a fiduciary decision governed by the provisions of part 4 of title I of ERISA. In discharging their obligations under section 404(a)(1), 29 U.S.C. 1104(a)(1), to act solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits to the participants and beneficiaries as well as defraying reasonable expenses of administering the plan, fiduciaries choosing an annuity provider for the purpose of making a benefit distribution must take steps calculated to obtain the safest annuity available, unless under the circumstances it would be in the interests of participants and beneficiaries to do otherwise. In addition, the fiduciary obligation of prudence, described at section 404(a)(1)(B), 29 U.S.C. 1104(a)(1)(B), requires, at a minimum, that plan fiduciaries conduct an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities. In conducting such a search, a fiduciary must evaluate a number of factors relating to a potential annuity provider's claims paying ability and creditworthiness. Reliance solely on ratings provided by insurance rating services would not be sufficient to meet this requirement. In this regard, the types of factors a fiduciary should consider would include, among other things:
(d) Costs and Other Considerations. The Department recognizes that there are situations where it may be in the interest of the participants and beneficiaries to purchase other than the safest available annuity. Such situations may occur where the safest available annuity is only marginally safer, but disproportionately more expensive than competing annuities, and the participants and beneficiaries are likely to bear a significant portion of that increased cost. For example, where the participants in a terminating pension plan are likely to receive, in the form of increased benefits, a substantial share of the cost savings that would result from choosing a competing annuity, it may be in the interest of the participants to choose the competing annuity. It may also be in the interest of the participants and beneficiaries to choose a competing annuity of the annuity provider offering the safest available annuity is unable to demonstrate the ability to administer the payment of benefits to the participants and beneficiaries. The Department notes, however, that increased cost or other considerations could never justify putting the benefits of annuitized participants and beneficiaries at risk by purchasing an unsafe annuity. In contrast to the above, a fiduciary's decision to purchase more risky, lower-priced annuities in order to ensure or maximize a reversion of excess assets that will be paid solely to the employer-sponsor in connection with the termination of an over-funded pension plan would violate the fiduciary's duties under ERISA to act solely in the interest of the plan participants and beneficiaries. In such circumstances, the interests of those participants and beneficiaries who will receive annuities lies in receiving the safest annuity available and other participants and beneficiaries have no countervailing interests. The fiduciary in such circumstances must make diligent efforts to assure that the safest available annuity is purchased. Similarly, a fiduciary may not purchase a riskier annuity solely because there are insufficient assets in a defined benefit plan to purchase a safer annuity. The fiduciary may have to condition the purchase of annuities on additional employer contributions sufficient to purchase the safest available annuity. (e) Conflicts of Interest. Special care should be taken in reversion situations where fiduciaries selecting the annuity provider have an interest in the sponsoring employer which might affect their judgment and therefore create the potential for a violation of ERISA Sec. 406(b)(1). As a practical matter, many fiduciaries have this conflict of interest and therefore will need to obtain and follow independent expert advice calculated to identify those insurers with the highest claims-paying ability willing to write the business. [60 FR 12329, Mar. 6, 1995] 96-1 Participant Investment Education for Individual Account [404(c)] PlansInterpretive Bulletin 96-1 June 11, 1996 (61 FR 29586)
Interpretive Bulletin Agency: Pension and Welfare Benefits Administration, Labor. Action: Interpretive bulletin. Summary: This interpretive bulletin sets forth the views of the Department of Labor (the Department) concerning the circumstances under which the provision of investment-related information to participants and beneficiaries in participant-directed individual account pension plans will not constitute the rendering of "investment advice" under the Employee Retirement Income Security Act of 1974, as amended (ERISA). This guidance is intended to assist plan sponsors, service providers, participants and beneficiaries in determining when activities designed to educate and assist participants and beneficiaries in making informed investment decisions will not cause persons engaged in such activities to become fiduciaries with respect to a plan by virtue of providing "investment advice" to plan participants and beneficiaries for a fee or other compensation. Effective Date: January 1, 1975.
For further information contact: Bette J. Briggs or Teresa L. Turyn, Pension and Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution Ave. N.W. Room N-5669, Washington, DC 20210, telephone (202) 219-8671, or Paul D. Mannina, Plan Benefits Security Division, Office of the Solicitor, U.S. Department of Labor, Washington, DC 20210, telephone (202) 219-4592. These are not toll-free numbers. Supplementary Information: In order to provide a concise and ready reference to its interpretations of ERISA, the Department publishes its interpretive bulletins in the Rules and Regulations section of the Federal Register. Published in this issue of the Federal Register is ERISA Interpretive Bulletin 96-1, which interprets section 3(21)(A)(ii), 29 USC 1002(21)(A)(ii), and the Department's regulation issued thereunder at 29 C.F.R. 2510.3-21(c). The Department is publishing this interpretive bulletin because it believes there is a need to clarify the circumstances under which the provision of investment-related information to participants and beneficiaries will not give rise to fiduciary status under ERISA section 3(21)(A)(ii). (Sec. 505, Pub. L. 93-406, 88 Stat. 894 (29 USC 1135).) Background: With the growth of participant-directed individual account pension plans, more employees are directing the investment of their pension plan assets and, thereby, assuming more responsibility for ensuring the adequacy of their retirement income.* At the same time, there has been an increasing concern on the part of the Department, employers and others that many participants may not have a sufficient understanding of investment principles and strategies to make their own informed investment decisions. It has been represented to the Department that, while a number of employers sponsoring participant-directed individual account pension plans have instituted programs intended to educate their employees about investment principles, financial planning and retirement, many employers have not offered programs or offered only limited programs due to uncertainty regarding the extent to which the provision of investment-related information may be considered the rendering of "investment advice" under section 3(21)(A)(ii) of ERISA, resulting in fiduciary responsibility and potential liability in connection with participant-directed investments. Although section 404(c) of ERISA, 29 USC 1104(c), and the Department's regulations, at 29 C.F.R. 2550.404c-1, provide limited relief from liability for fiduciaries of pension plans that permit a participant or beneficiary to exercise control over the assets in his or her individual account, there remains a need for employers and others who provide investment information with respect to pension plan assets to know what standards apply in determining whether an education activity may give rise to fiduciary status. In view of the important role that investment education can play in assisting participants and beneficiaries in making informed investment and retirement-related decisions and the uncertainty relating to the fiduciary implications of providing investment-related information to participants and beneficiaries, the Department is clarifying, herein, the application of ERISA's definition of the term "fiduciary with respect to a plan" in section 3(21)(A)(ii) to the provision of investment-related information to participants and beneficiaries. Interpretive Bulletin 96-1 identifies categories of information and materials regarding participant-directed individual account pension plans that do not, in the view of the Department, constitute "investment advice" under the definition of "fiduciary" in ERISA section 3(21)(A)(ii) and the corresponding regulation at 29 C.F.R. 2510.3-21(c)(1). The interpretive bulletin points out, in effect, a series of graduated safe harbors under ERISA for plan sponsors and service providers who provide participants and beneficiaries with four increasingly specific categories of investment information and materials -- plan information, general financial and investment information, asset allocation models and interactive investment materials -- as described in paragraph (d) of IB 96-1. Comments on the Interpretive Bulletin Interpretive Bulletin 96-1 was developed following extensive review of educational materials currently being provided by plan sponsors and service providers to participants. To further ensure that the guidance provided would be helpful, and would promote increased and improved participant education efforts, the Department also released an exposure draft of the interpretive bulletin for public comment. The response to the exposure draft was overwhelmingly positive. Both plan sponsor and service provider representatives unequivocally agreed that the guidance as drafted would strengthen participant investment education, and urged the Department to proceed as expeditiously as possible to adopt the interpretive bulletin. The commenters also suggested various technical and clarifying changes which, as discussed below, have been included in the interpretive bulletin. Identifying Specific Investment Alternatives in Model Asset Allocations The most frequent comment on the exposure draft concerned the safe harbor provision in paragraphs (d)(3) (asset allocation models) and (d)(4) (interactive investment materials) that if a model asset allocation identifies or matches any specific investment alternative available under the plan with a generic asset class, then all investment alternatives under the plan with similar risk and return characteristics must be similarly identified or matched. The commenters were concerned that in plans with investment alternatives offered by multiple service providers it would be difficult, and possibly inappropriate, for one service provider to identify and describe a competitor's products. The requirement to identify other investment alternatives within an asset class was intended to address the concern that a service provider could effectively steer participants to a specific investment alternative by identifying only one particular fund in connection with an asset allocation model. Where it is possible to identify other investment alternatives within an asset class, the Department encourages service providers to do so. In response to the comments, however, safe harbors (d)(3) and (d)(4) have been revised to provide that, where an asset allocation model identifies any specific investment alternative available under the plan, an accompanying statement must indicate that other investment alternatives having similar risk and return characteristics may be available under the plan, and must identify where information on those investment alternatives may be obtained. The Fiduciary Safe Harbors and Section 404(c) Several commenters requested clarification of the statement in the exposure draft that issues relating to the circumstances under which information provided to participants and beneficiaries may affect their ability to exercise independent control for purposes of 404(c) are outside the scope of the IB. The commenters were concerned that activities which come within one of the safe harbors for participant education may nevertheless be viewed by the Department as compromising a participant's or beneficiary's ability to exercise independent control under section 404(c). Whether a participant or beneficiary has exercised independent control over the assets in his or her individual account pursuant to section 404(c) is necessarily a factual inquiry. In general, however, the types of educational programs described in the safe harbors do not, in the view of the Department, raise issues under section 404(c). Accordingly, footnote 2 of IB 96-1 makes clear that the provision of investment-related information and materials to participants and beneficiaries in accordance with paragraph (d) of the IB will not, in and of itself, affect the availability of relief from the fiduciary responsibility provisions of ERISA that is provided by section 404(c). Applying Asset Allocations to Individual Participants and Beneficiaries A number of commenters asked the Department to clarify the requirement to provide a statement that individual participants and beneficiaries should consider their other assets, income or investments (outside of the plan) when applying an asset allocation model or using interactive investment materials. The commenters pointed out that, in many instances, interactive models or materials already take into account an individual's other assets. Accordingly, they requested clarification that such models or materials come within the safe harbor in paragraph (d)(4). Commenters were also concerned that given the rationale for the safe harbor in paragraph (d)(4) -- i.e. that interactive investment models or materials enable participants and beneficiaries independently to design and assess multiple asset allocation models -- the Department may have intended to exclude from the safe harbors situations in which service providers assist individual participants or beneficiaries to develop possible asset allocation models based upon their personal financial information. The provisions of the safe harbors are designed to ensure that participants and beneficiaries will have adequate information to enable them to make their own, informed asset allocation decisions. The Department has clarified that the safe harbor in paragraph (d)(4) for interactive investment materials would not be unavailable merely because the asset allocation models generated by the materials take into account a participant's or beneficiary's non-plan assets, income and investments. Nor does the Department consider that the safe harbor would be unavailable merely because participants and beneficiaries receive personal assistance in developing model asset allocations. In this regard, paragraph (d) of the IB states that providing the categories of information identified in paragraph (d) will not in and of itself constitute the rendering of "investment advice" irrespective of the form in which the materials are provided (e.g., whether on an individual or group basis, in writing or orally, or via video or computer software). The interpretive bulletin also makes clear that information and materials within each category may be furnished alone or combined with information and materials from other categories. For example, general financial and investment information on estimating future retirement income needs, determining investment time horizons and assessing risk tolerance, as described in paragraph (d)(2), may be combined with interactive investment materials described in paragraph (d)(4) in order to assist participants and beneficiaries to relate basic retirement planning concepts to their individual situations. Generally Accepted Investment Theories Several commenters requested clarification of the requirement that asset allocation models and interactive investment materials must be based on "generally accepted investment theories that take into account the historic returns of different asset classes (e.g., equities, bonds, or cash) over defined periods of time." The Department included this requirement to assure that, for purposes of the safe harbors, any models or materials presented to participants or beneficiaries will be consistent with widely accepted principles of modern portfolio theory, recognizing the relationship between risk and return, the historic returns of different asset classes, and the importance of diversification. Plan Sponsor or Fiduciary Endorsements of Service Providers The commenters also requested clarification regarding the circumstances in which a plan sponsor or fiduciary may be viewed as having fiduciary responsibility by virtue of endorsing a third party who has been selected by a participant or beneficiary to provide participant education or investment advice. Commenters noted, for example, that a plan sponsor may wish merely to provide office space or make computer terminals available for use by a service provider that has been selected by a participant or beneficiary to provide investment education using interactive materials. Whether a plan sponsor or fiduciary has effectively endorsed or made an arrangement with a particular service provider is an inherently factual inquiry which depends upon all the relevant facts and circumstances. It is the Department's view, however, that a uniformly applied policy of providing office space or computer terminals for use by participants or beneficiaries who have independently selected a service provider to provide investment education would not, in and of itself, constitute an endorsement of or arrangement with the service provider for purposes of the IB. Participation Rates, Contribution Levels and Pre-retirement Withdrawals With the objective of distinguishing between investment education and investment advice, IB 96-1 focuses primarily on educational activities relating to investment decision-making. However, as suggested in a recent study by the Employee Benefits Research Institute (EBRI), which was commissioned by the Department of Labor, plan participants also need to be informed about the impact on retirement savings of pre-retirement withdrawals and other fundamental principles regarding plan participation and contribution levels. According to the EBRI study, the impact of pre-retirement withdrawals on retirement income is one of the least often provided topics and could have serious consequences for the adequacy of employees' retirement income. The Department, therefore, encourages educational service providers to emphasize that participants should: (1) participate in available plans as soon as they are eligible; (2) make the maximum contribution possible to the plan; and(3) if they change employment, refrain from withdrawing their retirement savings, and opt instead to directly transfer or roll over their plan account into an IRA or other retirement vehicle. Such information relating to plan participation is specifically encompassed within the safe harbor in paragraph (d)(1) of IB 96-1. Application of the Investment Advisers Act of 1940 Employer sponsors of participant-directed individual account pension plans that provide investment-related information to employees who are participants in those plans have also raised questions regarding their status under the Investment Advisers Act of 1940, 15 USC 80b-1 et seq., ("Advisers Act"). In this regard, the staff of the Division of Investment Management of the Securities and Exchange Commission (SEC) has advised the Department of Labor that, generally, employers who provide their employees with investment information including, but not limited to, the type described in paragraph (d) of IB 96-1 would not be subject to registration or regulation under the Advisers Act. This position applies only to employers who provide such information, and not to third-party service providers, whose status under the Adviser's Act must be determined independently. See Letters from Jack W. Murphy, Associate Director (Chief Counsel), Division of Investment Management, SEC, to Olena Berg, Assistant Secretary, Pension and Welfare Benefit Administration, U.S. Department of Labor, dated February 22, 1996, and December 5, 1995. Persons who have questions regarding this issue are directed to contact the Office of the Chief Counsel, Division of Investment Management, at (202) 942-0660. This is not a toll free number.
For the reasons set forth above, Part 2509 of Title 29 of The Code of Federal Regulations is amended as follows:
With both an increase in the number of participant-directed individual account plans and the number of investment options available to participants and beneficiaries under such plans, there has been an increasing recognition of the importance of providing participants and beneficiaries, whose investment decisions will directly affect their income at retirement, with information designed to assist them in making investment and retirement-related decisions appropriate to their particular situations. Concerns have been raised, however, that the provision of such information may in some situations be viewed as rendering "investment advice for a fee or other compensation," within the meaning of ERISA section 3(21)(A)(ii), thereby giving rise to fiduciary status and potential liability under ERISA for investment decisions of plan participants and beneficiaries. In response to these concerns, the Department of Labor is clarifying herein the applicability of ERISA section 3(21)(A)(ii) and 29 C.F.R. 2510.3-21(c) to the provision of investment-related educational information to participants and beneficiaries in participant directed individual account plans.[FN 2] In providing this clarification, the Department does not address the "fee or other compensation, direct or indirect," which is a necessary element of fiduciary status under ERISA section 3(21)(A)(ii).[FN 3] Applying 29 C.F.R. 2510.3-21(c) in the context of providing investment- related information to participants and beneficiaries of participant-directed individual account pension plans, a person will be considered to be rendering "investment advice," within the meaning of ERISA section 3(21)(A)(ii), to a participant or beneficiary only if: (i) the person renders advice to the participant or beneficiary as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property (2510.3-21(c)(1)(i); and (ii) the person, either directly or indirectly, (A) has discretionary authority or control with respect to purchasing or selling securities or other property for the participant or beneficiary (2510.3-21(c)(1)(ii)(A)), or (B) renders the advice on a regular basis to the participant or beneficiary, pursuant to a mutual agreement, arrangement or understanding (written or otherwise) with the participant or beneficiary that the advice will serve as a primary basis for the participant's or beneficiary's investment decisions with respect to plan assets and that such person will render individualized advice based on the particular needs of the participant or beneficiary (2510.3-21(c)(1)(ii)(B)).[FN 4] Whether the provision of particular investment-related information or materials to a participant or beneficiary constitutes the rendering of "investment advice," within the meaning of 29 C.F.R. 2510.3-21(c)(1), generally can be determined only by reference to the facts and circumstances of the particular case with respect to the individual plan participant or beneficiary. To facilitate such determinations, however, the Department of Labor has identified, in paragraph (d), below, examples of investment-related information and materials which if provided to plan participants and beneficiaries would not, in the view of the Department, result in the rendering of "investment advice" under ERISA section 3(21)(A)(ii) and 29 C.F.R. 2510.3- 21(c). The information and materials described above relate to the plan and plan participation, without reference to the appropriateness of any individual investment option for a particular participant or beneficiary under the plan. The information, therefore, does not contain either "advice" or "recommendations" within the meaning of 29 C.F.R. 2510.3-21(c)(1)(i). Accordingly, the furnishing of such information would not constitute the rendering of "investment advice" for purposes of section 3(21)(A)(ii) of ERISA. The information and materials described above are general financial and investment information that have no direct relationship to investment alternatives available to participants and beneficiaries under a plan or to individual participants or beneficiaries. The furnishing of such information, therefore, would not constitute rendering "advice" or making "recommendations" to a participant or beneficiary within the meaning of 29 C.F.R. 2510.3-21(c)(1)(i). Accordingly, the furnishing of such information would not constitute the rendering of "investment advice" for purposes of section 3(21)(A)(ii) of ERISA. Because the information and materials described above would enable a participant or beneficiary to assess the relevance of an asset allocation model to his or her individual situation, the furnishing of such information would not constitute a "recommendation" within the meaning of 29 C.F.R. 2510.3-21(c)(1)(i) and, accordingly, would not constitute "investment advice" for purposes of section 3(21)(A)(ii) of ERISA. This result would not, in the view of the Department, be affected by the fact that a plan offers only one investment alternative in a particular asset class identified in an asset allocation model.
Signed at Washington, DC, this 30th day of May, 1996. Olena Berg, Footnotes * Under section 3(2) of ERISA, 29 USC 1002(2), the term "pension plan" encompasses any plan, fund or program established or maintained by an employer or employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances, it provides retirement income to employees or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond. The Department notes that, for purposes of Title I of ERISA, an employer-sponsored individual retirement account (IRA) is considered to be an individual account pension plan. See 29 C.F.R. 2510.3-2(d).
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86-1 Soft Dollars and Directed Commissions for Securities TransactionsTechnical Bulletin 86-1 May 22, 1986
Technical Bulletin This statement reflects the views of the Pension and Welfare Benefits Administration (PWBA) with regard, to "soft dollar" and directed commission arrangements pursuant to its responsibility to administer and enforce the provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Investment managers, plan sponsors and other members of the pension community which provide services to employee plans have expressed a great deal of interest in the application of the fiduciary responsibility provisions of ERISA to these arrangements. "Soft dollar" and directed commission arrangements typically involve situations in which an investment manager of an employee benefit plan or other plan fiduciary purchases goods or services with a portion of the brokerage commission paid by a plan to a broker for executing a securities transaction. Prior to the elimination of fixed commission rates on stock exchange transactions, investment managers often purchased additional services with commission dollars beyond simple execution, clearance and settlement of securities transactions. After the elimination of fixed commission rates in May 1975, Congress, as part of the Securities Acts Amendments of 1975, added Section 28(e) to the Securities Exchange Act of 1934 (the 1934 Act) to address the practice whereby brokers provided investment managers with brokerage and research services. The Securities and Exchange Commission (the Commission) administers the 1934 Act and has exclusive authority to interpret the scope of Section 28(e) and the terms used therein. Section 28(e) of the 1934 Act provides generally that no person who exercises investment discretion with respect to securities transactions will be deemed to have acted unlawfully or to have breached a fiduciary duty solely by reason of paying brokerage commissions for effecting a securities transaction in excess of the amount of commission another broker-dealer would have charged, if such person determined in good faith that the commission was reasonable in relation to the value of brokerage and research services provided by the broker-dealer. The limited safe harbor provided by Section 28(e) is available only for the provision of brokerage and research services to persons who exercise investment discretion with respect to an account as that term is defined in Section 3(a)(35) of the 1934 Act. The Commission has indicated that if a plan fiduciary does not exercise investment discretion with respect to the securities transaction or uses "soft dollars" to pay for non-research related services, the transaction falls outside the protection afforded by Section 28(e) of the 1934 Act and may be in violation of the securities laws and the fiduciary responsibility provisions of ERISA. It has come to the attention of PWBA that ERISA fiduciaries may be involved in several types of "soft dollar" and directed commission arrangements which do not qualify for the "safe harbor" provided by Section 28(e) of the 1934 Act. In some instances, investment managers direct a portion of a plan's securities trades through specific broker-dealers, who then apply a percentage of the brokerage commissions to pay for travel, hotel rooms and other goods and services for such investment managers which do not qualify as research within the meaning of Section 28(e).1 In other instances, plan sponsors who do not exercise investment discretion with respect to a plan direct the plan's securities trades to one or more broker-dealers in return for research, performance evaluation, other administrative services or discounted commissions. The Commission has indicated that the safe harbor of Section 28(e) is not available for directed brokerage transactions.2 A fiduciary for an ERISA plan, such as a trustee or investment manager, must meet the fiduciary responsibility standards set forth in part 4 of Title I of ERISA. These standards are designed to help ensure that the fiduciary's decisions are made in the best interests of the plan and are not colored by self-interest. Section 403(c)(1) provides, in part, that the assets of a plan shall be held for the exclusive purpose of providing benefits to the plan's participants and their beneficiaries and defraying reasonable expenses of administering the plan. Section 404(a)(1) sets forth a similar requirement on how a plan fiduciary must discharge his duties with respect to the plan, and provides further that such fiduciary must act prudently and solely in the interest of the participants and beneficiaries. Those basic provisions are supplemented by the per se prohibitions of certain classes of transactions set forth in section 406 of ERISA. Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan from causing that plan to engage in a transaction if he knows or should know that the transaction would constitute a direct or indirect transfer to, or use by or for the benefit of, a party in interest, of any assets of that plan. Section 3(14) includes, within the definition of "party in interest" with respect to a plan, any fiduciary with respect to that plan. Thus, section 406(a)(1)(D) would not only prohibit a fiduciary from causing the plan to engage in a transaction which would benefit a third person who is a party in interest, but it also would prohibit the fiduciary from similarly benefiting himself. In addition, section 406(b)(1) specifically prohibits a fiduciary with respect to a plan from dealing with the assets of that plan in his own interest or for his own account. Section 406(b)(3) supplements these provisions by prohibiting a plan fiduciary from receiving any consideration for his own personal account from any party dealing with the plan in connection with a transaction involving the assets of the plan. When investment management responsibility has been properly delegated to an investment manager, the manager is responsible for all aspects of the investment process.3 The manager, in those cases, is required to act prudently with respect to a decision to buy or sell securities as well as with respect to the decision concerning who will execute the transaction. If such a delegation has occurred, the named fiduciary of the plan is not liable for the particular acts or omissions of the manager but has oversight responsibility to periodically review the investment manager's performance. Where an investment manager has entered into a "soft dollar" arrangement, Section 28(e) of the 1934 Act does not relieve anyone other than the person who exercises investment discretion from the applicability of the fiduciary provisions of ERISA. Therefore, the fiduciary who appoints the investment manager is not relieved of his ongoing duty to monitor the investment manager to assure that the manager has secured best execution of the plan's brokerage transactions and to assure that the commissions paid on such transactions are reasonable in relation to the value of the brokerage and research services provided to the plan.4 It is PWBA's understanding that where a plan sponsor or other plan fiduciary directs the investment manager to execute securities trades for the plan through one or more specified broker-dealers, the direction generally requires the investment manager to execute a specified percentage of the plan's trades or a specified amount of the plan's commission business through the particular broker-dealers, consistent with the manager's duty to secure best execution for the transactions. A plan sponsor's decision to direct brokerage transactions must be made prudently and solely in the interest of the participants and beneficiaries. In directing a plan's brokerage transactions, the sponsor has an initial responsibility to determine that the broker-dealer is capable of providing best execution for the plan's brokerage transactions. In addition, the sponsor has an ongoing responsibility to monitor the services provided by the broker-dealer so as to assure that the manager has secured best execution of the plan's brokerage transactions and that the commissions paid are reasonable in relation to the value of the brokerage and other services received by the plan. In considering "soft dollar" and directed commission arrangements, ERISA's prohibited transaction provisions also must be taken into account. A fiduciary with respect to an ERISA plan is generally prohibited, by section 406(b)(1), from causing the plan to engage in a transaction if the fiduciary has an interest in the matter which may affect the fiduciary's best judgment as a fiduciary. For example, an employer which is the named fiduciary for its plan and which does not exercise investment discretion would, normally be prohibited from directing the plan's brokerage transactions through a designated broker-dealer who agrees to utilize a portion of the brokerage commissions received from the plan to procure goods or services for the benefit of the employer. (As previously noted, Section 28(e) is unavailable for such brokerage transactions.) Each use of the broker-dealer that results in the receipt of goods and services by the employer following that designation would create an additional violation of sections 406(a)(1)(D) and 406(b)(1) of ERISA. In addition, where the relief provided by Section 28(e) is unavailable, the receipt by a fiduciary (i.e., the employer) of goods or services for its own personal account from a party (i.e., the broker-dealer) dealing with a plan in connection with a transaction involving the assets of the plan would, in the opinion of PWBA, constitute a violation of section 406(b)(3). Such an arrangement would also violate sections 403(c)(1) and 404(a)(1) to the extent that the employer is benefiting from its use of its position. However, where an investment manager directs brokerage transactions through a designated broker-dealer to procure goods and services on behalf of the plan, and for which the plan would be otherwise obligated to pay, such use of brokerage commissions ordinarily would not violate the fiduciary provisions of ERISA, provided that the amount paid for the brokerage and other goods and services is reasonable, and the investment manager has fulfilled its fiduciary duty to obtain best execution for the plan's securities transactions. This result does not depend on the availability of the "safe harbor" under Section 28(e) for these transactions. In applying the fiduciary responsibility provisions of ERISA to the various "soft dollar" and directed commission arrangements that fall outside of the protection of Section 28(e), it is apparent to PWBA that issues are raised under section 406 of ERISA whenever there is an inducement for the investment manager or other plan fiduciary to direct plan brokerage transactions through particular broker-dealers. The following examples illustrate the application of the fiduciary responsibility provisions of ERISA to "soft dollar" and directed commission arrangements:
The foregoing discussion is intended to provide general guidance as to the nature of the analysis applicable to these situations. The discussion should not be viewed as expressing an opinion with respect to any specific case. Footnotes
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77-46 Diversification Applicability to Insured and Uninsured DepositsAdvisory Opinion 77-46 June 7, 1977
U.S. Department of Labor June 7, 1977 AO 77-46 Mr. Frederic S. Kramer Dear Mr. Kramer: Thank you for your letter requesting our advice as to whether the diversification rule of the Employee Retirement Income Security Act of 1974 (ERISA) permits savings bank trustees or custodians to invest contributions under self-employed retirement plans and individual retirement account plans (IRAs) in savings accounts and deposits with the trustee or custodian savings bank where the account balance exceeds the $40,000 amount covered by FDIC insurance. With respect to IRAs, we assume your question refers to an IRA which is established by an employer or union (or other employee association), since an IRA established by an individual for himself is not subject to Title I of ERISA. I regret the delay in responding to your letter. You explain that the National Association of Mutual Savings Banks represents the 475 mutual savings banks in the United States which are authorized under the Internal Revenue Code of 1954 to act as trustees or custodians of self-employed retirement plan funds and IRAs. You advise that many jurisdictions in which savings banks do not enjoy trust powers have enacted legislation permitting savings banks to act as fiduciaries with respect to such plans and that New York law is typical of such legislation. You state that New York law provides that savings banks shall have the power to act as trustees of such plans provided that the provisions of these plans "require the funds of such trust to be invested exclusively in deposits in savings banks" (section 237.7 and 237.8, New York Banking Law). Accordingly, typical provisions in self-employed retirement plans and IRAs in savings banks jurisdictions authorizing savings banks to act as trustees of these accounts provide that the funds of such trusts will be invested exclusively in savings accounts or deposits in the trustee (or custodian) savings bank. You advise that mutual savings banks are state chartered institutions that derive their powers, including investment powers, from their respective states; as state chartered institutions, mutual savings bank investments are not regulated by federal law. You have submitted a chart showing the types of legal investments for mutual savings banks, by state, which was most recently compiled as of September 30, 1975. The chart shows that mutual savings banks in Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, Oregon, Pennsylvania, Rhode Island, and Washington are permitted to invest in the following: U.S. Government bonds; state, county, and municipal bonds; railroad bonds; equipment obligations; telephone bonds; electric utility bonds; Canadian bonds; real estate construction loans; conventional mortgage loans; 20 percent mortgage loans; FHA loans; VA loans; large-scale housing; equity securities; bank stock; collateral loans; unsecured notes; acceptances and bills of exchange. The chart also shows that mutual savings banks in Maine, New Jersey, New York, Ohio, and Vermont are permitted to invest in all but one of these types of investments and that Minnesota, Indiana, Alaska, and Wisconsin are somewhat more restrictive in the types of investments permitted for such banks. In all of the above-named states, except Indiana, Vermont, and Wisconsin, mutual savings banks are permitted to invest in equity securities, as well as in debt instruments. You have also submitted a booklet containing a list of securities considered legal investments for savings banks under section 235 of the New York Banking Law as of July 1, 1975, and financial statements showing the actual investments of three mutual savings banks (a large bank, a small one, and a medium-sized one). You explain that the investment authority of mutual savings banks differs from that of commercial banks in that while practically all mutual savings banks can invest in equity securities, commercial banks are prohibited, with limited exceptions, from investing in stocks of corporations. Also, while mutual savings banks' authority to invest in equity securities is generally far broader than that of commercial banks, commercial banks have the power to make short term commercial loans at rates which may be tied to the prime rate and further may make such loans to any one issuer or borrower in an amount up to ten percent of the bank's capital stock, paid-in and unimpaired, plus ten percent of its unimpaired surplus fund. Section 404(a)(1)(C) of ERISA requires a fiduciary to discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. The Conference Report (H. Rep. No. 93-1280, 93rd Congress, 2nd Session) states, on page 305, that the conferees intend that, in general, whether the plan assets are sufficiently diversified is to be determined by examining the ultimate investment of the plan assets. For example, the conferees understand that for efficiency and economy plans may invest all their assets in a single bank or other pooled investment fund, but that the pooled fund itself could have diversified investments. It is intended that, in this case, the diversification rule is to be applied to the plan by examining the diversification of the investments in the pooled fund. The same is true with respect to investments in a mutual fund. Also, generally a plan may be invested wholly in insurance or annuity contracts without violating the diversification rules, since generally an insurance company's assets are to be invested in a diversified manner. The Conference Report also explains, on page 314, that it is expected that the prudent man, diversification, and other rules of section 404(a) of ERISA generally will not be violated if all plan assets in an individual account plan are invested in a federally-insured account, so long as the investments are fully insured. (If an individual's account balance is greater than the amount covered by federal insurance, this will not violate the prudence and diversification requirements if the individual participant or beneficiary has control over his account and determines, for himself, that the assets should be so invested.) With respect to control, section 404(c) of ERISA states that in the case of a pension plan which provides for individual accounts and permits a participant or beneficiary to exercise control over assets in his account, if a participant or beneficiary exercises control over the assets in his account (as determined under regulations of the Secretary) -- (1) such participant or beneficiary shall not be deemed to be a fiduciary by reason of such exercise and (2) no person who is otherwise a fiduciary shall be liable under Part I of ERISA for any loss, or by reason of any breach, which results from such participant's or beneficiary's exercise of control. However, the Conference Report states, on pages 305-306, that the conferees recognize that there may be difficulties in determining whether the participant in fact exercises independent control over his account. Consequently, whether participants and beneficiaries exercise independent control is to be determined pursuant to regulations prescribed by the Secretary of Labor. The conferees expect that the regulations generally will require that for there to be independent control by participants, a broad range of investments must be available to the individual participants and beneficiaries. You believe that although the term "control" is not defined by ERISA, the requisite control would exist even though substantial penalties for withdrawal from retirement plan accounts are imposed both by the FDIC and the Internal Revenue Code. A participant can withdraw his funds, which are fully vested at all times, at any time subject to these penalties. A participant's control over his IRA is such that he can, once every three years, withdraw the entire amount of the funds in his account and reinvest the proceeds in another IRA funded through insurance contracts or a mutual fund, or through the deposits of another financial institution. Alternatively, in the event it is determined that the individual participant or beneficiary does not have control over the account as that term might be defined in regulations, you suggest that recognition of the diversification of insurance company investments, discussed on page 305 of the Conference Report, should apply equally to those of a mutual savings bank. You believe that the investment alternatives of a savings bank are, in much the same way as the investment alternatives of an insurance company, strictly regulated to insure the sound and prudent investment of these kinds of funds. As noted above, no regulations have yet been issued under section 404(c). In the absence of such regulations, we are unable to respond to the question of control. [FDIC Note: DOL Regulation 2550.404c-1 was not adopted until 10-13-92.] With respect to your second question as to whether section 404(a)(1)(C) of ERISA permits investment of all the assets of an individual account plan in savings accounts of mutual savings banks where the account balance exceeds the amount covered by Federal insurance, it is the view of the Department of Labor that such an investment would not, in and of itself, contravene the diversification requirements of section 404(a)(1)(C), assuming that the bank invested its assets in a diversified manner. As noted by the Conference Report at p. 314, to the extent that the investment in the account balance is not in excess of the amount covered by Federal insurance, the diversification standard will not be violated, as there cannot be large losses. However, the individual account plan may invest all its assets in a savings bank even if such amount exceeds the amount covered by Federal insurance, without violating the diversification rules, if the bank's assets are invested in a diversified manner. The fiduciary making such investment would, of course, have to determine whether the bank's assets were diversified so as to minimize the risk of large losses. We are expressing no opinion as to whether in practice the investments of self-employed retirement plans or IRAs in any specific mutual savings bank or any specific group of mutual savings banks are actually sufficiently diversified to meet the requirements of section 404(a)(1)(C). Sincerely, Fred W. Stuckwisch 79-49 Payment of Fiduciary Fee to Bank Sponsor of PlanAdvisory Opinion to Bank Plan (79-49) May 14, 1979
U.S. Department of Labor May 14, 1979 79-49 Mr. Alfred T. Spada Re: Riggs National Bank Amended Pension Plan Dear Mr. Spada: This is in response to your letter of September 8, 1977, in which you seek our opinion as to whether the appointment and service of the Riggs National Bank (the Bank) as trustee of the Riggs National Bank Amended Pension Plan (the Plan) would constitute a prohibited transaction under section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) or would otherwise be prohibited under ERISA. In your letter, you represent that the Board of Directors of the Bank adopted the Plan in September 1976 and the related amended trust agreement in May 1977. These documents include an amendment substituting Riggs as trustee of the Plan in place of various individuals currently serving as trustees. You further represent that the Bank will not receive any fee or other compensation from the Plan for its services as trustee. A number of provisions in Part 4 of Subtitle B of Title I of ERISA seem to imply that an employer of a plan's participants may serve as trustee of the plan. Section 402(c)(1) states that any employee benefit plan may provide that any person or group of persons may serve in more than one fiduciary capacity with respect to the plan (including service both as trustee and administrator). Section 408(c)(3) provides that the restrictions of section 406 shall not prohibit a fiduciary from serving as a fiduciary in addition to being an officer, employee, agent, or other representative of a party in interest. Under section 3(14)(C), an employer any of whose employees are covered by a plan is a party in interest with respect to the plan. Section 408(b)(4)(A) permits the investment of Plan assets in deposits which bear a reasonable interest rate in a bank or similar financial institution supervised by the United States or a State, if such bank or other institution is a fiduciary of the plan and if the plan covers only employees of the bank or other institution and employees of affiliates of such bank or other institution. Part 4 of Subtitle B of Title I of ERISA contains no provision that prohibits an organization from being both an employer of a plan's participants and a trustee of the plan. We note, however, that the conduct of any organization in its capacity as trustee would be subject to the fiduciary responsibility requirements of Part 4, including section 404 (relating to fiduciary duties) and section 406 (relating to prohibited transactions). Section 406(a)(1)(C) of ERISA provides generally that a plan fiduciary shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest. Section 408(b)(2), however, exempts from the prohibitions of section 406 contracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of a plan, if no more than reasonable compensation is paid therefore. Regulation 2550.408b-2 explains that the 408(b)(2) exemption applies only to transactions described in section 406(a) of ERISA. If the furnishing of a service involves an act described in section 406(b) (relating to conflicts of interest by fiduciaries), such act constitutes a separate transaction which in not exempt under section 408(b)(2). The prohibitions of section 406(b) are intended to deter fiduciaries from exercising the authority, control, or responsibility which makes them fiduciaries when they have interests which may conflict with the interests of the plans for which they act. Thus, section 406(b) would prohibit a fiduciary from using the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary (or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary) to provide a service. Section 2550.408b-2(c)(3) of the regulation states, however, that if a fiduciary provides services to a plan without the receipt of compensation or other consideration (other than reimbursement of direct expenses properly and actually incurred in the performance of such services), the provision of such services does not, in and of itself, constitute an act described in section 406(b) of ERISA. We regret the delay in responding to your request, and hope you find this general information helpful. Sincerely, Alan D. Lebowitz 80-OCC Investment in Fiduciary Bank/Holding Company SecuritiesAdvisory Opinion to OCC (80-OCC) July 25, 1980
U.S. Department of Labor Reply to the Attention of: July 25, 1980 Mr. Dean E. Miller Dear Mr. Miller: By letter dated May 27, 1980, you presented certain issues arising under the prohibited transactions provisions contained in Part 4 of Title I of ERISA that are often discerned by your trust examiners during the course of their inspections. Accordingly, you have requested guidance with regard to the following questions:
The prohibited transactions provisions of ERISA restrict the acquisition and holding by an employee benefit plan of securities issued by an employer-sponsoring company. See section 407 of ERISA. No such explicit proscription or limitation applies to stock of a bank trustee or holding company thereof. However, section 406(a)(1)(D) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. The ERISA Conference Report (H.R. Rep. No. 93-1280; 93d Cong., 2d Session 308 (1974)) clarifies this prohibition by stating, among other things, "... securities purchases or sales by a plan to manipulate the price of the security to the advantage of a party in interest constitutes a use by or for the benefit of a party in interest of any assets of the plan." Sections 406(b)(1) and (2) further prohibit a fiduciary from dealing with the assets of a plan in his own interest or for his own account or acting in any transaction involving the plan on behalf of a party or representing a party whose interests are adverse to the interests of its participants or beneficiaries. The prohibitions of section 406(b) of ERISA impose upon fiduciaries a duty of undivided loyalty to the plans for which they act. Moreover, the codification of the "prudent man rule" contained in section 404(a)(1) of ERISA provides in relevant part:
Although a determination of whether a violation of sections 406(b)(1) or (2) and 404(a) has occurred will generally depend on the particular facts and circumstances of each case, it burdens our imagination to envision a situation in which a trustee with investment discretion could make an objective decision, solely on the basis of the prudence standard, regarding the purchase or sale of its own stock [emphasis added]. For example, a trustee may exercise his or her discretion based on inside information regarding the bank's financial condition. Although, in a particular case, it may be in the plan's best interest to sell the bank stock, the sale of such stock might cause a further decline in its market value. In such case, the bank trustee would have an interest in the transaction which would conflict with the interest of the plan for which he acts so as to be in violation of section 406(b)(2) of ERISA. A bank trustee may avoid engaging in an act described in section 406(b)(1) or (2) of ERISA by not using the authority, control or responsibility which makes it a fiduciary to cause a plan to purchase or sell bank stock. Thus, the purchase or sale of bank stock by a trustee pursuant to the instructions of a named fiduciary or investment manager not affiliated with such trustee will not result in violations of such 406(b) of ERISA. It should be noted that the inquiry concerning whether a fiduciary has violated section 406(b)(1) and (2) of ERISA is not limited to a decision whether to buy or sell bank stock. At all times that a trustee acts in a fiduciary capacity, he may make no decision on behalf of a plan which would have the effect of benefiting a person in which such fiduciary has an interest. A decision to retain bank stock in the plan portfolio, as well as decisions to buy or sell such stock, may involve acts described in section 406(b) of ERISA. However, to the extent a trustee has no discretion regarding retention of bank stock, (e.g., the decision to retain bank stock is, in fact, made by an independent investment manager), no violation of section 406(b)(1) or (2) will occur. We hope this information provides adequate guidance to you in the implementation of examination policy. Of course, we would welcome any further inquiries raised under the fiduciary responsibility provisions of ERISA. Sincerely, Alan D. Lebowitz 85-36A Loans Intended to Benefit Union Members/EmployersAdvisory Opinion/Individual Exemption 85-36A October 23, 1985
U.S. Department of Labor Ralph P. Katz RE: Annuity Fund of the Electrical Industry of Long Island Identification Number: F-2521 Dear Mr. Katz: This is in response to your letter of September 23, 1982, in which you requested clarification regarding the application of the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA) to a proposed investment by the Annuity Fund of the Electrical Industry of Long Island (the Fund). Specifically, you inquired whether a prohibited transaction would occur if the trustees of the Fund made an investment which was part of an overall agreement obligating an insurance company to invest a specified amount of insurance company assets in construction mortgages within the geographic jurisdiction of the union whose members are participants in the Fund. The agreement would further require the insurance company to make such investments in construction projects employing only labor represented by unions affiliated with the AFL-CIO. You state that the trustees will make the investment after determining that the investment rate of return is equal to or greater than similar investments bearing similar risks. Section 406(a)(1)(D) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction which the fiduciary knows or should know constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 406(b)(1) and (2) of ERISA further prohibit a fiduciary with respect to a plan from dealing with the assets of a plan in his or her own interest or for his or her own account, or acting in any transaction on behalf of a party or representing a party whose interests are adverse to the interest of the plan or its participants. Section 3(14) of ERISA defines the term party in interest to include a fiduciary, an employer any of whose employees are covered by the plan, and any employees of such employer. We wish to point out, as we have done in prior correspondence regarding this matter, that ERISA's general standards of fiduciary conduct apply to your proposed investment course of action. Sections 403(c) and 404(a)(1) of ERISA require, among other things, that a fiduciary of a plan act prudently, solely in the interest of the plan's participants and beneficiaries, and for the exclusive purpose of providing benefits to participants and beneficiaries. As you know the Department, on a number of occasions, has expressed its views as to the meaning of these requirements in the context of investment decision-making. We have stated that, to act prudently, a plan fiduciary must consider, among other factors, the availability, riskiness, and potential return of alternative investments for his plan. Because the investment you propose causes the plan to forego other alternative investment opportunities, such an investment would not be prudent if it provided a plan with less return, in comparison to risk, than comparable investments available to the plan, or if it involved a greater risk to the security of plan assets than other investments offering a similar return. We have construed the requirements that a fiduciary act solely in the interest of, and for the exclusive purpose of providing benefits to, participants and beneficiaries as prohibiting a fiduciary from subordinating the interests of participants and beneficiaries in their requirement income to unrelated objectives. Thus, in deciding whether and to what extent to invest in a particular investment, a fiduciary must ordinarily consider only factors relating to the interests of plan participants and beneficiaries in their retirement income. A decision to make an investment may not be influenced by desire to stimulate the construction industry and generate employment, unless the investment, judged solely on the basis of its economic value to the plan, would be equal or superior to alternative investments available to the plan. Thus, it would not be inconsistent with the requirements of sections 403(c) or 404 of ERISA for plan fiduciaries to select an investment course of action that reflects non-economic factors, so long as application of such factors follows primary consideration of a broad range of investment opportunities that are, economically advantageous. Based on the representations made in your letter, it does not appear that the arrangement you describe would involve a prohibited transaction of the kind described in sections 406(a)(1)(A), (B) or (C) of ERISA (relating to sales, leases or other exchanges of property, loans or other extensions of credit and the furnishing of goods, services or facilities). In addition, it does not appear that the arrangement involves a direct transfer of plan assets to, or use of plan assets by or for the benefit of, a party of interest of the kind described in section 406(a)(1)(D) of the Act. Nonetheless, it is reasonable to infer that the arrangement will result in some benefit to parties in interest with respect to the plan, i.e. contributing employers and their employees. Thus, it is necessary to determine whether the arrangement would involve an indirect use of plan assets for the benefit of a party in interest. In the circumstances you describe, where the arrangement would be prohibited, if at all, solely as an indirect use of plan assets for the benefit of a party in interest,* the Department believes that it is appropriate to examine the facts and circumstances surrounding the plan's investment to determine whether it is made for the purposes of providing a prohibited benefit. Since this is an inherently factual determination, the Department is not prepared to issue an advisory opinion regarding the specific arrangement described in your letter. In our view, however, a plan investment which is made subject to a condition which can reasonably be expected to result in a benefit to one or more parties in interest would violate section 406(a)(1)(D) (as well as sections 403 and 404 of the Act) if it involves greater a greater risk or a lesser return to the plan than a comparable transaction that is not subject to such a condition. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Elliot I. Daniel * This kind of arrangement should be distinguished from a plan investment made subject to a condition which in effect makes the transaction an indirect sale or loan.
86-FRB Sweep Arrangements and Related Sweep Transaction FeesAdvisory Opinion/Individual Exemption 86-FRB August 1, 1986
U.S. Department of Labor Mr. Robert S. Plotkin Dear Mr. Plotkin: This is in response to your letter requesting our views regarding the application of the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA) to certain "sweep services" provided to employee benefit plans by banks acting as trustees and/or investment managers. Under such arrangements, banks transfer ("sweep") idle cash balances of customer accounts, including plan accounts, into short term interest bearing investment vehicles such as money market funds or bank-affiliated short-term collective investment funds. You have specifically asked whether such "sweep services" would qualify for the statutory exemptions provided by sections 408(b)(2), 408(b)(6) and/or 408(b)(8) of ERISA. You indicate that the bank regulatory agencies for many years have been advising the institutions subject to their supervision of their duty to institute cash management procedures and to productively invest trust funds that are temporarily in their custody. Recent technological advances have permitted increased investment returns to trust accounts by the sweeping of once idle cash balances into interest-bearing investment vehicles. You further state that typically, as compensation for its sweep services, a bank retains as its fee a portion of the daily interest generated by the sweep fund, which fee is calculated as a percentage of the daily invested cash balance. In the case of an employee benefit plan, you believe that this compensation retained by a bank may violate the prohibited transaction provisions of ERISA in the absence of an applicable statutory exemption.1 Section 406(a) of ERISA provides, in pertinent part, that a fiduciary of an ERISA plan shall not cause the plan to engage in a transaction which the fiduciary knows or should know constitutes a direct or indirect: (1) sale or exchange, or leasing of any property between the plan and a party in interest; (2) furnishing of goods, services, or facilities between the plan and a party in interest; or (3) transfer to, or use by or for the benefit of a party in interest, of any asset of the plan. Section 3(14) defines the term "party in interest" to include a fiduciary and a person providing services to the plan. In addition, section 406(b) provides that a fiduciary with respect to a plan shall not: (1) deal with the assets of the plan in its own interest or for its own account; (2) act on behalf of or represent a part whose interests are adverse to those of the plan; or (3) receive consideration from a third party in connection with a transaction involving plan assets. ERISA section 408(b)(2) exempts from the prohibitions of section 406(a) the payment by a plan to a party in interest, including a fiduciary, for a service (or a combination of services if: (1) the service is necessary for the establishment or operation of the plan; (2) the service is furnished under a contract or arrangement which is reasonable; and (3) no more than reasonable compensation is paid for the service. Accordingly, the mere provision of cash sweep services by a bank or similar institution would be exempt from the prohibitions of ERISA section 406(a) if the conditions of the exemption described in section 408(b)(2) were met.2 With respect to the prohibitions in section 406(b), regulation 29 C.F.R. 2550.408b-2(a) indicates that ERISA section 408(b)(2) does not contain an exemption for an act described in ERISA section 406(b) (relating to conflicts of interest on the part of fiduciaries) even if such act occurs in connection with a provision of services which is exempt under section 408(b)(2). As explained in regulation 29 C.F.R. 2550.408b-2(e)(1), if a fiduciary uses the authority, control, or responsibility which makes it a fiduciary to cause the plan to enter into a transaction involving the provision of services when such fiduciary has an interest in the transaction which may affect the exercise of its best judgment as a fiduciary, a transaction described in section 406(b) would occur, and that transaction would be deemed to be a separate transaction from the transaction involving the provision of services and would not be exempted by section 408(b)(2). As a general matter, a bank engages in violations of section 406(b)(1) whenever it uses its fiduciary authority or control with respect to plan funds to increase the amount of its compensation by determining the timing and/or the amount of plan funds to be transferred into the sweep fund.3 Conversely, section 29 C.F.R. 2550.408b-2(e)(3) indicates that if a bank provides sweep services without the receipt of additional compensation or other consideration (other than reimbursement of direct expenses Properly and actually incurred in the performance of such services within the meaning of 29 C.F.R. 2550.408c-2(b)(3)), then the provision of sweep services by the bank would not, in itself, constitute a violation of section 406(b) of ERISA. Moreover, the provision by a bank of investment management services, including sweep services, under a single arrangement which is calculated as a investment management services, including sweep services, of the market value of the total assets under management would not, in itself, constitute an act described in section 406(b)(1) of ERISA because the bank would not be exercising its fiduciary authority or control to cause a plan to pay an additional fee. The following examples illustrate the application of the of section 408(b)(2) of ERISA to sweep service arrangement. The examples assume that the underlying investment transactions otherwise comply with applicable statutory exemptions.
You further indicate that some banks have been relying on the exemption provided by section 408(b)(6) of ERISA. Section 408(b)(6) exempts from the prohibitions of section 406 the provision of certain ancillary services by a bank or similar financial institution supervised by the United States or a State to a plan for which it acts as a fiduciary if the conditions of 29 C.F.R. 2550.408b-6(b) are met. Such ancillary services include services which do not meet the requirements of ERISA section 408(b)(2) because the provision of such services involves an act described in section 406(b)(1) or (b)(2) of ERISA, section 2550.408b-6(b) requires that such services must be provided at not more than reasonable compensation; under adequate internal safeguards which assure that the provision of such service is consistent with sound banking and financial practice, as determined by Federal or State supervisory authority; and only to the extent such service is subject to specific guidelines issued by the bank or similar financial institution which meet the requirements of section 2550.408b-6(c). To date, no regulations have been issued clarifying that section. However, the Department has stated that the condition contained in section 408(b)(6)(B) requiring "specific guidelines" is satisfied (in the absence of such regulations) if the ancillary services are provided in accordance with specific guidelines issued by the bank or similar financial institution, and if adherence to the guidelines would reasonably preclude such bank or institution from providing the services in an excessive or unreasonable manner and in a manner that would be inconsistent with the best interests of the participants and beneficiaries. (See 47 FR 14806, April 6, 1982.) A bank which is a fiduciary to a plan may receive additional fees for additional services rendered only if such services are "ancillary services." In the Department's view, the question of whether short-term cash management services constitute "ancillary services" within the meaning of section 408(b)(6) depends on the expectations of the parties as evidenced by the terms of the governing instrument and applicable Federal banking law. Thus, for example, the Department believes that where a plan appoints a bank trustee or investment manager with complete discretion to manage the assets placed in its control, and no provision for short-term cash management is made under the terms of the governing instrument, the plan does so with the expectation that such person will minimize uninvested cash balances and maximize the plan's rate of return in accordance with evolving technology for short-term cash management. However, where, for example, a plan appoints an independent investment manager to manage plan assets, the provision by a custodial trustee bank of sweep services for any idle cash balances may constitute an "ancillary service" within the meaning of section 408(b)(6). At the present time, the Department is not prepared to conclude that section 408(b)(6) is available in all cases For the arrangements described in your letter. You further indicate that some banks appear to be relying on the exemption provided by ERISA section 408(b)(8) to invest plan funds in collective trust funds maintained by such banks. Section 408(b)(8) of ERISA provides an exemption for any transaction between a plan and a common or collective trust fund maintained by a bank or trust company supervised by a State or Federal agency, if (a) the transaction is a sale or purchase of an interest in the fund, (b) the bank or trust company receives not more than reasonable compensation, and (c) the transaction is expressly permitted by the instrument under which the plan is maintained, or by a fiduciary (other than the bank or trust company, or an affiliate thereof) who has authority to manage and control the assets of the plan. The Department has been unwilling to indicate the extent to which section 408(b)(8) provides relief from the prohibitions of section 406(b) of ERISA (See 44 FR 44291 n. 3, July 27, 1979). However, if the bank does not exercise its fiduciary authority to cause a plan to pay an additional fee or other compensation in connection with the acquisition by a plan of an interest in a collective trust fund or for the provisions of services under such fund, the investment would not, in itself, involve acts described in section 406(b)(1) of ERISA. We hope these comments have been helpful. However, if you should have any further questions or if we can provide any further assistance, please feel free to contact Ivan Strasfeld at (202) 523-8671. Alan D. Lebowitz cc: Dean Miller Footnotes
88-02A Sweep Arrangements and Related Sweep Transaction FeesAdvisory Opinion/Individual Exemption 88-02A February 2, 1988
U.S. Department of Labor February 2, 1988 88-02A Sec. 406(b)(1) & (3), 408(b)(2) Ms. Charlotte 0. Roederer Re: Identification Number: F-3634A Dear Ms. Roederer; This is in response to your request for an advisory opinion regarding the application of the Employee Retirement Income Security Act of 1974 (ERISA) to certain "sweep services" provided by Manufacturers and Traders Trust Company (the Bank) to employee benefit plans for which the Bank acts as custodian or directed trustee. You specifically ask whether the transactions would qualify for the statutory exemptions provided by sections 408(b)(2) and/or 408(b)(6) of ERISA. You represent that the bank offers a daily cash "sweep service" to employee benefit plans for which the Bank acts as custodian or directed trustee. For those plans which elect to utilize the sweep service, some or all of the plans' uninvested cash is swept into one of several money market funds, all of which are sponsored by independent third parties. For each plan to which the Bank offers this service, an independent third party (or the employer, other than the Bank) functions as the sole investment advisor. The investment advisor determines whether and how much uninvested cash will be swept, and chooses which of several money market funds will be utilized. The specified amount of uninvested cash is swept into the selected investment vehicle at the close of each business day. Each month the plans participating in the sweep service receive a dividend from the money market funds based on the prior month's daily invested cash balance in the funds. The bank periodically calculates a "cash sweep" fee which is a percentage of the dividends received by each plan from the funds. The bank receives no fees or other compensation from the money market funds. Thus, you represent that no part of the dividends received are allocated to the Bank for its own account as compensation for sweep services. The cash sweep fee is recorded separately in the periodic accounting and billing which the Bank sends to the employer. For most plans, the fee is calculated and billed on a quarterly basis, but small plan accounts are billed annually. The cash sweep arrangement is subject to immediate termination without penalty and requires that the Bank notify the plan no less than 30 days prior to any change in the fees to be charged for the service. The provisions of section 406(a)(1)(C) and (D) of ERISA prohibit a fiduciary with respect to a plan from causing the plan to engage in a transaction if he or she knows or should know that the transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest, or transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 406(b)(1) of ERISA further prohibits a fiduciary with respect to a plan from dealing with the assets of the plan in his or her own interest or for his or her own account. Section 406(b)(2) of ERISA provides that a fiduciary shall not in his or her individual or in any other capacity act in any 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. Section 406(b)(3) of ERISA prohibits a fiduciary from receiving a fee or other consideration for his or her own personal account from a party dealing with a plan in connection with a transaction involving the assets of the plan. Subject to the limitations of section 408(d), section 408(b)(2) of ERISA exempts from the prohibitions of section 406(a) contracting (or making reasonable arrangements) for services (or a combination of services) with a party in interest if: the service is necessary for the establishment or operation of the plan; (2) the service is furnished under a contract which is reasonable; and no more than reasonable compensation is paid for the service. Regulations issued by the Department clarify the terms "necessary service" (29 C.F.R. 2550.408b-2(b)), "reasonable contract or arrangement" (29 C.F.R. 2550.408b-2(c)), and "reasonable compensation" (29 C.F.R. 2550.408c-2). Accordingly, the provision of sweep services would be exempt from the prohibitions of section 406(a) of ERISA if the conditions of section 408(b)(2) are met.1 We note, however, that the questions of what constitutes a necessary service, a reasonable contract or arrangement, and reasonable compensation are inherently factual in nature. Section 5.01 of Advisory Opinion Procedure 76-1 (ERISA Proc. 76-1, 41 FR 36281, August 27, 1976) states that the Department generally will not issue opinions on such questions. With respect to the prohibitions in section 406(b), regulation 29 C.F.R. 2550.408b-2(a) states that section 408(b)(2) of ERISA does not contain an exemption for an act described in section 406(b). As explained in 29 C.F.R. 2550.408b-2(e)(1), if a fiduciary uses the authority, control or responsibility that makes him or her a fiduciary to cause the plan to enter into a transaction involving the provision of services when such a fiduciary has an interest in the transaction that may affect the exercise of his or her best judgment as a fiduciary, a transaction described in section 406(b) of ERISA would occur, and the transaction would be deemed to be a separate transaction from the one involving the provision of services and would not be exempted by ERISA section 408(b)(2). Your letter of March 31, 1987 states that the bank does not have investment discretion with respect to the plans to which the Bank offers the sweep service, and that the decision to utilize the sweep services and compensate the Bank therefore is made by independent investment advisors. Your submission also explains that the Bank will not receive a fee or other benefit from any of the unrelated money market funds into which uninvested cash is swept and that the Bank will notify a plan no less than 30 days prior to any change in the fees to be charged for the service. Your letter also states that each month, the plan receives from the fund into which the plan's assets are swept a dividend based on the prior month's activity and that the bank's "cash sweep" fee is a percentage of these dividends either paid by the plan sponsor or deducted by the Bank (at the instruction of the sponsor) from the assets of the plan.2 In the circumstances you describe, it appears that the Bank would not be exercising any of the authority, control, or responsibility that makes it a fiduciary to cause a plan to pay an additional fee in connection with the "sweep services". Thus, the provision of sweep services would not, in and of itself, involve acts described in section 406(b)(1) of ERISA. The Bank also would not appear to violate section 406(b)(2) because it would not, solely by reason of the circumstances you describe, be acting on behalf of a party whose interests are adverse to those of the plan.3 With respect to section 406(b)(3), the Department notes that, under the described circumstances, the receipt of fees by the Bank from the assets of a plan for the provision of sweep services would not, in itself, constitute a violation of section 406(b)(3) of ERISA. You also ask whether the provision of sweep services by the Bank would qualify for the statutory exemption provided by section 408(b)(6) of ERISA. However, to the extent that the arrangement you describe is covered by section 408(b)(2), the Department does not find it necessary to address whether an additional statutory exemption is available. This letter constitutes an advisory opinion under ERISA Procedure 76-1 and is issued subject to the provisions of that procedure, including section 10, relating to the effect of advisory opinions. We note that pursuant to section 5 of ERISA Procedure 76-1, this advisory opinion relates solely to the arrangement described involving the Bank. Sincerely, Robert J. Doyle Footnotes
88-09A Investment in Fiduciary Bank/BHC Treasury StockAdvisory Opinion/Individual Exemption 88-09A April 15, 1988
U.S. Department of Labor April 15, 1988 A/Opinion 88-09A Lloyd V. Crawford Re: Bank of Prattville Identification Number: F-3677A Dear Mr. Crawford: This is in response to your letters of May 29 and June 18, 1987 requesting an advisory opinion regarding the application of the prohibited transaction provisions of section 4975 of the Internal Revenue Code of 1986 (the Code). In particular, your letter concerns purchases of stock of the parent (the Parent) of the Bank of Prattville (the Bank) by various self-directed individual retirement accounts (IRAs) sponsored by the Bank. You represent that the Bank is a banking corporation organized under the laws of the state of Alabama and is wholly owned by the Parent. The Bank qualifies under section 408(a)(2) and 408(n) of the Code as a trustee of IRAs. The Bank is considering amending the existing master and prototype IRA for which it serves as custodian to include a self-directed feature which permits the participants to direct the investments of their accounts in securities selected by the participants, including stock of the Parent. Pursuant to these amendments, the participants will have complete and sole discretion over the investments, with the Bank acting only as a nondiscretionary trustee or custodian. The Bank will not make any investments or dispose of any investments for the IRAs except upon the written direction of the participants. Neither the Bank nor the Parent will provide any form of investment advice or make investment recommendations. Purchases and sales of securities will be conducted through brokerage accounts which the IRA participants will establish with the Bank. Parent stock is not traded on any exchange or on the national over-the-counter market system. In cases where an IRA participant directs that funds in his or her account be invested in Parent stock, the stock would be purchased either from the Parent's treasury or from unrelated third parties. You ask for an opinion with respect to the following questions:
Pursuant to section 2510.3-2(d) of the Department's regulations, the Department does not have jurisdiction under Title I of the Employee Retirement Income Security Act (ERISA) over those individual retirement accounts described in section 408(2) of the Code which comply with the provisions of that section of the regulation.1 Such IRAs are within the purview of Title II of ERISA, section 4975 of the Code. Under Presidential Reorganization No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 of the Code has been transferred, with certain exceptions not here relevant, to the Secretary of Labor and the Secretary of the Treasury is bound by the interpretations of the Secretary of Labor pursuant to such authority. To the extent there is Title I jurisdiction regarding any IRA for which the Bank serves as custodian or trustee, references to specific sections of the Code in this letter shall also refer to the corresponding sections of ERISA. Section 4975(c)(1) of the Code prohibits, in relevant part, the sale or exchange of property between a plan and a disqualified person (4975(c)(1)(A)), the furnishing of goods or services between a plan and a disqualified person (4975(c)(1)(C)), the use by or for the benefit of a disqualified person of the income or assets of a plan (4975(c)(1)(D)), and an act by a disqualified person who is a fiduciary whereby he or she deals with the income or assets of a plan in his or her own interest or for his or her own account (4975(c)(1)(E)). Section 4975(e)(2) of the Code defines the term "disqualified person" to include a plan fiduciary and a person providing services to a plan. Thus, the Bank is a disqualified person with respect to the IRAs. The Parent, however, is not a disqualified person with respect to the IRAs solely by reason of its ownership of the Bank.2 The question of whether the Parent is a disqualified person with respect to the IRAs under any other provision of section 4975(e)(2) of the Code is inherently factual in nature. Section 5.01 of Advisory Opinion Procedure 76-1 (ERISA Proc. 76-1, 41 FR 36281, August 27, 1976) states that the Department generally will not issue opinions on such questions. Therefore, with respect to questions 1 and 2, to the extent that the Parent is not a disqualified person with respect to the IRAs, purchases of stock from the Parent by the Bank on behalf of and at the direction of the IRA participants would not involve transactions described in section 4975(c)(1)(A) of the Code. With respect to questions 3 and 4, it is the Department's opinion that if the seller of the Parent stock is not otherwise a disqualified person with respect to an IRA, the purchase by the Bank of Parent stock from unrelated third parties on behalf of the IRA does not constitute a transaction described in section 4975(c)(1)(A) of the Code. With respect to question 5, regarding purchases of Parent stock by IRA custodians other than the Bank on behalf of and at the sole direction of participants who are officers or directors of the Bank from the Parent or an unrelated third party, it is our view that the purchases of Parent stock do not constitute transactions described in section 4975(c)(i)(A) of the Code to the extent that the seller of Parent stock is not a disqualified person with respect to the IRA.3 However, while the Parent may not be a disqualified person with respect to the IRAs sponsored by the Bank, purchases and holding of Parent stock by the self-directed IRAs of officers and directors of the Bank raise questions under section 4975(c)(1)(D) and (E) of the Code, depending on the degree (if any) of the participant's interest in the transaction. The IRA participants, as officers and directors of the Bank, may have interests in the proposed transactions which may affect their best judgment as fiduciaries of their IRAs. In such circumstances, the transactions may violate section 4975(c)(1)(D) and (E) of the Code. In addition, although the Bank may have no discretion in selecting the investments to be made by the IRAs, it appears that the Bank may have discretion in determining the seller from which the IRAs will purchase Parent stock. To the extent that it does have such discretion, the Bank would be a plan fiduciary with respect to its exercise of such discretion. Thus, if the IRA participants do not instruct the Bank with respect to such matters but, rather, rely on it as a fiduciary to select appropriate sellers for the transactions, a selection by the Bank of the Parent as seller would raise questions under section 4975(c)(1)(D) and (E) of the Code. This is because the Bank, as a wholly-owned subsidiary of the Parent, has an interest in the fortunes of the Parent. Therefore, the Bank may be in a position to indirectly use the assets of a plan for its own benefit or to deal with the assets of a plan in its own interest.4 We note that you have not requested and consequently the Department is not offering an opinion regarding the provision of brokerage services by the Bank to the IRAs. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Section 10 of the procedure describes the effect of advisory opinions. Sincerely, Robert J. Doyle
88-18A Self-Directed IRA Loans to Company Where IRA Grantor/Beneficiary is InsiderAdvisory Opinion/Individual Exemption 88-18A December 23, 1988
U.S. Department of Labor December 23, 1988 Mr. Joseph E. Hurst, Jr. Re: Thomas E. Darragh Identification Number: F-3819A Dear Mr. Hurst: Your letter dated January 22, 1988, to the Internal Revenue Service (the Service) has been forwarded to this office for our consideration and response. Your letter concerns whether a loan from an Individual Retirement Account (IRA) to a corporation would violate section 4975(c)(1)(B) of the Internal Revenue Code of 1986 (the Code). You represent that Thomas F. Darragh established an IRA described in section 408 of the Code. Mr. Darragh is the only participant in the IRA and has reserved the right to direct the IRA's investments. You further represent that Mr. Darragh is currently an employee, shareholder and member of the Board of Directors of Darragh Company (the Corporation). Your subsequent letter of April 28, 1988, indicates that the Corporation has no involvement whatsoever with the establishment or maintenance of the IRA. The Corporation has two classes of stock, Class A voting and Class B nonvoting. Mr. Darragh owns directly and indirectly (pursuant to section 4975(e)(4) and (6) of the Code) 46.04 percent of the total voting power of the Corporation and 48.14 percent of the total issued and outstanding shares of stock. Mr. Darragh proposes to direct the IRA Custodian, One National Bank, to lend the Corporation approximately $500,000 pursuant to a promissory note entered into by the Corporation. The Corporation will pay the IRA interest on the note based on the then current prevailing market rate of interest which lenders are currently charging to the Corporation. You have requested an advisory opinion that the proposed loan will not constitute a prohibited transaction under section 4975(c)(1)(B) of the Code. Pursuant to section 2510.3-2(d) of the Department of Labor's (the Department) regulations, the Department does not have jurisdiction under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) over those IRAs described in section 408(a) of the Code which comply with the provisions of that section of regulation.1 Under Presidential Reorganization Plan No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 of the Code has been transferred, with certain exceptions not here relevant, to the Secretary of Labor and the Secretary of the Treasury is bound by such interpretations of the Secretary of Labor pursuant to such authority. Section 4975(c)(1)(B) of the Code prohibits any direct or indirect sale, lending of money or other extension of credit between a plan and a disqualified person. Section 4975(e)(1) of the Code, in relevant part, defines the term plan to include an IRA described in section 408(a) of the Code. Section 4975(e)(2) of the Code defines "disqualified person" to include a fiduciary, an employer any of whose employees are covered by the plan, and a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of the corporation, (ii) the capital interest or profits interest of such partnership, or (iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by a fiduciary. Section 4975(e)(3) of the Code defines the term fiduciary, in part, to include any person who exercises any discretionary authority or discretionary control respecting management of the plan, or exercised any authority or control respecting the management or the disposition of its assets. Mr. Darragh is a fiduciary and, thus, a disqualified person with respect to the IRA because of the authority under the IRA to direct investments. You have stated that Mr. Darragh is employed by the Corporation. Although section 4975 does not define the term "employer", section 3(5) of ERISA provides, in part, that an "employer" is any person acting as an employer in relation to an employee benefit plan. You have stated that the Corporation has no involvement with the establishment or maintenance of the IRA. Therefore, it is the opinion of the Department that the Corporation is not a disqualified person with respect to the IRA under section 4975(e)(2)(C) of the Code. In addition, the Corporation is not a disqualified person with respect to the IRA under section 4975(e)(2)(G) of the Code by reason of Mr. Darragh's stock ownership in the Corporation. Therefore, to the extent that the Corporation is not a disqualified person with respect to the IRA under any other provision of section 4975(e)(2) of the Code, the loan by the IRA to the Corporation would not violate section 4975(c)(1)(B) of the Code. We note, however, that this conclusion does not preclude the existence of other prohibited transactions under section 4975 of the Code. Section 4975(c)(1)(D) of the Code prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. Section 4975(c)(1)(E) of the Code prohibits a fiduciary from dealing with the income or assets of a plan in his own interest or for his own account. Section 54.4975-6(a)(5) of the Pension Excise Tax Regulations characterizes transactions described in section 4975(c)(1)(E) as involving the use of authority by fiduciaries to cause plans to enter into transactions when those fiduciaries have interests which may affect the exercise of their best judgment as fiduciaries. Mr. Darragh is a fiduciary with respect to the IRA. In addition, he has a substantial interest in the Corporation. Therefore, the Corporation is a party in whom Mr. Darragh has an interest which might affect his best judgment as a fiduciary. Accordingly, a prohibited use of plan assets for the benefit of a disqualified person under section 4975(c)(1)(D) or an act of self-dealing under section 4975(c)(1)(E) is likely to result if Mr. Darragh directs the IRA to loan funds to the Corporation. [Emphasis added] This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, this letter is issued subject to the provisions of the procedures, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Robert J. Doyle Footnote
88-28 Investment in Fiduciary Bank/BHC Stock in Initial Public OfferingAdvisory Opinion/Individual Exemption 88-28 January 26, 1988 (Exemption Application D-7187)
U.S. Department of Labor People's Bank (People's) Located In Proposed Exemption The Department is considering granting an exemption under the authority of section 408(a) of the Act and section 4975(c)(2) of the Code and in accordance with the procedures set forth in ERISA Procedure 75-1 (40 FR 18471, April 21 1975). If the exemption is granted the restrictions of section 406(a) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) thru (D) of the Code shall not apply to the sale by People's of its subsidiary's stock to the Keogh Plans (the Keoghs) for which People's services [sic] as custodian, as part of an initial issue of such stock, and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the Code shall not apply to the sale by People's of its subsidiary's stock to the individual retirement accounts (the IRAs) for which People's serves as custodian, as part of an initial issue of such stock, provided the Keoghs and IRAs pay no more than the fair market value of the stock on the date of the sale.1 Summary of Facts and Representations
For further information contact: Gary H. Lefkowitz of the Department, telephone (202) 523-8881. (This is not a toll-free number.) People's Bank (People's) Located Bridgeport, Connecticut [Prohibited Transaction Exemption 88-28. Exemption Application No. D-7187] Exemption The restrictions of section 406(a) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(2)(A) through (D) of the Code, shall not apply to the sale by People's of its subsidiary's stock to the Keogh plans (the Keoghs) for which People's serves as custodian, as part of an initial issue of such stock, and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the Code shall not apply to the sale by People's of its subsidiary's stock to the individual retirement accounts (the IRAs) for which People's serves as custodian, as part of an initial issue of such stock, provided the Keoghs and the IRAs pay no more than the fair market value of the stock on the date of the sale.1 For a more complete statement of the facts and representations supporting the Department's decision to grant this exemption refer to the notice of proposed exemption published on January 26, 1988 at 53 FR 2106. For Further Information Contact: Gary Lefkowitz of the Department, telephone (202) 523-8881. (This is not a toll-free number.)
89-03 Self-Directed IRA Purchases of Employer Stock from EmployerAdvisory Opinion/Individual Exemption 89-03 March 23, 1989
U.S. Department of Labor March 23, 1989 Ms. Maria Stefanis Re: Individual Retirement Accounts of Edward E. and Frances E. Bowns Identification Number F-3879A Dear Ms. Stefanis: Your letter dated May 19, 1988, to the Internal Revenue Service has been forwarded to this office for our consideration and response. Your letter concerns whether a purchase of stock by an Individual Retirement Account (IRA) from a corporation would violate section 4975(c)(1)(A) of the Internal Revenue Code of 1986 (the Code). You represent that Edward E. Bowns and his wife, Frances, established IRAs described in section 408 of the Code. Mr. and Mr. Bowns are the only participants in their respective IRAs and have reserved the right to direct their IRA's investments. Mr. Bowns is Executive Vice President and General Manager of the Partition Division of the Rock-Tenn Company. Mr. Bowns owns directly 1,122 shares. Mr. Bowns holds incentive stock options, expiring 1993 through 1998, to acquire an additional 27,020 shares. Assuming all options are exercised and including the 400 shares proposed to be purchased by the IRAs, the Bowns family would own a total of 29,327 shares. There are now approximately 2,500,000 shares of Rock-Tenn common stock outstanding. You further attest that Rock-Tenn has not sponsored, maintained or made any contribution to the IRAs. Mr. and Mrs. Bowns propose to direct their IRA trustee to purchase Rock-Tenn common stock from Rock-Tenn on behalf of each of their IRAs. The trustee will pay no more than adequate compensation for the Rock-Tenn stock. You have requested an advisory opinion that the proposed purchase will not constitute a prohibited transaction under section 4975(c)(1)(A) of the Code. Pursuant to section 2510.3-2(d) of the Department of Labor's (the Department) regulations, the Department does not have jurisdiction under Title I of the Employee Retirement Income Security Act of 1974 (ERISA) over those IRAs described in section 408 of the Code which comply with the provisions of that section of regulation.1 Such IRAs are, however, subject to section 4975 of the Code. Pursuant to Presidential Reorganization Plan No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 of the Code, subject to certain exceptions not here relevant, has been transferred to the Secretary of Labor and the Secretary of the Treasury is bound by such interpretations. Section 4975(c)(1)(A) of the Code prohibits any direct or indirect sale, exchange or leasing of any property between a plan and a disqualified person. Section 4975(e)(1) of the Code, in relevant part, defines the term plan to include an IRA described in section 408(a) of the Code. Section 4975(e)(2) of the Code defines the term disqualified person to include a fiduciary, an employer any of whose employees are covered by the plan, and a corporation of which 50 percent or more of the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of the corporation, is owned directly or indirectly, or held by a fiduciary. Section 4975(e)(4) of the Code provides that, for purposes of section 4975(e)(2)(G), there shall be taken into account indirect stock holdings which would be taken into account under section 267(c) of the Code. Section 4975(e)(3) of the Code defines the term fiduciary, in part, to include any person who exercises any discretionary authority or discretionary control respecting management of the plan, or exercised any authority or control respecting the management or the disposition of its assets. Mr. and Mrs. Bowns are fiduciaries and, thus, disqualified persons with respect to their IRAs because of their authority under the IRAs to direct investments. Although section 4975 does not define the term employer, section 3(5) of ERISA provides, in part, that an employer is any person acting as an employer in relation to an employee benefit plan. You have stated that Rock-Tenn has no involvement with the establishment or maintenance of the IRAs. Therefore, it is the opinion of the Department that Rock-Tenn is not a disqualified person with respect to the IRAs under section 4975(e)(2)(C) of the Code. In addition, Rock-Tenn is not a disqualified person under section 4975(e)(2)(G) of the code by reason of the Bowns' stock ownership in Rock-Tenn. Therefore, to the extent that Rock-Tenn is not a disqualified person under any other provisions of section 4975(e)(2) of the Code, the purchase of Rock-Tenn would not violate section 4975(c)(1)(A) of the Code. We note, however, that this conclusion does not preclude the existence of other prohibited transactions under section 4975 of the Code. Section 4975(c)(1)(D) of the Code prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. Section 4975(c)(1)(E) of the Code prohibits a fiduciary from dealing with the income or assets of a plan in his own interest or for his own account. The Department will generally not issue advisory opinions with respect to inherently factual matters.2 We note, however, that Mr. and Mrs. Bowns are fiduciaries with respect to their IRAs. In addition, Mr. Bowns is an officer of Rock-Tenn and the Bowns have stock ownership interests in Rock-Tenn. Accordingly, you may wish to consider whether the purchases of stock involve violations of section 4975(c)(1)(D) or (E) of the Code. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, this letter is issued subject to the provisions of the procedures, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Robert J. Doyle Footnotes
92-23A Investment in Fiduciary Bank/BHC StockAdvisory Opinion/Individual Exemption 92-23A October 27, 1992
U.S. Department of Labor October 27, 1992 ERISA SEC. Mr. John S. Brescher, Jr., Esq. 406(b)(1) Dear Mr. Brescher: This is in response to your request for an advisory opinion regarding the application of the prohibited transaction provisions of section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) and section 4975 of the Internal Revenue Code (the Code). Your letter concerns purchases of securities issued by the parent company of Citizens First National Bank of New Jersey (the Bank) at the direction of fiduciaries of employee benefit plans for which the Bank serves an trustee. According to your representations, the Bank is a wholly owned subsidiary of Citizens First Bancorp., Inc. (Bancorp), a bank holding company organized and existing under the laws of the State of New Jersey. Bancorp is a publicly held company; its stock is regularly traded on the American Stock Exchange. You represent that the Bank, as part of its regular banking services, maintains a Prototype Defined Contribution Plan and Trustee/Custodial Account (the Prototype Plan) for adoption by those of its customers who wish to adopt a qualified retirement program. You state that the Bank may be appointed to serve either as custodian or trustee of an employee benefit plan that adopts the Prototype Plan. You indicate that, in either of these cases, the Bank must invest funds held thereunder in accordance with the requirements of ERISA. You state that, where the Bank serves as trustee, the Prototype Plan permits investments "in any form of property," expressly including "securities issued by the Trustee and/or affiliates of the Trustee." An adopting employer has the option to direct investments by the trustee, to appoint an investment manager (registered as an investment advisor under the Investment Advisors Act of 1940) to direct investments by the trustee, or to give the trustee sole investment management responsibility. The employer must choose an option in its adoption agreement and the Bank must agree to it. You represent that if the Bank as trustee is subject to the investment direction of the employer or of an investment manager, any investment direction to the Bank must be made in writing by the authorized person. According to your representations, the Bank, as directed trustee, anticipates receiving directions to purchase Bancorp stock on behalf of a plan. Such stock purchases would be made on the open market on the American Stock Exchange through an unaffiliated national brokerage firm selected by the Bank. No more than fair market value would be paid for the stock and the Bank would receive no commission as a result of any such purchase. The identity of the sellers of any stock so purchased would not be known to the Bank and would, you state, be difficult, if not impossible, to ascertain. You represent that the Bank does not act as market-maker for such stock. You request an opinion as to whether the Bank would engage in a prohibited transaction within the meaning of section 406 of ERISA or section 4975 of the Code if, in its capacity as directed trustee of an employee benefit plan which adopts the Prototype Plan, it purchased Bancorp stock on the American Stock Exchange on behalf of any such plan, at the proper direction of a named fiduciary having the authority to direct investments by the Bank, or of an investment manager appointed by a named fiduciary.1 Section 403(a) of ERISA provides, in part, that a plan trustee shall have exclusive authority and discretion to manage and control the assets of the plan, except to the extent that: (1) the plan expressly provides that the trustees are subject to the direction of a named fiduciary who is not a trustee, in which case the trustee shall be subject to the proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to ERISA; or (2) the authority to manage, acquire, or dispose of the assets of the plan is delegated to one or more investment managers pursuant to section 402(c)(3) of ERISA. Section 406(a)(1)(A) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction if he or she knows or should know that the transaction constitutes a direct or indirect sale or exchange, or leasing, of any property between the plan and a party in interest. Section 3(14) of ERISA defines the term "party in interest" to include a fiduciary with respect to a plan and a person providing services to a plan, as well as a 10 percent or more shareholder, directly or indirectly, of such a person.2 Section 406(b)(1) of ERISA prohibits a fiduciary with respect to a plan from dealing with the assets of the plan in his or her own interest or for his or her own account. With respect to purchases and sales of Bancorp stock on the open market in the manner described above, we note that the Conference Report accompanying ERISA states that:
Based on your representations, it is the opinion of the Department that purchases and sales of Bancorp stock in blind transactions executed by unaffiliated brokers at the proper direction of named fiduciaries of plans of its customers would not constitute transactions described in section 406(a)(1)(A) of ERISA. Moreover, under such circumstances, the Bank would not exercise the authority, control or responsibility to cause the plans for which it serves as directed trustee to engage in purchases and sales of Bancorp stock. Accordingly, it is the Department's view that the Bank, as directed trustee, would not engage in prohibited self-dealing under section 406(b)(1) solely as a result of following the directions of an unaffiliated named fiduciary, made in accordance with section 403(a), to purchase Bancorp stock.3 It should be pointed out, however, that under section 403(a)(1) of ERISA, a trustee that is subject to proper directions from the plan's named fiduciary remains responsible for determining whether following a given direction would result in a violation of ERISA. The directed trustee also has responsibility to exercise discretion where the directed trustee has reason to believe that the named fiduciary's directions are not made in accordance with the terms of the plan or are contrary to ERISA. Furthermore, as with other fiduciary duties, the trustee must ascertain whether existing or potential conflicts of interest may interfere with the proper exercise of this responsibility. Whether, in light of all the facts and circumstances, a trustee is subject to a conflict of interest or has reason to believe that a particular direction is contrary to ERISA are inherently factual questions as to which the Department generally will not opine. See section 5.01 of ERISA Procedure 76-1, 41 Fed. Reg. 36281 (Aug. 27, 1976). If the named fiduciary has designated an investment manager pursuant to ERISA section 402(c)(3), then pursuant to ERISA section 405(d)(1) the trustee is not liable for the acts and omissions of the investment manager and is under no obligation to invest or otherwise manage any asset of the plan which is subject to the management of such investment manager. Under ERISA section 405(d)(2), however, the trustee would remain liable for any acts of the trustee including knowing participation or knowing concealment of a breach by another fiduciary under ERISA section 405(a)(1). This letter constitutes an advisory opinion under ERISA Procedure 76-1. Section 10 of the procedure describes the affect of advisory opinions. Sincerely, Robert J. Doyle Footnotes
93-13A Investment in Affiliated Mutual FundsAdvisory Opinion/Individual Exemption 93-13A April 27, 1993
U.S. Department of Labor April 27, 1993 AO 93-13A Fred R. Green, Esq. Re: Frank Russell Company Identification No.: C-9103 Dear Mr. Green: This is in response to your request for an advisory opinion on behalf of Frank Russell Trust Company and its affiliates regarding the application of Prohibited Transaction Exemption 77-4 (42 FR 18732, April 8, 1977) (PTE 77-4). You represent that Frank Russell Company (FRC), Frank Russell Trust Company (FRTC), Frank Russell Investment Company (FRIC) and Frank Russell Investment Management Company (FRIMCO) are part of a group of affiliated companies referred to as the Frank Russell Group (hereinafter referred to collectively as FRG). You further indicate that FRTC serves as trustee, or as investment manager with respect to employee benefit plans (Plans). In addition, FRIMCO serves as investment adviser1 for a family of mutual funds (the Funds) sponsored by FRIC, each of which is an open-end, registered investment company under the Investment Company Act of 1940. FRIMCO develops the investment programs for each of the Funds, selects money managers/investment advisers (Sub-Advisers) within each of the Funds, allocates assets among the Sub-Advisers within each Fund and monitors the Sub-Advisers' investment programs and results. FRTC proposes to invest plan assets in the Funds. The Plans will continue to pay an investment advisory fee to FRTC with respect to all plan assets for which FRTC is a trustee with investment discretion or investment manager, including plan assets invested in the Funds. The Plans and the Funds will not pay an investment advisory or similar fee to FRIMCO, or any affiliate, with respect to the plan assets invested in the shares of the Funds. However, shareholders of the Funds, other than the Plans, will pay an investment management fee directly to FRIMCO. In turn, FRIMCO is responsible for the payment of investment advisory fees to the Sub-Advisers of the Funds from fees it receives. In addition, FRC and FRIMCO provide other services (Secondary Services) to the Funds including (i) transfer agent services; (ii) portfolio activity reports; (iii) analysis of international management reports; and (iv) tax record maintenance. FRIMCO and FRC propose to collect all fees for Secondary services provided to the Funds without waiver of, or credit for, the Plans' pro rata share of such fees. You state that a fiduciary of a Plan who is independent of and unrelated to FRTC or any affiliate will receive a current prospectus provided by FRTC and written disclosure of the investment advisory and other fees, and any change in such fees, to be paid to FRG by the Funds.2 After reviewing the written fee disclosures and the prospectus, the independent fiduciary will provide written approval of a program of investment of Plan assets in the shares of the Funds. The form of the written approval may include, but is not limited to, the execution of modified trust and investment management agreements by the independent fiduciary and FRTC. You ask whether FRIMCO's waiver of the investment advisory fee, otherwise payable by the Plans to FRG in connection with the investment of plan assets in the Funds, complies with the requirements of paragraph (c) of section II of PTE 77-4.3 Further, you ask whether paragraphs (d), (e) and (f) of section II of PTE 77-4 require written disclosure and approval of fees paid to parties unrelated to FRIMCO, or any affiliate, with respect to the investment of plan assets in the Funds. Finally, you ask whether PTE 77-4 provides relief for the purchase or sale of shares of the Funds subsequent to the approval by a Plan fiduciary, independent of and unrelated to FRTC, of a program for the purchase or sale of shares in the Funds, without prior approval of each such purchase or sale by the independent Plan fiduciary. PTE 77-4 provides, in part, that:
Paragraph (c) of section II of PTE 77-4 states that:
The preamble to the proposed class exemption (41 FR 50516, November 16, 1976) explains that:
In addition, paragraph (d) of section II of PTE 77-4 provides that:
Further, paragraph (e) of section II of PTE 77-4 states that:
In addition, paragraph (f) of section II of PTE 77-4 provides that:
It is the opinion of the Department that the arrangement described in your submissions for the payment of investment management fees by the Plans to FRTC and the waiver of investment advisory fees otherwise payable by the Plans to FRIMCO, or any affiliate, with respect to plan assets invested in the Funds will satisfy the conditions of paragraph (c) of section II of PTE 77-4.4 With respect to your second request, the Department is of the view that the conditions of paragraphs (d), (e) and (f) of section II of PTE 77-4 do not apply to fees paid to parties unrelated to FRIMCO, or any affiliate, under the above described arrangement.5 With respect to your last issue, the Department believes that PTE 77-4 provides relief for transactions in which FRTC causes a Plan to purchase or sell shares of the Funds subsequent to written approval by a Plan fiduciary, independent of and unrelated to FRTC, of a program for the purchase or sale of shares in the Funds, without the prior approval of each such purchase or sale by an independent fiduciary, provided all of the other conditions of the exemption are met. This letter constitutes an advisory opinion under ERISA Procedure 76-1 and is issued subject to the provisions of that procedure, including section 10, relating to the effect of advisory opinions. We note that pursuant to section 5 of ERISA Procedure 76-1 this advisory opinion relates solely to the arrangement described involving FRG. Sincerely, Ivan L. Strasfeld Footnotes
The Department further notes that at the time PTE 77-4 was granted, the use of a portion of the assets of a registered investment company to pay distribution expenses was not generally permitted by the Securities and Exchange Commission. Accordingly, the payment of fees pursuant to a distribution plan adopted in accordance with Rule 12b-1 under the Investment Company Act ("12b-1 fees"), was not specifically considered by the Department as part of its determination to grant PTE 77-4. In any event, the Department does not believe that the payment of a 12b-1 fee by a fund to a plan fiduciary or its affiliate can be functionally distinguished in many instances from the payment of a commission by the plan in connection with the acquisition or sale of shares in a mutual fund. Therefore, the Department is unable to conclude that PTE 77-4 would be available for plan purchases and sales of mutual fund shares if a 12b-1 fee is paid to the fiduciary or its affiliate with regard to that portion of the fund's assets attributable to the plan's investment. 93-24A Float ManagementAdvisory Opinion 93-24A September 13, 1993
U.S. Department of Labor Pension and Welfare Benefits Administration Washington, D.C. 20210 September 13, 1993 AO 93-24A ERISA SECTION: Roger W. Thomas Staff Attorney Department of Financial Institutions Fourth Floor, The John Sevier Building 500 Charlotte Avenue Nashville, TN 37243-0705 Dear Mr. Thomas: This is in response to your inquiry whether certain transactions engaged in by a Tennessee bank are consistent with the Employee Retirement Income Security Act of 1974 (ERISA). In particular, you call attention to an asserted "common industry practice" whereby banks acting as agents or trustees for employee benefit plans earn interest for their own accounts from the "float" when a benefit check is written to a participant until the check is presented for payment. You indicate that a company (Trust Company), which is chartered under Tennessee law as a non-depository bank limited to trust powers, acts as an agent or trustee for various employee benefit plans. It also offers various collective investment funds in which plans invest. A national bank (National Bank) located in Tennessee serves as custodian for some of these plans. In connection with the administration of the plans, Trust Company maintains accounts at National Bank, including a "General Account" and a "Disbursement Account." When Trust Company is directed to liquidate pooled fund assets to pay benefits, unless it is specifically directed to wire the funds to the participant, it transfers the funds to the General Account and simultaneously issues a check payable to the participant from the Disbursement Account. When checks are presented for payment, funds are wired from the General to the Disbursement Account. In the interim, Trust Company earns income on such funds for its own account, pursuant to a retail repurchase agreement with National Bank. You question whether the payment of this income to Trust Company is a prohibited receipt by a fiduciary of consideration from a party dealing with the plan in connection with a transaction involving the assets of the plan under section 406(b)(3) of ERISA. You also express concern that the Trust Company may be violating ERISA by dealing with National Bank, given National Bank's relationship to the plans. Trust Company, through its attorney, contends that once a check is written to a participant, corresponding amounts in the General Account cease to be plan assets. In support of this argument Trust Company relies upon the first example of the participant contribution regulation in 29 C.F.R. 2510.3-102, which addresses when amounts that an employer withholds from a participant's pay for contribution to a plan can reasonably be segregated from the employer's general assets, and thus become assets of the plan for certain purposes. These special rules concerning segregation of participant contributions from an employer's general assets, however, have no application to the question of whether a plan has an interest in an administrative account when plan assets are transferred to the account in support of an outstanding benefit check.1 Turning to an analysis of the issues presented, section 406(b)(1) of ERISA states that a fiduciary with respect to a plan shall not deal with the assets of the plan in his or her own interest or for his or her own account. Section 3(21)(A) of ERISA defines a fiduciary, in part, as one who exercises any discretionary authority with respect to the assets of a plan. As explained in 29 C .F.R. 2509.75-8, persons serving as plan trustees (and certain other plan officials) will be fiduciaries due to the very nature of their positions. Other persons will be fiduciaries to the extent that they perform any of the functions described in section 3(21)(A) of ERISA. Accordingly, it is the view of the Department that, based on the facts described above, where a fiduciary (e.g. Trust Company) exercises discretion with regard to plan assets, its receipt of income from the "float" on benefit checks under a repurchase agreement with a national bank in connection with the investment of such plan assets would result in a transaction described in ERISA section 406(b)(1).2 Moreover, even if all income earned under the repurchase agreements were allocated to the plans, the repurchase agreements themselves may be prohibited where the national bank is a party in interest with respect to the plans. Section 406(a)(1)(A) and (B) of ERISA, in part, prohibit sales or extensions of credit between plans and parties in interest. The term "party in interest" is defined in section 3(14) of ERISA to include a person providing services to a plan. From the information provided, it appears that National Bank, as the custodian of plan assets for some of the plans, is a service provider to such plans. As we understand it, repurchase agreements essentially involve debt transactions structured as sales of securities. Therefore, absent exemptive relief, it appears that the repurchase agreements in question would involve prohibited extensions of credit, as well as prohibited sales between National Bank and plans that it serves. The Department has issued an administrative exemption, Prohibited Transaction Exemption 81-8 (copy enclosed), which provides conditional relief for investments in repurchase agreements, by or on behalf of an employee benefit plan. Whether this class exemption would grant relief to the parties involved in the subject retail repurchase agreement cannot be determined from the information provided. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, it is issued subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions. Sincerely, Robert J. Doyle Footnotes
U.S. Department of Labor Pension and Welfare Benefits Administration Washington, D.C. 20210 AUG 11 1994 Ms. Judith A. McCormick Federal Counsel American Bankers Association 1120 Connecticut Avenue, N.W. Washington, D.C. 20036 Dear Ms. McCormick: Thank you for the invitation to respond to an editorial entitled "Special Analysis, Perspectives on the 'Float' Issue," which appeared in the American Bankers Association January 1994 edition of the Trust Letter. We appreciate this opportunity to clear up an apparent misunderstanding in the editorial regarding prohibited self-dealing by banks that serve as fiduciaries to employee benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA). The focus of the editorial is an ERISA advisory opinion, AO 93-24A (Sept. 13, 1993), which concluded that a bank trustee's exercise of discretion to earn income for its own account from the "float" attributable to outstanding benefit checks constitutes prohibited fiduciary self-dealing under ERISA. The editorial questions whether the analysis in AO 93-24A is limited to its facts -- which involved the use of accounts and repurchase agreements with a third-party national bank to earn income for the bank trustee during the period of the float -- or whether the opinion has broader implications for the procedures banks commonly utilize in issuing benefit checks. Although advisory opinions apply only to the specific factual situations that they describe, (ERISA Procedure 76-1, § 10, 41 Fed. Reg. 36281, 36283 (Aug. 27, 1976)), the essential analysis of AO 93-24A is not unique to its facts. The editorial notes that, in contrast to the facts presented In AO 93-24A, banks commonly issue benefit checks drawn on a disbursement account within the same institution. The editorial points out that, as a technical matter depending upon the type of account used, the actual amounts in such disbursement accounts may no longer be considered plan assets. From this, the editorial concludes, in our view erroneously, that "[i]f these balances are no longer plan assets once transferred to such an account, then no prohibited transaction occurs." This conclusion misses the fundamental principle of AO 93-24A that, without regard to the status of the funds after they are placed in a disbursement or other account, a bank fiduciary's decision to handle plan assets in such a way as to benefit itself constitutes prohibited self-dealing. We also take issue with the suggestion in the editorial that section 408(b)(6) of ERISA exempts such fiduciary self-dealing. That section affords conditional relief from the prohibitions on self-dealing for the providing of "ancillary" services by a bank to a plan for which it is a fiduciary if, among other requirements, the services are provided for no more than reasonable compensation. The legislative history of this section indicates that "in determining whether a plan pays more than reasonable compensation for its checking account services, the interest available on an alternate use of the funds is to be considered." H.R. Conf. Rept. No. 93-1280, 93d Cong., 2d Sess. (1974) at 315. Given the widespread technological advances in cash management during the twenty years since ERISA was enacted, it is by now generally recognized that banks have the capability of investing daily all but small amounts of cash in trust-quality investment vehicles at competitive market rates. (See Board of Governors of the Federal Reserve System letter to Stephen R. Steinbrink, Deputy Comptroller, Office of Comptroller of the currency, dated May 17, 1991). Accordingly, Section 408(b)(6) does not provide relief for a bank trustee who maintains cash balanced in a zero-interest disbursing account within the same institution to the extent that it is reasonably possible to earn net returns for the plan on those monies. Nor would such an exercise of discretion that is intended to benefit the bank at the expense of the plan's interests comport with the requirements of section 404(a)(1)(A) of ERISA that fiduciaries act prudently and solely in the interest of participants and beneficiaries. Of course, if a bank fiduciary has openly negotiated with an independent plan fiduciary to retain earnings on the float attributable to outstanding benefit checks as part of its overall compensation, then the bank's use of the float would not be self-dealing because the bank would not be exercising its fiduciary authority or control for its own benefit. Therefore, to avoid, problems, banks should, as part of their fee negotiations, provide full and fair disclosure regarding the use of float an outstanding benefit checks. Again, thank you for opening a dialogue on this important matter. We hope that this exchange will help to clarify any misunderstanding concerning the "float" issue. Sincerely, Robert J. Doyle 93-26A Investment in Affiliated Mutual Funds by IRA and Keogh AccountsAdvisory Opinion/Individual Exemption 93-26A September 9, 1993
U.S. Department of Labor Pension and Welfare Benefits Administration Washington, D.C. 20210 September 9, 1993 Donald S. Kohla, Esq. AO 93-26A King & Spalding 191 Peachtree Street Atlanta, Georgia 30303-1763 Re: SunTrust Banks, Inc. (SunTrust) Exemption Application No. D-9423 Dear Mr. Kohla: This is in response to the above referenced application requesting an exemption from the prohibitions of section 406 of the Employee Retirement Income Security Act of 1974 (ERISA or the Act) and from the sanctions resulting from the application of Section 4975 of the Internal Revenue Code of 1986 (the Code). Your application sets forth the following facts and representations. SunTrust proposes to offer shares of the STI Classic Funds (the Funds), a series of open-end investment companies registered under the Investment Company Act of 1940, to individual retirement accounts (IRAs) for which SunTrust acts as a trustee with investment management responsibility. Sun Bank Capital Management and Trustco Capital Management, affiliates of SunTrust, serve as investment advisers for the Funds and receive fees for their services from the Funds. You represent that SunTrust will not charge the IRAs any investment management fees for assets that are invested in the Funds. At the conference regarding your exemption request on August 19, 1993, you stated that, as an alternative to obtaining an individual exemption for the proposed transactions, SunTrust would be willing to structure the arrangement to comply with Prohibited Transaction Exemption (PTE) 77-4 (42 FR 18732, April 8, 1977) if that exemption is available for IRAs. Under Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978) the authority to issue rulings under section 4975 of the Code has been transferred, with certain exceptions, to the Secretary of Labor. Therefore, the references in this letter to specific sections of ERISA refer also to corresponding sections of the Code. PTE 77-4 provides that the restrictions of section 406 of the Act, and the taxes imposed by section 4975(a) and (b) of the Code, shall not apply to the purchase and sale by an employee benefit plan of shares of an open-end investment company registered under the Investment Company Act of 1940, the investment adviser for which is also a fiduciary with respect to the plan (or an affiliate of such fiduciary), and is not an employer of employees covered by the plan, provided certain conditions are met. Although PTE 77-4 does not define the term "employee benefit plan", the Department of Labor (the Department) is of the view that the exemption is applicable not only to transactions involving employee benefit plans covered under Title I of ERISA, but also to transactions involving IRAs and HR-10 plans which are not covered by Title I of ERISA but which are subject to the provisions of section 4975 of the Code. We have conferred with representatives of the Internal Revenue Service and they concur in the view that plans described in code section 4975(e)(1) are included within the scope of PTE 77-4. This letter constitutes an advisory opinion under ERISA Procedure 76-1 and is issued subject to the provisions of that procedure, including section 10, relating to the effect of advisory opinions. This opinion relates only to the specific issue addressed herein. For example, the Department is not providing an opinion as to whether the particular arrangement described in your exemption application would satisfy the conditions imposed by PTE 77-4. Nor is the Department providing an opinion as to the definition of the term "employee benefit plan" in any exemption other than PTE 77-4. if you have any further questions, please contact Mr. E. F. Williams, Department of Labor, (202) 219-8883. Sincerely, Ivan L. Strasfeld Director Office of Exemption Determinations 94-41A EscheatingAdvisory Opinion to OCC (94-41A) December 7, 1994 U.S. Department of Labor Pension and Welfare Benefits Administration Washington, DC 20210 December 7, 1994 Mr. Thomas R. Giltner 94-4lA Cox & Smith Incorporated ERISA SECTION 112 East Pecan Street, Suite 2000 514(a) San Antonio, Texas 78205 Dear Mr. Giltner: This is in reply to your request for an advisory opinion regarding the applicability of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you ask whether section 514(a) of Title I of ERISA preempts the application of the Texas Unclaimed Property Statutes (Tex. Prop. Code Ann. Title 6 (West 1985)), with the result that the State of Texas may not assume custody over unclaimed benefits of those participants in the Luby's Cafeterias, Inc. Employees Profit Sharing and Retirement Trust (the Plan) who cannot be located. You advise that Luby's Cafeterias, Inc. (the Company) sponsors the Plan for its eligible employees. You further advise that, in the normal operation of the Plan, the plan administrator has occasionally been unable to locate a participant or beneficiary entitled to a distribution of retirement benefits. You interpret Section 7.10 of the plan document, which provides a procedure in the event a participant or beneficiary fails to claim a distribution, to permit or require your current practice in such circumstances, which you describe as follows. If a distributee fails to claim a distribution under the plan, the amount of the unclaimed benefit is transferred to an account styled "Terminated Employees' Account," which is an account segregated from the Plan's other bank accounts, but is an account of the Plan. (l) The Plan maintains records to indicate the amount of each "lost" participant's or beneficiary's interest in the account. If a lost participant or beneficiary is later located, his or her benefits are paid from the Plan's main account, which is then reimbursed from the Terminated Employees' Account. If a lost participant or beneficiary is not located within four years, you represent that his or her share in the Terminated Employees' Account is then transferred to the Plan's main account. If the lost participant or beneficiary is located at any time after this transfer occurs, you represent that his or her benefits are reinstated and paid by the Plan.
Section 514(a) of Title I of ERISA provides:
Section 514(a) does conflict with Title I of ERISA, not merely preempt state laws that ERISA, but broadly preempts all state laws related to employee benefit plans. The reasons for the broad preemption of state laws under ERISA were succinctly stated by Senator Javits, a major sponsor and floor manager of the bill that became ERISA, during its final consideration:
interest and the interests of uniformity with respect to interstate plans required -- but for certain exceptions -- the displacement of State action in the field of private employee benefit programs. (120 Cong. Rec. S15751 (daily ed. Aug 22, 1974)). It is the view of the Department of Labor (the Department) that, if the above-quoted section of the Texas Unclaimed Property Statutes were applied to require the Plan to pay to the State amounts held in the Terminated Employees' Account, or in other accounts of the Plan, pursuant to the procedures described above, then such application of the section would be preempted under section 514(a) of ERISA. (2) Such an application of the State escheat law would directly affect the core functions of the Plan by reducing, through the escheat, the amount of plan assets held in trust for the benefit of all participants and beneficiaries of the Plan. (3) Moreover, because the statute at issue is not a law regulating insurance, banking or securities, it is not saved from preemption under section 514(b) (2). (4) This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, it is issued subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions. Sincerely, Robert J. Doyle
94-OCC Collective Investment Fund Conversions to Mutual FundsAdvisory Opinion to OCC (94-OCC) (Makes reference to PTE 77-4) February 14, 1994 U.S. Department of Labor Pension and Welfare Benefits Administration Washington, DC 20210 February 14, 1994 Mr. William Granovsky National Bank Examiner Compliance Management Comptroller of the Currency Administrator of National Banks Washington, D.C. 20219 Re: Applicability of Prohibited Transaction Exemption (PTE) 77-4 to the Conversion of Bank Collective Investment Funds. Dear Mr. Granovsky: As a follow-up to our meeting on February 1, 1994, I thought it would be helpful if the Department formally provided its views regarding the applicability of Prohibited Transaction Exemption PTE 77-4 to the conversion of bank collective investment funds. As you know, PTE 77-4 provides conditional relief from ERISA's prohibited transaction provisions for the purchase or sale by a plan of shares of an open-end investment company, the investment adviser for which is also a fiduciary with respect to the plan. Although PTE 77-4 does not specifically address in-kind exchanges, the Department is of the view that the transactions exempted by PTE 77-4 do not include the acquisition or sale of investment company shares for anything other than cash. We believe that if such transactions had been contemplated at the time that the exemption was granted, the exemption would contain additional safeguards designed to address the valuation and other' issues associated with in-kind exchanges. Therefore, the Department is unable to conclude that PTE 77-4 would be available for conversions of bank collective investment funds involving the exchange of securities held by the fund on behalf of plan investors for shares of the bank's affiliated investment company. If you have any further questions please contact Eric Berger at (202) 219-8971. Sincerely, Ivan L. Strasfeld 96-OCC Investments in DerivativesAdvisory Opinion to OCC (96-OCC) March 21, 1996 U.S. Department of Labor Assistant Secretary for Pension and Welfare Benefits Washington, D.C. 20210 March 21, 1996 Honorable Eugene A. Ludwig Comptroller of the Currency 250 E Street, S.W. Washington, D.C. 20219 Dear Mr. Ludwig, At our last meeting we discussed the Department of Labor's views with respect to the utilization of derivatives1 in the management of a portfolio of assets of a pension plan which is subject to the Employee Retirement Income Security Act of 1974 (ERISA). This letter is to provide you with an update of our views in a format which may be of use to you and your staff. ERISA governs private-sector sponsored employee welfare and pension benefit plans and provides a general framework within which plan fiduciaries are expected to conduct their investment activities. Under ERISA, a fiduciary includes anyone who exercises discretion in the administration of an employee benefit plan; has authority or control over the plan's assets; or renders investment advice for a fee with respect to any plan assets.2 Thus, any entity, including an institution such as a bank, that meets this functional test with respect to an employee benefit plan sponsored by a private-sector employer, employee organization, or both, would be considered a fiduciary under ERISA. ERISA establishes comprehensive standards to govern fiduciary conduct. Among other things, fiduciaries with respect to an employee benefit plan must discharge their duties with respect to a plan solely in the interest of the plan's participants and beneficiaries, and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.3 Investments in derivatives are subject to the fiduciary responsibility rules in the same manner as are any other plan investments. Thus, plan fiduciaries must determine that an investment in derivatives is, among other things, prudent and made solely in the interest of the plan's participants and beneficiaries. In determining whether to invest in a particular derivative, plan fiduciaries are required to engage in the same general procedures and undertake the same type of analysis that they would in making any other investment decision. This would include, but not be limited to, a consideration of how the investment fits within the plan's investment policy, what role the particular derivative plays in the plan's portfolio, and the plan's potential exposure to losses. While derivatives may be a useful tool for managing a variety of risks and for broadening investment alternatives in a plan's portfolio, investments in certain derivatives, such as structured notes and collateralized mortgage obligations, may require a higher degree of sophistication and understanding on the part of plan fiduciaries than other investments. Characteristics of such derivatives may include extreme price volatility, a high degree of leverage, limited testing by markets, and difficulty in determining the market value of the derivative due to illiquid market conditions. As with any investment made by a plan, plan fiduciaries with the authority for investing in derivatives are responsible for securing sufficient information to understand the investment prior to making the investment. For example, plan fiduciaries should secure from dealers and other sellers of derivatives, among other things, sufficient information to allow an independent analysis of the credit risk and market risk being undertaken by the plan in making the investment in the particular derivative. The market risks presented by the derivatives purchased by the plan should be understood and evaluated in terms of the effects that they will have on the relevant segments of the plan's portfolio as well as the portfolio's overall risk. Plan fiduciaries have a duty to determine the appropriate methodology used to evaluate market risk and the information which must be collected to do so. Among other things, this would include, where appropriate, stress simulation models showing the projected performance of the derivatives and of the plan's portfolio under various market conditions. Stress simulations are particularly important because assumptions which may be valid for normal markets may not be valid in abnormal markets, resulting in significant losses. To the extent that there may be little pricing information available with respect to some derivatives, reliable price comparisons may be necessary. After entering into an investment, a plan fiduciary should be able to obtain timely information from the derivatives dealer regarding the plan's credit exposure and the current market value of its derivative positions, and, where appropriate, should obtain such information from third parties to determine the current market value of the plan's derivative positions, with a frequency that is appropriate to the nature and extent of these positions. If the plan is investing in a pooled fund which is managed by a party other than the plan fiduciary who has chosen the fund, then that plan fiduciary should obtain, among other things, sufficient information to determine the pooled fund's strategy with respect to use of derivatives in its portfolio, the extent of investment by the fund in derivatives, and such other information as would be appropriate under the circumstances. As part of its evaluation of the investment, a fiduciary must analyze the operational risks being undertaken in making the investment. Among other things, the fiduciary should determine whether it possesses the requisite expertise, knowledge, and information to understand and analyze the nature of the risks and potential returns involved in a particular derivative investment. In particular, the fiduciary must determine whether the plan has adequate information and risk management systems in place given the nature, size and complexity of the plan's derivatives activity, and whether the plan fiduciary has personnel who are competent to manage these systems. If the investments are made by outside investment managers hired by the plan fiduciary, that fiduciary should consider whether the investment managers have such personnel and controls and whether the plan fiduciary has personnel who are competent to monitor the derivatives activities of the investment managers. Plan fiduciaries have a duty to evaluate the legal risk related to the investment. This would include assuring proper documentation of the derivative transaction and, where the transaction is pursuant to a contract, assuring written documentation of the contract before entering into the contract. Also, as with any other investment, plan fiduciaries have a duty to properly monitor their investments in derivatives to determine whether they are still appropriately fulfilling their role in the portfolio. The frequency and degree of the monitoring will, of course, depend on the nature of such investments and their role in the plan's portfolio. We hope these comments have been helpful. However, if you should have any further questions or if we can provide any further assistance, please feel free to contact Morton Klevan at (202) 219-9044 or Louis Campagna at (202) 219-8883. Sincerely, Olana Berg Footnotes
97-15A Acceptance of Mutual Fund 12b-1 Fees; Letter to Frost National Bank; Discretionary and Non-Discretionary AccountsAdvisory Opinion 97-15A to Frost National Bank May 22, 1997
U.S. Department of Labor May 22 1997 Mark S. Miller 97-15A Fulbright & Jaworski, LLP 1301 McKinney, Suite 5100 Houston, Texas 77010-3095 Dear Mr. Miller: This is in response to your request for an advisory opinion regarding the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA). In particular, you ask whether the payment of certain fees by a mutual fund in which an employee pension benefit plan has invested to a bank serving as the plan's trustee would violate sections 406(b)(1) and 406(b)(3) of ERISA. You represent that Frost National Bank (Frost) serves as trustee to various employee pension benefit plans (the Plans). As trustee of the Plans, Frost's duties may include one or more of the following functions, pursuant to instructions from the Plan sponsor or participants: opening and maintaining individual participant accounts; receiving contributions from the Plan sponsor and crediting them to individual participant accounts; investing contributions in shares of a mutual fund and reinvesting dividends and other distributions; redeeming, transferring, or exchanging mutual fund shares; providing or maintaining various administrative forms in making distributions from the Plan to participants or beneficiaries; keeping custody of the Plan's assets; withholding amounts on Plan distributions; making sure all Plan loan payments are collected and properly credited; conducting Plan enrollment meetings; and preparing newsletters and videos relating to the administration of the Plan. In connection with its Plan-related business, Frost has entered into arrangements with one or more distributors of, or investment advisors to, mutual fund families pursuant to which Frost will make the mutual fund families available for investment by the Plans. Frost will periodically review each such mutual fund family to determine whether to continue the arrangement, and will reserve the right to add or remove mutual fund families that it makes available to the Plans. As part of Frost's arrangements with the mutual fund families, Frost may provide shareholder services to, and receive fees from, some of the Individual mutual funds in which Plan assets are invested. The shareholder services may include, e.g., providing mutual fund recordkeeping and accounting services in connection with the Plans' purchase or sale of shares, processing mutual fund sales and redemption transactions involving the Plans, and providing mutual fund enrollment material (including prospectuses) to Plan participants. The fees paid by the mutual funds to Frost will generally be based on a percentage of Plan assets invested in each mutual fund, and will be paid pursuant to either a distribution plan described in Securities and Exchange Commission (SEC) Rule 12b-1, 17 C.F.R. 270.12b-I (a 12b-1 plan), or a "subtransfer agency arrangement."1 You further represent that, with respect to some of the Plans, Frost will recommend to the Plan fiduciary the advisability of investing in particular mutual funds offered pursuant to Frost's arrangements with the mutual fund families. In addition, Frost will monitor the performance of the individual mutual funds selected by the Plan fiduciary and, as it deems appropriate, will make further recommendations regarding additional or substitute mutual funds for the investment of Plan assets. With respect to other Plans, Frost will not make any recommendations concerning the selection of, or continued investment in, particular mutual funds. Rather, the responsible Plan fiduciary will independently select, from the mutual fund families made available by Frost, particular mutual funds for the investment of Plan assets, or for designation as investment alternatives offered to participants under the Plan. In both instances, whether or not Frost makes specific investment recommendations, you represent that, before a Plan enters into the arrangement, the terms of Frost's fee arrangements with the mutual fund families will be fully disclosed to the Plans. In addition, Frost's trustee agreement with a Plan will be structured so that any 12b-1 or subtransfer agent fees received by Frost that are attributable to the Plan's investment in a mutual fund will be used to benefit the Plan. Pursuant to the particular agreement with each Plan, Frost will offset such fees, on a dollar-for-dollar basis, against the trustee fee that the Plan is obligated to pay Frost or against the recordkeeping fee that the Plan is obligated to pay to a third-party recordkeeper; or Frost will credit the Plan directly with the fees it receives based on the investment of Plan assets in the mutual fund.2 The trustee agreement will provide that, to the extent that Frost receives fees from mutual funds in connection with the Plan's investments that are in excess of the fee that the Plan owes to Frost, the Plan will be entitled to the excess amount. You request an opinion that Frost's receipt of fees from the mutual funds under the circumstances described would not constitute a violation of ERISA section 406(b)(1) or (b)(3).3 You have asked us to assume for the purpose of your request that the arrangements between Frost and the Plans satisfy the conditions of ERISA section 408(b)(2).4 Section 406(b)(1) of ERISA prohibits a fiduciary with respect to a plan from dealing with the assets of the plan in his or her own interest or for his or her own account. Section 406(b)(3) prohibits a fiduciary with respect to a plan from receiving any consideration for his or her personal account from any party dealing with the plan in connection with a transaction involving the assets of the plan.5 Under section 3(21)(A) of ERISA, a person is a "fiduciary" with respect to a plan to the extent that the person (i) exercises any discretionary authority or control respecting management of the plan or any authority or control respecting management or disposition of its assets, (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or responsibility in the administration of the plan. Frost, as trustee, is a fiduciary with respect to the Plans under section 3(21)(A) of ERISA. See 29 C.F.R. 2509.75-8, D-3 (the position of trustee of a plan, by its very nature, requires the person who holds it to perform one or more of the functions described in ERISA section 3(21)(A))6 When the Trustee Advises You have indicated that, with respect to some of the Plans, Frost will advise the Plan fiduciary regarding particular mutual funds in which to invest Plan assets.7 It also appears from your submission that, under Frost's arrangements with various mutual fund families, Frost may receive fees from some of the mutual funds as a result of a Plan's investment in the mutual funds recommended by Frost. In the view of the Department, advising that plan assets be invested in mutual funds that pay additional fees to the advising fiduciary generally would violate the prohibitions of ERISA section 406(b)(1). You represent, however, that before entering into an arrangement with a Plan, or recommending any particular mutual fund investments, Frost will disclose to the Plan fiduciary the extent to which it may receive fees from the mutual fund(s). Furthermore, you represent that the trustee agreement between Frost and the Plan will expressly provide that any fees received by Frost as a result of the Plan's investment in such a mutual fund will be used to pay all or a portion of the compensation that the Plan is obligated to pay to Frost, and that the Plan will be entitled to any such fees that exceed the Plan's liability to Frost.8 To the extent the Plan's legal obligation to Frost is extinguished by the amount of the offset, it is the opinion of the Department that Frost would not be dealing with the assets of the Plan in its own interest or for its own account in violation of section 406(b)(1). With respect to the prohibition of section 406(b)(3), Frost's contract with a Plan, as described above, will provide that Frost's receipt of fees from one or more mutual funds in connection with the Plan's investment in such funds will be used to reduce the Plan's obligation to Frost, will in no circumstances increase Frost's compensation, and thus will benefit the Plan rather than Frost. Accordingly, it is the opinion of the Department that in these circumstances Frost would not be deemed to receive such payments for its own personal account in violation of section 406(b)(3). When the Trustee is Directed With respect to Plans for which Frost does not provide any investment advice, it appears that the Plan fiduciary, and in some instances the Plan participants, will select the mutual funds in which to invest Plan assets from among those made available by Frost. Generally speaking, if a trustee acts pursuant to a direction in accordance with section 403(a)(1) or 404(c) of ERISA and does not exercise any authority or control to cause a plan to invest in a mutual fund that pays a fee to the trustee in connection with the plan's investment, the trustee would not be dealing with the assets of the plan for its own interest or for its own account in violation of section 406(b)(1). Similarly, it is generally the view of the Department that if a trustee acts pursuant to a direction in accordance with section 403(a)(1) or 404(c) of ERISA and does not exercise any authority or control to cause a plan to invest in a mutual fund, the mere receipt by the trustee of a fee or other compensation from the mutual fund in connection with such investment would not in and of itself violate section 406(b)(3). Your submission indicates, however, that Frost reserves the right to add or remove mutual fund families that it makes available to Plans. Under these circumstances, we are unable to conclude that Frost would not exercise any discretionary authority or control to cause the Plans to invest in mutual funds that pay a fee or other compensation to Frost.9 However, because Frost's trustee agreements with the Plans are structured so that any 12b-1 or subtransfer agent fees attributable to the Plans' investments in mutual funds are used to benefit the Plans, either as a dollar-for-dollar offset against the fees the Plans would be obligated to pay to Frost for its services or as amounts credited directly to the Plans, it is the view of the Department that Frost would not be dealing with the assets of the Plans in its own interest or for its own account, or receiving payments for its own personal account in violation of section 406(b)(1) or (b)(3). Finally, it should be noted that ERISA's general standards of fiduciary conduct also would apply to the proposed arrangement. Under section 404(a)(1) of ERISA, the responsible Plan fiduciaries must act prudently and solely in the interest of the Plan participants and beneficiaries both in deciding whether to enter into, or continue, the above-described arrangement and trustee agreement with Frost, and in determining which investment options to utilize or make available to Plan participants or beneficiaries. In this regard, the responsible Plan fiduciaries must assure that the compensation paid directly or indirectly by the Plan to Frost is reasonable, taking into account the trustee services provided to the Plan as well as any other fees or compensation received by Frost in connection with the investment of Plan assets. In this connection, it is the view of the Department that the responsible Plan fiduciaries must obtain sufficient information regarding any fees or other compensation that Frost receives with respect to the Plan's investments in each mutual fund to make an informed decision whether Frost's compensation for services is no more than reasonable. The Plan fiduciaries also must periodically monitor the actions taken by Frost in the performance of its duties, to assure, among other things, that any fee offsets to which the Plan is entitled are correctly calculated and applied. This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, it is issued subject to the provisions of that procedure, including section 10 thereof regarding the effect of advisory opinions. Sincerely, Bette J. Briggs Footnotes
97-16A Acceptance of Mutual Fund 12b-1 Fees; Letter to Aetna Life Insurance and Annuity Company; Non-Discretionary AccountsAdvisory Opinion 97-16A to Aetna Life Insurance and Annuity Company May 22, 1997
U.S. Department of Labor May 22 1997 Stephen M. Saxon 97-16A Groom & Nordberg 1701 Pennsylvania Avenue, N.W. Suite 1200 Washington, DC 20006 Dear Mr. Saxon: This is in response to your request for an advisory opinion concerning the application of section 406(b)(3) of the Employee Retirement Income Security Act (ERISA ) to the receipt of certain fees by the Aetna Life Insurance and Annuity Company (ALIAC), an indirect subsidiary of Aetna Insurance Company, Inc. (Aetna). In particular, you request an opinion that ALIAC's receipt of fees from mutual funds that are unrelated to Aetna for recordkeeping and other services in connection with investments by employee benefit plans in the unrelated funds does not violate section 406(b)(3) under the circumstances described in your request. ALIAC is a life insurance company domiciled in Connecticut, as well as a registered broker-dealer and a registered investment adviser. You represent that ALIAC sponsors and manages the Aetna Mutual Funds 401(k) Program (the 401(k) Program), which offers sponsors (other than Aetna) of participant-directed defined contribution plans (Plans): a) a volume submitter plan document; b) recordkeeping and related administrative services through Aetna 401 Retirement Plan Services (ARPS), ALIAC's business unit; c) investment options selected by ALIAC consisting of no-load or low load mutual funds from various fund families that are unrelated to Aetna (Unrelated Funds), Aetna Series Funds (a series of mutual funds within a diversified open-ended investment company registered under the Investment Company Act of 1940 (ICA)), and group annuity contracts (GACS) issued by Aetna Life Insurance Company (ALIC), an affiliate of ALIAC;1 and d) directed trustee or custodial services provided by a bank that is unrelated to Aetna (the Bank). You represent that Unrelated Funds from three different mutual fund families are currently available and that additional families may be added in the future. You further represent that, in the future, Unrelated Funds may also pay fees to ALIAC for "marketing services."2 Plan fiduciaries who are independent of and unrelated to ALIAC, ALIC, and their affiliates are responsible for selecting the investment options to be offered to Plan participants from among the Unrelated Funds, Aetna Series Funds, and several options under the GACS. You further represent that neither ALIAC, ALIC, nor any other affiliate of Aetna (or any of its employees) provides investment advice or recommendations, within the meaning of ERISA section 3(21)(A)(ii), to Plan fiduciaries or participants regarding the advisability of either selecting any of the investment options for the Plans, or investing in any of the investment options that are available under the Plans. ARPS, ALIAC's business unit, will, pursuant to a plan services agreement, provide some or all of the following services to Plans:
You represent that ARPS is not a "plan administrator" as defined in ERISA section 3(16)(A). You indicate that the 401(k) Program service charges are fully disclosed in the marketing materials describing the 401(k) Program that are provided to Plan fiduciaries. Plans entering into the 401(k) Program pay ARPS a one-time charge for installation services, and annual charges for standard administrative and recordkeeping services, based on the number of participants. Additional services are available on a fee-for-service basis, at the election of the Plan fiduciary. Either party may terminate the arrangement without penalty on 60 days written notice. ALIC receives fees for administration and management of the GACS, including the separate accounts maintained in connection with the GACS. ALIAC receives advisory and administrative fees for investment management and related services provided to the Aetna Series Funds, pursuant to agreements between the Aetna Series Funds and ALIAC, which you represent are standard in the mutual fund industry.3 ALIAC has entered into various contracts with the Unrelated Funds (or their advisers or distributors) pursuant to which shares issued by the Unrelated Funds are purchased on behalf of Plans from the distributors of the Unrelated Funds or directly from the Unrelated Funds. Pursuant to these agreements, ALIAC receives from the Unrelated Funds (or their advisers or distributors) payments in consideration of (1) ARPS's provision of shareholder services (including participant-level recordkeeping) and other administrative services in connection with Plan investments in the Unrelated Funds, and (2) reductions in the Unrelated Funds' shareholder servicing and other administrative expenses (e.g., transfer agency fees) made possible by ARPS's provision of such services. These payments are based on a percentage of Plan assets invested in each Unrelated Fund through the 401(k) Program, and are paid either as administrative expenses by an Unrelated Fund (or by a servicing agent, adviser, or distributor from which the Unrelated Fund obtains its administrative services), or pursuant to a written plan described in Securities and Exchange Commission (SEC) Rule 12b-1, 17 C.F.R. 270.12b-1 (a 12b-1 Plan). The total administrative expenses paid by Unrelated Funds, including fees paid pursuant to 12b-1 Plans, are described to shareholders in prospectus materials. ALIAC discloses its receipt of fees from the Unrelated Funds (or their investment managers or other affiliates) in marketing and other disclosure materials provided to Plan fiduciaries. In particular, ALIAC will provide existing and prospective Plan customers a statement disclosing that ALIAC receives, or may receive, fees from many, but not all, of the Unrelated Funds, their managers or other affiliates (described as a percentage of assets under management with the Unrelated Funds). The statement will enumerate the services that ALIAC provides to the mutual funds and the rate of fees paid. The statement will also provide a toll-free telephone number to request more detailed information concerning which funds pay fees and an estimate of how much ALIAC may receive or has received during a particular time period. ALIAC will update the disclosure whenever there is any material change. ALIAC reserves the right to modify the agreement with the Plan, including the list of Unrelated Funds available for investment, by giving 60 days written notice to the Plan's named fiduciary. If ALIAC decides to delete or replace an Unrelated Fund, ALIAC will notify the fiduciary of each Plan affected by the change. This notice would generally be sent by first class mail or fax. The notice would: (1) explain the proposed modification to the Unrelated Funds menu; (2) fully disclose any resulting chances in the fees paid to ALIAC by the Plan, or by any other entity with respect to Plan assets invested in the affected Funds; (3) identify the effective date of the change; (4) explain the Plan fiduciary's right to reject the change or terminate the agreement; and (5) reiterate that, pursuant to the contract provisions agreed to by the Plan fiduciary, failure to object will be treated as consent to the proposed change. In addition, ALIAC may, depending on the facts and circumstances, send the notice by certified mail, include additional information and notice of the proposed deletion or substitution in other mailings to the Plan fiduciary (e.g., in periodic newsletters, in materials provided to assist the Plan fiduciary in notifying participants of the change, or in an invoice), or follow up its notice of a Fund deletion or substitution by telephone or other contact with the Plan fiduciary. Any or all of these procedures might be taken with respect to a particular Plan or implemented for all Plans affected by a deletion or substitution of a Fund. You represent that if a Plan fiduciary rejects the proposed deletion or substitution, ALIAC would not be authorized to make the proposed deletion or substitution effective with respect to that particular Plan. In such circumstances, upon written notice of termination, the Plan fiduciary is afforded an additional 60 days to convert the Plan to another service provider. You represent, however, that in most cases ALIAC would seek to avoid terminating the agreement and losing a customer by negotiating to address the concerns of a Plan fiduciary that has rejected a proposed modification to the Unrelated Funds menu. You also represent that ALIAC may determine, based on the particular facts and circumstances, to provide more than the minimum 60 days notice of the proposed change, waive some or all of the agreement's 60-day period for notice of termination by a Plan, and/or, if administratively feasible, agree to continue to provide services to a particular Plan beyond the 60-day termination period without deleting or substituting any Unrelated Funds pending the Plan's conversion to a new service provider if additional time is required to complete a conversion. Any of these or other measures might be taken with respect to particular Plans, or implemented for all Plans affected by a deletion or substitution of an Unrelated Fund. You thus represent that a Plan fiduciary will have a reasonable period of time within which to convert to a new service provider. You have requested an opinion that the receipt of fees by ALIAC from the Unrelated Funds would not violate ERISA section 406(b)(3). Section 406(b)(3) provides that: A fiduciary with respect to a plan shall not receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan. The Department has taken the position that if a fiduciary does not exercise any authority or control to cause a plan to invest in a mutual fund, the mere receipt by the fiduciary of a fee or other compensation from the mutual fund in connection with the plan's investment would not in and of itself violate section ERISA 406(b)(3) (See, Advisory Opinion 97-15A, May 22, 1997). Whether the receipt of such fees by ALIAC involves violations of section 406(b)(3) turns first on whether ALIAC is a fiduciary with respect to the investing Plans. ALIAC receives fees from an Unrelated Fund for its own account that are based on a percentage of the Plan assets invested in the Unrelated Fund. Such fees are paid to ALIAC by the Unrelated Fund or a related party in connection with a transaction (the purchase and sale of securities issued by the Unrelated Fund) involving the assets of the Plans. The circumstances under which ALIAC provides recordkeeping and administrative services to Plans, you believe, would not cause ALIAC to be considered a fiduciary. You seek assurance, however, that ALIAC will not be deemed to be a fiduciary with respect to a Plan merely because ALIC, an affiliate under common control with ALIAC, may be considered a fiduciary of the Plan by virtue of providing investment management services for Plan assets invested in an ALIC separate account. ERISA section 3(21)(A) provides that a person is a fiduciary with respect to a plan to the extent that he/she (i) exercises any discretionary authority or control respecting management of the plan or exercises any authority or control respecting management or disposition of its assets, (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or responsibility in the administration of the plan. Section 3(21)(B) provides that neither an investment company registered under the ICA, nor its investment adviser or principal underwriter shall be deemed to be fiduciaries or parties in interest with respect to a plan solely by reason of the plan's investment in securities issued by the investment company, unless the plan covers employees of the investment company, investment adviser or principal underwriter. Interpretive Bulletin 75-8 (IB 75-8, 29 C.F.R. 2509-75-8) provides additional guidance concerning what types of functions will make a person a fiduciary with respect to a plan. In particular, question-and-answer D-2 states that a person who performs purely ministerial functions, such as preparation of employee communications material, preparation of government reports, and preparation of reports concerning participants' benefits, among others, within a framework of policies, interpretations, rules, practices and procedures made by other persons is not a fiduciary because such person does not have or exercise any discretionary authority or control regarding the management of the plan or its assets. Pursuant to these provisions, a determination of whether a person is a fiduciary with respect to a plan requires an analysis of the types of functions performed and actions taken by the person on behalf of the plan to determine whether particular functions or actions are fiduciary in nature and therefore subject to ERISA's fiduciary responsibility provisions. As a result, the question of whether ALIAC is a "fiduciary" within the meaning of section 3(21)(A) of ERISA is inherently factual and will depend on the particular actions or functions ALIAC performs on behalf of the Plans. You represent that ALIAC is not a trustee or administrator of the Plans, and provides only non-discretionary administrative and recordkeeping services pursuant to detailed administrative guidelines described in the Plan services agreement. Based on this representation, it would appear that, in most respects, ALIAC would not be a fiduciary with respect to Plans that are a party to such service agreements. ALIAC, however, retains some authority over the investment options selected by the Plans under the 401(k) Program in that it may, in its discretion, delete or substitute Unrelated Funds. In such instances, you represent that, before implementing a change in Funds with respect to any given Plan, ALIAC will provide advance notice to the appropriate Plan fiduciary regarding the change, including any changes in the fees to be received by ALIAC. If the Plan is permitted to maintain its investments in a deleted or replaced Fund, the advance notice will disclose any increased charges attributable to the retention by the Plan of the deleted or replaced Fund. In connection with this notice, you represent that Plan fiduciaries are afforded up to120 days, or more, to reject the change and terminate ALIAC's services without penalty. It is the view of the Department that a person would not be exercising discretionary authority or control over the management of a plan or its assets solely as a result of deleting or substituting a fund from a program of investment options and services offered to plans, provided that the appropriate plan fiduciary in fact makes the decision to accept or reject the change. In this regard, the fiduciary must be provided advance notice of the change, including any changes in the fees received, and afforded a reasonable period of time within which to decide whether to accept or reject the change and, in the event of a rejection, secure a new service provider. On the basis of your representations that ALIAC provides the appropriate Plan fiduciary advance notice of the deletion or substitution of Funds and a reasonable period of time following receipt of the notice (here, at least 120 days) within which to reject the change in Funds and secure a new service provider,5 as described in your letter, it is the view of the Department that ALIAC would not become a fiduciary solely as a result of deleting or substituting an Unrelated Fund under such circumstances, provided that the actual decision to accept or reject the change in Funds is made by the Plan fiduciary. You have assumed that ALIC, an affiliate under common control with ALIAC, is a fiduciary with respect to the Plans by virtue of exercising authority or control over Plan assets invested in separate accounts maintained by ALIC. There is nothing, however, in your submission to indicate that ALIAC is in a position to (or in fact does) exercise any authority or control over those assets. Accordingly it does not appear that ALIAC would be considered a fiduciary merely as a result of its affiliation with ALIC. Finally, it should be noted that ERISA's general standards of fiduciary conduct also would apply to the proposed arrangement. Under section 404(a)(1) of ERISA, the responsible Plan fiduciaries must act prudently and solely in the interest of the Plan participants and beneficiaries both in deciding whether to enter into, or continue, the above-described arrangement with ALIAC, and in determining which investment options to utilize or make available to Plan participants and beneficiaries. In this regard, the responsible Plan fiduciaries must assure that the compensation paid directly or indirectly by the Plan to ALIAC is reasonable, taking into account the services provided to the Plan as well as any other fees or compensation received by ALIAC in connection with the investment of Plan assets. The responsible Plan fiduciaries therefore must obtain sufficient information regarding any fees or other compensation that ALIAC receives with respect to the Plan's investments in each Unrelated Fund to make an informed decision whether ALIAC's compensation for services is no more than reasonable. This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued subject to the provisions of the procedure, including section to relating to the effect of advisory opinions. Sincerely, Bette J. Briggs Footnotes
98-06A Investment of In-House Employee Benefit Plans into Proprietary Mutual FundsAdvisory Opinion (98-06A) July 30, 1998
U.S. Department of Labor Washington, D.C. 20216 July 30, 1998 Mr. Donald J. Myers Reed Smith Shaw & McClay LLP 1301 K Street, N.W. Suite 1100 - East Tower Washington, D.C. 20005-3317 Re: Federated Investors Identification Number C-9171 Dear Mr. Myers: This is in response to your request on behalf of Federated Investors ("Federated") for guidance concerning whether Prohibited Transaction Class Exemption 77-3, 42 Fed. Reg. 18734 (April 8, 1977) (PTE 77-3) provides relief for the investment by a bank’s in-house plan in a mutual fund advised by the bank through an in-kind exchange of assets for mutual fund shares, assuming the conditions of the exemption have been satisfied. You represent that Federated advises, administers and distributes its own mutual funds, and also administers, distributes and provides related services to funds that are advised by other financial institutions, including many banks. Federated has assisted its client banks in establishing "proprietary" mutual funds, i.e., open-end investment companies registered under the Investment Company Act of 1940 as to which the bank serves as investment adviser. These funds often come to serve as the investment vehicles for in-house bank plans through the conversion or partial conversion of the collective investment funds (the "CIFs") maintained by the bank. Federated assists these banks in the conversion process, and may serve as administrator and distributor, as well as in other capacities (such as transfer agent and portfolio recordkeeper) with respect to the proprietary mutual funds. You state that on the date of a CIF conversion, assets representing the interests of investing plans in the converting CIFs are transferred to the mutual funds, in exchange for which the plans receive shares of the mutual funds of equal value to the assets transferred. These assets are valued for purposes of the transfer in a consistent and objective manner as of the close of business on the day of the transfer in accordance with the valuation conditions of Rule 17a-7 under the Investment Company Act of 1940 at 17 C.F.R. section 270.17a-7. Rule 17a-7 was adopted by the Securities and Exchange Commission as an exemption to permit, among other things, direct portfolio transactions between funds using the same investment adviser subject to specific conditions. That rule, at subsection 270.17a-7(b), requires that each security be valued at its "independent current market price" and stipulates the methods for determining price based on independent sources, as follows:
You also represent that all plans involved in these transactions, both the in-house plans of the bank and the outside client plans of the bank, are treated in the same manner in these transactions and on a basis no less favorable than such dealings would be with other shareholders of the mutual funds. No brokerage commissions or other transaction costs are charged to the CIFs, the investing plans or the mutual funds in the exchange transaction. PTE 77-3 provides that the restrictions of sections 406 and 407(a) of the Employee Retirement Income Security Act of 1974 ("ERISA") and the taxes imposed by section 4975 (a) and (b) of the Internal Revenue Code (the "Code"), by reason of section 4975(c)(1) of the Code, shall not apply to the acquisition or sale of shares of an open-end investment company registered under the Investment Company Act of 1940 by an employee benefit plan covering only employees of such investment company, employees of the investment adviser or principal underwriter for such investment company, or employees of any affiliated person of such investment adviser or principal underwriter; provided that the conditions of the class exemption are met. The term "acquisition" is not defined in PTE 77-3. In support of your argument that PTE 77-3 extends to the in-kind exchange of assets for mutual fund shares, you note that the regulation at 29 C.F.R. 2550.407a-2(b) defines the term "acquisition" for purposes of section 407(a) of ERISA to include both an acquisition "by purchase" and "by the exchange of plan assets." You assert that by distinguishing a "purchase" from an "exchange," the regulation makes clear that, compared to a "purchase," an "acquisition" is a broader term that includes both cash "purchases" and in-kind "exchanges." In this regard, you argue that the meaning of the term "acquisition" in both the regulation and PTE 77-3 should be interpreted in a similar manner. However, the Department notes that the definition of the term "acquisition" in 29 CFR 2550.407a-2(b) does not control the meaning of that term in PTE 77-3, since the application of that definition is expressly limited to the implementation of section 407(a) of ERISA. Nevertheless, it is the view of the Department of Labor (the "Department") that relief under PTE 77-3 is available not only for cash purchases of investment company shares, but also for transactions involving the exchange of securities held on behalf of a plan for shares of the investment company. In this regard, the Department notes that section (d) of PTE 77-3 requires that all other dealings between the plan and the investment company, the investment adviser or principal underwriter for the investment company, or any affiliated person of such investment adviser or principal underwriter, are on a basis no less favorable to the plan than such dealings are with other shareholders of the investment company. The Department further notes that Prohibited Transaction Exemption 97-41 (62 FR 42830, August 8, 1997) permits a plan to purchase shares of an open-end mutual fund, the investment adviser for which is a bank that also serves as a fiduciary of a non-affiliated client plan, in exchange for plan assets transferred in-kind to the fund from a collective investment fund maintained by the bank. To the extent that the transactions described in your request involve both the conversion of CIF assets owned by outside client plans, which is within the scope of PTE 97-41, and the conversion of CIF assets owned by in-house plans, which is not, the Department interprets section (d) of PTE 77-3 to require that the methodology used to value the assets of the in-house plan transferred to the mutual fund and to determine the number of shares of the mutual fund received by the in-house plan, be the same as is applicable to the conversion of outside client plan assets under PTE 97-41. Moreover, section 406(b)(1) of ERISA prohibits a fiduciary from dealing with the plan’s assets in his or her own interest or for his or her own account. In addition, section 406(b)(2) of ERISA prohibits a plan fiduciary from acting on behalf of a party whose interests are adverse to the interests of the plan or the plan’s participants or beneficiaries. Accordingly, a plan fiduciary considering the in-kind acquisition of shares of a mutual fund advised by the bank in exchange for assets of the bank’s in-house plan must ensure that the fiduciary’s or the bank’s interest in attracting and retaining investors in the mutual fund does not conflict with the interests of the plan or its participants and beneficiaries in the selection of appropriate investment vehicles. In addition, it is the Department’s view that the class exemption prescribed in PTE 77-3 would not provide relief for any prohibited transaction that may arise in connection with terminating a CIF, permitting certain plans to withdraw from a CIF that is not terminating, or transferring any plan assets held by a CIF. PTE 77-3 only provides relief for the acquisition of a proprietary mutual fund’s shares by an in-house plan in exchange for assets that were transferred from a CIF. The Department cautions that ERISA’s general standards of fiduciary conduct would apply to the plan’s acquisition of mutual fund shares in exchange for plan assets transferred in-kind to the mutual fund from a CIF maintained by the plan’s sponsor. Section 404(a)(1)(B) of ERISA requires that a fiduciary discharge his or her duties with respect to a plan solely in the interest of the participants and beneficiaries and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. Accordingly, the plan fiduciary must act "prudently" and "solely in the interest" of the plan’s participants and beneficiaries with respect to the decision regarding the in-kind acquisition of mutual fund shares by the plan. The Department further emphasizes that it expects a plan fiduciary, prior to entering into the transaction, to fully understand the mechanics of the transaction and to evaluate the risks associated with this type of investment, following disclosure of all relevant information pertaining to the transaction, including the valuation methodology applicable to the transferred securities and the mutual fund shares received in exchange. If the decision by the plan fiduciary to enter into the transaction is not "solely in the interest" of the plan’s participants and beneficiaries, e.g., if the decision is motivated by the intent to generate seed money that facilitates the marketing of the mutual fund, then the plan fiduciary would be liable for any loss resulting from such breach of fiduciary responsibility, even if the acquisition of mutual fund shares was exempt by reason of PTE 77-3. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, it is issued subject to the provisions of the procedure, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Ivan Strasfeld 1999-03A Purchase of Mortgage-Backed Securities Representing Interests in a Trust Fund for which an Affliate of the Fiduciary Serves as a Sub-Servicer1999-03A January 25, 1999
Michael A. Lawson Dear Mr. Lawson: This is in response to your request for an advisory opinion concerning the application of section 406(b) of the Employee Retirement Income Security Act of 1974 (ERISA) and section 4975(c)(1)(D), (E), and (F) of the Internal Revenue Code of 1986 (the Code).(1) In particular, you request guidance with respect to a plan fiduciary’s decision to purchase on the secondary market, with plan assets, non-subordinated mortgage-backed pass-through certificates (Certificates) representing interests in a trust fund for which an affiliate of the fiduciary serves as a sub-servicer.(2) You represent that BlackRock Financial Management, Inc. (BlackRock), is an investment advisor that is registered under the Investment Advisors Act of 1940 and is a wholly-owned second-tier subsidiary of PNC Bank, a national banking association (PNC). BlackRock has over $45 billion in assets under management, including assets of a number of employee benefit plans (Plans) subject to Title I of ERISA and/or section 4975 of the Internal Revenue Code of 1986 (the Code). The Certificates represent interests in trust funds (Trusts), each of which consists of a segregated pool primarily of conventional, fixed-rate, multifamily or commercial mortgage loans (Mortgage Loans). A portion of the Mortgage Loans in each pool have been originated by PNC (PNC Loans). PNC also acts, pursuant to the pooling and servicing agreement that establishes each Trust, as a sub-servicer for the PNC Loans held in each Trust. The services provided by PNC typically include, among other things, notifying borrowers of amounts due on receivables, maintaining records of payments received, and instituting foreclosure or similar proceedings in the event of default with respect to the PNC Loans. Such services do not include any investment management or investment advisory services. As the subservicer of PNC Loans in a Trust, PNC receives a monthly fee in an amount equal to a fixed percentage of the outstanding principal balance of each Loan. This amount is collected from interest actually paid with respect to each Loan. In addition, under certain Trusts, PNC is entitled to retain certain ancillary fees that may be collected with respect to the Loan, including assumption fees, modification fees, insufficient funds fees and similar charges. You represent that PNC has no discretion with respect to the assets or management of the Trust. You further represent that neither PNC nor BlackRock is affiliated with any other entity that is a party to any of the Trusts, including the underwriter, master servicer, trustee, insurer, or obligor to or of the Trusts. The sponsor of a Trust, through one or more underwriters or placement agents, makes an initial public or private offering of Certificates to investors. After the initial offering, Certificates are traded on the secondary market. The price of Certificates, both in the initial offering and in the secondary market, is affected by market forces, including investor demand, the pass-through interest rate on the Certificates in relation to the rate payable on investments of similar types and quality, expectations as to the effect on yield resulting from the prepayment of underlying mortgages, and expectations as to the likelihood of timely payment.(3) The pass-through rate for holders of Certificates is equal to the interest rate on mortgages included in the Trust minus a specified servicing fee. You represent that all fees and other consideration payable by the Trust to PNC and other service providers to the Trust are determined and fixed as of the closing of the initial offering of the Certificates. You state that BlackRock will cause Plans to purchase Certificates only on the secondary market.(4) You assert that any fees payable to PNC in accordance with the applicable pooling and servicing agreement between PNC and the Trust will be unaffected by BlackRock’s causing Plans to purchase Certificates on the secondary market. Neither PNC nor BlackRock, you state, would have any interest in, or receive any additional consideration from, any source by reason of, or in connection with, such secondary market transactions. You are seeking guidance that BlackRock would not violate ERISA section 406(b) by causing Plans over which it has fiduciary authority to purchase, on the secondary market, Certificates of Trusts containing PNC Loans merely because its affiliate, PNC, acts as sub- servicer for such Loans and receives compensation, pursuant to its subservicing agreements, from the Trusts for the provision of such services. Section 406(b)(1) of ERISA prohibits a fiduciary with respect to a plan from dealing with the assets of the plan in his own interest or for his own account. Section 406(b)(2) prohibits a fiduciary, in his individual or any other capacity, from acting in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries. Section 406(b)(3) 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 the assets of the plan. You have represented that PNC’s compensation from the Trusts is determined and fixed as of the close of the initial offering of Certificates in each Trust and is not affected by whether or not BlackRock invests plan assets in the Certificates in the secondary market. Regulation section 29 C.F.R. 2550.408b-2(e)(2) states that a fiduciary does not engage in an act described in section 406(b)(1) of ERISA if the fiduciary does not use any of the authority, control, or responsibility that makes such person a fiduciary to cause a plan to pay additional fees for a service provided by such fiduciary or by a person in whom such fiduciary has an interest that may affect the exercise of such fiduciary’s best judgment as a fiduciary. Similarly, it is the view of the Department that a fiduciary does not engage in an act described in section 406(b)(3) of ERISA if the fiduciary does not use any of its authority, control, or responsibility to cause a third party to pay to the fiduciary any compensation in connection with a transaction involving the assets of the plan.(5) Accordingly, it is the opinion of the Department that BlackRock would not violate section 406(b)(1) or (b)(3) of ERISA by causing Plans over which it has fiduciary authority to purchase Certificates of the Trusts on the secondary market merely because its affiliate, PNC, acts as a sub-servicer of the Trusts, as long as the compensation that BlackRock and PNC receives is not affected by such investment. Moreover, because PNC’s relationship to the Trusts remains wholly unaffected by BlackRock’s investment of Plan assets in the Certificates, such investment would not be considered to involve BlackRock’s acting on behalf of PNC in violation of section 406(b)(2) of ERISA merely because of PNC’s role as sub-servicer of the Trusts.(6) This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 relating to the effect of advisory opinions. Sincerely, Susan G. Lahne Footnotes
1999-05A Application of Plan Assets Regulation to Certain Mortgage Pool Certificates Offered by Freddie Mac1999-05A February 22, 1999
Laraine S. Rothenberg, Esq. Dear Ms. Rothenberg: This is in response to your request on behalf of the Federal Agricultural Mortgage Corporation (“Farmer Mac”) for an advisory opinion regarding the application of the “plan assets” regulation issued by the Department of Labor (the Department) under the Employee Retirement Income Security Act of 1974 (“ERISA”) to certain mortgage pool certificates offered by Farmer Mac. Specifically, you request an advisory opinion that guaranteed mortgage-backed certificates issued by Farmer Mac are “guaranteed governmental mortgage pool certificates” within the meaning of 29 C.F.R. 2510.3-101(i)(2). You also request an advisory opinion as to whether certain parties performing various services with respect to the assets underlying the mortgage-backed certificates would be parties in interest under section 3(14) of ERISA or disqualified persons under section 4975(e)(2) of the Internal Revenue Code of 1986 (the Code) with respect to investing employee benefit plans.(1) In addition, you ask for an advisory opinion that the certificates would be deemed to meet a particular condition of a group of prohibited transaction exemptions (“the Underwriter Exemptions”),(2) granted to provide relief for the origination and operation of certain asset pool investment trusts, including guaranteed governmental mortgage pool certificate investment trusts, and for the acquisition, holding and disposition of asset backed pass-through certificates representing undivided interests in those trusts. You represent that Farmer Mac is a federally chartered corporate instrumentality of the United States established in 1987 for the purpose of promoting a secondary market for agricultural mortgage loans, similar to the secondary markets in residential mortgage loans established by the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”).(3) The Board of Directors of Farmer Mac consists of fifteen members, five of whom are elected by holders of common stock of Farmer Mac that are banks, insurance companies, or other financial institutions or entities; five of whom are elected by holders of common stock of Farmer Mac that are Farm Credit System institutions; and five of whom, including the Chairman of the Board, are appointed by the President of the United States and confirmed by the Senate. Farmer Mac is authorized under the Farm Credit Act to purchase several different types of agricultural and real estate mortgages, mortgage pass-through certificates and other mortgage- backed securities evidencing interests in or secured by agricultural real estate mortgages, and to resell them, primarily in the form of mortgage-backed certificates (“Certificates”) representing undivided interests in pools of mortgages purchased by Farmer Mac.(4) You state that while Farmer Mac Certificates are not guaranteed directly by the United States, Farmer Mac guarantees the timely payment of principal and interest on such investments to all Certificate holders. Farmer Mac Certificates provide for periodic (monthly, quarterly, semi-annual or annual) payment of interest and the pass-through of principal based on collections with respect to the underlying mortgages. You state further that Farmer Mac Certificates are offered from time to time in one or more series. Each series of Certificates represents, in the aggregate, the entire beneficial ownership interest in a segregated pool of mortgages held in a trust fund managed by Farmer Mac Securities Corporation (“Depositor”), a wholly-owned subsidiary of Farmer Mac. The Certificates are purchased from the Depositor by an underwriter or placement agent that offers the Certificates from time to time in public offerings registered under the Securities Act of 1933, and in private placements. The Certificates may be sold in negotiated transactions, at varying prices determined at the time of sale. The trustee of the trust funds managed by the Depositor is currently U.S. Bank Trust National Association.(5) The assets of the trust funds consist of segregated pools of fixed rate or adjustable rate agricultural real estate mortgage loans (“Qualified Loans”); portions of loans that are guaranteed by the United States Secretary of Agriculture (“Guaranteed Portions”); mortgage pass-through certificates or other mortgage-backed securities evidencing interests in or secured by Qualified Loans or Guaranteed Portions; or any combination thereof (collectively, “Qualified Assets”).(6) Qualified Loans are secured by parcels of land, which may be improved by buildings or other structures permanently affixed to the parcels, that are used for the production of one or more agricultural commodities and consist of a minimum of five acres or are used in producing minimum annual receipts of at least $5,000; or by a mortgage on a principal residence that is a single-family moderately priced residential dwelling located in a rural area.(7) You represent further that the sellers of Qualified Assets (“Sellers”) are banks and other financial institutions, including member institutions of the Farm Credit System and insurance companies. The Sellers may be the financial institutions that originally made the Qualified Loans (“Originators”) or they may be purchasers of the Qualified Loans from one or more Originators. Farmer Mac selects the Qualified Assets that it wishes to purchase from a Seller, after determining that the Qualified Assets meet Farmer Mac’s underwriting standards. The Depositor then purchases the Qualified Assets from the Seller, assigns the Qualified Assets transferred to it by the Seller to a segregated pool in a trust fund,(8) causes the trust fund to issue one or more series of Certificates, and receives the proceeds of the sale of the Certificates. Farmer Mac guarantees the timely payment of principal and interest on the Certificates upon their issuance by the Depositor. To assure its ability to fulfill its guarantee obligations, Farmer Mac is required to establish reserves upon issuance of a guarantee. Farmer Mac’s charter provides that, in the event that Farmer Mac’s own reserves and capital are insufficient to enable it to meet its guarantee obligations, the Treasury will purchase up to $1.5 billion of Farmer Mac’s obligations.(9) You state that Farmer Mac acts as Master Servicer of the Qualified Loans in each loan pool and is ultimately responsible for the servicing of the Qualified Loans, though it has contracted with banks and other financial institutions (collectively, “Central Servicers”) to perform the servicing functions on its behalf, including the distribution of principal and interest payments on the Qualified Loans in each pool and the distribution of any yield maintenance charge (the amount payable by a borrower under a loan in connection with a principal prepayment or acceleration by the lender) to the Trust Fund, on behalf of the holders of Certificates.(10) Pursuant to the contracts, Central Servicers establish and maintain separate accounts on behalf of the Trust Fund for the collection of payments on Qualified Assets and foreclose upon or comparably convert the ownership of properties of any Qualified Loans that continue in default.(11) The Central Servicers are compensated for their services out of the interest payments received on each Qualified Loan and also retain certain late fees, servicing charges assessed against borrowers, and other fees. Central Servicers may subcontract their servicing functions with respect to the Qualified Loans to qualified agricultural mortgage servicers (“Field Servicers”), some of whom may be Sellers or Originators. The Farm Credit Administration (FCA), acting through the Office of Secondary Market Oversight (OSMO), has general regulatory and enforcement authority over Farmer Mac, including the authority to promulgate rules and regulations governing the activities of Farmer Mac and to apply its general enforcement power to Farmer Mac and its activities. In accordance with its statutory mandate, Farmer Mac’s loan standards were submitted to Congress for approval before they were adopted in 1990. The Director of OMSO, who is selected by and reports to the FCA Board, is responsible for the examination of Farmer Mac and the general supervision of the safe and sound performance by Farmer Mac of the powers and duties vested in it by Title VIII of the Farm Credit Act of 1971, as amended.(12) The Farm Credit Act requires the FCA to examine and audit Farmer Mac’s books and financial transactions and to perform an evaluation of the safety and soundness of Farmer Mac’s operations at least annually. Farmer Mac is required to file quarterly reports of condition with the FCA, as well as copies of all documents filed with the Securities Exchange Commission under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934. While the FCA is not required to approve the payment of dividends on Farmer Mac common stock, the Farm Credit Act provides that no dividend may be declared or paid unless the Farmer Mac Board determines that adequate provision has been made for the corporation’s reserve against guarantee losses and that no obligation issued by Farmer Mac to the Secretary of the Treasury remains outstanding.(13) Under its general regulatory and supervisory authority, the FCA regularly reviews new programs and activities of Farmer Mac involving the purchase, sale, servicing of, lending on the security of, or otherwise dealing in conventional agricultural mortgages. In addition, the Farm Credit Act requires the Comptroller General of the United States to perform an annual review of the actuarial soundness and reasonableness of the guarantee fees established by Farmer Mac. It is expected by the Board of Directors and management of Farmer Mac that the Depositor will not have any relationships to investing employee benefit plans, other than through their transactions with respect to the Certificates. However, you state that obligors with respect to Qualified Assets Collateralizing the Certificates (“Borrowers”) may be related to sponsors of investing employee benefit plans. For example, a Borrower may also be the plan sponsor of an investing employee benefit plan. You state that it is also possible that a Central Servicer, Field Servicer, Seller, or trustee of a trust fund managed by the Depositor may be related to investing employee benefit plans and may therefore be a party in interest or fiduciary with respect to such plans. The Department’s plan asset regulation at 29 C.F.R. 2510.3-101 describes the circumstances under which the assets of an entity in which a plan invests will be considered to include assets of the plan for purposes of ERISA’s reporting and disclosure and fiduciary responsibility provisions and the related prohibited transaction provisions of the Internal Revenue Code. Section 2510.3-101(i)(2) defines a “guaranteed governmental mortgage pool certificate” as “a certificate backed by, or evidencing an interest in, specified mortgages or participation interests therein and with respect to which interest and principal payable pursuant to the certificate are guaranteed by the United States or an agency or instrumentality thereof.” The regulation specifically refers to mortgage pool certificates guaranteed by Ginnie Mae, Freddie Mac, or Fannie Mae,(14) but makes clear that the exception may also apply to similar governmental mortgage pool investments. As explained in the preamble to the final regulation, the regulation provides in section 2510.3-101(i)(l) that, when a plan invests in a guaranteed governmental mortgage pool, its assets include its investment, but do not, solely by reason of such investment, include any of the underlying mortgages. Thus, the sponsor or manager of a governmental mortgage pool would not be a fiduciary of a plan solely by reason of the plan’s investment in the pool. The regulation specifically states that interests in Freddie Mac, Ginnie Mae and Fannie Mae are among the investments to which the regulation’s general rule applies.(15) Accordingly, the term “guaranteed governmental mortgage pool certificate” in section 2510.3-101(i)(2) is not limited to securities of the three entities specifically listed, but encompasses any certificates backed by, or evidencing an interest in, specified mortgages or participation interests therein and with respect to which interest and principal payable pursuant to the certificate are guaranteed by the United States or an agency or instrumentality thereof. It appears to the Department from your representations that, for purposes of the definition of plan assets, Farmer Mac was established and is operated in a manner substantially similar to that of Fannie Mae and Freddie Mac. Like those entities, Farmer Mac is a Federally chartered instrumentality of the United States that issues guarantees on pools of mortgage loans in order to increase the availability of mortgage credit. Although Farmer Mac Certificates are not guaranteed by the United States, in light of the significant Federal involvement in the management of the Farmer Mac, it is our view that investments in Certificates issued by Farmer Mac should be treated in the same way as investments in certificates issued by Fannie Mae and Freddie Mac. Based on your representations and in view of the foregoing, it is the view of the Department that the mortgage pool Certificates guaranteed and issued by Farmer Mac meet the definition of a “guaranteed governmental mortgage pool certificate,” as defined in 29 C.F.R. 2510.3-101(i)(2). The Department notes that ERISA’s general standards of fiduciary liability apply to any investment by a plan covered by Title I, including an investment in a guaranteed governmental mortgage certificate as defined in 29 C.F.R. 2510.3-101(i)(2). Section 404(a)(1)(B) of ERISA requires that a fiduciary discharge his duties to a plan solely in the interests of the plan participants and beneficiaries, and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man would use in the conduct of an enterprise of like character and with like aims. Accordingly, the fiduciaries of an investing plan must act “prudently” and “solely in the interest” of the plan’s participants and beneficiaries when deciding whether or not to invest in a Certificate. You also requested an opinion as to whether trustees of a trust fund managed by the Depositor, Central Servicers, Field Servicers or Borrowers would be parties in interest under section 3(14) of ERISA or disqualified persons under section 4975(e)(2) of the Code. In this regard, we note that the mere investment of plan assets in the Certificates issued by Farmer Mac would not, by itself, make those entities parties in interest or disqualified persons, since it is our view that it is only the Certificates, and not the assets underlying the Certificates, that are plan assets. However, to the extent any of these entities have other relationships to the investing plans that are described in ERISA section 3(14) or Code section 4975(e)(2), such entities may be parties in interest or disqualified persons with respect to such plans. Further, because it is our view that the Certificates are “guaranteed governmental mortgage certificates” within the meaning of that term as defined at 29 C.F.R. 2510.3-101(i)(2), transactions between these parties and a Farmer Mac trust fund that relate only to the assets underlying the Certificates, and that do not involve the Certificates themselves, would not constitute prohibited transactions under sections 406 or 407 of ERISA or section 4975(c)(1) of the Code. We are unable to provide you guidance on your final question regarding the Underwriter Exemptions. Specifically, you asked for an opinion that the Certificates are deemed to meet the condition that “the certificates acquired by the plan have received a rating at the time of such acquisition that is in one of the three highest generic rating categories from either Standard & Poor’s Structured Rating Group, Moodys Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service, L.P.” We do not have authority to deem that a transaction satisfies a condition set forth in an individual exemption. To the extent that the prohibited transactions provisions of ERISA or the Code are implicated by transactions involving the Certificates, we suggest that you discuss this matter with the Office of Exemption Determinations of this agency. This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Section 10 of the Procedure describes the effect of advisory opinions. Sincerely, Susan G. Lahne Footnotes
1999-13A Treatment of QDROs Believed to be Questionable1999-13A September 29, 1999
Brian G. Belisle Dear Mr. Belisle: This is in response to your request on behalf of the UAL Corporation (UAL) and United Air Lines, Inc. (United) for an advisory opinion. Specifically, you ask how a plan administrator should treat domestic relations orders the plan administrator has reason to believe are “sham” or “questionable” in nature.(1) UAL is a holding company. Its major wholly-owned subsidiary is United. You represent that employees of United participate in three pension plans – an employee stock ownership plan (the ESOP); a 401(k) plan that is a profit sharing plan qualified under section 401(a) of the Code (the 401(k) Plan); and a defined benefit pension plan. The ESOP is a combination leveraged ESOP and non-leveraged stock bonus plan that is qualified under section 401(a) of the Code. Substantially all of the assets in the ESOP are invested in UAL stock. You represent that the named plan administrator of the ESOP is UAL. UAL has assigned many of its administrative duties under the ESOP, including the duty to establish procedures for determining whether a domestic relations order constitutes a “qualified domestic relations order” (QDRO), to an ESOP Committee consisting of employees of United. The ESOP Committee has delegated to United’s Pension Programs Department (Pension Programs) the responsibility of reviewing and determining whether a domestic relations order received by the ESOP Committee is a QDRO within the meaning of section 206(d)(3) of ERISA. Appeals of QDRO determinations are made to the ESOP Committee. You further represent that the ESOP permits an alternate payee to request the immediate lump sum distribution of any benefits under the plan that are assigned pursuant to the terms of any domestic relations order that the ESOP Committee determines is a QDRO. The ESOP otherwise permits lump sum distributions only following a participant’s termination of employment (including by way of the participant’s death). The named plan administrator of the 401(k) Plan is United. United has delegated the authority to control and manage the administration of the 401(k) Plan, including the duty to establish procedures for determining whether a domestic relations order constitutes a QDRO, to a Pension and Welfare Plans Administration Committee (PAWPAC) consisting of employees of United. PAWPAC in turn has delegated to Pension Programs the responsibility for reviewing and determining whether a domestic relations order applying to the 401(k) Plan is a QDRO. Appeals of a QDRO determination are made to PAWPAC. As with the ESOP, the 401(k) Plan permits the immediate distribution of benefits under the plan that are assigned pursuant to the terms of a QDRO. Although an alternate payee may thus receive an immediate lump sum distribution from the 401(k) Plan, participants or beneficiaries are entitled to distributions from the 401(k) plan only following termination of employment (including by way of the participant’s death) or upon financial hardship. You represent that Pension Programs currently has under review 16 domestic relations orders concerning benefits under the ESOP and the 401(k) Plan that Pension Programs believes may be “questionable” or “sham” in nature.(2) You detail the grounds for Pension Programs’ suspicions as to the nature of these domestic relations orders as follows. Pension Programs received within a very short period of time five domestic relations orders from the same lawyer (two of the orders were mailed in the same envelope). Each order related to participants working in United’s maintenance facility located in Indianapolis, Indiana. Each of the five orders identically provided for an assignment of 100 percent of the participant’s benefit in the ESOP and the 401(k) Plan to an alternate payee. Each order made no provision for any assignment of these participants’ benefits in United’s defined benefit pension plan. In each of the orders, the alternate payee and participant were shown as having the same address. Despite its suspicions, Pension Programs determined that each of the five orders was qualified because they satisfied the requirements of section 206(d)(3) of ERISA. In Pension Programs’ view, these orders differed from other domestic relations orders processed by Pension Programs in that they dealt only with the ESOP and the 401(k) Plan; they provided for assignment of 100 percent of the participant’s benefit; and they showed the participant and alternate payee as having the same address. After its determination that these five domestic relations orders were QDROs, Pension Programs received and reviewed 16 other orders that had unusual characteristics similar to those of the original five orders. These 16 orders similarly provided for a 100 percent assignment of benefits payable under the ESOP and/or the 401(k) Plan, made no mention of the defined benefit pension plan, and specified in most cases that the alternate payee and participant shared the same address. You represent that Pension Programs performed additional investigation in its review of these 16 domestic relations orders to determine whether they were qualified.(3) While these orders were pending review with Pension Programs, two participants from the Indiana facility called at different times to determine the status of the review of their orders. You indicate that, during those conversations, each participant asserted that his order was not one of the “fraudulent QDROs.” You represent that these statements led Pension Programs to heighten its scrutiny of the 16 orders assigning 100 percent of the participant’s right to the ESOP and 401(k) benefits. You further represent that, after beginning its investigation of the 16 domestic relations orders in question, Pension Programs learned of a pamphlet entitled “Retirement Liberation Handbook” that was being distributed by at least one United employee in the Indianapolis, Indiana area.(4) The pamphlet advocated, as a method of acquiring a distribution of pension plan benefits before reaching retirement age, that participants and their spouses obtain a divorce for the sole purpose of securing a court order assigning pension plan benefits and then remarry. Such a sham divorce, according to the Liberation Handbook, would enable the participant to obtain direct control over the investment of the participant’s pension benefit. The Liberation Handbook also suggested that single employees could go through a sham marriage and subsequent divorce, by paying an individual a percentage of the anticipated pension distribution as compensation for acting as spouse, or could instead quit employment in order to obtain a similar early distribution and later get rehired. The Handbook described in some detail how distributions from pension plans are handled for tax purposes and discussed various options for distributions and investments of the distributions. After reviewing the Liberation Handbook, Pension Programs determined that all of the 16 orders in question, as well as the original five orders it had previously deemed qualified, had significant similarities to the specific format promoted by the Liberation Handbook. For example, two of the initial five orders requested that distribution be made to an inappropriate account named in the Liberation Handbook. In addition, all of the orders identified by Pension Programs as questionable relate to the ESOP and 401(k) benefits of employees who, at the time of the order, resided in the Indianapolis area and were in related work groups, and all had a number of common characteristics not typically seen in Pension Programs’ review of domestic relations orders. Included in these were rapid remarriage and continued use by the putative alternate payee of United’s no-cost travel for spouses. You represent that Pension Programs engaged local counsel in Indiana to determine whether and to what extent the questionable domestic relations orders might be valid under Indiana law. Indiana counsel opined that, if the orders had been obtained as promoted by the Liberation Handbook, (i) the participant and alternate payee would have committed perjury; (ii) the parties would be in contempt of court; (iii) the order would have been fraudulently obtained; and (iv) if the foregoing could be established to the satisfaction of a judge, the order likely would be vacated by the court. You have asked for an advisory opinion as to whether, and if so when, a plan administrator may investigate or question a domestic relations order submitted for review to determine whether it is a valid “domestic relations order” under State law for purposes of section 206(d)(3)(B) of ERISA. Section 206(d)(1) of ERISA generally requires pension plans covered by Title I of ERISA to provide that plan benefits may not be assigned or alienated. Section 206(d)(3)(A) of ERISA states that section 206(d)(1) applies to an assignment or alienation of benefits pursuant to a “domestic relations order” unless the order is determined to be a “qualified domestic relations order” (QDRO). Section 206(d)(3)(A) further provides that pension plans must provide for payment of benefits in accordance with the applicable requirements of any QDRO. Section 206(d)(3)(B) of ERISA defines the terms “qualified domestic relations order” and “domestic relations order” for purposes of section 206(d)(3) as follows:
Section 206(d)(3)(C) requires that in order for a domestic relations order to be qualified such order must clearly specify (i) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order; (ii) the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined; (iii) the number of payments or period to which such order applies; and (iv) each plan to which the order applies. Section 206(d)(3)(D) specifies that a domestic relations order is qualified only if such order does not require (i) the plan to provide any type of benefit, or any option, not otherwise provided by the plan; (ii) the plan to provide increased benefits (determined on the basis of actuarial value); and (iii) the payment of benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order. Section 206(d)(3)(G) of ERISA requires the plan administrator to determine the qualified status of domestic relations orders received by the plan and to administer distributions under such qualified orders, pursuant to reasonable procedures established by the plan. In administering QDROs, plan administrators must follow the plan’s reasonable procedures, as required under section 206(d)(3)(G), and must assure that the plan pays only reasonable expenses of administering the plan, as required by sections 403(c)(1) and 404(a)(1)(A) of ERISA. In this regard, plan fiduciaries must take appropriate steps to ensure that plan procedures are designed to be cost effective and to minimize expenses associated with the administration of domestic relations orders. See Advisory Opinion 94-32A (Aug. 4, 1994). When a pension plan receives an order requiring that all or a part of the benefits payable with respect to a participant be paid to an alternate payee, the plan administrator must determine that the judgment, decree or order is a “domestic relations order” within the meaning of section 206(d)(3)(B)(ii) of ERISA – i.e., that it relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of the participant and that it is made pursuant to State domestic relations law by a State authority with jurisdiction over such matters. Additionally, the plan administrator must determine that the order is qualified under the requirements of section 206(d)(3) of ERISA. It is the view of the Department that the plan administrator is not required by section 206(d)(3) or any other provision of Title I to review the correctness of a determination by a competent State authority pursuant to State domestic relations law that the parties are entitled to a judgment of divorce. See Advisory Opinion 92-17A (Aug. 21, 1992). Nevertheless, a plan administrator who has received a document purporting to be a domestic relations order must carry out his or her responsibilities under section 206(d)(3) in a manner consistent with the general fiduciary duties in part 4 of title I of ERISA. For example, if the plan administrator has received evidence calling into question the validity of an order relating to marital property rights under State domestic relations law, the plan administrator is not free to ignore that information. Information indicating that an order was fraudulently obtained calls into question whether the order was issued pursuant to State domestic relations law, and therefore whether the order is a “domestic relations order” under section 206(d)(3)(C). When made aware of such evidence, the administrator must take reasonable steps to determine its credibility. If the administrator determines that the evidence is credible, the administrator must decide how best to resolve the question of the validity of the order without inappropriately spending plan assets or inappropriately involving the plan in the State domestic relations proceeding. The appropriate course of action will depend on the actual facts and circumstances of the particular case and may vary depending on the fiduciary’s exercise of discretion. However, in these circumstances, we note that appropriate action could include relaying the evidence of invalidity to the State court or agency that issued the order and informing the court or agency that its resolution of the matter may affect the administrator’s determination of whether the order is a QDRO under ERISA.(5) The plan administrator’s ultimate treatment of the order could then be guided by the State court or agency’s response as to the validity of the order under State law. If, however, the administrator is unable to obtain a response from the court or agency within a reasonable time, the administrator may not independently determine that the order is not valid under State law and therefore is not a “domestic relations order” under section 206(d)(3)(C), but should rather proceed with the determination of whether the order is a QDRO. This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Susan G. Lahne Footnotes
2000-10A Whether allowing the owner of an IRA to direct the IRA to invest in a limited partnership, in which relatives and the IRA owner in his individual capacity are partners, will violate section 4975 of the Code2000-10A July 27, 2000
Hugh Janow Dear Mr. Janow: This is in response to your request for an advisory opinion under section 4975 of the Internal Revenue Code (Code). Specifically, you ask whether allowing the owner of an IRA to direct the IRA to invest in a limited partnership, in which relatives and the IRA owner in his individual capacity are partners, will violate section 4975 of the Code.(1) You represent that the Fetner Family Partnership is a New York general partnership that is an investment club (the Partnership), in which Mr. Adler, through a general partnership known as Esponda Associates (Esponda), and various relatives of Mr. Adler invest. Through his investment in Esponda, which is a pass-through partnership, Mr. Adler owns a 12.11 percent interest in the Partnership. Mr. Adler presently owns a 30.38 percent interest in Esponda. The only other partner in Esponda is David Geiger, who is unrelated to Mr. Adler. Esponda currently owns a 39.85 percent interest in the Partnership. The other current partners of the Partnership are as follows: Steven Adler (Mr. Adler’s son) – 5.25%; Jack Fetner (Mr. Adler’s father-in-law) – 13.44%; Adam Nadel (Mr. Adler’s son’s brother-in-law); Fay Nadel (Mr. Adler’s mother-in-law) – 25.55%; Andrea Raskin (Mr. Adler’s daughter) – 5.33%; Lois Zoldon (Mr. Adler’s sister-in-law) – 7.57%. The Partnership’s assets are managed by Bernard L. Madoff Investment Securities (Madoff), which is unrelated to Mr. Adler. Madoff requires entities to maintain a minimum capital account. You represent that the Partnership currently has an account with Madoff and has not received any notice that its does not meet minimum capital requirements for investment management by Madoff. The IRA’s assets are not necessary for the Partnership to continue its account with Madoff. You represent that Leonard Adler intends to open a self-directed individual retirement account (IRA) in the amount of approximately five hundred thousand ($500,000.00) dollars through Retirement Accounts, Inc. of Denver, Colorado. At the time Mr. Adler directs the IRA investment, the Partnership will become a limited Partnership. Mr. Adler will be the only general partner in the Partnership and will own 6.52%. Mr. Adler will not have any investment management functions with respect to the assets of the Partnership. The limited partners and their percentage ownership interests will be as follows: Andrea Raskin – 1.35%; Steven Adler – 3.07%; Jack Fetner – 3.94%; Fay Nadel – 18.1%; Adam Nadel – 1.77%; Lois Zoldon – 5.55%; David Geiger – 20.31%; IRA of Leonard Adler – 39.38%. Messrs. Adler and Geiger will invest directly in the Partnership in the same percentages as they would have invested through Esponda, instead of investing through Esponda. Esponda will no longer invest in the Partnership. You further represent that Mr. Adler believes that Madoff would effectively manage assets for the IRA, but that Mr. Adler’s IRA does not meet the minimum capital requirements (currently $1 million) for investment management by Madoff. You represent, however, that Madoff will manage the IRA’s assets if it invests with Madoff through the Partnership, even though the IRA by itself otherwise would not meet the minimum capital requirements. You further represent that all of the assets of the Partnership are liquid marketable securities. You also represent that none of the funds contributed by the IRA is required to be used, or will be used, to liquidate or redeem any other partner’s interest in the Partnership. Finally, you represent that Mr. Adler does not and will not receive any compensation from the Partnership. He likewise will not receive any compensation as a result of the acquisition by the IRA of its limited partnership interest. You ask whether the investment by the IRA in the Partnership will give rise to a prohibited transaction under section 4975 of the Code. Section 4975(e)(1) of the Code, in relevant part, defines the term “plan” to include an IRA, described in section 408(a) of the Code. Section 4975(e)(2) of the Code defines “disqualified person,” in relevant part, to include a fiduciary, a relative, and a partnership, of which (or in which) 50 percent or more of the capital interest or profits interest of such partnership is owned directly or indirectly, or held by a fiduciary. Section 4975(e)(3) of the Code defines the term “fiduciary,” in part, to include any person who exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control regarding management or disposition of its assets. In order for a prohibited transaction to occur under section 4975 of the Code, there must be a transaction involving a disqualified person with respect to a plan. Where none of the relationships described in section 4975(e)(2) of the Code are found to exist, an entity would not be a disqualified person with respect to a plan. Section 4975(c)(1)(A) of the Code prohibits any direct or indirect sale or exchange or leasing, of any property between a plan and a disqualified person. Section 4975(c)(1)(D) of the Code prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. Section 4975(c)(1)(E) of the Code prohibits a fiduciary from dealing with the income or assets of a plan in his or her own interest or for his or her own account. Section 54.4975-6(a)(5) of the Pension Excise Tax Regulations characterizes transactions described in section 4975(c)(1)(E) as involving the use of authority by fiduciaries to cause plans to enter into transactions when those fiduciaries have interests which may affect the exercise of their best judgment as fiduciaries. As a trustee with investment discretion over the assets of his IRA, Mr. Adler is a fiduciary, and therefore, a disqualified person under section 4975(e)(2) of the Code. Mr. Adler is also a disqualified person in his capacity as the general partner of the Partnership to the extent he exercises discretionary authority over the administration or management of the IRA assets invested in the Partnership. In addition, although Mr. Adler, his son and his daughter are disqualified persons, you represent that the investment transaction is between the Partnership itself and the IRA, and not with Mr. Adler and his family, except as fellow investors in the Partnership. Mr. Adler owns only 6.5 percent of the Partnership, and therefore the Partnership itself is not a disqualified person under section 4975(e)(2)(G) of the Code which defines a disqualified person to include a corporation, partnership or trust or estate of which 50 percent or more of the capital interest is owned directly or indirectly, or held by persons described as fiduciaries. Based solely on the facts and representations contained in your submissions, it is the opinion of the Department that the IRA’s purchase of an interest in the Partnership would not constitute a transaction described in section 4975(c)(1)(A) of the Code (prohibiting any direct or indirect sale or exchange or leasing of any property between a plan and a disqualified person). Whether the proposed transaction would violate sections 4975(c)(1)(D) and (E) of the Code raises questions of a factual nature upon which the Department will not issue an opinion. A violation of section 4975(c)(1)(D) and (E) would occur if the transaction was part of an agreement, arrangement or understanding in which the fiduciary caused plan assets to be used in a manner designed to benefit such fiduciary (or any person which such fiduciary had an interest which would affect the exercise of his best judgment as a fiduciary). In this regard, the Department notes Mr. Adler does not and will not receive any compensation from the Partnership and will not receive any compensation by virtue of the IRA’s investment in the Partnership. However, the Department further notes that if an IRA fiduciary causes the IRA to enter into a transaction where, by the terms or nature of that transaction, a conflict of interest between the IRA and the fiduciary (or persons in which the fiduciary has an interest) exists or will arise in the future, that transaction would violate either 4975(c)(1)(D) or (E) of the Code. Moreover, the fiduciary must not rely upon and cannot be otherwise dependent upon the participation of the IRA in order for the fiduciary (or persons in which the fiduciary has an interest) to undertake or to continue his or her share of the investment. Furthermore, even if at its inception the transaction did not involve a violation, if a divergence of interests develops between the IRA and the fiduciary (or persons in which the fiduciary has an interest), the fiduciary must take steps to eliminate the conflict of interest in order to avoid engaging in a prohibited transaction. Nonetheless, a violation of section 4975(c)(1)(D) or (E) will not occur merely because the fiduciary derives some incidental benefit from a transaction involving IRA assets. Moreover, the Department notes that by virtue of the contemplated investment by the IRA in the Partnership, there will be significant investment in the Partnership by benefit plan investors. See 29 CFR § 2510.3-101(f). Accordingly, the Partnership will hold “plan assets” within the meaning of that term in the Department’s regulations at 29 CFR § 2510.3-101. As a result, any person who exercises discretionary authority or control with respect to assets of the Partnership will be fiduciary of the IRA and subject to the restrictions of section 4975(c)(1) of the Code, except to the extent a statutory or administrative exemption applies. This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Louis Campagna Footnotes Under Presidential Reorganization Plan No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 of the Code has been transferred, with certain exceptions not here relevant, to the Secretary of Labor and the Secretary of the Treasury is bound by the interpretations of the Secretary of Labor pursuant to such authority. 2001-01A The application of Title I of ERISA to the payment by plans of expenses relating to tax-qualification2001-01A January 18, 2001
Mr. Carl J. Stoney, Jr. Dear Mr. Stoney: This is in response to your recent correspondence in which you request confirmation of the continued viability of the Department of Labor’s views expressed in Advisory Opinion 97-03A (January 23, 1997), discussing the application of the Employee Retirement Income Security Act (ERISA) to the payment of certain plan termination expenses by tax-qualified plans administered by the Insurance Commissioner of the State of California in its capacity as liquidator of the companies which sponsored the plans. Further, you request any other guidance that the department may be able to provide on the issue of permissible plan expenses. In this regard, you indicate that you represent the Conservation and Liquidation Office of the State of California Department of Insurance in connection with the termination of, and attendant distribution of assets from, tax-qualified retirement plans sponsored by now-insolvent insurance companies. Since the issuance of Advisory Opinion 97-03A, questions have been raised concerning the extent to which an employee benefit plan may pay the costs attendant to maintaining tax- qualified status, without regard to the fact that tax qualification confers a benefit on the plan sponsor. The following is intended to clarify the views of the Department of Labor on this issue. As discussed in Advisory Opinion 97-03A, a determination as to whether to pay a particular expense out of plan assets is a fiduciary act governed by ERISA’s fiduciary responsibility provisions. ERISA provides that, subject to certain exceptions, the assets of an employee benefit plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. In discharging their duties under ERISA, fiduciaries must act prudently and solely in the interest of the plan participants and beneficiaries, and in accordance with the documents and instruments governing the plan insofar as they are consistent with the provisions of ERISA. See ERISA sections 403(c)(1), 404(a)(1)(A), (B), and (D). With regard to sections 403 and 404 of ERISA, we noted that, as a general rule, reasonable expenses of administering a plan include direct expenses properly and actually incurred in the performance of a fiduciary’s duties to the plan. We also noted, however, that the department has long taken the position that there is a class of discretionary activities which relate to the formation, rather than the management, of plans, explaining that these so-called settlor functions include decisions relating to the establishment, design and termination of plans and, except in the context of multi-employer plans, generally are not fiduciary activities governed by ERISA. Expenses incurred in connection with the performance of settlor functions would not be reasonable expenses of a plan as they would be incurred for the benefit of the employer and would involve services for which an employer could reasonably be expected to bear the cost in the normal course of its business operations. However, reasonable expenses incurred in connection with the implementation of a settlor decision would generally be payable by the plan. In Advisory Opinion 97-03A, the department expressed the view that the tax-qualified status of a plan confers benefits upon both the plan sponsor and the plan and, therefore, in the case of a plan that is intended to be tax-qualified and that otherwise permits expenses to be paid from plan assets, a portion of the expenses attendant to tax-qualification activities may be reasonable plan expenses. This view has been construed to require an apportionment of all tax qualification- related expenses between the plan and plan sponsor. The department does not agree with this reading of the opinion. The opinion recognizes that, in the context of tax-qualification activities, fiduciaries must consider, consistent with the principles articulated in earlier letters,(1) whether the activities are settlor in nature for purposes of determining whether the expenses attendant thereto may be reasonable expenses of the plan. However, in making this determination, the department does not believe that a fiduciary must take into account the benefit a plan’s tax-qualified status confers on the employer. Any such benefit, in the opinion of the department, should be viewed as an integral component of the incidental benefits that flow to plan sponsors generally by virtue of offering a plan.(2) In the context of tax-qualification activities, it is the view of the department that the formation of a plan as a tax-qualified plan is a settlor activity for which a plan may not pay. Where a plan is intended to be a tax-qualified plan, however, implementation of this settlor decision may require plan fiduciaries to undertake activities relating to maintaining the plan’s tax-qualified status for which a plan may pay reasonable expenses (i.e., reasonable in light of the services rendered). Implementation activities might include drafting plan amendments required by changes in the tax law, nondiscrimination testing, and requesting IRS determination letters. If, on the other hand, maintaining the plan’s tax-qualified status involves analysis of options for amending the plan from which the plan sponsor makes a choice, the expenses incurred in analyzing the options would be settlor expenses. The foregoing views are intended to clarify, rather than supersede, the views of the department set forth in Advisory Opinion 97-03A. We hope the information provided is of assistance to you. This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Sincerely, Robert J. Doyle Footnotes
2001-09A How Financial Services Firms Can Provide Asset Allocation AdviceAdvisory Opinion 2001-09A Application of ERISA Sec. 406(b) to certain transactions involving the provision of investment advice and discretionary services with regard to asset allocation for participants in participant-directed defined contribution plans. December 14, 2001
Mr. William A. Schmidt Dear Messrs. Schmidt and Berger: This is in response to your application, on behalf of SunAmerica Retirement Markets, Inc. (SunAmerica), for an exemption from the prohibited transaction restrictions of section 406 of the Employee Retirement Income Security Act of 1974, as amended (ERISA), with respect to a program (the Program) under which SunAmerica would render certain discretionary and nondiscretionary asset allocation services to participants in ERISA-covered plans (Plans). On the basis of the facts and representations contained in your submission, it is the view of the Department that, for the reasons discussed below, the transactions with respect to which you have requested exemptive relief would not, to the extent executed in a manner consistent with such facts and representations, violate the provisions of section 406(b) of ERISA. Accordingly, we have determined that the appropriate response to your request is an advisory opinion, rather than an exemption under ERISA section 408(a).1 Your submission contains the following facts and representations. SunAmerica is an indirectly wholly owned subsidiary of SunAmerica Inc., and is one of a group of companies wholly owned by SunAmerica, Inc. that provide a broad range of financial services. SunAmerica’s affiliate, SunAmerica Asset Management Corp., is a registered investment adviser under the Investment Advisers Act of 1940. SunAmerica intends to offer the Program to individual account plans described in section 3(34) of ERISA. It is anticipated that virtually all of these Plans will be designed or administered in a manner intended to comply with the provisions of section 404(c) of ERISA.2 Under the Program, asset allocation services may be rendered to Plan participants3 either through the "Discretionary Asset Allocation Service” or the "Recommended Asset Allocation Service” (collectively, Services; singly, Service). Through the Discretionary Asset Allocation Service, a specific Model Asset Allocation Portfolio will be implemented automatically with respect to a participant’s account (Account). Through the Recommended Asset Allocation Service, a specific Model Asset Allocation Portfolio will be recommended to a participant for investment of his or her Account and the participant then may choose to implement the advice, or to disregard the recommendation and invest in a manner that does not conform to the Model Asset Allocation Portfolios.4 The Plan fiduciary who causes a Plan to participate in the Program will select the Service (or Services) that will be available to participants and the manner by which participants will authorize such Service (or Services). Model Asset Allocation Portfolios will be based solely on the investment alternatives available under the Plan, which your application refers to as "Core Investments,” but which we refer to herein as "Designated Investments.”5 In this regard, it is anticipated that the Plans will offer, exclusively or in addition to other vehicles, collective investment vehicles to which SunAmerica or an affiliate of SunAmerica provides investment advisory services (SunAmerica Funds).6 According to your submission, while SunAmerica will be making the Program, as well as other services, available to Plans, the Model Asset Allocation Portfolios offered under the Program will, in fact, be the product of a computer program applying a methodology developed, maintained and overseen by a financial expert who is independent of SunAmerica (the Financial Expert). The Model Asset Allocation Portfolio produced under the Program with respect to a particular participant, therefore, will reflect the application of the methodologies developed by the Financial Expert to the Designated Investments, taking into account individual participant data, as provided by the participant, Plan sponsor or recordkeeper. You represent that, with respect to a Plan’s initial participation in the Program, a Plan fiduciary (i.e., a fiduciary independent of SunAmerica and its affiliates) will be provided detailed information concerning, among other things, the Program and the role of the Financial Expert in the development of the Model Asset Allocation Portfolios under the Program. In addition, the Plan fiduciary will be provided, on an on-going basis, a number of disclosures concerning the Program and Designated Investments under the Plan, including information pertaining to performance and rates of returns on Designated Investments, expenses and fees of SunAmerica Funds that are Designated Investments, and any proposed increases in investment advisory or other fees charged under a SunAmerica Fund. You represent that, with respect to the development of the Model Asset Allocation Portfolios, the Financial Expert, using its own methodologies, will construct strategic "asset class” level portfolios. Using generally accepted principles of Modern Portfolio Theory, the Financial Expert will evaluate and determine its strategic asset class level portfolio recommendations. The Financial Expert then will construct each Model Asset Allocation Portfolio by combining Designated Investments so that the total asset class exposures of those Designated Investments equals the desired strategic asset class portfolio weight.7 The Model Asset Allocation Portfolios will have different risk and return characteristics. In order for these methodologies to be employed, the Designated Investments of a participating Plan must provide a minimum exposure to a certain number of asset classes. SunAmerica will inform the Plan fiduciary who causes a Plan to participate in the Program of the asset classes that must be available for operation of the Program,(8) and will inform the Plan fiduciary whether this requirement has been satisfied, as solely determined by the Financial Expert, with respect to a particular selection of an investment alternative.8 SunAmerica may assist the Financial Expert by providing certain background information for the development of the Model Asset Allocation Portfolios. Specifically, SunAmerica may supply the Financial Expert with algorithms, studies, analytics, research, models, papers and any other relevant materials. The Financial Expert also may seek the assistance of other entities in developing the Model Asset Allocation Portfolios. You represent that in all cases, the Financial Expert retains the sole control and discretion for the development and maintenance of the Model Asset Allocation Portfolios. With regard to the computer programs utilized by the Financial Expert to select the specific Model Asset Allocation Portfolio provided to a participant, you represent that any programmers who are retained to formulate those programs will have no affiliation with SunAmerica, and that neither SunAmerica nor any of its affiliates will have any discretion regarding the output of such programs. You further represent that these computer programs require an input of minimum participant data that will be determined by the Financial Expert. The Financial Expert also will create a worksheet (the Worksheet) for gathering information from individual participants. The Worksheet will consist of a series of questions designed primarily to assess the participant’s retirement needs, and will provide the participant an opportunity to designate specific investments other than Designated Investments, or to place constraints on investments in and among Designated Investments, if available under the Plan. Also, with respect to the Discretionary Asset Allocation Service, subsequent to initial participation in the Program, at least once each calendar quarter, a "Facilitator” will contact each participant to whom services are provided to obtain any new or different information requested on the Worksheet. This information may lead the Financial Expert to implement a new Model Asset Allocation Portfolio for the participant. The Facilitators will be employees of SunAmerica, independent contractors of SunAmerica’s affiliates, or independent contractors or employees of broker-dealers not affiliated with SunAmerica. Facilitators will not provide services to participants who receive the Recommended Asset Allocation Service, and will not choose or recommend a Model Asset Allocation Portfolio in connection with the Discretionary Asset Allocation Service. The Model Asset Allocation Portfolios (or any other Asset Allocation Portfolio) implemented will be reviewed regularly and "rebalanced.” You explain that participant Account or Asset Allocation Portfolio rebalancing is the process of moving the assets in an Account or Asset Allocation Portfolio asset class exposures toward its strategic target. This process seeks to reduce the relative performance risk associated with moving the asset class exposures away from what was intended in the strategic asset allocation. You represent that the rebalancing procedures will not involve any discretion on the part of SunAmerica or its affiliates, and that the Financial Expert will develop a mechanical formula to rebalance the relative value of the assets in each Account on a predetermined basis. With regard to amounts paid by a Plan under the Program, you represent that SunAmerica will receive a fixed percentage of assets of the Plan invested in the Designated Investments up to 100 basis points (the Program Fee). In addition, SunAmerica may receive reimbursements, not to exceed a fixed percentage of Plan assets invested in the Designated Investments up to 25 basis points, for Facilitator fees and "direct expenses” within the meaning of 29 C.F.R. section 2550.408c-2 in connection with the operation of the Program paid by SunAmerica to unaffiliated third persons for goods and services provided to SunAmerica. SunAmerica, or any affiliate, will not be precluded from receiving fees from the SunAmerica Funds. The Program Fee and any reimbursements payable to SunAmerica, and any compensation payable to the Facilitators under the Program, will not vary based on the asset allocations made or recommended by the Financial Expert, except that the Program Fee and any such reimbursements will be based on Designated Investments only and will be reduced if an Account invests in other than the Designated Investments. The compensation of the Financial Expert in connection with the Program will not be affected by the decisions made by the participants regarding investment of the assets of their Accounts in accordance with any Asset Allocation Portfolio. With regard to the Financial Expert, you represent that the Financial Expert will receive compensation from SunAmerica for its services as the Financial Expert. You represent that fees to be paid by SunAmerica to the Financial Expert will not exceed 5 percent of the Financial Expert’s gross income on an annual basis. In addition you represent that the fees paid to the Financial Expert by SunAmerica will not be affected by investments made in accordance with any Asset Allocation Portfolio under the Program. For example, neither the choice of the Financial Expert by SunAmerica nor any decision to continue or terminate the relationship shall be based on the fee income to SunAmerica that is generated by the Financial Expert’s construction of the Model Asset Allocation Portfolios. You further represent that there have not been, nor will there be, any other relationships between SunAmerica and the Financial Expert that would affect the ability of the Financial Expert to act independent of SunAmerica and its affiliates. Your submission indicates that by providing discretionary asset management services and investment advice to participants, SunAmerica may be acting as a fiduciary with respect to the Plans. Your submission further indicates that implementation of a Model Asset Allocation Portfolio, whether automatically or at the direction of a participant, may result in the receipt of increased investment advisory fees by SunAmerica or an affiliated entity. At issue, therefore, is whether, under the circumstances described in your submission, the receipt of such fees resulting from the asset allocation services rendered to Plan participants under the Program violates the prohibitions of section 406(b) of ERISA. Section 3(21)(A) of ERISA defines the term fiduciary as a person with respect to a plan who (i) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or discretionary responsibility in the administration of such plan. Regulation 29 C.F.R. section 2510.3-21(c)(1) states that, as a general matter, a person will be deemed to be rendering investment advice within the meaning of section 3(21)(A)(ii) if two criteria are met. First, pursuant to regulation section 2510.3-21(c)(1)(i), the person must render advice to the plan with regard to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing or selling securities or other property. Second, pursuant to regulation section 2510.3-21(c)(1)(ii), a person performing this type of service must either (A) have discretionary authority or control with respect to purchasing or selling securities or other property for the plan, or (B) render such advice on a regular basis pursuant to a mutual agreement, arrangement or understanding, written or otherwise, with the plan that the plan or a fiduciary with respect to the plan will rely on such advice as a primary basis for investment decisions with regard to plan assets. Although the question of whether an entity is a fiduciary by reason of providing services generally depends on the particular facts and circumstances of each case, we are assuming, for purposes of the discussion that follows in this advisory opinion, that the totality of services provided by SunAmerica causes it to be a fiduciary with respect to plans and participants to which it renders services. In this regard, we note that section 404 of ERISA generally provides that fiduciaries shall discharge their duties with respect to a plan prudently and solely in the interest of the participants and beneficiaries. While section 406(a)(1)(C) of ERISA proscribes the provision of services to a plan by a party in interest, including a fiduciary, and section 406(a)(1)(D) prohibits the use by or for the benefit of, a party in interest, of the assets of a plan, section 408(b)(2) of ERISA provides a statutory exemption from the prohibitions of section 406(a) of ERISA for contracting or making reasonable arrangements with a party in interest, including a fiduciary, for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid. Section 406(b)(1) of ERISA provides that a fiduciary with respect to a plan shall not deal with plan assets in his or her own interests or for his or her own account. Section 406(b)(3) provides that a fiduciary with respect to a plan shall not receive any consideration for his or her own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan. With respect to the prohibitions in section 406(b), regulation 29 C.F.R. section 2550.408b-2(a) indicates that section 408(b)(2) of ERISA does not contain an exemption for an act described in section 406(b) of ERISA (relating to conflicts of interest on the part of fiduciaries) even if such act occurs in connection with a provision of services which is exempt under section 408(b)(2).9 As explained in regulation 29 C.F.R. section 2550.408b-2(e)(1), if a fiduciary uses the authority, control, or responsibility which makes it a fiduciary to cause the plan to enter into a transaction involving the provision of services when such fiduciary has an interest in the transaction which may affect the exercise of its best judgment as a fiduciary, a transaction described in section 406(b)(1) would occur, and that transaction would be deemed to be a separate transaction from the transaction involving the provision of services and would not be exempted by section 408(b)(2). Conversely, the regulation explains that a fiduciary does not engage in an act described in section 406(b)(1) if the fiduciary does not use any of the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay additional fees for a service furnished by such fiduciary or to pay a fee for a service furnished by a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary. In general, the provision of investment advice for a fee is a fiduciary act. On the basis of the foregoing, it is the view of the Department that SunAmerica would be acting as a fiduciary with respect to both the discretionary and nondiscretionary asset allocation services provided to plans and plan participants and, as such, would be subject to the fiduciary responsibility provisions of ERISA, including sections 404 and 406. In this regard, SunAmerica would be responsible for the prudent selection and periodic monitoring of its investment advisory services consistent with the requirements of ERISA section 404.10 With respect to the prohibitions in section 406(b) of ERISA, it is the view of the Department that, based on the facts and representations contained in your submission, the individual investment decisions or recommendations (i.e., Asset Allocation Portfolios) provided or implemented under the Program would not be the result of SunAmerica’s exercise of authority, control, or responsibility for purposes of section 406(b) and the applicable regulations. This conclusion is premised on the following facts. First, Plan fiduciaries responsible for selecting the Program are fully informed about, and approve, the Program and the nature of the services provided thereunder, including the role of the Financial Expert. Second, the investment recommendations provided to, or implemented on behalf of, participants are the result of methodologies developed, maintained and overseen by a party (the Financial Expert) that is independent of SunAmerica and any of its affiliates.(11) The Financial Expert (an independent party) retains sole control and discretion over the development and maintenance of the methodologies. Any computer programmers engaged to formulate the computer programs used by the Financial Expert will have no affiliation with SunAmerica. Recommendations provided to, or implemented on behalf of, participants by SunAmerica will be based solely on input of participant information into computer programs utilizing methodologies and parameters provided by the Financial Expert and neither SunAmerica, nor its affiliates, will be able to change or affect the output of the computer programs. SunAmerica will exercise no discretion over the communication to, or implementation of, investment recommendations provided under the Program. Third, the arrangement between SunAmerica and the Financial Expert preserves the Financial Expert’s ability to develop Model Asset Allocation Portfolios solely in the interests of the plan participants and beneficiaries. Neither the Financial Expert’s compensation from SunAmerica, nor any other aspect of the arrangement between the Financial Expert and SunAmerica, is related to the fee income that SunAmerica or its affiliates will receive from investments made pursuant to the Portfolios. It is the view of the Department, therefore, that, to the extent that SunAmerica follows the Program as structured in relation to an investment of Plan assets in SunAmerica Funds, there would not be a per se violation of section 406(b)(1) or (3) of ERISA solely as a result of SunAmerica’s, or any affiliate’s, receipt of increased investment advisory fees resulting from such investments. In view of this letter, the Department believes that no further action is necessary with respect to your exemption application. Accordingly, your exemption application is closed without further action. This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (Aug. 27, 1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions.
Sincerely, Footnotes 1 Under Reorganization Plan No. 4 of 1978, 43 Fed. Reg. 47713 (Oct. 17, 1978), the authority of the Secretary of the Treasury to issue rulings under section 4975 of the Internal Revenue Code (Code) has been transferred, with certain exceptions not here relevant, to the Secretary of Labor. Therefore, the references in this letter to specific sections of ERISA also refer to the corresponding sections of the Code. 2 The Department expresses no views herein, and no views should be implied, concerning the application of ERISA section 404(c) to the Program or any participating Plan or participant. 3 The asset allocation services under the Program also may be available to beneficiaries who, under the terms of their Plan, have the power to direct the investments in their account balances. For purposes of convenience, we refer only to participants. 4 You represent that the Program and Services will impose no limit on the frequency with which a participant may change his or her investment election. However, there may be limits concerning such frequency under the terms of a participating Plan. 5 You explain that, with respect to the Recommended Asset Allocation Services, under circumstances where a participating Plan permits participant input such as direction to invest in assets other than Designated Investments or to place ceilings or floors on the percentages, or amounts, of Designated or non-Designated Investments, the methodologies followed by the Financial Expert, as described below, may result in a portfolio, other than a Model Asset Allocation Portfolio, that includes non-Designated Investments. You refer to such portfolios, along with the Model Asset Allocation Portfolios, generally as "Asset Allocation Portfolios.” 6 As described below, an independent Plan fiduciary will determine the investments that will be available under the Plan. 7 You explain that the assets underlying the Designated Investments may fall into more than one asset class, and that in constructing a Model Asset Allocation Portfolio, the Financial Expert will employ a statistical method to determine the asset class exposure to a participant of a Designated Investment’s investment approach. 8 You note that this process may be completed in a summary manner where SunAmerica offers the Program along with a range of SunAmerica Funds that will constitute the Designated Investments. You also represent that under no circumstances, except for Plans maintained by SunAmerica and its affiliates, will SunAmerica select investment alternatives to be made available under a Plan. This letter addresses only participation by Plans that are not maintained by SunAmerica and/or its affiliates. 9 We express no opinion as to whether the requirements of section 408(b)(2) of ERISA would be satisfied with respect to the Program. 10 The Department notes that, with regard to the selection and monitoring of the Financial Expert and SunAmerica’s investment advisory services, any consideration of the effect of investment recommendations, or methodologies upon which such recommendations are based, on the fees or other compensation of SunAmerica or any of its affiliates, would, in the view of the Department, be inconsistent with a fiduciary’s obligations under section 404 of ERISA. 11 Whether a party is "independent" for purposes of the subject analysis will generally involve a determination as to whether there exists a financial interest (e.g., compensation, fees, etc.), ownership interest, or other relationship, agreement or understanding that would limit the ability of the party to carry out its responsibility beyond the control, direction or influence of the fiduciary. In this regard, we note there have been other contexts in which the Department dealt with this issue. Under Prohibited Transaction Class Exemption 84-14, relief from section 406(a) of ERISA was provided for transactions between plans and parties in interest if approved by a qualified professional asset manager (QPAM). The party in interest could not be "related” to the QPAM - meaning such party in interest (or person controlling, or controlled by, the party in interest) could not own a five percent or more interest in the QPAM; or the QPAM (or person controlling, or controlled by, the QPAM) could not own a five percent or more interest in the party in interest. Further, the plan with respect to which the person was a party in interest could not represent more than 20% of the assets that the QPAM had under management at the time of the transaction. 2001-10A Application of ERISA Secs. 408(b)(2) and 408(b)(6) to the provision of trustee services by Laurel Trust Company2001-10A December 14, 2001
Mr. James M. Winn Dear Mr. Winn: This is in response to your letter requesting an advisory opinion under the Employee Retirement Income Security Act of 1974, as amended (ERISA). In particular, you request an opinion that the provision of trustee services by Laurel Trust Company (Laurel) to two defined benefit pension plans sponsored by Laurel (the Plans), and the payment by the Plans of Laurel’s standard trustee fees would be exempt from ERISA’s prohibited transaction provisions by reason of section 408(b)(6) of ERISA.(1) Your letter contains the following representations. Laurel provided trustee services to the Plans and charged its customary trustee fees for such services. Laurel assumed that the provision of such services and the receipt of the fees was exempted from the prohibited transactions provisions of section 406 of ERISA by reason of section 408(b)(6). You represent that in 1996, the Department of Labor (the Department) determined that this arrangement constituted a violation of section 406 of ERISA and imposed on Laurel (then known as BT Management Trust Company) a civil penalty under section 502(l) of ERISA. Laurel petitioned the Department for a waiver or reduction of the civil penalty, which was denied. Laurel paid the civil penalty and ceased charging its customary fees to the Plans. Citing a 1993 IRS Field Service Advice Memorandum, which you believe takes a view contrary to that of the Department, you have requested that the Department reconsider its position with respect to section 408(b)(6) of ERISA. Laurel contends that section 406 of ERISA does not prohibit the Plans from paying Laurel its customary trustee fees, which are the same fees paid by plans sponsored by parties unrelated to Laurel. You represent that such fees represent reasonable compensation for services, which plans are permitted to pay, even if those fees include a profit component. You recognize that ERISA section 406 would otherwise prohibit the payment of such fees, but claim that the statutory exemption provided by section 408(b)(6) permits the payment of the fees by the Plans to Laurel. Section 406(a)(1)(C) and (D) of ERISA provides that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if the fiduciary knows or should know that such transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest or a transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 406(b)(1) of ERISA provides that a fiduciary with respect to a plan shall not deal with plan assets in his own interest or for his own account. Section 406(b)(2) of ERISA prohibits a fiduciary with respect to a plan from acting in any transaction involving the plan on behalf of a party, or represent a party, whose interests are adverse to the interests of the plan or of its participants and beneficiaries. Section 408(b)(6) of ERISA provides that the prohibitions of section 406 shall not apply to the provision of any ancillary service by a bank or similar financial institution supervised by the United States or a State, if such bank or financial institution is a fiduciary of such plan, provided that certain conditions are satisfied. You represent that Laurel, as a Pennsylvania state-chartered trust company, is a “bank or similar financial institution” that is supervised by a State. You further represent that the provision of services to and payment of fees by the Plans satisfies the other conditions of ERISA section 408(b)(6). You claim that the Department has previously concluded that a plan’s payment of fees that include a profit component is not “reasonable compensation,” as that term is used in both section 408(b)(2) and 408(b)(6) of ERISA. You further claim that the Internal Revenue Service (IRS) has taken a contrary position with respect to section 4975(d)(6) of the Internal Revenue Code of 1986 (the Code), a parallel provision to ERISA section 408(b)(6), in a 1993 Field Service Advice Memorandum (Memorandum), a copy of which you included with your letter. Pursuant to section 102 of Reorganization Plan No. 4 of 1978 (see, footnote 1, above), all authority to issue regulations, rulings, interpretations, and exemptions under section 4975(d) of the Code, with exceptions not here relevant, was transferred to the Department. The Department, therefore, has sole authority and responsibility to interpret section 4975(d)(6) of the Code. Section 408(b)(6) of ERISA (and by reference, section 4975(d)(6) of the Code, see, footnote 1, above) exempts from the prohibited transaction provisions of ERISA the provision of “ancillary” services to a plan by a fiduciary that is a bank or similar financial institution supervised by the United States or a State and the payment of no more than “reasonable compensation” by the plan. It is the opinion of the Department that trustee services are not ancillary services. Trustee services are necessary and essential to the establishment, maintenance, and operation of a pension plan that is subject to ERISA. Section 403(a) of ERISA requires that, subject to several exceptions not relevant here, all assets of an employee benefit plan shall be held in trust by one or more trustees. The trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan, except to the extent that the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee, in which case the trustees shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to ERISA, or to the extent that authority to manage, acquire, or dispose of assets of the plan is delegated to one or more investment managers. In the Department’s view a service is “ancillary” if it aids or is auxiliary to a primary or principal service. For instance, the Department has stated that the provision of “sweep services” by a trustee who is subject to direction from an independent investment manager for the investment of plan assets, may constitute an “ancillary service” within the meaning of section 408(b)(6).(2) Given the central role that the establishment of a trust and the naming of a trustee plays in the establishment, maintenance, and operation of an employee benefit plan, the Department concludes that trustee services cannot be “ancillary services” within the meaning of ERISA section 408(b)(6). Section 408(b)(2) of ERISA exempts from the prohibitions of section 406(a) any contract or reasonable arrangement with a party in interest, including a fiduciary, for office space, or legal, accounting or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefore. Regulations issued by the Department clarify the terms "necessary service" (29 CFR §2550.408b-2(b)), "reasonable contract or arrangement" (29 CFR §2550.408b-2(c)) and "reasonable compensation" (29 CFR §2550.408b-2(d) and 2550.408c-2) as used in section 408(b)(2). As a general matter, whether the requirements of that section are met in each case involves questions which are inherently factual in nature. Pursuant to section 5.01 of ERISA Procedure 76-1, the Department ordinarily does not issue opinions on such matters. The Department has not concluded, however, that fees including a profit component necessarily exceed reasonable compensation. With respect to the prohibitions in section 406(b), the regulation under section 408(b)(2) of ERISA (29 CFR §2550.408b-2(a)) states that section 408(b)(2) of ERISA does not contain an exemption for an act described in section 406(b) even if such act occurs in connection with a provision of services that is exempt under section 408(b)(2). As explained in regulation 29 CFR §2550.408b-2(e)(1), the prohibitions of section 406(b) are imposed upon fiduciaries to deter them from exercising the authority, control, or responsibility that makes them fiduciaries when they have interests that may conflict with the interests of the plans for which they act. Thus, a fiduciary may not use the authority, control, or responsibility that makes him a fiduciary to cause a plan to pay an additional fee to such fiduciary, or to a person in which he has an interest that may affect the exercise of his best judgment as a fiduciary, to provide a service. However, regulation 29 CFR §2550.408b-2(e)(2) provides that a fiduciary does not engage in an act described in section 406(b)(1) of ERISA if the fiduciary does not use any of the authority, control, or responsibility that makes him a fiduciary to cause a plan to pay additional fees for a service furnished by such fiduciary or to pay a fee for a service furnished by a person in which the fiduciary has an interest that may affect the exercise of his judgment as a fiduciary. Furthermore, regulation section 2550.408b-2(e)(3) explains that if a fiduciary provides services to a plan without the receipt of compensation or other consideration other than the reimbursement of direct expenses properly and actually incurred in the performance of such services, the provision of such services does not, in and of itself, constitute an act described in section 406(b) of ERISA. Regulation section 2550.408c-2(b)(3) provides that an expense is not a direct expense to the extent that it would have been sustained had the service not been provided or if it represents an allocable portion of overhead. Accordingly, it is the opinion of the Department that if Laurel provides trustee services to the Plans and charges the Plans a fee that exceeds the direct expenses that Laurel incurs in the provision of trustee services to the Plans, it would engage in violations of ERISA section 406(b)(1) and (2), which would not be exempted by ERISA section 408(b)(2) or (6). This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 relating to the effect of advisory opinions. Sincerely, Louis Campagna Footnotes
2002-04A Application of Sec. 408(e) of ERISA to certain transactions between a plan and various personal trusts and estates2002-04A June 7, 2002
Wallace M. Starke, Esq. Dear Mr. Starke: This is in response to your request for an advisory opinion regarding the application of section 408(e) of the Employee Retirement Income Security Act of 1974, as amended (ERISA) to certain transactions between a plan and various personal trusts and estates sharing a common trustee with the plan. You represent that National Bankshares, Inc. (NBI) is a bank holding company which owns all the issued and outstanding stock of the National Bank of Blacksburg (the Bank). The Bank is a national banking association subject to the supervision of the Office of the Comptroller of the Currency (OCC). You further represent that NBI acts as plan sponsor of the National Bankshares, Inc. Employee Stock Ownership Plan (the ESOP) and the Bank is a participating employer with respect to the ESOP. You state that the Bank serves as trustee of the ESOP and also serves as trustee of various inter vivos and executorial trusts and estates (referred to hereafter as personal trusts). You state that to the best of your knowledge, none of the personal trusts are ERISA plans, parties in interest with respect to the ESOP as defined in section 3(14) of ERISA, or disqualified persons within the meaning of section 4975(e) of the Internal Revenue Code (the Code). You state that the ESOP is an employee stock ownership plan within the meaning of 4975(e)(7) of the Code and section 407(d)(6) of ERISA. It is intended to be qualified under section 401(a) of the Code and last received a favorable determination letter from the Internal Revenue Service to that effect on June 1, 1995. The ESOP, by its terms, is designed to invest primarily in the stock of NBI. NBI's outstanding stock consists of one class of common stock which is readily traded on the NASDAQ small cap market. You request an advisory opinion regarding several transactions involving the purchase by the ESOP of NBI stock from several personal trusts for which the Bank also serves as trustee. No broker was used for the sales. You represent that the Bank as trustee for the ESOP initiated such purchases of NBI stock for the ESOP. You state that the Bank has an established procedure to obtain, prior to executing any acquisition of NBI stock by the ESOP from a personal trust, written consent from the primary beneficiary or any co-fiduciary of the personal trust to sell NBI stock owned by the personal trust to the ESOP. You state that no commission was charged to the ESOP or the personal trusts in connection with the NBI stock purchases in question. The consideration paid by the ESOP for the NBI stock was cash equal to the bid price for such shares as quoted by the online service MSN Money Central, a price which was not more than the fair market value of such shares at the time of their purchase. The trustee did not receive any consideration for its personal account in connection with any of the NBI stock purchases in question. You state that MSN Money Central is an online pricing service that obtains its stock quotes from Standard and Poor's ComStock, Inc., the same service used by a number of other pricing services. You state that there is a 15-minute delay when a stock quote is obtained from MSN Money Central, and that in each of the purchases at issue the transaction was executed within 15 minutes of the time that a price quote was obtained. You state that effecting the trade at the bid price, rather than the asked price, benefitted the plan in that the bid price in most, if not all, cases is lower than the asked price. A total of ten such transactions occurred between June of 2000 and April of 2001 representing a total of 7,646 shares of NBI stock and a total sale price of $163,301. During an examination by the OCC of the operations of the trust department of the Bank, the OCC examiner questioned whether these transactions were prohibited by ERISA and the Code. You request the Department's view as to whether the described transactions are exempt from the prohibited transaction restrictions of ERISA and the Code by virtue of sections 408(e) of ERISA and 4975(d)(13) of the Code. Section 406(a)(1)(A) and (D) of ERISA prohibit a fiduciary with respect to a plan from causing a plan to engage in a transaction if s/he knows or should know that such transaction constitutes a direct or indirect sale or exchange, or leasing of any property between a plan and a party in interest; or a transfer to, or use for the benefit of, a party in interest, of any assets of the plan. Section 3(14)(A) and (C) of ERISA define a party in interest with respect to a plan to include a fiduciary of the plan and an employer any of whose employees are covered by such plan. Section 406(a)(1)(E) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction if s/he knows or should know that such transaction constitutes a direct or indirect acquisition, on behalf of the plan, of any employer security in violation of section 407(a). In addition section 406(a)(2) prohibits certain fiduciaries from permitting a plan to hold any employer security if s/he knows or should know that holding such security violates section 407(a). Section 407(a) of ERISA provides, in part, that a plan may not acquire or hold any employer security which is not a qualifying employer security. Section 406(b)(1) and (2) of ERISA prohibit a fiduciary with respect to a plan from dealing with the assets of a plan in his or her own interest or for his own account, or from acting in his or her individual or in any other capacity in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries. Section 406(b)(3) prohibits a fiduciary with respect to a plan from receiving any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of a plan. However, section 408(e) of ERISA provides, in part, that sections 406(a) and 406(b)(1) and (2) shall not apply to the acquisition or sale by a plan of qualifying employer securities (as defined in section 407(d)(5)) if the following conditions are met: (1) the acquisition or sale is for adequate consideration; (2) no commission is charged with respect to the acquisition or sale; and (3) the plan is an eligible individual account plan (as defined in section 407(d)(3))… 2. Section 407(d)(1) of ERISA defines the term employer security in part to mean a security issued by an employer of employees covered by the plan or by an affiliate of such employer. With respect to eligible individual account plans, section 407(d)(5) of ERISA defines the term qualifying employer security to include an employer security which is a stock. Section 3(18) of ERISA defines the term adequate consideration to include, in the case of a security for which there is a generally recognized market and if the security is not traded on a national securities exchange which is registered under section 6 of the Securities Exchange Act of 1934, a price not less favorable to the plan than the offering price for the security as established by the current bid and asked prices quoted by persons independent of the issuer and of any party in interest. The term eligible individual account plan is defined under section 407(d)(3) as including employee stock ownership plans which explicitly provide for the acquisition and holding of qualifying employer securities. Based on the representations described in your request, it is the opinion of the Department that the ESOP constitutes an eligible individual account plan inasmuch as the plan is an employee stock ownership plan within the meaning of 4975(e)(7) of the Code and 407(d)(6) of ERISA and is designed, by its terms, to invest primarily in the common stock of NBI. You have represented that the transactions involve the purchase of NBI common stock by the ESOP. You state that the ESOP is maintained for the benefit of the employees of NBI, the Bank, and any other NBI affiliate which adopts the ESOP as a participating employer. The Bank, as a wholly owned subsidiary of NBI, constitutes an affiliate of NBI on the basis of the facts you describe. Based on your representations, it is the Department's view that common stock of NBI will constitute qualifying employer securities with respect to the ESOP. You represent that none of these trusts are parties in interest as defined under section 3(14). As a result, a violation of section 406(a) would not have occurred with respect to the transactions. You have also represented that the transactions involve the purchase of NBI common stock by the ESOP from several personal trusts for which the Bank also serves as the trustee. Such transactions would involve violations of section 406(b)(2). Further, the Department has stated that to the extent that an investment manager exercises discretion over both sides of a transaction in a cross-trade transaction, there is potential for the investment manager to use its discretion to favor one account over another, for example, in the pricing or timing of the trade or in the decision to buy or sell securities for an ERISA account. Such acts could result in one or more violations of the fiduciary provisions of Title I of ERISA in addition to those described in section 406(b)(2). Regulations issued by the Department clarify that section 408(e), by its terms, exempts certain transactions from the prohibitions of section 406(a) and 406(b)(1) and (2). Accordingly, it is the view of the Department that the acquisitions of NBI stock by the ESOP under the circumstances described would be exempt from the prohibitions of 406(a), and 406(b)(1) and (2) by virtue of section 408(e) provided that the transactions are for adequate consideration and that no commission is charged with respect to the transactions. Whether the terms of section 408(e) have been met with respect to a transaction is an inherently factual question which may only be answered by the appropriate plan fiduciaries based on all of the relevant facts and circumstances. The Department generally will not opine as to whether a particular transaction is for adequate consideration. Rather, the Department believes that such determinations should be made by appropriate plan fiduciaries on the basis of all relevant facts and circumstances. We would note, however, that the fact that a transaction is exempt under section 408(e) is not determinative of whether a fiduciary has met its fiduciary obligations under ERISA. Section 404(a)(1)(A) of ERISA requires plan fiduciaries to discharge their duties with respect to a plan solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan. Section 404(a)(1)(B) requires plan fiduciaries to act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims. Section 403(c)(1) provides that the assets of a plan shall never inure to the benefit of an employer and shall be held for the exclusive purposes of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. The general standards of fiduciary conduct contained in sections 404(a)(1) and 403(c) apply to the described purchases of NBI stock by the ESOP. Accordingly, fiduciaries of the ESOP must act prudently, solely in the interest of the plan's participants and beneficiaries, and for the exclusive purpose of providing benefits and defraying reasonable plan administrative costs when deciding whether to acquire NBI stock for the ESOP. Therefore, if plan fiduciaries failed to act in compliance with these general fiduciary standards in the acquisition of the NBI stock for the ESOP, they would be liable for losses resulting from such breaches of fiduciary responsibility regardless of whether the acquisition may be exempt from certain prohibited transaction restrictions by virtue of section 408(e). If, under the facts and circumstances of any transaction, the Bank uses the authority which makes it a fiduciary with respect to the transaction to benefit personal trust clients at the expense of the ESOP, or otherwise fails to act solely in the interest of plan participants and beneficiaries in deciding to purchase NBI stock for the ESOP, violations of sections 404(a)(1) and 403(c) could occur. This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (Aug. 27, 1976). Accordingly, it is issued subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions. Sincerely, Louis J. Campagna 2002-05A Whether the prohibition in PTE 77-4 (42 FR 18732, April 8, 1977) on sales commission payments would apply to commissions paid by a plan to an independent broker2002-05A June 7, 2002
Melanie Franco Nussdorf, Esq. Dear Ms. Nussdorf: This is in response to your request for an advisory opinion concerning Prohibited Transaction Exemption 77-4 (42 FR 18732, April 8, 1977) (PTE 77-4). Specifically, you request an opinion as to whether the prohibition on sales commission payments in PTE 77-4 would apply to commissions paid by a plan to an independent broker who executes the plan’s purchase or sale of shares of open-end investment companies registered under the Investment Company Act of 1940 through a securities exchange. As you know, PTE 77-4 provides an exemption from the restrictions of section 406 of the Employee Retirement Income Security Act (the Act), as amended, and the taxes imposed by section 4975(a) and (b) of the Internal Revenue Code of 1986, as amended (the Code), by reason of section 4975(c)(1) of the Code, for the purchase or sale by an employee benefit plan of shares of an open-end investment company registered under the Investment Company Act of 1940, where the investment adviser for the investment company is also a fiduciary with respect to the plan (or an affiliate of such fiduciary) and is not an employer of employees covered by the plan, provided certain conditions are met. Section II(a) of PTE 77-4 provides that the plan must not pay a sales commission in connection with such purchase or sale. You represent that your inquiry concerns an investment vehicle known as an Exchange Traded Fund or ETF which is similar to a mutual fund. You have explained that an ETF is legally classified as a registered open-end investment company. Like other open-end investment companies, an ETF issues shares representing an undivided interest in a managed portfolio of securities. Additionally, ETF shares are offered continuously and may be purchased and redeemed directly through the ETF on a daily basis, at the net asset value (NAV) per share, with or without a fixed transaction fee. You represent that direct purchases and redemptions occur, however, only in large blocks (generally called creation units) and generally are effected through an in-kind tender of a specified basket of securities, and not cash. You note that this tends to reduce portfolio turnover and attendant transactional expenses by minimizing the liquidations and acquisitions of portfolio securities required with respect to purchases and redemptions in ETF shares. You state that individual ETF shares trade on the exchanges at market prices, which may differ from NAV. Trades of ETF shares in the secondary market incur brokerage commissions, like common stocks. You have requested an advisory opinion confirming that the sales commissions precluded under section II(a) of PTE 77-4 do not include commissions paid to brokers provided that: (1) the sale of shares of open-end investment companies registered under the Investment Company Act of 1940 are executed through a securities exchange; and (2) the brokers are unrelated to the investment company’s principal underwriter or investment adviser (or their affiliates). You note that where the broker is not affiliated with the investment adviser for the fund and the fund’s principal underwriter, neither the adviser, the principal underwriter, nor any of their affiliates, derives any additional benefit from initiating a transaction which causes the broker to receive a commission. ETFs did not exist in 1977 at the time PTE 77-4 was granted by the Department of Labor (the Department). At that time open-end investment company shares were purchased from the fund itself (or through a broker affiliated with the fund). The prohibition in PTE 77-4 on the payment of sales commissions by a plan was intended to avoid potential abuses that could arise if a mutual fund, its investment adviser or an affiliate thereof were to receive a commission or load in connection with the transaction. The Department explained in the preamble to the proposed class exemption relating to PTE 77-4 that the requirement that the plan not pay commissions would apply ...whether the transaction is between the plan and the mutual fund directly or is executed by the mutual fund’s principal underwriter or transfer agent as an intermediary. (See 41 FR 50516, November 16, 1976). Each of these types of transactions would involve payment of a commission to someone associated with the mutual fund. The Department’s views regarding fees paid to parties with respect to transactions described in PTE 77-4 were also discussed in Advisory Opinion 93-13A, in which a company, serving as investment manager or trustee to employee benefit plans, proposed to invest the plans’ assets in affiliated mutual funds. The Department stated that conditions (d), (e) and (f) of PTE 77-4, relating to required disclosures and approval by an independent fiduciary, would not apply to fees paid to parties unrelated to the mutual funds’ adviser, or any affiliate, under the arrangement described in the advisory opinion. As noted above, ETFs are a more recent development in the securities market and their trading procedures differ from those of traditional open-end investment companies. In this regard, creation units are traded directly with the fund in like-kind exchanges while individual shares are traded between investors on securities exchanges and result in brokerage commissions being paid to brokers who may or may not be related to the fund, investment adviser or any affiliates thereof. Based on the above facts and representations, the Department is of the view that the term sales commission as used in section II(a) of PTE 77-4 does not include brokerage commissions paid to a broker in connection with purchases or sales of shares of registered open-end investment companies on an exchange if the broker is unaffiliated with the fund, its principal underwriter, investment adviser or any affiliate thereof.(1) The Department cautions, however, that where a plan fiduciary, who is an investment adviser to a fund, causes the plan to pay commissions to a broker-dealer who is an affiliate of such adviser or of the fund, such commission payments would be separate prohibited transactions under section 406(b) of the Act for which no relief is available under PTE 77-4. Section 406(b) prohibits a plan fiduciary from dealing with the assets of the plan in his own interest or for his own account, acting in his individual or in any other capacity in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants and beneficiaries, or receiving any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan. This letter constitutes an advisory opinion under ERISA Procedure 76-1 and is issued subject to the provisions of that procedure, including section 10, relating to the effect of advisory opinions. This opinion relates only to the specific issue addressed herein. Sincerely, Ivan L. Strasfeld Footnotes The Department notes PTE 77-4 would not apply to the in-kind purchase or sale of ETF creation units by employee benefit plans. 2002-08A Whether indemnification and limitation of liability provisions in a plan's service provider contract would violate the fiduciary provisions of ERISA2002-08A August 20, 2002
Michael A. Crabtree, Esq. Dear Mr. Crabtree: This is in response to your request for an advisory opinion on behalf of the Central Pension Fund of the International Union of Operating Engineers and Participating Employers (the “Fund”) concerning the application of the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). Specifically, you have requested the views of the Department as to whether inclusion of certain indemnification and hold-harmless provisions in a plan’s service provider contract would violate the fiduciary provisions of ERISA. You represent that an actuarial firm, in connection with discussions relating to the renewal of its contract to provide actuarial services to the Fund, advised that it was requiring all new engagement letters to contain, among other things, “limitation of liability” and “indemnification” provisions. These provisions, in effect, would require the Fund to agree not to recover from the actuarial firm an amount in excess of the greater of $250,000 or one year’s fee for any damage caused to the Fund “regardless of the cause of action,” and to indemnify and hold the actuarial firm harmless for any amount exceeding the same limits “from any third party claim or liability” arising from, or in connection with, the firm’s services to the Fund. The Fund’s insurer has informed the Fund that its fiduciary liability policy would not cover the Fund’s losses if the Fund suffered losses in excess of $250,000 as a result of the actuarial firm’s actions that were not recovered because of the proposed limitation of liability and indemnification provisions. The insurer explained that the policy is not designed to cover professional liability exposures normally associated with Actuarial Errors and Omissions coverage. Although the Fund has decided not to retain the actuarial firm, opting instead for a firm that required no specific limitation of liability or indemnification provision, limitation of liability and indemnification provisions may be becoming increasingly popular with actuarial firms according to press and other reports. Given the current and future issues presented to fiduciaries with respect to the engagement of service providers with contractual limitations of liability or indemnification provisions, you have requested guidance from the Department concerning the permissibility of such provisions under ERISA. Section 404(a)(1) of ERISA requires, among other things, that a fiduciary discharge his or her duties with respect to a plan solely in the interest of the participants and beneficiaries and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character with like aims. The prohibited transaction provisions state, in section 406(a)(1)(C) and (D) of ERISA, that a fiduciary with respect to an employee benefit plan shall not cause the plan to engage in a transaction if he or she knows or should know that such transaction constitutes a direct or indirect furnishing of services between the plan and a party in interest with respect to the plan, or transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 408(b)(2) of ERISA provides a statutory exemption from the prohibitions of section 406(a) for contracting or making reasonable arrangements with a party in interest, including a fiduciary, for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid for such services. With regard to the selection of service providers under ERISA, the Department has previously indicated that the responsible plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided. In addition, such process should be designed to avoid self-dealing, conflicts of interest or other improper influence. What constitutes an appropriate method of selecting a service provider, however, will depend upon the particular facts and circumstances. Soliciting bids among service providers is a means by which a fiduciary can obtain the necessary information relevant to the decision-making process, including information about contractual provisions such as those identified in your letter relating to limitations of liability and indemnification. The Department does not believe that, in and of themselves, most limitation of liability and indemnification provisions in a service provider contract are either per se imprudent under ERISA section 404(a)(1)(B) or per se unreasonable under ERISA section 408(b)(2). The Department believes, however, that provisions that purport to apply to fraud or willful misconduct by the service provider are void as against public policy and that it would not be prudent or reasonable to agree to such provisions. Other limitations of liability and indemnification provisions, applying to negligence and unintentional malpractice, may be consistent with sections 404(a)(1) and 408(b)(2) of ERISA when considered in connection with the reasonableness of the arrangement as a whole and the potential risks to participants and beneficiaries. At a minimum, compliance with these standards would require that a fiduciary assess the plan’s ability to obtain comparable services at comparable costs either from service providers without having to agree to such provisions, or from service providers who have provisions that provide greater protection to the plan. In the Department’s view, compliance with ERISA’s fiduciary provisions, including section 408(b)(2), also would require that a fiduciary assess the potential risk of loss and costs to the plan that might result from a service provider’s act or omission subject to a proposed limitation of liability or indemnification provision. In making such an assessment, a fiduciary should consider the potential for, and outside limits of, such a loss, as well as any additional actions that may be available to the plan to minimize such a loss. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 relating to the effect of advisory opinions. Sincerely, Louis Campagna 2002-14A Guidance concerning the selection of annuity providers in connection with distributions2002-14A December 18, 2002
Leonard A. Davis, Chief Counsel – Benefits Dear Mr. Davis and Ms. Vaino: This is in response to your request for guidance concerning the selection of annuity providers, pursuant to Interpretive Bulletin 95-1 (29 C.F.R. § 2509.95-1), in connection with distributions from defined contribution plans. Specifically, you have requested the Department to address the application of specific requirements of Interpretive Bulletin 95-1 to defined contribution plans. Interpretive Bulletin 95-1 (the IB) provides guidance concerning the fiduciary standards under Part 4 of Title I of the Employee Retirement Income Security Act (ERISA) applicable to the selection of annuity providers for purposes of pension plan benefit distributions. In general, the IB makes clear that the selection of an annuity provider in connection with benefit distributions is a fiduciary act governed by the fiduciary standards of section 404(a)(1), including the duty to act prudently and solely in the interest of the plan’s participants and beneficiaries. In this regard, the IB provides that plan fiduciaries must take steps calculated to obtain the safest annuity available, unless under the circumstances it would be in the interest of the participants and beneficiaries to do otherwise. The IB also provides that fiduciaries must conduct an objective, thorough and analytical search for purposes of identifying providers from which to purchase annuities and sets forth six factors that should be considered by fiduciaries in evaluating a provider’s claims paying ability and creditworthiness. (§ 2509.95-1(c)). Further, the IB recognizes that there may be situations where it may be in the interest of participants and beneficiaries to purchase other than the safest available annuity, such as when an annuity is only marginally safer, but disproportionately more expensive than a competing annuity. However, the IB notes that increased costs or other considerations could never justify putting the benefits of participants and beneficiaries at risk by purchasing an unsafe annuity. (§ 2509.95-1(d)). The following information is provided in response to the specific issues raised by your request. The general fiduciary principles set forth in the IB with regard to the selection of annuity providers are equally applicable to defined benefit and defined contribution plans. Accordingly, the selection of annuity provider by the fiduciary of a defined contribution plan would be governed by section 404(a)(1) and, therefore, such fiduciary, in evaluating claims paying ability and creditworthiness of an annuity provider, should take into account the six factors set forth in § 2509.95-1(c). With regard to factor six (§ 2509.95-1(c)(6)) relating to state guarantees, you requested a clarification as to the scope of a fiduciary’s consideration. Factor six indicates that fiduciaries should consider “the availability of additional protection through state guaranty associations and the extent of their guarantees.” For purposes of factor six, fiduciaries should determine whether the provider and annuity product are covered by state guarantees and the extent of those guarantees, in terms of amounts (e.g., percentage limits on guarantees) and individuals covered (e.g., residents, as opposed to non-residents, of a state). Such information should be available to the public and easily accessible through state guaranty associations and state insurance departments. Of course, if there were facts known to the fiduciary calling into question the ability of a state association offering guarantees to meet its obligations under the guarantee, it would be incumbent on the fiduciary to weigh that information when selecting an annuity provider. In evaluating the six factors, the IB indicates that, “[u]nless they possess the necessary expertise to evaluate such factors, fiduciaries would need to obtain the advice of a qualified, independent expert.” With regard to this provision, you express concern that fiduciaries should be able to make evaluations of annuity providers without becoming or hiring an expert in annuity matters. The standard set forth in the IB follows from the prudence standard of section 404(a)(1)(B). That section provides that a fiduciary shall discharge its duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” (Emphasis supplied). Accordingly, in those instances where the fiduciary responsible for the selection of an annuity provider has, at the time of the selection, a sufficient level of expertise or knowledge to meaningfully evaluate the claims paying ability and creditworthiness of an annuity provider, including the factors set forth in the IB, the fiduciary would not be required to engage a qualified, independent expert to evaluate such factors. For purposes of the IB, “independent” means independent of the annuity provider. With regard to paragraph (d) of § 2509.95-1, relating to costs and other considerations, you request confirmation that, in evaluating competing products, cost is an appropriate consideration for the fiduciary of a defined contribution plan when the participant receives an increased benefit as a result of reduced costs. It is the view of the Department that it is appropriate for the fiduciary of a defined contribution plan in selecting an annuity provider to take into account the costs and benefits to the participant or beneficiary of competing annuity products. Consistent with the IB, however, a lower cost cannot justify the purchase of an unsafe annuity even when the annuity would pay a higher benefit amount to the participant or beneficiary. Lastly, you raise a question concerning the applicability of paragraph (e) of § 2509.95-1 to defined contribution plans. Paragraph (e) requires that special care be taken in reversion situations where fiduciaries selecting annuity providers have an interest in the sponsoring employer that may affect their judgment. In such situations, the IB advises that the fiduciary will need to obtain and follow independent expert advice calculated to identify those insurers with the highest claims-paying ability willing to write the business. In the absence of any possibility of funds reverting to a plan sponsor in connection with the termination of a defined contribution plan, it is the view of the Department that paragraph (e) would not apply to such plan. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 relating to the effect of advisory opinions. Sincerely, Louis Campagna 2003-02A Regarding the application of ERISA to the provision of overdraft protection services2003-02A February 10, 2003
Lisa J. Bleier Dear Ms. Bleier: This is in response to your request, on behalf of the American Bankers Association, regarding the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). Specifically, you have requested an opinion clarifying the application of sections 408(b)(2) and 408(b)(6) of ERISA to the provision of overdraft protection services, including any inherent extension of credit incident to such services, by banks, whether or not the bank or other financial institution or affiliate exercises investment discretion over plan assets.(1) You represent that banks provide custodial or trust services to institutional clients, including employee benefit plans. A bank or its affiliate may also serve as investment manager for plans and other clients or as trustee and investment manager of collective funds in which plans invest. An essential part of bank custodial and trust services provided to clients, including employee benefit plans, is the orderly processing of the client’s securities and other financial market transactions, generally based on the anticipated receipt of funds to cover such transactions. In this regard, you indicate that banks have established settlement policies and procedures to maximize the efficiency of the securities trading in institutional accounts. You note that plan investment performance would suffer significantly if a bank held up settlements to ensure that every sale scheduled to settle (thus generating funds necessary to effectuate subsequent transactions) had in fact settled or that anticipated funds had indeed been received. You represent that, although most transactions settle on time, settlement problems may arise due to errors, unexpected delays by a counterparty or its agent, settlement failures by a counterparty or its custodian, broker failures or inefficient markets. In the event of such a failure, banks will generally settle plan transactions without contemporaneous assurance that the necessary funds have been credited, in the correct currency, to the plan’s account. You represent that this overdraft protection is provided as part of a bank’s and its sub-custodians’ “standard operating systems and practices maintained routinely for all institutional customers.” Overdraft protection is necessary to the custody service and is expected and demanded by plan and non-plan clients. You explain that unlike a conventional loan between a plan and a bank, overdraft protection involves no agreement to lend a stated sum for a specified period of time. Events giving rise to an overdraft are generally inadvertent or outside the control of the bank or affiliate. A bank or an affiliate makes no specific discretionary decision to extend overdraft protection at the time of the settlement of a transaction and neither the plan nor its investment fiduciary makes a specific discretionary decision at that time to accept it. In fact, although the client is aware that overdraft protection is available, when needed, neither the client nor the bank is likely to be aware of the existence of any particular overdraft or its amount at the time that overdraft protection is actually provided. Banks recognize the extent to which overdrafts occur only in retrospect upon reconciliation of client accounts. Further, you represent that banks have procedures in place to discourage overdrafts and prevent clients, including plans, from using the overdraft protection as an intentional line of credit. Your letter contains the following general information about overdraft protection procedures. Overdraft protection procedures are designed to ensure that overdraft protection is consistent with sound banking practice under published positions of both the Office of the Comptroller of the Currency and the Federal Reserve Board.(2) According to your letter, bank procedures, as well as agreements with plan clients, ensure that the terms of overdraft protection are at least as favorable to plans as the terms generally available in arm's length transactions between unrelated parties. After an overdraft is determined, a bank promptly notifies the appropriate investment manager or other plan fiduciary to determine the course of action that the fiduciary will take to correct the overdraft. Notice may be provided by telephone, facsimile, e-mail, through a bank's secure Web site or by some alternative method directed by the plan. Banks generally impose an overdraft charge and intend that such charge function as a disincentive for the investment fiduciary to intentionally prolong an overdraft. The overdraft charge is based on an objective measure that varies depending upon factors such as the custody location or currency involved. The overdraft charge may be defined by reference to an identified published rate. The overdraft charge, according to your letter, does not exceed "reasonable compensation." You represent that banks disclose and obtain the consent of plan clients to the provision of overdraft protection. Bank disclosures describe the overdraft protection service and identify the objective basis for the overdraft charge. Consent may be affirmative if the plan client signs a trust, custody, or other agreement describing the services. Alternatively, consent may be deemed given following disclosure of the services. As a trustee or custodian, a bank is a party in interest with respect to each plan. ERISA section 3(14) defines “party in interest” to include, among others, a fiduciary or person who provides services to a plan. Absent an exemption, a bank’s provision of overdraft protection, as described herein, to plans would violate sections 406(a)(1)(C) and (D) of ERISA, which prohibit the provision of services by a party in interest to a plan and the transfer of assets from a plan to a party in interest. In addition, absent an exemption, any extension of credit between the bank and plan that may occur in connection with the overdraft protection would violate section 406(a)(1)(B) of ERISA. Moreover, if a bank uses any of the authority, control, or responsibility that makes the bank a fiduciary to cause a plan to pay to the bank an overdraft charge, the bank may violate sections 406(b)(1) and (2) of ERISA. As discussed below, it is the view of the Department that the provision of overdraft protection services, including any inherent extensions of credit incident to such services, described in your letter would not constitute a prohibited transaction under section 406 to the extent that the bank providing such services complies with the requirements for relief under section 408(b)(2) or section 408(b)(6) of ERISA, as appropriate, and such provision of services is not otherwise part of an arrangement to secure credit unrelated to the settlement of securities or other financial market transactions. Section 408(b)(2) provides a statutory exemption from the prohibitions of section 406(a) for contracting or making reasonable arrangements with a party in interest, including a fiduciary, for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor. Regulations issued by the Department clarify the terms "necessary service" (29 C.F.R. §2550.408b-2(b)), "reasonable contract or arrangement" (29 C.F.R. §2550.408b-2(c)), and "reasonable compensation” (29 C.F.R. §§2550.408b-2(d) and 2550.408c-2) as used in section 408(b)(2). Thus, overdraft protection services, in the context described in your letter, appear to be necessary to ensure the orderly processing of plan securities and other financial market transactions and, therefore, would appear to be a “necessary service” for purposes of section 408(b)(2) and §2550.408b-2(b). Accordingly, such services would be covered by section 408(b)(2) to the extent such services are furnished under contracts or arrangements that are reasonable and no more than reasonable compensation is paid for such services within the meaning of §2550.408b-2. As explained in §2550.408b-2(a), section 408(b)(2) does not contain an exemption for an act described in ERISA section 406(b) (relating to conflicts of interest on the part of fiduciaries) even if such act occurs in connection with the provision of services that are exempt under section 408(b)(2). Section 408(b)(6) of ERISA provides a statutory exemption from the prohibitions of section 406 for any ancillary services provided to a plan by a bank or similar financial institution supervised by the United States or a State, if such bank or financial institution is a fiduciary of such plan and certain conditions are satisfied. Section 2550.408b-6 further clarifies the application of section 408(b)(6). Such ancillary services include services that do not meet the requirements of ERISA section 408(b)(2) because the provision of such services involves an act described in section 406(b)(1) or (b)(2) of ERISA. The Department has indicated that a service is “ancillary” if it aids or is auxiliary to a primary or principal service. The Department has concluded that the provision of “sweep services” by a trustee who is subject to direction from an independent investment manager for the investment of plan assets may constitute an “ancillary service” within the meaning of section 408(b)(6).(3) The Department also has indicated that the question of what constitutes an “ancillary service” within the meaning of section 408(b)(6) depends on the expectations of the parties as evidenced by the terms of the underlying service agreement and applicable Federal banking law.(4) With regard to the expectations of the parties, you represent that plan fiduciaries are fully informed about, and approve, the terms governing the provision of overdraft protection services in settling securities and other financial market transactions for the plan, including associated charges.(5) Additionally, you represent that disclosure documents make clear that charges attendant to overdrafts are in addition to and separate from fees charged for other services, such as trustee or investment management services, provided by the bank or an affiliate. Given the foregoing and the fact that overdraft protection services appear to be necessary to ensure the orderly processing of plan securities transactions and other financial market transactions, as well as a banking practice recognized and permitted by Federal banking authorities, it is the view of the Department that the overdraft protection services described in your letter would constitute an “ancillary service” and, therefore, may be exempt from the prohibitions of section 406 if the conditions of section 408(b)(6) are satisfied. Whether any given bank satisfies the conditions of section 408(b)(6) is an inherently factual determination on which the Department generally will not rule. Section 2550.408b-6(b) requires that ancillary services described in section 408(b)(6) must be provided at not more than reasonable compensation; under adequate internal safeguards which assure that the provision of such service is consistent with sound banking and financial practice, as determined by Federal or State supervisory authority; and only to the extent such service is subject to specific guidelines issued by the bank or similar financial institution which meet the requirements of §2550.408b-6(c). To date, no regulations have been issued to set specific requirements for such guidelines. However, the Department has stated that the condition contained in section 408(b)(6)(B) requiring "specific guidelines" is satisfied (in the absence of such regulations) if the ancillary services are provided in accordance with the specific guidelines issued by the bank or similar financial institution, and adherence to the guidelines would reasonably preclude such bank or institution from providing the services in an excessive or unreasonable manner and in a manner that would be inconsistent with the best interests of the participants and beneficiaries (See 47 FR 14806, April 6, 1982). In order to reasonably preclude providing services in an excessive or unreasonable manner or in a manner that would be inconsistent with the best interests of the participants and beneficiaries, it is the view of the Department that guidelines relating to overdraft protection services, at a minimum, would be required to include measures designed to ensure timely notice to the appropriate plan fiduciary of any overdraft and the imposition of charges with respect thereto, to monitor and limit the duration and usage of overdraft services, and to limit the ability of a fiduciary to utilize overdraft protection services as a routine means by which securities and other financial market transactions are settled. For example, a pattern or practice of routine use of overdraft protection for settlement of securities or other financial market transactions would evidence the providing of ancillary services in an excessive and unreasonable manner and in a manner inconsistent with the interests of participants and beneficiaries in violation of section 408(b)(6). ERISA’s general standards of fiduciary conduct also apply to the overdraft protection services. Section 404 requires, among other things, a fiduciary to discharge his duties respecting a plan solely in the interest of the plan’s participants and beneficiaries and in a prudent fashion and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan. Further, except as provided in section 408, fiduciaries also have an obligation under section 406 not to engage in self-dealing or to cause the plan to engage in certain transactions, including a direct or indirect furnishing of goods, services or facilities between the plan and a party in interest. In this regard, banks or institutions which act as investment managers to plans and provide through their affiliates or otherwise overdraft services would need to assure adherence with the conditions and guidelines specified in section 408(b)(6) of ERISA in the performance of those services. As with the selection of any service provider, a plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of the services offered, and the reasonableness of the fees charged in light of the services provided, including overdraft protection services. As with any compensation arrangement, plan fiduciaries should consider the circumstances under which services will be rendered and the charges for such services, the basis for such charges and the ability of the fiduciary to limit such charges. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, it is subject to the provisions of the procedure, including section 10 thereof relating to the effect of advisory opinions. Sincerely, Louis Campagna Footnotes
2003-09A Whether a trust company’s receipt of 12b-1 and subtransfer fees from mutual funds2003-09A June 25, 2003 Gary W. Howell Dear Mr. Howell: This is in response to your request for guidance under the Employee Retirement Income Security Act of 1974 (ERISA). In particular, you ask whether a trust company’s receipt of 12b-1 and subtransfer fees from mutual funds, the investment advisers of which are affiliates of the trust company, for services in connection with investment by employee benefit plans in the mutual funds, would violate section 406(b)(1) and 406(b)(3) of ERISA when the decision to invest in such funds is made by an employee benefit plan fiduciary or participant who is independent of the trust company and its affiliates. You write on behalf of ABN AMRO Trust Services Company (AATSC), a state-chartered trust company. You represent that AATSC is a wholly owned subsidiary of Alleghany Asset Management Company (Alleghany), which is a wholly owned subsidiary of ABN-AMRO North America Holding Company, a bank holding company (ABN-AMRO).(1) Alleghany is also the parent organization of several institutional investment advisers (Advisers), including some that have entered into investment advisory contracts with mutual funds registered under the Investment Company Act of 1940. You refer to those mutual funds with which such Advisers have investment advisory contracts as ‘Proprietary Funds.’ All other mutual funds are referred to as ‘Non-Proprietary Funds.’ You represent that AATSC provides directed trustee and ‘non-fiduciary’ services to participant-directed and other defined contribution pension plans (Client Plans) through ‘bundled service’ arrangements. You represent that these services (Plan Services) provided by AATSC through bundled service arrangements include, but are not limited to, custodial trustee services, participant level recordkeeping, participant communications and educational materials and programs, voice response system access to accounts for participants, plan documentation, including prototype plans, summary plan descriptions and annual reports, tax compliance assistance, administrative assistance in processing plan distributions and loans, and a facility for plan investment options. In connection with the Client Plan-related business, AATSC has entered into shareholder service arrangements with distributors of, or investment advisers to, mutual fund families pursuant to which AATSC will make mutual fund families available for investment by Client Plans. Among the investment advisers with which AATSC enters into such arrangements are those Advisers with investment advisory contracts with Proprietary Funds. You represent that neither AATSC, nor any other bundled service provider of which AATSC is aware, engages in arrangements where just Plan Services are provided. You represent that, because the true cost of Plan Services would exceed any amount that could be charged in the competitive bundled service market with regard to a Client Plan’s engagement of AATSC as a bundled service provider, all bundled service arrangements between AATSC and a Client Plan are predicated on a Client Plan’s offering of one or more Proprietary Funds as an investment option. You represent that disclosures with regard to Proprietary Funds will enable the fiduciaries of potential Client Plans to make an informed decision regarding whether to engage AATSC in a bundled service arrangement. Included in every proposal made by AATSC to a potential Client Plan are the following disclosures regarding each Proprietary Fund offered:
You represent that participant-directed and other defined contribution pension plans become Client Plans through a process of presentation and negotiation. Typically, a plan sponsor, on behalf of a potential Client Plan, either directly, or through a third-party consultant, will ask AATSC to respond to a ‘request for proposal’ to provide a bundle of services for the plan, such as recordkeeping, directed trusteeship, participant investment education, participant loan and distribution processing and investment vehicles. You represent that a potential Client Plan will typically ask other bundled service providers also to respond to a request for proposal. Client Plan fiduciaries select the funds in which the Client Plans will invest. AATSC does not restrict the mutual funds that a Client Plan may utilize, beyond requiring, as a condition of engagement, that a Client Plan select at least one Proprietary Fund to offer as an investment option. AATSC will, if requested, provide a list of investment funds for the Client Plan to consider. The Client Plan fiduciaries are free to select funds other than those listed by AATSC. Your representations indicate that AATSC, under the terms of a bundled service arrangement, will not be able to assert any influence with respect to selection of other investment options in which Client Plans will invest or the particular Proprietary Fund in which the Client Plan elects to invest. Potential Client Plan fiduciaries are free to accept, reject or further negotiate a bundled service arrangement from AATSC. Based upon such flexibility on the part of a potential Client Plan with respect to negotiation of the terms surrounding engagement of AATSC to provide Plan Services, you represent that engagement of AATSC results from arm’s length negotiations between a potential Client Plan and AATSC. You represent that a Client Plan’s choice of investment vehicles affects the cost of engaging AATSC to provide Plan Services. AATSC estimates the amounts that a potential Client Plan would likely invest in Proprietary Funds based on the amount of the Client Plan’s assets and the number of Proprietary Funds selected. This estimate affects the price at which AATSC offers to perform Plan Services. For example, if Client Plan fiduciaries may direct investment into three Proprietary Funds, Plan Services would cost less than if Client Plan fiduciaries may direct investment into two Proprietary Funds. Similarly, Client Plan fiduciaries that may direct investment into only one Proprietary Fund would be quoted a higher price for bundled services, because AATSC would expect to cover less of the cost of providing Plan Services from asset management revenue. As a directed trustee, AATSC takes direction from Client Plans regarding their selection of investment options. You assert that, because AATSC does not restrict the mutual funds that a potential Client Plan may utilize, the preparation and furnishing of a list offering an array of mutual fund choices does not constitute discretion to add or delete mutual fund families in which Client Plans may invest. You represent that if a Client Plan decides to remove a Proprietary Fund as an investment option, AATSC’s total anticipated revenue from the Client Plan and Proprietary Fund would be affected, leaving less asset management revenue with which to provide Plan Services. In such a situation, you represent that AATSC would invite the Client Plan fiduciaries to consider one or more other Proprietary Funds to replace non-Proprietary Fund investment options. If the plan fiduciaries do not choose to offer another Proprietary Fund as an investment option, AATSC would continue to provide Plan Services pursuant to the bundled services arrangement, but would evaluate such arrangement, as follows. If AATSC determines that a bundled service arrangement is no longer profitable, AATSC can withdraw or make an offer to the Client Plan fiduciaries to renegotiate the fees for AATSC’s provision of Plan Services. You represent that AATSC’s bundled service arrangements generally include a provision whereby AATSC may propose a fee adjustment upon sixty days’ written notice. In addition, either party can terminate a bundled service arrangement without cause, upon at least thirty days’ advance written notice. Upon termination of a bundled service arrangement, funds are transferred on the effective date of appointment of a successor trustee. You represent that AATSC has the systems and administrative capability to provide investment facilities to a Client Plan for any mutual fund that accepts investments from pension plans. You represent that the majority of mutual funds are traded by AATSC on the National Securities Clearing Corporation (NSCC) ‘platform’ for processing transactions in mutual funds. Mutual fund transactions processed through NSCC’s ‘Fund/SERV’ service are made on its standard, highly automated platform that links approximately 2,000 key providers in the mutual fund industry, including AATSC. For those few funds utilized by Client Plans that do not participate in NSCC, generally because of their small size or low volume of trades, you represent that AATSC processes trades manually, in a manner consistent with industry practice. You ask whether AATSC’s receipt of 12b-1 and subtransfer agency fees from mutual funds, including those Proprietary Funds the investment advisers of which are affiliates of AATSC, for services in connection with investment by employee benefit plans in the mutual funds, would violate section 406(b)(1) and 406(b)(3) of ERISA when the decision to invest in such funds is made by an employee benefit plan fiduciary who is independent of AATSC and its affiliates.(2) Section 3(14)(A) and (B) of ERISA provides that a party in interest means, as to an employee benefit plan, any fiduciary, including a trustee, of an employee benefit plan or a person providing services to a plan. ERISA section 3(21)(A) provides that a person is a fiduciary with respect to a plan to the extent that it (i) exercises any authority or control respecting management or disposition of its assets, (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or responsibility in the administration of the plan. Accordingly, as directed trustee of Client Plans, AATSC will be a party in interest and a fiduciary. Section 406(a)(1)(C) of ERISA proscribes the provision of services to a plan by a party in interest, including a fiduciary, and section 406(a)(1)(D) prohibits the use by or for the benefit of, a party in interest, of the assets of a plan. However, section 408(b)(2) of ERISA provides an exemption from the prohibitions of section 406(a) of ERISA for contracting or making reasonable arrangements with a party in interest, including a fiduciary, for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid. 29 CFR 2550.408b-2 provides, with respect to a reasonable contract or arrangement, that no contract or arrangement is reasonable within the meaning of section 408(b)(2) and 29 CFR 2550.408b-2(a)(2) if it does not permit termination by the plan without penalty to the plan on reasonably short notice under the circumstances to prevent the plan from becoming locked into an arrangement that has become disadvantageous. Your representations indicate that, pursuant to the Client Plan’s arrangement with AATSC and consistent with 29 CFR 2550.408b-2(c), the Client Plan may terminate a bundled service arrangement without cause and without penalty, upon at least thirty days’ advance written notice.(3) Section 406(b)(1) of ERISA prohibits a fiduciary with respect to a plan from dealing with the assets of the plan in its own interest or for its own account. Section 406(b)(3) of ERISA prohibits a fiduciary with respect to a plan from receiving any consideration for its own personal account from any party dealing with the plan in connection with a transaction involving the assets of the plan. With respect to the prohibitions in section 406(b), regulation 29 CFR 2550.408b-2(a) indicates that section 408(b)(2) of ERISA does not contain an exemption for an act described in section 406(b) of ERISA (relating to conflicts of interest on the part of fiduciaries) even if such act occurs in connection with a provision of services which is exempt under section 408(b)(2). As explained in regulation 29 CFR 2550.408b-2(e)(1), if a fiduciary uses the authority, control, or responsibility which makes it a fiduciary to cause the plan to enter into a transaction involving the provision of services when such fiduciary has an interest in the transaction which may affect the exercise of its best judgment as a fiduciary, a transaction described in section 406(b)(1) would occur, and that transaction would be deemed to be a separate transaction from the transaction involving the provision of services and would not be exempted by section 408(b)(2). Conversely, the regulation explains that a fiduciary does not engage in an act described in section 406(b)(1) if the fiduciary does not use any of the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay additional fees for a service furnished by such fiduciary or to pay a fee for a service furnished by a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary. You assert that principles previously expressed by the Department in Advisory Opinion 97-15A(4) would apply here. In Advisory Opinion 97-15A, the Department opined that if a trustee acts pursuant to a proper direction in accordance with sections 403(a)(1) or 404(c) of ERISA and does not exercise any authority or control to cause a plan to invest in a mutual fund that pays a fee to the trustee in connection with the plan’s investment, then the trustee would not be dealing with assets of the plan for its own interest or for its own account in violation of section 406(b)(1) of ERISA and the trustee would not be receiving consideration for itself from a third party in connection with a transaction involving plan assets in violation of section 406(b)(3). The arrangement about which you request the Department’s guidance differs from the facts of Advisory Opinion 97-15A. In that letter, the trustee had reserved the right to add or remove mutual fund families that it made available to its client plans. The trustee also agreed to apply any fees it received from the mutual funds to the benefit of the plans. You represent that, once a Client Plan enters into a bundled service arrangement with AATSC, the Client Plan fiduciary possesses authority to make decisions regarding investment fund choices and any modifications to the menu of investment fund choices available for investment of plan assets. In Advisory Opinion 97-16A,(5) the Department expressed the view that a person would not be exercising discretionary authority or control over the management of a plan or its assets solely as a result of deleting or substituting a fund from a program of investment options and services offered to plans, provided that the appropriate plan fiduciary in fact makes the decision to accept or reject the change. In this regard, the Department went on to opine that the plan fiduciary must be provided advance notice of the change, including disclosure of record-keeper fee information and must be afforded a reasonable amount of time in which to accept or reject the change. Such advance notice ensured that the fiduciary would maintain independence with respect to selection of investment options offered. Similar to the arrangement described in Advisory Opinion 97-16A, here a Client Plan sponsor or other fiduciary shall, independent of AATSC, maintain complete control with respect to the selection of funds in which the Client Plan will invest. AATSC itself has no role with respect to selection of investment options beyond requiring, as a condition of initial engagement of AATSC as a bundled service provider, that at least one Proprietary Fund is offered by a Client Plan for investment. You represent that when a Client Plan engages AATSC to provide bundled services, a Client Plan fiduciary, independent of AATSC or its affiliates, will select the Client Plan’s investment options. We note, however, that if, with respect to a particular Client Plan, AATSC provides ‘investment advice’ within the meaning of regulation 29 CFR 2510.3-21(c), AATSC would engage in a violation of section 406(b)(1) of ERISA in causing the Client Plan to invest in a Proprietary Fund (or any mutual fund that pays a fee to AATSC or its affiliates). It is the view of the Department that AATSC’s receipt of 12b-1 or subtransfer fees from mutual funds, including those Proprietary Funds the investment advisers of which are affiliates of AATSC, for services in connection with investment by employee benefit plans in the mutual funds, under the circumstances described above, would not violate section 406(b)(1) or 406(b)(3) of ERISA when the decision to invest in such funds is made by a fiduciary who is independent of AATSC and its affiliates, or by participants of such employee benefit plans. Finally, it should be noted that ERISA’s general standards of fiduciary conduct also would apply to the proposed arrangement. Section 403(c)(1) of ERISA provides that the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. Under section 404(a)(1) of ERISA, the responsible plan fiduciaries must act prudently and solely in the interest of the plan participants and beneficiaries both in deciding whether to enter into, or continue, arrangements with AATSC and in determining the investment options in which to invest or make available to plan participants and beneficiaries in self-directed plans. This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (Aug. 27, 1976). Accordingly, it is issued subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions. Sincerely, Louis Campagna Footnotes
Issued on May 22, 1997. 2003-11A Whether delivery of a Profile (as described in Rule 498 under the Securities Act of 1933)2003-11A September 8, 2003 Stephen M. Saxon Dear Mr. Saxon: This is in response to your request for guidance under the Employee Retirement Income Security Act of 1974 (ERISA). In particular, you ask whether a participant-directed individual account plan’s delivery of a mutual fund Profile, as described below, to participants and beneficiaries immediately before or immediately after their investment in the mutual fund would satisfy regulations issued by the Department of Labor (Department) pursuant to section 404(c) of ERISA. You represent that the Principal Financial Group (Principal) provides investment products and administrative services to tax-qualified defined contribution plans established pursuant to section 401(a) of the Internal Revenue Code of 1986 (the Code), including plans that permit employee elective deferrals under section 401(k) of the Code (401(k) plans). Many of these 401(k) plans permit participants to direct the investments of the amounts in their individual accounts. These 401(k) plans are typically designed and administered by Principal to comply with regulations issued by the Department pursuant to section 404(c) of ERISA (404(c) regulations).(1) Section 404(c) of ERISA provides that, in the case of an individual account plan that permits participants or beneficiaries to exercise control over assets in their accounts, no person who is otherwise a fiduciary shall be liable under part 4 of Title I of ERISA for any loss, or by reason of any breach, which results from such participant’s or beneficiary’s exercise of control. The 404(c) regulations require, among other things, that a participant or beneficiary shall be provided or have the opportunity to obtain sufficient information to make informed decisions with regard to investment alternatives available under the plan.(2) In the case of an investment alternative subject to the registration requirements of the Securities Act of 1933 (Securities Act) such as a mutual fund, the 404(c) regulations provide that a participant or beneficiary shall be provided by the identified plan fiduciary (or a person or persons designated by the plan fiduciary to act on his behalf), a copy of the most recent prospectus that was provided to the plan, either immediately before the participant’s or beneficiary’s initial investment in such investment alternative, or immediately following the participant’s or beneficiary’s initial investment.(3) The 404(c) regulations also provide that a participant or beneficiary shall be provided, either directly or upon request, the following information, which shall be based on the latest information available to the plan: copies of any prospectuses, financial statements and reports, and of any other materials relating to the investment alternatives available under the plan, to the extent such information is provided to the plan.(4) Section 2(a)(10) of the Securities Act generally defines the term “prospectus” to include any notice, circular, advertisement, letter, or communication that offers any security for sale or confirms the sale of any security.(5) Section 10(a) of the Securities Act generally provides that a prospectus relating to a security (10(a) prospectus) shall contain much of the same information that is contained in the registration statement of the security.(6) Section 10(a) of the Securities Act specifies the information that a prospectus must contain and the information that a prospectus may omit.(7) Section 10(b) of the Securities Act provides that the Securities and Exchange Commission (SEC) shall, by rules or regulations deemed necessary or appropriate in the public interest or for the protection of investors, permit the use of a summary document (10(b) prospectus) which omits in part or summarizes information provided in a 10(a) prospectus. Under section 5(b)(1) of the Securities Act, a 10(b) prospectus may be provided to an investor in connection with an offer to sell a registered security.(8) Under section 5(b)(2) of the Securities Act, however, a 10(a) prospectus must be provided to an investor at or before any sale of a registered security.(9) Thus, under the federal securities laws, while a summary document under section 10(b) of the Securities Act may be delivered for purposes of an offer, a 10(a) prospectus would, in any event, also be required to be delivered in order to sell a registered security. On March 13, 1998, the SEC adopted Rule 498 under the Securities Act (Securities Act Rule 498). Under Securities Act Rule 498, a summary prospectus, or a Profile, designed to comply with section 10(b) of the Securities Act, may be delivered to investors in connection with an offer to purchase or sell mutual fund shares.(10) Paragraph (b) of Securities Act Rule 498 provides that a Profile is intended to be a standardized summary of key information contained in a 10(a) prospectus. Securities Act Rule 498 requires a Profile to provide clear and concise information in a format designed to communicate information effectively, while avoiding excessive detail, technical or legal terms, and long sentences and paragraphs.(11) A Profile is specifically required to include, among other things: identifying information; an explanation that the Profile summarizes key information included in the prospectus; information regarding how investors can obtain the prospectus; investment objectives, strategies, and risks; fees and expenses; identities of investment advisers and managers; information regarding purchase and sale of shares; investment requirements; distributions and tax information; and other services available. In adopting Securities Act Rule 498, the SEC stated its belief that investors in participant-directed defined contribution plans may find a Profile helpful in evaluating and comparing funds offered as investment alternatives in a plan.(12) Paragraph (d)(1) of Securities Act Rule 498 provides that, in a Profile intended for use with respect to a 401(k) plan, a mutual fund may modify or omit certain information which may not be relevant to participants and beneficiaries of a plan, such as information about requirements for purchasing and selling shares, fund distributions, tax consequences with regard to distributions, and other fund services that are not applicable to plan participants and beneficiaries. The SEC did not, however, authorize the use of the Profile for purposes of a sale under section 5(b)(2) of the Securities Act. You represent that, because Principal’s 401(k) plan clients typically design and administer their plans to comply with the 404(c) regulations, administrative services provided by Principal include assistance in meeting the disclosure and other requirements of the 404(c) regulations. With regard to mutual funds, Principal proposes to deliver Profiles of mutual funds, including its proprietary funds, to participants of 401(k) plans designed to comply with the 404(c) regulations. You represent that Principal believes that delivery of a mutual fund Profile to a participant of a 401(k) plan designed to comply with the 404(c) regulations will satisfy the requirement under the 404(c) regulations that a prospectus be delivered to each participant either immediately before or immediately after the participant’s initial investment in the mutual fund.(13) You assert that automatic delivery of a Profile would permit plans to avoid the additional expense of automatically providing a lengthy 10(a) prospectus. In addition, you represent that, with regard to delivery of a 10(a) prospectus, Principal will send a 10(a) prospectus to any requesting participant or beneficiary within three days of receipt of such request.(14) You assert that, consistent with the Department’s reasoning in the preamble to the 404(c) regulations with regard to delivery of a prospectus, the delivery of a Profile, as a concise summary of a mutual fund’s investment objectives, risk and return characteristics, and type and diversification of assets, will provide participants and beneficiaries with the information necessary for them to make informed investment decisions with respect to investment in mutual funds. You assert that the required delivery of a prospectus under section 404(c) is intended to ensure that participants and beneficiaries are provided with sufficient information in order to be able to make informed decisions with respect to investment alternatives under the plan. In this regard, you represent that a Profile conveys all the information about a mutual fund that the 404(c) regulations require to be delivered automatically to participants in connection with each designated investment option (i.e., the description of investment objectives, risk and return characteristics, type and diversification of assets, and identification of investment manager, required by 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(ii) and (iii)). You specifically ask whether delivery of a Profile would satisfy a participant-directed individual account plan’s obligation under the 404(c) regulations to deliver a copy of the most recent prospectus to plan participants and beneficiaries immediately before or immediately after such individuals initially invest in mutual funds. The Department has not defined the term “prospectus” in the 404(c) regulations, or elsewhere. In the preamble to the 404(c) regulations, the Department states that the prospectus delivery requirement is intended to ensure that, immediately before or immediately after a participant’s or beneficiary’s initial investment in an investment alternative, such as a mutual fund, that is required to deliver a prospectus to investors under the federal securities laws, participants and beneficiaries must be afforded the opportunity to review the prospectus in connection with an initial investment in such investment alternative.(15) The Department takes no position with respect to the application of the federal securities laws to your question. However, it is the view of the Department that, under the 404(c) regulations, the term “prospectus” includes a Profile. The Department believes that the delivery of a Profile by an identified plan fiduciary or designee to plan participants or beneficiaries satisfies the requirements of the 404(c) regulations because it provides a clear summary of key information about a mutual fund that is useful to such participants and/or beneficiaries. A Profile, designed to comply with section 10(b) of the Securities Act, provides participants with information of the sort that the Department intended a participant in a section 404(c) plan to receive both automatically and upon request with respect to a relevant investment. Moreover, if a participant wishes to obtain additional information, the cover page of the Profile shows how to obtain a 10(a) prospectus from the offeror. Where the most recent prospectus in the plan’s possession is a Profile, then delivering the Profile to plan participants and beneficiaries, immediately before or immediately after such individuals’ initial investment in a mutual fund, would satisfy a participant-directed individual account plan’s prospectus delivery obligation under 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(viii). Where the most recent prospectus is a 10(a) prospectus, 29 CFR section 2550.404c-1(b)(2)(i)(B)(1)(viii) would require the delivery of a 10(a) prospectus. Separately, under 29 CFR section 2550.404c-1(b)(2)(i)(B)(2), the identified plan fiduciary or designee must provide, either directly or upon request, copies of prospectuses (among other things) based on the latest information available to the plan. Where a participant requests a prospectus, and the most recent prospectus is a Profile, then providing the Profile will comply with this requirement. If, however, the participant specifically requests a 10(a) prospectus, the most recent 10(a) prospectus must be provided. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, it is subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions. Sincerely, Louis Campagna Footnotes
2003-15A Whether a limited partnership in which employee benefit plans invest would be deemed a party in interest with respect to the plans2003-15A November 17, 2003
William A. Schmidt
Jacob I. Friedman Dear Messrs. Schmidt and Friedman: This is in response to your request for an advisory opinion on behalf of Verizon Investment Management Corp. as to whether certain transactions between employee benefit plans sponsored by Verizon Communications, Inc. (Verizon) and a limited partnership in which those plans invest would constitute prohibited transactions under the Employee Retirement Income Security Act of 1974 (ERISA). You represent that Verizon sponsors welfare benefit plans that qualify as voluntary employees’ beneficiary associations (VEBAs) and defined benefit plans (DB Plans), collectively the Verizon Plans.(1) The Bell Atlantic Master Trust (Master Trust) holds the assets of the Verizon DB Plans. Mellon Bank, N.A. (Mellon) serves as the directed trustee of the Master Trust. Each VEBA is held in trust by Mellon. Verizon Investment Management Corp. (VIMCO), a wholly-owned subsidiary of Verizon, serves as investment manager of the Verizon Plans. You represent that VIMCO is an in-house asset manager (INHAM) within the meaning of Part IV(a) of Prohibited Transaction Exemption 96-23 with respect to the Verizon Plans. You represent that Verizon intends to create an investment vehicle for the Verizon Plans, employee benefit plans maintained and sponsored by third parties unrelated to Verizon or Mellon (Third Party Plans), and other institutional investors. To accomplish this, VIMCO, in concert with Mellon, would establish and operate a limited partnership, which is a collective investment vehicle (CIV) organized under the laws of Delaware.(2) The CIV will be managed by a joint venture between VIMCO and Mellon (Joint Venture). You represent that Delaware law requires that, among other things, the CIV have one or more general partners and one or more limited partners. You represent that, pursuant to Delaware law, the general partner is not required to make contributions to the CIV nor acquire a partnership interest in the CIV. You further represent that the general partner will not make a contribution to, nor acquire a partnership interest in, the CIV unless required to do so pursuant to the law of jurisdictions, other than Delaware, in which the CIV may be doing business.(3) A wholly-owned subsidiary of VIMCO will be the general partner of the CIV. You represent that the Verizon Plans will contribute assets to the CIV and become limited partners of the CIV at the time the CIV is organized. You represent that Mellon will have no responsibility or authority with respect to the Verizon Plans’ decisions to invest in the CIV. The Third Party Plans and other third party institutional investors will become limited partners at future dates upon contribution to the CIV. Mellon or a third party will be the trustee for the Third Party Plans. The Third Party Plans will not have any relationship with VIMCO prior to making a contribution to the CIV. You represent that, assuming that state law requirements are fulfilled, the liability of each limited partner for the CIV’s debts or obligations will be limited to the extent of the capital that the limited partner has contributed or has agreed to contribute to the CIV, undistributed profits and, under certain circumstances, the return of certain distributions from the CIV. You represent that the CIV will not be designated as a named fiduciary of, nor perform fiduciary functions for, the Verizon Plans or the Third Party Plans. With respect to a Third Party Plan’s participation in the CIV, an independent fiduciary (i.e., independent of VIMCO and Mellon) will make a determination whether to make initial or subsequent contributions into the CIV based upon detailed information provided by VIMCO concerning the available investment pools and other relevant information. The independent fiduciary must approve each Third Party Plan’s program of purchases and redemptions of interests in the CIV. Mellon will be the custodian of the assets of the CIV. You represent that Mellon, as trustee of the Master Trust, will hold at least fifty percent of the interests of the CIV, on behalf of the Verizon DB Plans, for the foreseeable future. The CIV will be composed of multiple investment pools with varying investment risks. The Joint Venture will be the investment manager of the CIV, and as such, will direct the allocation of each limited partner’s interests in the CIV among the various investment pools. The Joint Venture will enter into a contract with VIMCO under which VIMCO will discharge substantially all of the Joint Venture’s investment management responsibilities with respect to the CIV. You further represent that each limited partner will have an undivided interest in the assets of each underlying investment pool in which it invests. The various investment pools will be either (i) invested in common investment funds or mutual funds, or (ii) managed by the Joint Venture or other investment advisers designated by the Joint Venture (Third Party Investment Advisers), which will act as investment managers and which are registered under the Investment Advisers Act of 1940 or which are banks or insurance companies. You represent that the Joint Venture and the Third Party Investment Advisers will receive reasonable fees from the Third Party Plans and other institutional investors for their services. In addition, while the Third Party Investment Advisers will receive reasonable fees from the Verizon Plans for their services, the Joint Venture, VIMCO and Mellon will not receive any fees or other compensation (directly or indirectly) for investment management services to the Verizon Plans, but will be reimbursed for expenses directly and properly incurred for performing services for the Verizon Plans. You have asked for an advisory opinion to the effect that, where fifty percent or more of the interests in the CIV are legally held by Mellon, as fiduciary for the benefit of the Verizon Plans, the CIV is not itself a party in interest with respect to the Verizon Plans invested in the CIV, and therefore, contributions to and distributions from the CIV would not constitute prohibited transactions under ERISA. You are specifically concerned that the CIV may be deemed a party in interest with respect to the Verizon Plans under section 3(14)(G) of ERISA because Mellon would hold more than fifty percent of the interests in the CIV on behalf of the Verizon Plans as trustee of those Plans. Section 406(a)(1)(A) and (D) prohibits, in relevant part, the exchange of any property between a plan and party in interest and the transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 3(14)(G) of ERISA defines a party in interest to include a corporation, partnership or trust or estate of which (or in which) fifty percent or more of (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation, (ii) the capital interest or profits interest of such partnership, or (iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by, among others, a fiduciary of a plan. (Emphasis added.) Mellon, as trustee of the Verizon Plans, is a fiduciary with respect to the Verizon Plans under section 3(21) of ERISA. The Verizon Plans’ contributions to the CIV would be directed by VIMCO. The ownership interests in the CIV would be held by Mellon on behalf of the Verizon Plans. Similarly, distributions from the CIV to the Verizon Plans would be made to Mellon and held on behalf of the Verizon Plans. Consistent with section 3(14) of ERISA, a plan’s ownership of fifty percent or more of a partnership entity will not cause that partnership to become a party in interest with respect to that investing plan.(4) In our view, the application of section 3(14)(G) should not change that result merely because a plan’s interests in a partnership are held by a fiduciary on behalf of the plan. Although Mellon would hold more than fifty percent of the value of the CIV interests, it would hold such interests on behalf of the Verizon Plans, not on behalf of itself or a third party. As a result, it is the view of the Department that the CIV will not be a party in interest with respect to the Verizon Plans.(5) Therefore, transactions between the Verizon Plans and the CIV, including initial and subsequent contributions to the CIV by the Verizon Plans and distributions from the CIV to the Verizon Plans, would not be prohibited under section 406(a) of ERISA. Section 406(b)(1) of ERISA prohibits a fiduciary from dealing with plan assets in his or her own interests or for his or her own account. ERISA section 406(b)(2) specifically prohibits fiduciaries in their individual or in any other capacity from acting in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries. Accordingly, VIMCO and Mellon must ensure that they can act on behalf of the CIV without compromising their positions as fiduciaries of the Verizon Plans. Further, while the Department recognizes that determining whether violations of the prohibited transaction provisions of section 406(b) of ERISA would occur are inherently factual questions, it is the view of the Department that if, in operation, VIMCO’s provision of investment management services to the Verizon Plans or Mellon’s provision of trustee services to the Verizon Plans results in a divergence of interests between VIMCO and the Verizon Plans or Mellon and the Verizon Plans, violations of sections 406(b) of ERISA could occur. The Department cautions that ERISA’s general standards of fiduciary conduct would apply to the Verizon Plans’ investment in the CIV. Section 404(a)(1) of ERISA requires, among other things, that a fiduciary discharge his or her duties with respect to a plan solely in the interest of the participants and beneficiaries, and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims. Accordingly, the appropriate plan fiduciaries must act “prudently” and “solely in the interests” of the plan participants and beneficiaries with respect to the decision to acquire or dispose of the Verizon Plans’ interests in the CIV. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 relating to the effect of advisory opinions. Sincerely, Louis J. Campagna Footnotes
2004-02A Time and Order of Issuance of Domestic Relations Orders2004-02A Whether a domestic relations order that changes a prior assignment of benefits to an alternate payee to reduce the amount assigned to the alternate payee may be a qualified domestic relations order within the meaning of section 206(d)(3) of ERISA. Terry-Lynne Lastovich Dear Ms. Lastovich: This is in response to your request on behalf of Northwest Airlines, Inc. Retirement Plan for Pilot Employees (the Plan) for an advisory opinion under section 206(d) of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you ask whether a domestic relations order that changes a prior assignment of benefits to an alternate payee to reduce the amount assigned to the alternate payee may be a "qualified domestic relations order" (QDRO) within the meaning of section 206(d)(3) of ERISA. You represent that this question arises out of a divorce and property settlement involving a now-retired employee of Northwest Airlines, Inc. (the participant) and his former spouse (the alternate payee). The participant has earned a vested pension benefit under the Plan, which is a defined benefit pension plan. Northwest Airlines, Inc. (Northwest) sponsors and is the administrator of the Plan. In 1997, while the participant was still actively employed, the Plan received a domestic relations order, dated April 3, 1997, that assigned to the alternate payee a percentage of the participant's pension benefits (the 1997 Order). The 1997 Order was issued by the District Court of the First Judicial District, Family Court Division, County of Dakota, State of Minnesota. In accordance with its procedures, the Plan reviewed the order, determined it to be a QDRO, and so informed both the participant and the alternate payee on August 27, 1997. In November 2000, while the participant was still actively employed, the participant notified the Plan that both he and the alternate payee desired to modify the assignment reflected in the QDRO to reduce the portion of the participant's benefits that would be paid in the future to the alternate payee. The participant sought the Plan's advice on how to make such a change. The Plan advised the alternate payee and the participant that it would not consider an order that purported to reduce the assignment already made under a previously recognized QDRO to be permissible. Nonetheless, on June 6, 2002, the participant submitted to the Plan a second domestic relations order, dated June 4, 2002 (the 2002 Order). The 2002 Order was also issued by the District Court of the First Judicial District, Family Division, County of Dakota, State of Minnesota. This order stated that the parties to the divorce were "in agreement" that the QDRO provisions of the 1997 Order should be altered and therefore ordered that those 1997 QDRO provisions were "deleted." The 2002 Order set forth new provisions for a different (and smaller) assignment to the alternate payee. During the course of its review of the 2002 Order, the Plan expressed its doubts as to whether such a reduction in the amount assigned could be effected by a QDRO and requested both participant and alternate payee to provide "a written explanation of why this amended order should or should not be reviewed as a qualified domestic relations order." These parties declined to offer argument on this issue and continued to assert that the 2002 Order expressed their consensus on how the participant's benefits should be divided between them. In September 2002, before the Plan had issued a determination on the qualified status of the 2002 Order, the participant retired, and Northwest began paying benefits to both the participant and the alternate payee under the terms of the 1997 Order. On November 15, 2002, the Plan sent a letter to the participant, setting forth its "decision” that the 2002 Order was not qualified, based upon its view that a subsequent order cannot reduce the benefits awarded to an alternate payee under a previous domestic relations order recognized by the Plan as a QDRO. This letter set forth the following additional determinations: (1) the 2002 Order is "provisionally" determined not to be a QDRO; (2) the 1997 Order continues in full force and effect; (3) the Plan has requested an advisory opinion from the Department of Labor (the Department) on whether an order that "takes away" benefits previously assigned to an alternate payee can be a QDRO; and (4) pending issuance of the advisory opinion, the Plan will continue to pay out benefits in accordance with the 1997 Order. The letter further advised the participant that, if the Department opined that the 2002 Order cannot be a QDRO, the Plan's determination would become "final." The letter further stated that if the Department opined that the 2002 Order could be a QDRO "even though it 'takes away' a benefit previously awarded" to the alternate payee, it would then seek reimbursement of any "overpayments" made to the alternate payee based on the 1997 Order. If the alternate payee did not return the "overpayments" the Plan would withhold future payments to the alternate payee until the "overpayments" were recovered. This request for an advisory opinion ensued. In the context of these facts, you seek guidance on whether the 2002 Order, which purported to reduce the amount of the participant's benefits that are assigned to the alternate payee, could qualify as a QDRO within the meaning of section 206(d)(3) of ERISA. Under section 206(d)(3) of ERISA, the plan administrator is the party to whom an initial determination of the qualified status of an order is entrusted. The Department generally does not provide advisory opinions addressing this question because making such a determination necessarily requires an interpretation of the specific provisions of a plan and application of those provisions to specific facts, including the nature and amount of a participant's pension benefits. Nonetheless, the Department believes it is appropriate to provide guidance under section 206(d)(3) on the narrow issue you have presented of whether a subsequent domestic relations order that alters or modifies a qualified domestic relations order involving the same participant and alternate payee may itself be qualified and therefore supercede the previous order. In providing this guidance, however, the Department takes no position on whether any particular order described in this letter is or is not a "qualified domestic relations order" within the meaning of section 206(d)(3) of ERISA. Section 206(d)(1) of ERISA generally requires pension plans covered by Title I of ERISA to provide that plan benefits may not be assigned or alienated. Section 206(d)(3)(A) of ERISA states that section 206(d)(1) applies to any assignment or alienation of benefits made pursuant to a "domestic relations order," unless the order is determined to be a “qualified domestic relations order.” Section 206(d)(3)(A) further provides that pension plans must provide for the payment of benefits in accordance with the applicable requirements of any order that is determined to be a “qualified domestic relations order.” The grounds on which the plan administrator must judge the status of an order that purports to assign benefits are set forth in the specific subparagraphs of section 206(d)(3). Subparagraph (B) of section 206(d)(3) of ERISA defines the terms "qualified domestic relations order" and "domestic relations order" for purposes of section 206(d)(3) as follows:
Subparagraphs (C) and (D) of section 206(d)(3) of ERISA contain both positive and negative requirements for qualification of a domestic relations order. Subparagraph (C) specifies that, in order for a domestic relations order to be qualified, such order must clearly specify (i) the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order; (ii) the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined; (iii) the number of payments or period to which such order applies; and (iv) each plan to which the order applies. Subparagraph (D) provides that an order cannot be qualified if it either (i) requires the plan to provide any type of benefit, or any option, not otherwise provided by the plan; (ii) requires the plan to provide increased benefits (determined on the basis of actuarial value); or (iii) requires the plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order. A plan administrator may determine that an order is not qualified only on the basis of the requirements set forth in section 206(d)(3) of ERISA. In our view, nothing in section 206(d)(3) suggests that a State court (or other appropriate State agency or instrumentality) may not alter or modify a previous domestic relations order involving the same participant and alternate payee, as long as the new domestic relations order itself meets the statutory requirements. Indeed, the purpose of section 206(d)(3) is to permit the division of marital property on divorce in accordance with the directions of the State authority with jurisdiction to achieve the appropriate disposition of property upon the dissolution of a marriage. Where a State authority reasserts jurisdiction over a marital dissolution and issues an order changing a previously established property allocation, it would appear contrary to this purpose to create additional requirements, beyond what is specified in section 206(d)(3) of ERISA, that would thwart the exercise of that authority. Accordingly, provided that a domestic relations order otherwise meets the requirements of section 206(d)(3) of ERISA, a plan administrator may not fail to qualify the domestic relations order merely because the order changes a prior assignment to the same alternate payee.(1) Thus, it is the Department's view that a plan administrator may determine, consistent with the requirements of section 206(d)(3), that a domestic relations order is qualified even if it would supersede or amend a pre-existing QDRO assigning the same participant's benefits to the same alternate payee. The plan administrator in this case has made apparent its intention to seek repayments from, or to withhold future payments to, the alternate payee of amounts paid out in accordance with the 1997 Order. We do not believe that, under these facts, the plan administrator would have the authority to do so. As a general matter, a plan administrator making QDRO determinations has fiduciary duties applicable to the determination process. The administrator has a duty under section 206(d)(3)(G) of ERISA to determine whether a domestic relations order is a QDRO within a reasonable time after receipt and to promptly notify the participant and each alternate payee of the determination. The administrator has a duty under section 404(a)(1) of ERISA to act prudently and solely in the interests of the plan's participants and beneficiaries, and to follow the plan's QDRO procedures unless they conflict with the provisions of ERISA. Because, in this case, the plan administrator had previously determined the 1997 Order to be a QDRO, the plan was required to make benefit payments in accordance with the 1997 Order. The plan administrator took no steps to preserve the amounts that would be affected by the 2002 Order during its consideration of that order's qualified status, but continued to make the payments required by the 1997 Order. Subparagraph (I) of section 206(d)(3) of ERISA provides that, if a plan fiduciary, acting in accordance with its fiduciary duties, treats a domestic relations order as being qualified, and pays out benefits in accordance with its determination and the 18-month segregation rules of subparagraph (H), the plan's obligations to the participant and any alternate payee are discharged with respect to such payments.(2) Accordingly, under these circumstances it is appropriate to treat the 2002 Order as prospective only. There does not appear to be grounds on which the plan could seek repayment from the alternate payee of the benefits paid out in accordance with the 1997 Order.(3) This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Louis Campagna Footnotes
2004-05A Whether the execution of a securities transaction between a plan and party in interest through an alternative trading system2004-05A
May 24, 2004
Mr. William R. Charyk Dear Mr. Charyk: This is in response to your request for guidance under section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) and section 4975 of the Internal Revenue Code of 1986, as amended (the Code).(1) In particular, you ask whether the execution of a securities transaction between a plan and a party in interest with respect to such plan as defined in ERISA through an alternative trading system (ATS) maintained by Liquidnet, Inc. (Liquidnet) constitutes a prohibited transaction under section 406(a)(1)(A) and (D) of ERISA. In addition, you inquire whether the execution of a securities transaction through the Liquidnet ATS (the Liquidnet System) between a plan and a counterparty that is an affiliate of the fiduciary directing such trade on behalf of the plan also violates section 406(b) of ERISA. You write on behalf of Liquidnet, a registered broker/dealer that maintains the Liquidnet System. The Liquidnet System is an "alternative trading system," as defined in Rule 300(a) of Regulation ATS under the Securities Exchange Act of 1934, as amended. You also represent that all of Liquidnet’s approximately 200 subscribers are large institutional investors that individually manage, on average, approximately $31 billion of equity assets. You note that these subscribers, none of which are affiliated with Liquidnet, often act as named fiduciaries, investment managers, or provide other services to employee benefit plans. You state that Liquidnet was created to facilitate the trading of “blocks” of equity securities. In this regard, since its inception in 2001, more than three billion shares of equity securities have been traded over the Liquidnet System pursuant to trade sizes that have averaged approximately 44,000 shares. You state that the total value of the shares traded through the Liquidnet System approximated $61 billion as of August 29, 2003. You state that subscribers to Liquidnet may trade U.S., U.K., French, German, Netherlands, and Swiss equity securities through the Liquidnet System. In this regard, you state that the Liquidnet System: (1) interfaces with the order management systems of Liquidnet’s subscribers; and (2) identifies, with respect to a particular security, each Liquidnet subscriber that has an interest in buying the security and each Liquidnet subscriber that contemporaneously has an interest in selling the security. You state that each Liquidnet subscriber indicates to the Liquidnet System its interest in buying or selling various securities. If one subscriber indicates to the Liquidnet System an interest in buying a certain security that a different subscriber has independently indicated to the Liquidnet System an interest in selling, the Liquidnet System notifies both subscribers that a transaction opportunity exists.(2) You note that the Liquidnet System does not disclose the identity of either subscriber to the other. The two subscribers may then negotiate; through their respective computer systems; both the price and the quantity of the security. Accordingly, you state that the Liquidnet System enables subscribers to engage in an anonymous, no obligation, one-on-one, real-time negotiation (a subscriber must terminate its current negotiation with another subscriber before engaging in a new negotiation with a different subscriber). You state that multiple Liquidnet subscribers may have an interest in buying (or selling) a security that a different Liquidnet subscriber has an interest in selling (or buying). Where, for example, the Liquidnet System identifies that multiple subscribers have an interest in buying a security that a different subscriber has an interest in selling, the Liquidnet System provides the selling subscriber with an electronic listing of the anonymous subscribers interested in buying. You note that once a subscriber is provided with such a listing, the subscriber may thereafter negotiate with any or all of the subscribers on the list. You state that the Liquidnet System currently determines the order of a multiple subscriber listing by comparing the quantities they have posted to the quantity posted by the single contra-side subscriber. The subscriber posting a quantity that is nearest to the quantity posted by the single contra-side subscriber is placed first on the list. The remaining order is determined in the same fashion.(3) You state that the Liquidnet System's trading rules, which are distributed to all subscribers, contains a disclosure that describes how multiple potential negotiating subscribers will be ordered. You represent that trades entered into pursuant to the Liquidnet System are executed on a “blind” basis. In this regard, you state that, during the entire execution and settlement processes, subscribers interact with each other pursuant to policies and rules designed to ensure anonymity. You represent that the Liquidnet System, never discloses the identity of a subscriber to any other. In addition, all physical transfers of equity securities and cash are made between an independent clearing firm, Bear, Stearns Securities Corp. and the buyer’s and seller’s respective custodians. Therefore, the identities of the parties to a trade will not be revealed to the parties during the clearing process. You state that: given the number and type of Liquidnet subscribers; the large number of trades executed on Liquidnet on a daily basis; and the fact that such trades are executed and settled pursuant to rules, procedures and software designed to ensure anonymity; it is expected that the parties to a transaction engaged in through the Liquidnet System will not know, at any time, the identity of each other.(4) Accordingly, it is possible for a subscriber, in its capacity as a fiduciary with respect to a plan, to unknowingly buy/sell a security on behalf of the plan through the Liquidnet System from/to a Liquidnet subscriber that is a party in interest to the plan. Further, you note that although a subscriber cannot execute a securities transaction with itself through the Liquidnet System (i.e., as both the buyer and seller), it is possible for a plan fiduciary to direct a trade through the Liquidnet System whereby the Liquidnet subscriber that is the counterparty to the plan is an affiliate of such fiduciary. You state that two affiliates may request that Liquidnet "block" negotiations between the two entities. However, you note that a Liquidnet subscriber may not be aware that an affiliate thereof is also a Liquidnet subscriber. Section 3(14)(A) and (B) of ERISA defines the term “party in interest” as meaning, as to an employee benefit plan, any fiduciary (including, among others, a trustee) of an employee benefit plan; and a person providing services to such plan. ERISA section 3(21)(A) provides that a person is a fiduciary with respect to a plan to the extent that (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or responsibility in the administration of such plan. Section 406(a)(1)(A) of ERISA prohibits a fiduciary with respect to a plan from causing the plan to engage in a transaction if he or she knows or should know that the transaction constitutes a direct or indirect sale or exchange, or leasing, of any property between the plan and a party in interest. Section 406(a)(1)(D) of ERISA provides that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he or she knows or should know that such transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 406(b)(1) of ERISA provides that a fiduciary with respect to a plan shall not deal with the assets of the plan in his or her own interest or for his or her own account. Section 406(b)(2) provides that a fiduciary with respect to a plan shall not in his or her individual or in any other capacity act in any 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. With respect to purchases and sales of equity securities, we note that the Conference Report accompanying ERISA states that: In general, it is expected that a transaction will not be a prohibited transaction (under either the labor or tax provisions) if the transaction is an ordinary “blind” purchase or sale of securities through an exchange where neither buyer nor seller (nor the agent of either) knows the identity of the other party involved. In this case, there is no reason to impose a sanction on a fiduciary (or party-in-interest) merely because, by chance, the other party turns out to be a party-in-interest (or plan). H.R. Rep. 93-1280, 93rd Cong., 2d Sess., 307 (1974). As you noted, Liquidnet matches purchase and sell orders from its clients and gives purchasers and sellers the opportunity to negotiate a trade based on price and volume. The number of subscribers and the trading procedures assure a party’s anonymity, unless the party wishes to identify itself to the counter-party. In our view, transactions executed through Liquidnet’s trading procedures for the execution of transactions, that are designed to permit anonymous negotiations without identifying the parties, function in a manner similar to the operation of an exchange. Accordingly, based on your representations, it is our further view that “blind” transactions executed pursuant to such procedures would not, in themselves, constitute prohibited transactions under section 406(a)(1)(A), 406(a)(1)(D), 406(b)(1) or 406(b)(2) of ERISA. The Department notes, however, that a transaction effectuated through the Liquidnet System will not be considered "blind” if, prior to the execution of such transaction, the plan fiduciary responsible for the plan's engagement in the transaction knew, or had reason to know, the identity of the counterparty to such transaction. Given the ability of parties to a transaction to disclose their identities to each other, persons trading on behalf of employee benefit plans should be particularly careful to make sure the transaction is truly blind. Moreover, these determinations assume that such purchase and sale transactions did not arise in connection with any arrangement, agreement, or understanding designed to benefit the fiduciary (including an affiliate thereof) or any other party in interest to the plan. In addition, with respect to the arrangement and transactions described above, ERISA's general standards of fiduciary conduct apply to: (i) the determination to buy or sell a particular equity security (and, in addition, the determination as to the appropriate purchase or sale price for such security); and (ii) the determination as to which trading system should be used to assist with the purchase or sale of equity securities.(5) In this regard, as noted above, section 404 of ERISA requires a fiduciary to discharge his duties respecting a plan solely in the interest of the plan's participants and beneficiaries. This section also requires that a plan fiduciary act prudently and for the exclusive purpose of: providing benefits to plan participants and their beneficiaries; and defraying reasonable expenses of administering the plan. Accordingly, plan fiduciaries that subscribe to Liquidnet must consider the costs associated with the use of alternative trading systems as well as the potential revenue returns, discounts, and other benefits that result from the continuing use of particular alternative trading systems over other similar services. Further, prior to a plan fiduciary’s decision to execute a securities transaction through Liquidnet, the plan fiduciary (as a subscriber or an affiliate of a subscriber) should determine whether any existing or potential conflicts of interest or prohibited transactions under ERISA would interfere with the proper exercise of any of the fiduciary’s responsibilities under section 404 of ERISA, including the duty to act solely on behalf of the plan. This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 relating to the effect of advisory opinions. The opinion only relates to the specific issues raised by your request. For example, you have not asked and the Department is expressing no opinion with respect to the fees and other compensation received by persons engaging in transactions on the Liquidnet System on behalf of plans. Sincerely, Louis Campagna Footnotes
2004-7A Non-depository, state chartered trust company2004-07A July 1, 2004
William A. Mrozowski Dear Mr. Mrozowski: This is in response to your request for an advisory opinion regarding the application of section 412 of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, you ask whether the First Commonwealth Trust Company (FCTC) is exempt from ERISA’s fidelity bonding requirement pursuant to the statutory exemption in section 412(a)(2) of ERISA with respect to plans for which FCTC acts in a fiduciary capacity. You also ask whether FCTC would be covered by the regulatory exemption in 29 C.F.R. §§ 2580.412-27 and 412-28 applicable to certain banking institutions and trust companies subject to federal regulation. The correspondence and materials you forwarded contain the following facts and representations. FCTC is a corporation that has operated as a trust company in the State of Pennsylvania since 1991, and it is authorized to exercise trust powers under a non-deposit trust bank charter from Pennsylvania. Although FCTC is not itself a member of the Federal Reserve System, it is a wholly owned subsidiary of First Commonwealth Financial Corporation (“First Commonwealth”), a bank holding company. Further, an affiliate of FCTC, another wholly owned subsidiary of First Commonwealth, is a state-chartered member bank of the Federal Reserve System. First Commonwealth is subject to supervision and examination by the Federal Reserve System pursuant to the Bank Holding Company Act. You represent that FCTC is subject to examination and supervision by Pennsylvania banking regulators under state law and by the Federal Reserve System pursuant to section 5 of the Bank Holding Company Act, 12 U.S.C. § 1844, which provides the Federal Reserve System with the authority to supervise and examine subsidiaries of bank holding companies.(1) You represent that the Federal Reserve Bank of Cleveland in fact periodically examines FCTC. You further represent that FCTC has over $1 million in capital and surplus, and has fidelity bonding coverage that would satisfy the bonding coverage required for First Commonwealth under federal banking law. Section 412 of ERISA, subject to certain exceptions, requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan shall be covered by a fidelity bond that meets the requirements of section 412 of ERISA and the Department of Labor’s implementing regulations. Section 412(a)(2) provides, in relevant part, that no bond shall be required of a fiduciary (or of any director, officer, or employee of such fiduciary) if such fiduciary – (A) is a corporation organized and doing business under the laws of the United States or of any State; (B) is authorized under such laws to exercise trust powers or to conduct an insurance business; (C) is subject to supervision or examination by Federal or State authority; and (D) has at all times a combined capital and surplus in excess of such a minimum amount as may be established by regulations issued by the Secretary, which amount shall be at least $1,000,000.(2) Section 412(a)(2) of ERISA further provides that the exemption for such fiduciaries shall apply to a bank or other financial institution which is authorized to exercise trust powers and the deposits of which are not insured by the Federal Deposit Insurance Corporation (FDIC), “only if such bank or institution meets bonding or similar requirements under State law which the Secretary [of Labor] determines are at least equivalent to those imposed on banks by Federal law.” The Secretary has not made any determinations as to whether any state bonding or similar requirements are at least equivalent to those imposed on banks by federal law. The statutory exemption in section 412(a)(2) thus is not available to any bank or other financial institution authorized to exercise trust powers that has deposits that are not insured by the FDIC. It is the view of the Department, however, that banks and other financial institutions that have no deposits, such as FCTC, are not subject to this additional condition. Accordingly, based on your representations that FCTC satisfies all of the other conditions in section 412(a)(2), FCTC would satisfy the conditions for the exemption in section 412(a)(2) of ERISA with respect to the ERISA-covered plans for which FCTC acts in a fiduciary capacity. The Department has also promulgated regulations under section 412 of ERISA. The regulation at 29 C.F.R. § 2550.412-1 provides, in relevant part, that any plan official, as defined in section 412(a), shall be deemed to be in compliance with the bonding requirements of ERISA if he or she is exempt from such bonding requirements under an exemption in Part 2580 of Title 29 of the Code of Federal Regulations.(3) The regulations at 29 C.F.R. §§ 2580.412-27 and 412-28 provide “banking institutions and trust companies subject to regulation and examination by the Comptroller of the Currency or the Board of Governors of the Federal Reserve System, or the Federal Deposit Insurance Corporation” with an “exemption from the bonding requirements” in sections 412(a) and (b) of ERISA.(4) In the view of the Department, the authority of the Federal Reserve System over FCTC as a subsidiary of a bank holding company pursuant to the Bank Holding Company Act constitutes regulation and examination by the Board of Governors of the Federal Reserve System within the meaning of 29 C.F.R. §§ 2580.412-27 and 412-28.(5) Accordingly, based on the facts and representations you supplied, it is the opinion of the Department that FCTC would also be exempt under 29 C.F.R. §§ 2580.412-27 and 412-28 from being bonded under Title I in connection with its handling of plan funds or other property of ERISA-covered welfare and pension plans. This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976), and, accordingly, is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, John J. Canary Footnotes
2004-09A Concerning the application of the prohibited transaction provisions under section 4975(c) of the IRC2004-09A December 22, 2004
Thomas G. Schendt, Esq. Dear Mr. Schendt: This is in response to your request for an advisory opinion from the U.S. Department of Labor (the Department) concerning the application of the prohibited transaction provisions under section 4975(c) of the Internal Revenue Code of 1986, as amended (the Code), to certain contributions to health savings accounts (HSAs), as described below.(1) You represent that your client, an insurer (the Company) and its affiliates, offers various health benefit plans in the individual market, including high deductible health plans (HDHPs), as that term is defined in section 223(c)(2) of the Code. In addition, the Company either offers HSAs, as defined in section 223(d) of the Code, to individuals covered by HDHPs issued by the Company, or enters into a contractual arrangement with a specified bank that will offer HSAs to such individuals, as described below. Your letter contains the following facts and representations. Factual Scenario I Under Factual Scenario I, only persons insured under HDHPs issued by the Company in the individual market are able to establish HSAs with the Company. However, a person does not have to establish an HSA with the Company to participate in an individual HDHP with the Company. If a person establishes an HSA with the Company, the Company will serve as both the trustee or custodian and the record-keeper of the HSA. The Company does not provide HSA custodial services in the employer group market. To encourage participation in the Company’s HSA program, the Company will offer an incentive to a person who establishes an HSA with the Company when he or she first enters into an individual HDHP with the Company. This incentive will be in the form of a $100 cash credit by the Company, as trustee or custodian, directly to the individual’s HSA. This credit to the HSA will be automatic. The account holder will not be required to make any contribution to his or her HSA to receive the credit to his or her HSA. The credit is dependent on the establishment of an HSA with the Company. The account holder will not be able to divert the money to himself or herself before it is credited to the HSA. If the person does not establish an HSA with the Company, he or she will not receive any incentive from the Company under this incentive program. Thus, for example, the individual will not receive any incentive from the Company in the form of a credit to an HSA not provided by the Company or in the form of money paid to him or her outside of the HSA. The credit to the account holder’s HSA with the Company will be subject to the statutory requirements for HSAs set forth in section 223 of the Code, and the tax treatment of any distributions from the HSA attributable to this credit will be governed by the provisions of section 223(f) of the Code. With respect to each HSA established with the Company pursuant to this incentive program, the Company represents that any arrangement for services by the Company to the HSA (e.g., as trustee or custodian and/or record-keeper of the HSA) will meet the requirements of section 4975(d)(2) of the Code and the Treasury’s regulations at 26 CFR §54.4975-6. The Company represents that the premiums payable under the HDHP will not vary based on the individual’s choice of HSA custodian or trustee. Thus, the individual’s insurance premiums will not be higher or lower as a result of his or her decision to establish an HSA either with the Company or with some other custodian or trustee. The Company also represents that any administrative fees the Company may charge the account holder with respect to his or her HSA will not change (i.e., will not increase or decrease) as a result of the credit to his or her HSA. The Company states that although the duration of this incentive program has not been determined, it envisions that the incentive program could be used at various times for specified periods of time. The Company also anticipates that the amount of the incentive could change from time to time. However, for purposes of this request, the Company represents that the amount of the incentive will not exceed $100 per person. Factual Scenario II Under Factual Scenario II, the Company and its affiliates offer various health benefit plans in the group market, including HDHPs as defined under the Code. The Company enters into a contractual relationship with a specified bank (the Bank) to provide HSAs for individuals covered by HDHPs issued by the Company. However, an individual does not have to establish an HSA with the Bank to participate in a group HDHP issued by the Company. The Bank serves as the trustee or custodian and the record-keeper of those HSAs and receives remuneration from the Company for its services in that regard. The Company also enters into a contractual relationship with a specified entity (the Vendor) to provide various services in relation to these HSAs, for which the Company compensates the Vendor. Neither the Bank nor the Vendor is a member of the Company’s controlled group under sections 414(b), (c) and (m) of the Code. To encourage the establishment of HSAs with the Bank in connection with group HDHPs issued by the Company, the Bank will offer an incentive to a person who establishes an HSA with the Bank when the Company first covers such person under a group HDHP. This incentive will be in the form of a $100 cash credit from the Bank directly to the individual’s HSA. This credit to the HSA will be automatic. The account holder will not be required to make any contribution to his or her HSA to receive the credit to his or her HSA. The credit will be dependent on the establishment of an HSA with the Bank. The account holder will not be able to divert the money to himself or herself before it is credited to the HSA. If the person does not establish an HSA with the Bank, he or she will not receive any incentive from the Bank under this incentive program. For example, the individual will not receive any incentive from the Company or the Bank in the form of a credit to an HSA not provided by the Bank or in the form of money paid to him or her outside of his or her HSA. The credit to the account holder’s HSA with the Bank will be subject to the statutory requirements for HSAs set forth in section 223 of the Code, and the tax treatment of any distributions from the HSA attributable to this credit will be governed by the provisions of section 223(f) of the Code. With respect to the HSAs established with the Bank pursuant to this incentive program, the Company, the Bank and the Vendor intend that any arrangements for services by the Bank or the Vendor to the HSA (e.g., as the trustee or custodian and/or record-keeper of the HSA) will meet the requirements of section 4975(d)(2) of the Code and the Treasury’s regulations at 26 CFR §54.4975-6.(2) The Company represents that the premiums charged for the individual’s coverage under the group HDHP will not vary based on the individual’s choice of HSA custodian or trustee. Thus, the premiums charged by the Company for the individual’s coverage under the group HDHP will not be higher or lower as a result of his or her decision to establish an HSA either with the Bank or with some other custodian or trustee. In addition, any administrative fees the Bank or the Vendor may charge the account holder with respect to his or her HSA will not change (i.e., will not increase or decrease) as a result of this credit to his or her HSA. The Company states that although the duration of this incentive program has not been determined, it envisions that the incentive program could be used at various times for specified periods of time. The Company also anticipates that the amount of the incentive could change from time to time. However, for purposes of this request, the Company represents that the amount of the incentive will not exceed $100 per person. Advisory Opinions Requested With respect to Factual Scenario I, you have requested an advisory opinion that the credit to an account holder’s HSA will not constitute a prohibited transaction under section 4975(c) of the Code for either the account holder or the Company. In addition, with respect to Factual Scenario II, you have requested an advisory opinion that the credit to an account holder’s HSA will not constitute a prohibited transaction under section 4975(c) of the Code or section 406 of the Employee Retirement Income Security Act of 1974, as amended (ERISA). Prohibited Transactions under the Internal Revenue Code Section 4975(e)(1)(E) of the Code defines the term “plan” to include “…a health savings account described in section 223(d)” of the Code. A “prohibited transaction” under section 4975(c)(1) of the Code includes, among other things, any direct or indirect:
A “disqualified person” is defined under section 4975(e)(2) of the Code, in pertinent part, to include a person who is a fiduciary or a person providing services to the plan. Analysis of Factual Scenarios I and II Under Factual Scenario I, the Company will be a trustee or custodian of the HSA. As such, the Company would be a disqualified person with respect to the HSA. Under Factual Scenario II, the Bank will be a trustee or custodian of the HSA. As such, the Bank is a disqualified person with respect to the HSA. However, as we understand the facts, the Company would not be a disqualified person with respect to the HSA. In both scenarios, the account holder is a fiduciary and disqualified person with respect to the HSA. Under both Factual Scenarios, the $100 credit proposed by either the Company or the Bank, respectively, would be a cash contribution to the account holder’s HSA. The Department notes that in accordance with IRS Notice 2004-50, Q&A 28, wherein it states that "any person . . . may make contributions to an HSA on behalf of an eligible individual," Code section 223 does not prohibit the Company or the Bank from making such contributions to its customers’ HSAs. A cash contribution to a plan is not generally a sale or exchange of property prohibited by section 4975(c)(1)(A) of the Code. Additionally, the cash contribution would not be a transfer of an asset of a plan for the benefit of a disqualified person or an act of self-dealing by either the Company or the Bank under section 4975(c)(1)(D) or (E) of the Code involving the assets of a plan. Therefore, neither the Company’s nor the Bank’s contribution of a cash credit to the account holder’s HSA, as described herein, would be a prohibited transaction under section 4975(c)(1) of the Code.(3) Similarly, the HSA's receipt of the Company’s or the Bank’s contribution of a cash credit, under the facts described above, would not be an act of self-dealing on the part of the account holder nor a receipt by the account holder in his or her individual capacity of any consideration from a party dealing with the HSA in connection with a transaction involving assets of the HSA. Even though the Company or the Bank, respectively, would make the contribution as an incentive to encourage the account holder's participation in the Company’s or the Bank’s HSA program, the contribution goes to the HSA and not to the account holder.(4) Therefore, the receipt by the HSA of such cash contributions would not be a prohibited transaction under section 4975(c)(1) of the Code.(5) Since the Company is not a disqualified person with respect the HSA under Factual Scenario II, the Bank’s contribution of the credit to the account holder’s HSA would not be a prohibited transaction under section 4975(c) of the Code with respect to the Company. Finally, with respect to the contribution of any cash credits by the Bank to an account holder’s HSA under the facts described above, the same analysis and conclusions would apply, for purposes of the prohibited transaction provisions contained in section 406(a) and (b) of ERISA, to an HSA that would be an “employee benefit plan” covered under Title I of ERISA(6) under the principles discussed in the Department’s Field Assistance Bulletin (FAB) 2004-01 (April 7, 2004). Further, in such instances, the fiduciary responsibility provisions of Title I would apply to the selection of service providers to the HSA. In discussing whether, and under what circumstances, HSAs established in connection with employment-based group health plans would be subject to the provisions of Title I of ERISA, FAB 2004-01 states that generally such HSAs would not constitute an “employee welfare benefit plan” as defined under section 3(1) of ERISA, if employer involvement with the HSA is limited. Specifically, HSAs meeting the conditions of the safe harbor for group or group-type insurance programs at 29 CFR §2510.3-1(j)(1)-(4) are not considered employee welfare benefit plans within the meaning of section 3(1) of ERISA. However, a finding that an HSA established by an employee is not covered by ERISA does not affect whether an HDHP sponsored by the employer is itself a group health plan subject to Title I. In fact, FAB 2004-01 states that unless otherwise exempt from Title I (e.g., governmental plans, church plans), employer-sponsored HDHPs will be “employee welfare benefit plans” within the meaning of section 3(1) of ERISA and, thus, subject to the fiduciary responsibility provisions of Title I. This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (Aug. 27, 1976). The letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Louis J. Campagna Footnotes
2005-04A Whether a plan may invest in a mutual fund2005-04A March 25, 2005
Ms. Norma M. Sharara Dear Ms. Sharara: This is in response to your request for guidance under the Employee Retirement Income Security Act of 1974 (ERISA). In particular, you request an advisory opinion that the proposed investment of assets of an employee retirement plan (the Plan) in a mutual fund (the Fund) will not constitute a per se prohibited transaction under section 406 of ERISA.(1) The Plan is sponsored by a foundation (the Foundation) and the Fund is a registered open-ended investment company that is advised and distributed by an investment advisor (the Advisor). You represent that the Foundation is a tax-exempt organization described in Code section 501(c)(3). The Foundation was organized under Ohio law as a non-profit corporation, and its principal place of business is currently located in New York City. The Foundation has functioned as a private foundation whose principal purpose is to support other operating charitable organizations. It is exempt from federal income taxation and has been classified by the Internal Revenue Service (IRS) as a private foundation under Code section 509. As of December 31, 2002, the Foundation had approximately $305,000,000 in assets. The Foundation, in keeping with the wishes of its founder is time-limited, and expects to disburse substantially all of its assets by 2010. Because the Foundation expects to bring its operations to a close by 2010, the level of grant-making will accelerate significantly in the coming years. Prior to 2002, the Foundation did not have any paid staff. The Foundation hired nine individuals in 2002 essentially to prepare for and carry out the increased grant-making activities that the Foundation expects to occur between 2002 and 2010 as the Foundation winds down its activities and operations. The Plan was established in 2002 on behalf of these nine employees. The Foundation is governed by a three-person board of trustees (the Board), none of whom are currently employees of the Foundation or participants in the Plan. One trustee also serves as the chief executive officer of the Foundation, and will soon become an employee of the Foundation. Another trustee serves as a vice-president of the Foundation. The Plan is a defined contribution plan covering nine participants and is intended to qualify under Code section 401(a). As of December 31, 2002, the Plan had net assets of $163,652. Investment decisions for the plan are made by the Foundation. The Foundation is also the plan administrator and named fiduciary of the Plan. The Board, as the decision-maker for the Foundation, carries out the Foundation’s fiduciary responsibilities on behalf of the Plan. The Board also serves as the Plan’s trustee, in which capacity it is subject to direction by the Foundation. The Board has determined to allocate the Plan’s investments equally between equity and interest-bearing securities. The Fund invests primarily in common stocks and is managed using a “value” strategy. The Fund has consistently outperformed its benchmark, the S&P 500 Index, over the last 10 years. A trustee and member of the Board is the President and Chief Executive Officer of the Advisor. He also holds a 22.9% ownership interest in the Advisor. Neither the Foundation nor any of the other trustees holds any ownership interest in, or has any other relationship with, the Advisor. The Board proposes to invest up to 25% of the Plan’s assets in the Fund. The remaining allocation to equity securities will be invested in other mutual funds that are unrelated to the Advisor. The Board has determined that this allocation would be consistent with the Plan’s investment policy. This trustee is also one of three Advisor portfolio managers charged with day-to-day management of the Fund’s assets. The Fund pays the Advisor an annual investment advisory fee of 1% of the Fund’s net asset value, reduced by certain expenses that the Advisor reimburses to the Fund. The Fund’s independent Board of Directors is responsible for approving the investment advisory agreement between the Fund and the Advisor. The Fund imposes no sales charges, exchange fees, or redemption fees. You represent that the trustee’s compensation for his services on behalf of the Advisor is not affected by the total amount of assets under management by the Fund. As of December 31, 2002, the Fund held net assets of approximately $3.9 billion. You request an opinion that the Plan’s investment of up to 25% of its assets in the Fund will not result in a prohibited transaction under section 406 of ERISA. Section 3(21) of ERISA provides that a person is a fiduciary with respect to a plan to the extent he exercises any discretionary authority or control respecting the management of the plan or the management or disposition of the assets of the plan. A plan’s administrator and named fiduciary by virtue of having those positions, must have or exercise discretionary authority or control respecting the management of the plan or the management or disposition of its assets.(2) The Foundation is the Plan’s administrator and named fiduciary. The Board exercises the Foundation’s fiduciary responsibilities on behalf of the plan. Accordingly, all trustees and members of the Board are fiduciaries with respect to the Plan. Section 406(b)(1) of ERISA prohibits a fiduciary from dealing with the assets of the plan in his own interest or for his own account. Section 406(b)(2) of ERISA prohibits a fiduciary with respect to a plan from acting in any transaction involving the plan on behalf of a party, or represent a party, whose interests are adverse to the interests of the plan or of its participants and beneficiaries. The Department has explained in regulation 29 CFR §2550.408b-2(e) that the prohibitions of section 406(b) are imposed upon fiduciaries to deter them from exercising the authority, control, or responsibility that makes them fiduciaries when they have interests that may conflict with the interests of the plans for which they act. Thus, a fiduciary may not use the authority, control, or responsibility that makes him a fiduciary to cause a plan to pay an additional fee to such fiduciary, or to a person in which he has an interest that may affect the exercise of his best judgment as a fiduciary, to provide a service. However, regulation 29 CFR §2550.408b-2(e)(2) provides that a fiduciary does not engage in an act described in section 406(b)(1) of ERISA if the fiduciary does not use any of the authority, control, or responsibility that makes him a fiduciary to cause a plan to pay additional fees for a service furnished by such fiduciary or to pay a fee for a service furnished by a person in which the fiduciary has an interest that may affect the exercise of his judgment as a fiduciary. One member of the Board and trustee of the Plan is a significant owner and the President and Chief Executive Officer of the Advisor, the investment advisor for the Fund. In addition, he is one of the portfolio managers of the Fund, involved in the day-to-day operation of the Fund. It is the opinion of the Department that based on these factors, taken together, this trustee has an interest in the Fund that may affect his best judgment as a fiduciary of the Plan regarding the decision whether to invest Plan assets in the Fund. Accordingly, if that trustee uses any of the authority, control, or responsibility that makes him a fiduciary to cause the Plan to invest in the Fund, the trustee will engage in a violation of section 406(b)(1) and 406(b)(2). The Department has stated in other situations involving a fiduciary who has this type of conflict of interest that the fiduciary can avoid engaging in a transaction described in section 406(b)(1) and 406(b)(2) of ERISA by removing himself from all consideration of the transaction in question, and not exercising any of the authority, control, or discretion that makes him a fiduciary to cause the plan to enter into the transaction, as long as there is no arrangement, agreement, or understanding regarding the proposed transaction.(3) We note, however, that if a fiduciary has or obtains material information, including information regarding plan investments, that would be necessary in order for other plan fiduciaries to make an appropriate and prudent decision with respect to the purchase, holding, or disposition of a particular investment, we believe the fiduciary’s duties under section 404 of ERISA would require informing the deciding fiduciaries of that information.(4) ERISA's general standards of fiduciary conduct also would apply to the proposed investment. Under section 404(a)(1), the responsible Plan fiduciaries must act prudently and solely in the interest of the Plan participants and beneficiaries in deciding whether to make an investment of Plan assets in the Fund. This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976). Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 relating to the effect of advisory opinions. Sincerely, Louis J. Campagna Footnotes
2005-09A Whether in-kind investments in a bank collective investment fund are covered by ERISA section 408(b)(8)2005-09A May 11, 2005
Donald J. Myers, Esq. Dear Mr. Myers: This is in response to your request for an advisory opinion on behalf of Vanguard Fiduciary Trust Company (Vanguard) concerning the application of section 408(b)(8) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the parallel provisions under section 4975(d)(8) of the Internal Revenue Code of 1986, as amended (the Code),(1) to an in-kind investment in a bank collective investment fund, as made under the circumstances described herein. Background You represent that Vanguard is a trust company, based in Valley Forge, Pennsylvania, that is organized under the laws applicable to such entities under the Pennsylvania Banking Code. Vanguard is supervised by the Pennsylvania Department of Banking. Vanguard is a wholly-owned subsidiary of The Vanguard Group, Inc. (Vanguard Group). The Vanguard Group manages assets through registered open-end investment companies, pursuant to the Investment Company Act of 1940 (i.e., mutual funds). Vanguard manages assets held in collective trust funds for employee benefit plans covered by ERISA. You state that many Vanguard Group mutual funds and Vanguard trust funds serve as investment options for participant-directed individual account plans, organized to comply with section 401(k) of the Code (“401(k) plans”), and as investments for other qualified retirement plans. Vanguard structures stable value investment options, designed to allow investors to receive current interest income and preserve principal amounts, for many 401(k) plans either using a commingled trust, or as a separately managed account for a particular plan. You state that over 900 plans use the commingled trust structure, and approximately 40 are using the stable value separate account structure (referred to collectively herein as “stable value portfolios”). The commingled trust structure uses a collective investment vehicle, the VRST Master Trust. Plans do not hold interests directly in the VRST Master Trust, but instead invest in one of seven “feeder” trusts – the Retirement Savings Trusts – that invest all of their assets in the VRST Master Trust. Investment management fees are imposed at the “feeder” trust level. The commingled trusts used by Vanguard take the form of collective investment funds intended to qualify as group trusts, pursuant to Revenue Ruling 81-100, 1981-1 C.B. 326, and Revenue Ruling 2004-67, 2004-28 I.R.B., that are tax exempt under section 401 and 501(a) of the Code. Vanguard serves as trustee for such commingled trusts. Plans pay fees to Vanguard only at the level of the stable value investment portfolio in which the plan directly invests. This is the level of the separately managed account or, with respect to the VRST Master Trust, the “feeder” trust level. Vanguard’s stable value portfolios (i.e., the commingled trusts or the separately managed accounts) currently invest in, among other things, a series of fixed-income commingled trusts, the Vanguard Targeted Return Trusts (the TRTs). The TRTs were established quarterly on a rolling basis, each with a 5-year term, and managed to a constantly decreasing duration to provide liquidity at the end of the 5-year term. At any one time, there would be 20 TRTs in existence with durations ranging from one quarter of a year to 5 years. Each quarter, one TRT would expire and a new one would be created. The stable value portfolios managed by Vanguard, including the VRST Master Trust, have invested in the various TRTs based on their available cash, other investments and liquidity needs. The VRST Master Trust holds the majority of the assets of each TRT. You state that Vanguard created the TRTs as stable value portfolios with high-quality fixed income securities with fixed maturity dates. These securities were then backed by “wrap” contracts with insurance companies or banks to provide for certain disbursements to be made at the “book” value of the assets, rather than the market value. This structure is commonly referred to as a “synthetic” guaranteed investment contract arrangement. You represent that for various reasons related to investment management strategies and cost efficiencies, Vanguard has begun to phase out the TRT program. As the existing TRTs mature, they are being replaced by investments in two commingled trusts of comparable aggregate duration – the Vanguard Intermediate-Term Bond Trust (ITBT), and the Vanguard Short-Term Bond Trust (STBT). These trusts (collectively, the Bond Trusts), like the TRTs, invest principally in high-quality fixed-income securities. As a means of transitioning to the new investment management structure, and more quickly realizing the efficiencies and other benefits of managing assets through the Bond Trusts rather than the existing TRTs, Vanguard would like to transfer the assets of the TRTs in-kind to the Bond Trusts as soon as possible, and then terminate the TRTs. Specifically, TRT securities would be allocated to the Bond Trusts based on the TRTs’ average durations. Each TRT would receive in return interests in the applicable Bond Trust – i.e., the STBT or ITBT – that are equal in value to the value of the securities it transferred to the respective Bond Trust. The same business day, the TRT would distribute those Bond Trust interests to each stable value portfolio that holds interests in the TRT, in proportion to the portfolio’s TRT interests, and then terminate. At the end of the business day, each stable value portfolio would hold Bond Trust interests equal in value to its former TRT interests. The principal advantage of liquidating the TRTs through in-kind exchanges of securities for interests in the Bond Trusts, as opposed to liquidations for cash on the open market, would be to avoid transaction costs. The total transaction cost estimates are in the range of $5.4 million as existing TRTs have securities with an estimated market value of approximately $3.4 billion. In addition, Vanguard seeks to avoid the possibility of the Bond Trusts not acquiring the same securities on the open market that are sold by the TRTs. You represent that the trust documents for the TRTs and the Bond Trusts provide the necessary authority for Vanguard to cause the TRTs to make an in-kind investment in the Bond Trusts. You state that the TRTs, by their terms, permit investment in a collective investment fund maintained by the trustee of the TRTs (i.e., Vanguard), where the fund invests principally in securities of the type in which the TRT is permitted to invest. Specifically, Article 6.1(a) of each TRT gives the trustee the authority, in its sole discretion, “to invest and reinvest the Trust in such investments and other property, without restrictions to investments authorized for fiduciaries, as the Trustee determines in accordance with the Trust’s investment objective as set forth in Article 1.2 …, including, without limitation, (i) any other collective investment trust maintained by the Trustee…” Your represent further that the trust documents for the Bond Trusts permit investment by any common, collective or commingled trust fund or group trust that consists solely of the assets of pension, profit-sharing and other qualified plans, and/or other types of retirement plans or vehicles holding retirement plan assets. Under Article 1.02 of the STBT and Article 2.2 of the ITBT, an investment in units of the respective Trust may be made in the form of cash, or in the form of other property acceptable to the trustee. For purposes of the in-kind investments by the TRTs in the Bond Trusts, you state that the assets being transferred would be valued in a consistent manner by both the investing and receiving trusts, using independent pricing sources. Specifically, for valuing fixed-income securities, Vanguard uses the same pricing services for both the TRTs and the Bond Trusts. Where none of the pricing services used makes a value available for a particular security, or where there has been a significant change in value of the security from the previous price used (i.e., greater than 1%), Vanguard will obtain quotations from three (3) different independent brokers, and will use the lowest of the three available quotes. You state that pricing services and broker quotations are not used for short-term instruments maturing within 60 days. Thus, pursuant to the trust document’s valuation provisions, these instruments would be valued at cost (plus or minus any amortized discount or premium). All valuations would be made as of 3:00 p.m. Eastern Time on the valuation date. Vanguard serves as trustee of both the TRTs and the Bond Trusts – all of which, as bank collective investment funds, are deemed to hold “plan assets” subject to ERISA pursuant to the Department’s regulations (see 29 CFR §2510.3-101(h)(1)(ii)). For this reason, you state that Vanguard would find itself acting in a discretionary role on both sides of any transaction between the TRTs and the Bond Trusts. Thus, the in-kind investment by the TRTs in the Bond Trusts could be viewed as a sale by the TRTs of their securities to the Bond Trusts, with Vanguard, in its capacity as trustee, acting in the role of both the buyer and the seller. Advisory Opinion Requested You request an opinion as to whether a purchase of interests in a collective investment fund through an in-kind investment of securities would be exempt from the prohibited transaction provisions of section 406 of ERISA by reason of the statutory exemption contained in section 408(b)(8) of ERISA. Relevant Provisions of ERISA and Analysis Section 406(a)(1) of ERISA provides, in part, that a fiduciary with respect to a plan shall not cause the plan to engage in certain direct or indirect transactions with a party in interest, including sales or exchanges of property between the plan and a party in interest (section 406(a)(1)(A)), and transfers to or use by or for the benefit of a party in interest of any assets of the plan (section 406(a)(1)(D)). Section 406(b)(1) of ERISA prohibits a fiduciary with respect to a plan from dealing with the assets of the plan in his or her own interest or for his or her own account. Section 406(b)(2) of ERISA provides that a fiduciary shall not in his or her individual or in any other capacity act in any 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. Section 3(21) of ERISA defines a “fiduciary” of a plan to include a person who exercises any discretionary authority or control respecting management or disposition of its assets; or who renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the plan, or has any authority or responsibility to do so. Section 3(14) of ERISA defines the term “party in interest” to include a fiduciary and a person providing services to a plan. The Department’s regulation at 29 CFR §2510.3-101 defines what are considered to be “plan assets” when a plan invests in another entity. The regulation provides, at 29 CFR §2510.3-101(h)(1)(ii), that when a plan acquires an interest in a common or collective trust fund of a bank, its assets include its investment as well as an undivided interest in each of the fund’s underlying assets. As you have acknowledged, Vanguard is a fiduciary under section 3(21) of ERISA with respect to ERISA-covered plans for which it serves as trustee. Pursuant to the Department’s regulations defining “plan assets” (as noted above), Vanguard is also a fiduciary for ERISA-covered plans that invest in the TRTs, either through separately managed accounts or commingled trusts, by reason of its discretionary authority and control over such assets. You indicate that Vanguard receives investment management fees from plans that invest in such accounts or trusts invested in the TRTs, at either the separate account or “feeder” trust level, as applicable. Therefore, unless an exemption applies, you are concerned that Vanguard would violate sections 406(a)(1)(A), 406(a)(1)(D), 406(b)(1), and 406(b)(2) of ERISA if, as a fiduciary of ERISA-covered plans, it caused “plan assets” invested in the TRTs to be invested in the Bond Trusts. Section 408(b)(8) of ERISA exempts, in pertinent part, any transaction between a plan and a common or collective trust fund maintained by a party in interest which is a bank or trust company supervised by a state or federal agency, if the following conditions are met:
You represent that the TRTs and Bond Trusts are collective trust funds maintained by Vanguard, a trust company supervised by the Pennsylvania Department of Banking. The transactions at issue would be purchases of interests in the Bond Trusts, and would be authorized by the applicable trust documents relating to each TRT and Bond Trust. Vanguard would not be paid any separate fees by the Bond Trusts for the assets invested therein by the TRTs. You state that Vanguard’s existing fee arrangements with plans would remain unaffected by the proposed transactions and it would not receive more than reasonable compensation as a result of the transactions. With respect to the conditions of ERISA section 408(b)(8), although the statutory provisions do not define the term “reasonable compensation” for purposes of the exemption, the ERISA Conference Committee Report (as issued by Congress in 1974) provides that:
Thus, Congress anticipated that the term “reasonable compensation” would apply to the purchase or sale of an interest in a collective investment fund by a plan and to amounts to be paid by the plan for investment management of such assets. In addition, with respect to covered transactions, the ERISA Conference Committee Report does not appear to distinguish cash from in-kind assets, nor does it specify a particular form of investment, with regard to any purchase or sale of interests or units in a common or collective investment trust fund, or pooled investment fund, maintained by a party in interest which is a bank or trust company. Furthermore, at the end of the relevant section discussing the provisions of ERISA section 408(b)(8), Congress expressed the view that, under the general fiduciary rules of ERISA, a bank “…cannot use pooled funds as a place to dump unwanted investments which were initially made on its own (or another’s behalf).” Id. In this regard, by noting the possibility of a bank placing investments it previously had made into a collective investment fund, Congress appears to have anticipated in-kind investments being made into such a fund as a “purchase” covered by the statutory exemption. Accordingly, it is the opinion of the Department that the statutory exemption provided under section 408(b)(8) of ERISA would permit an in-kind exchange of securities owned by a plan or fund holding “plan assets” for units or interests in a collective investment fund maintained by a bank or trust company, provided that the conditions necessary for relief as stated therein are met.(2) However, please note that the issue of whether all of the conditions of section 408(b)(8) will be met is a factual determination upon which the Department cannot opine. Therefore, the appropriate plan fiduciaries, including Vanguard, must determine, based on the particular facts and circumstances, whether the conditions of section 408(b)(8) will be met for the proposed in-kind exchanges. In particular, the Department notes that the exemption provided in section 408(b)(8) is available for the proposed in-kind exchanges only if the valuation method used by Vanguard in connection with each transaction results in a plan paying no more than reasonable compensation for its investment. In our view, a plan would pay more than reasonable compensation in any in-kind exchange in which the value of assets transferred to a fund would be more than the value of the fund units or interests the plan received. Therefore, the Department cautions Vanguard to ensure that appropriate procedures and safeguards are in place to guarantee uniform pricing of both the relevant “plan assets” in each TRT to be transferred to each Bond Trust and the Bond Trust’s units to be received by each plan’s stable value portfolio investment. As described herein, such investments would include the Retirement Savings Trusts that are “feeder” trusts for the VRST Master Trust, as managed by Vanguard on the date of the transactions. Finally, the Department is providing no opinion herein as to Vanguard’s current or future stable value investment strategies, or courses of action to implement to such strategies (including methods for saving transaction costs or avoiding market impact). Section 404(a)(1) of ERISA provides, in pertinent part, that fiduciaries shall discharge their duties with respect to a plan with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. Among other things, a fiduciary must give appropriate consideration to those facts and circumstances that, given the scope of such fiduciary’s investment duties, the fiduciary knows or should know are relevant to the particular investment or investment course of action involved, including the role the investment or investment course of action plays in that portion of the plan’s investment portfolio with respect to which the fiduciary has investment duties.(3) This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Louis J. Campagna Footnotes
2006-01A Whether a lease by a company (LLC) 49% owned by an IRA to a company (S)2006-01A Whether a lease by a company (LLC) 49% owned by an IRA to a company (S) which is a disqualified person with respect to that IRA is a prohibited transaction where the manager of the LLC is an officer of S. Whether 29 CFR 2509.75-2 makes the transaction an indirect prohibited transaction and whether it makes the transaction a violation of the Internal Revenue Code's exclusive benefit rule.
January 6, 2006 Dear Ms. Buchanan, This is in response to your request for an advisory opinion as to whether the following proposed transaction would be prohibited under section 4975 of the Internal Revenue Code (the “Code”), 26 U.S.C. § 4975.(1) You represent that Salon Services and Supplies, Inc. is a Washington state “S” Corporation (“S Company”) which is 68% owned by Miles and Sydney Berry, a marital community (M). The other 32% is owned by a third-party, George Learned (“G”). Miles Berry (Berry) proposes to create a limited liability corporation (“LLC”) that will purchase land, build a warehouse and lease the property to S Company. The investors in the LLC would be Berry’s individual retirement account (“IRA”) (49%), Robert Payne’s (“R”) IRA (31%) and G (20%). R is the comptroller of S Company. R and G will manage the LLC. You represent that S Company is a disqualified person with respect to Berry’s IRA under section 4975(e)(2) of the Code. You represent that R and G are independent of Berry. You also represent that the LLC does not contain plan assets because it is a “real estate operating company” (REOC) as defined by 29 C.F.R. § 2510.3-101(e). You state that an independent qualified commercial real estate appraiser has appraised the rental value of the lease and has found that the terms of the lease are not less favorable to the LLC and its IRA investors than those obtainable in an arm’s length transaction between unrelated parties. Finally, the custodian for Berry’s and R’s IRAs has reviewed the LLC operating agreement and has approved the investment for those two self-directed IRAs. Section 4975(c)(1)(A) of the Code prohibits any direct or indirect sale, exchange or leasing of any property between a plan and a “disqualified person.” Section 4975(c)(1)(D) of the Code prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. A “disqualified person” is defined under section 4975(e)(2)(A) of the Code to include a person who is a fiduciary. Code section 4975(e)(3) defines the term “fiduciary” to include, in pertinent part, any person who exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets. Section 4975(c)(1)(E) prohibits a fiduciary from dealing with the income or assets of a plan in the fiduciary’s own interest or for his or her own account. Section 4975(e)(1)(B) of the Code defines the term “plan” to include an individual retirement account described in Code section 408(a). We first address the proposed lease as it relates to Berry’s IRA. Berry is a fiduciary to his own IRA because he exercises authority or control over its assets and management. 26 U.S.C. § 4975(e)(3). As a fiduciary, Berry is a disqualified person under section 4975(e)(2)(A) of the Code. You represent that S Company is a disqualified person under section 4975(e)(2) of the Code. R, the comptroller of S Company, is a disqualified person with respect to Berry’s IRA under section 4975(e)(2)(H) as an officer of S Company. R, as an employee of S Company, a company 68% owned by M, cannot be considered independent of Berry. Based upon your representations, it is the opinion of the Department that a lease of property between the LLC and S Company would be a prohibited transaction under Code section 4975, at least as to Berry’s IRA. The lease constitutes a prohibited transaction regardless of whether the LLC qualifies as a REOC under the Department’s plan assets regulation. 29 C.F.R. § 2510.3-101. The Department’s regulation at 29 C.F.R. § 2509.75-2(a) (Interpretative Bulletin 75-2), explains that a transaction between a party in interest under ERISA(2) (or disqualified person under the Code, in this case S Company) and a corporation in which a plan has invested (i.e., the LLC) does not generally give rise to a prohibited transaction. However, in some cases it can give rise to a prohibited transaction. Regulation section 2509.75-2(c) and Department opinions interpreting it have made clear that a prohibited transaction occurs when a plan invests in a corporation as part of an arrangement or understanding under which it is expected that the corporation will engage in a transaction with a party in interest (or disqualified person).(3) According to your representations, it appears that Berry’s IRA will invest in the LLC under an arrangement or understanding that anticipates that the LLC will engage in a lease with S Company, a disqualified person. Therefore, the lease would amount to a transaction between Berry’s IRA and S Company that Code section 4975(c)(1)(A) and (D) prohibits. Additionally, the proposed lease, if consummated, may also constitute a violation by Berry, a fiduciary, of Code section 4975(c)(1)(D) and (E). Finally, we note the express emphasis in 29 C.F.R. § 2509.75-2(c) that the Department considers “a fiduciary who makes or retains an investment in a corporation or partnership for the purpose of avoiding the application of the fiduciary responsibility provisions of the Act to be in contravention of the provisions of section 404(a) of the Act.” Thus, the proposed lease, which would violate section 4975(c)(1) of the Code, would also have to be referred to the Internal Revenue Service for a determination as to whether it would consider the transaction a violation of the exclusive benefit rule of section 401(a)(2) of the Code, which is the Code’s analogue to the fiduciary responsibility provisions of section 404(a) of ERISA. Because we have concluded that the proposed lease would constitute a prohibited transaction with respect to Berry’s IRA, the issue of whether the Code prohibits the lease as it relates to R’s IRA is moot, and does not need to be addressed. This letter constitutes an advisory opinion under ERISA Procedure 76-1, 41 Fed. Reg. 36281 (1976). Accordingly, this letter is issued subject to the provisions of that procedure, including section 10 thereof, relating to the effect of advisory opinions. Sincerely, Louis J. Campagna Footnotes
2006-06A Whether the prohibition on the payment of sales commissions in PTE 77-3 applies to the payment of 12b-1 Fees
2006-06A Whether the prohibition on the payment of sales commissions in PTE 77-3 applies to the payment of 12b-1 Fees by a proprietary mutual fund to an unrelated broker. July 26, 2006 Re: Company A 401(k) and Profit Sharing Plan (the Plan) Identification Number C-09259 Dear Mr. Bragdon: This is in response to your request for an advisory opinion concerning Prohibited Transaction Exemption (PTE) 77-3 (42 FR 18734, April 8, 1977).(1) Specifically, you request an opinion on whether the prohibition on the payment of sales commissions in PTE 77-3 applies to the payment of distribution-related expenses (12b-1 Fees) by a proprietary mutual fund (the Mutual Fund) to an unrelated broker. In particular, the distributor of the Mutual Fund would pay the unrelated broker from Mutual Fund assets received by the distributor under a Rule 12b-1 plan of distribution (the 12b-1 Plan).(2) The distributor would retain no portion of the 12b-1 Fees. Due to your uncertainty about the application of PTE 77-3, you requested that we not identify the relevant parties. You describe the facts as follows. Company A is the sponsor of the Plan. Company A is an investment adviser to the Z Family of Mutual Funds (the Funds), and one of four employers of employees covered by the Plan. The other employers are Company B, the distributor and principal underwriter of the Funds; Company C, another investment adviser of the Funds; and Company D, which provides other services to the Funds. The Plan is a defined contribution plan with a section 401(k) cash or deferred feature permitting employee pre-tax deferrals, which allows participants to direct the investment of their accounts among the Funds. The Plan was established by Company A, effective January 1, 1994. The Plan covers only employees of Companies A, B, C, and D (the Companies). The Plan is intended to comply with section 404(c) of the Employee Retirement Income Security Act of 1974 (the Act or ERISA). As of June 30, 2005, the Plan had total assets of approximately $7 million. As of September 9, 2005, the Plan had 260 participants. The trustee of the Plan is Individual G, a senior executive officer of the Companies. From the inception of the Plan to September 2005, you explain that participants have directed the investment of their accounts among the Funds. Beginning in 1999, you indicate that some of the Funds, in which participants invested their accounts, adopted 12b-1 Plans in accordance with Rule 12b-1 under the Investment Company Act of 1940 (the ’40 Act), 17 CFR §240.12b-1. You further explain that the 12b-1 Plans permit 0.25 percent of the Funds’ assets to be used by Company B to pay 12b-1 Fees to promote the sale of shares of the Funds. No 12b-1 Fees have been paid by Company B in connection with the acquisition or sale of shares of the Funds by the Plan. You state that Company A has entered into an agreement (the Agreement) with Company E, an unrelated party to the Funds and the Companies, to provide administration services for the Plan. In connection therewith, Company A will (a) adopt the approved prototype plan of Company E, (b) appoint Bank F as successor trustee, and (c) transfer the assets of the Plan to Bank F in cash. After the transfer of the Plan assets, you explain that participants will direct the investment of their account balances among investment alternatives consisting of mutual funds that are offered by parties unrelated to the Funds and the Companies, whose net asset values are listed daily in financial and other news publications. To accommodate a number of participants that want to continue to direct the investment of their account balances in the Funds after the transfer, you state that the Agreement with Company E provides for a self-directed brokerage account (the Self-Directed Brokerage Account) established with Company H, that will permit participants to direct the investment of their account balances in the Funds. The Self-Directed Brokerage Accounts will be available to all participants on an equal basis. A Plan participant that uses the Self-Directed Brokerage Account option will pay a $75 annual fee to the Plan recordkeeper. You represent that Company B will pay a 12b-1 Fee to Company H, the broker, with respect to amounts invested in the Funds by Plan participants and that Company B will not retain any portion of such fee. You explain that Company H provides brokerage services to the Plan participants and that it is unrelated to the Funds, the Companies, Individual G, and Bank F. You also state that Company H is not a fiduciary, as defined in section 3(21) of the Act, with respect to the Plan, because it does not exercise any discretionary authority or control with respect to management of the Plan or exercise any authority or control with respect to management or disposition of assets of the Plan, and does not render investment advice with respect to any property of the Plan. You further represent that no fiduciary of the Plan, or affiliate of any fiduciary, will benefit from any part of the 12b-1 Fee. You represent that the Plan’s investment in the Funds has met and will continue to meet the conditions stated in PTE 77-3. Therefore, you explain that the only issue with respect to the continued availability of PTE 77-3 is the possibility that the payment of 12b-1 Fees to Company H may not be permissible under PTE 77-3. PTE 77-3 provides relief from the restrictions of sections 406 and 407(a) of the Act and the taxes imposed by section 4975 (a) and (b) of the Internal Revenue Code (the Code), by reason of section 4975(c)(1) of the Code, with respect to the acquisition or sale of shares of an open-end investment company registered under the ’40 Act by an employee benefit plan covering only employees of such investment company, employees of the investment adviser or principal underwriter for such investment company, or employees of any affiliated person of such investment adviser or principal underwriter; provided that the conditions of the class exemption are met. Among its requirements, section (c) of PTE 77-3 provides that the plan must not pay a sales commission in connection with such acquisition or sale. As you have noted, the Department’s concern with respect to 12b-1 Fees was expressed in ERISA Advisory Opinion 93-12A (April 27, 1993) in the context of a transaction otherwise covered by PTE 77-4 (42 FR 18732, April 8, 1977). PTE 77-4 permits the purchase or sale by a plan of shares of a registered open-end investment company where an investment adviser to the mutual fund is also a fiduciary with respect to the plan. In ERISA Advisory Opinion 93-12A, a company serving as investment manager or trustee to employee benefit plans invested plan assets in affiliated mutual funds. The company credited the plan for investment advisory fees that the company received from the mutual fund, but did not credit the plan for fees that it received for secondary services provided to that fund. The Department stated that PTE 77-4 would be available if the secondary services were not investment advisory services and the conditions of this class exemption were otherwise met. The Department also noted in ERISA Advisory Opinion 93-12A that at the time PTE 77-4 was granted, the use of a portion of the assets of a registered investment company to pay distribution-related expenses was not generally permitted by the Securities and Exchange Commission. Accordingly, the Department stated that the payment of 12b-1 Fees was not specifically considered as part of its determination to grant PTE 77-4. In any event, the Department was of the view that the payment of a 12b-1 Fee by a mutual fund to a plan fiduciary or its affiliate could not be “functionally distinguished” in many instances from the payment of a commission by the plan in connection with the acquisition or sale of shares in a mutual fund. Therefore, the Department was unable to conclude that PTE 77-4 would be available for plan purchases and sales of mutual fund shares if a 12b-1 Fee was paid to the fiduciary or its affiliate with regard to that portion of the fund’s assets attributable to the plan’s investment. In ERISA Advisory Opinion 2002-05A (June 7, 2002) involving “exchange-traded funds,” the Department expressed the view that the term “sales commission,” as used in section II(a) of PTE 77-4, would not include brokerage commissions paid to a broker in connection with purchases or sales of shares of registered open-end investment companies listed on an exchange if the broker is unaffiliated with the fund, its principal underwriter, investment adviser or any affiliate thereof. Similarly in the case under consideration, the broker (Company H) is unaffiliated with the Mutual Fund, its principal underwriter/distributor (Company B), any investment advisers (Companies A and C) or any affiliate thereof (Company D), and any other fiduciary of the Plan (Bank F and Company E). In addition, neither the Companies nor their affiliates would receive any part of the 12b-1 Fees, nor would any fiduciary with respect to the Plan or affiliate of such fiduciary receive such fees. Finally, no commissions would be paid from the Plan participants’ accounts other than 12b-1 Fees out of Fund assets. Accordingly, it is the Department’s view that the term “sales commission,” as used in section (c) of PTE 77-3, would not include 12b-1 Fees that are paid to Company H, by Company B, from Mutual Fund assets, where Company H is an unrelated party and Company B keeps no part of the 12b-1 Fees. This letter constitutes an advisory opinion under ERISA Procedure 76-1 and is issued subject to the provisions of that procedure, including section 10, relating to the effect of advisory opinions. This opinion relates only to the specific issue addressed herein and is consistent with ERISA Advisory Opinion 2002-05A. Sincerely, Ivan L. Strasfeld Footnotes
2006-08A Whether a fiduciary of a defined benefit plan may, consistent with the requirements of section 404 of ERISA2006-08A Whether a fiduciary of a defined benefit plan may, consistent with the requirements of section 404 of ERISA, consider the liability obligations of the plan and the risks associated with such liability obligations in determining a prudent investment strategy for the plan.
October 3, 2006 Dear Mr. Myers: This is in response to your request for an advisory opinion on behalf of JPMorgan Chase Bank, N.A. (JPMorgan) regarding the application of the fiduciary responsibility provisions of Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA). Specifically you have inquired whether a fiduciary of a defined benefit plan may, consistent with the requirements of section 404 of ERISA, consider the liability obligations of the plan and the risks associated with such liability obligations in determining a prudent investment strategy for the plan. You represent that JPMorgan, as a plan fiduciary, proposes to “risk manage” the assets of defined benefit plans by better matching the risks of a plan’s investment portfolio assets with the risks associated with its benefit liabilities, with a goal toward reducing the likelihood that liabilities will rise at a time when the assets decline. Defined benefit plan liabilities are determined by a number of factors, most significantly the demography of the participant population (participants’ number of years of service and/or expected length of time for payment of retirement benefits) and the interest rates used to calculate the present value of the plan’s obligations for funding and accounting purposes. According to your letter, these liabilities most closely correlate with fixed-income assets, so that one approach for risk managing assets would be to invest directly in a portfolio of fixed-income securities with a duration of the plan’s benefit obligations. However, you note that there may be aspects of a plan’s obligations that correlate more closely with other types of investments, and it may not be possible to match liabilities precisely with fixed-income securities due to limitations in the fixed-income market. As a result, you indicate that a variety of approaches may be used in practice, depending on the facts and circumstances of the particular plan. In developing an asset allocation that better matches the risk and duration characteristics of a plan’s benefit liabilities, you explain that the focus of JPMorgan’s services would be on reducing the risk of underfunding to the plan and its participants and beneficiaries by reducing volatility in funding levels. In this regard, you note that there may be incidental benefits to the plan sponsor from maintaining more consistent funding levels, such as reduced volatility on the sponsor’s financial statements and reduced minimum contribution obligations. However, you also note that the principal benefit of decreased volatility would be the reduced need for the plan to rely on the plan sponsor to meet its funding obligations, protecting the plan participants and beneficiaries in the event of the sponsor’s insolvency. Taking into account the foregoing, you have requested the views of the Department on whether a fiduciary of a defined benefit plan may, consistent with the requirements of section 404 of ERISA, consider the liability obligations of the plan and the risks associated with such liability obligations in determining a prudent investment strategy for the plan. Sections 403(c) and 404(a)(1)(A) of ERISA require plan fiduciaries to discharge their duties with respect to a plan solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan. Section 404(a)(1)(B) of ERISA requires plan fiduciaries to act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims. These fiduciary standards apply to the selection and monitoring of plan investments, including plan investments made pursuant to a particular investment strategy. The frequency and degree of monitoring, will, of course, depend on the nature of such investments and their role in the plan’s portfolio. The general standards of fiduciary conduct contained in sections 404(a)(1) apply to any investment by a plan covered by Title I, including investments made pursuant to the described risk management investment strategy. Accordingly, fiduciaries of the plan must act prudently, solely in the interest of the plan’s participants and beneficiaries, and for the exclusive purpose of providing benefits and defraying reasonable plan administrative costs when deciding whether to invest in a particular investment or use a particular investment strategy. With regard to investing plan assets, the Department has issued a regulation, at 29 CFR 2550.404a-1, interpreting the prudence requirements of ERISA as they apply to the investment duties of fiduciaries of employee benefit plans. The regulation provides that the prudence requirements of section 404(a)(1)(B) are satisfied if (1) the fiduciary making an investment or engaging in an investment course of action has given appropriate consideration to those facts and circumstances that, given the scope of the fiduciary's investment duties, the fiduciary knows or should know are relevant, and (2) the fiduciary acts accordingly. This includes giving appropriate consideration to the role that the investment or investment course of action plays with respect to that portion of the plan's investment portfolio within the scope of the fiduciary's responsibility. The regulation further specifies the facts and circumstances that must be given appropriate consideration to include, but not be limited to, (A) a determination by the fiduciary that the particular investment or investment course of action is reasonably designed, as part of the portfolio (or, where applicable, that portion of the plan portfolio with respect to which the fiduciary has investment duties) to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action and (B) consideration of the following factors as they relate to such portion of the portfolio: (i) the composition of the portfolio with regard to diversification; (ii) the liquidity and current return of the portfolio relative to the anticipated cash flow requirement of the plan; and (iii) the projected return of the portfolio relative to the funding objectives of the plan. Within the framework of ERISA’s prudence, exclusive purpose and diversification requirements, the Department believes that plan fiduciaries have broad discretion in defining investment strategies appropriate to their plans. In this regard, the Department does not believe that there is anything in the statute or the regulations that would limit a plan fiduciary’s ability to take into account the risks associated with benefit liabilities or how those risks relate to the portfolio management in designing an investment strategy. For these reasons, a fiduciary would not, in the view of the Department, violate their duties under sections 403 and 404 solely because the fiduciary implements an investment strategy for a plan that takes into account the liability obligations of the plan and the risks associated with such liabilities and results in reduced volatility in the plan’s funding requirements. Whether any particular investment strategy is prudent with respect to a particular plan will depend on all the facts and circumstances involved. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, it is issued subject to the provisions of that procedure, including section 10 thereof relating to the effect of advisory opinions. Sincerely, Louis J. Campagna 2006-09A This advisory opinion concludes that a self-directed IRA‘s investment in notes of a corporation2006-09A This advisory opinion concludes that a self-directed IRA‘s investment in notes of a corporation, a majority of whose stock is owned by the son-in-law of the IRA owner, would be a prohibited transaction under the Internal Revenue Code. December 19, 2006 Dear Mr. Appelt: This is in response to your request for an advisory opinion under section 4975 of the Internal Revenue Code (Code). Specifically, you ask whether allowing the owner of an individual retirement account (IRA) to direct the IRA to invest in notes being offered by a corporation, in which a relative of the IRA owner is the majority owner and stockholder, would give rise to a prohibited transaction under Code section 4975.(1) You represent that as the owner of an IRA for which you have retained investment discretion, you would like to direct the investment of these IRA funds into notes (Notes) that are being offered by STARR Life Sciences Corporation (STARR). STARR is currently owned by the founders of the Company who are: Eric (your son-in-law) - 87.5%; Erika (an unrelated party) - 7.5%; and Dr. Strolh (an unrelated party) - 5.0%. You represent that these Notes are being offered and sold exclusively to persons who qualify as "accredited investors" under rule 501(a) of Regulation D promulgated under the Securities Act of 1933. You represent that you qualify as an accredited investor. You ask whether the IRA’s investment in the Notes would give rise to a prohibited transaction under section 4975 of the Code. Section 4975(c)(1)(A) and (B) of the Code defines a prohibited transaction to include any direct or indirect sale or exchange of property and lending of money or other extension of credit between a plan and a disqualified person. Section 4975(e)(1) of the Code defines, in relevant part, the term "plan" to include an IRA described in Code section 408(a). Section 4975(e)(3) of the Code defines the term "fiduciary," in relevant part, to include any person who exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets. Because you retain investment discretion over the IRA, you are a fiduciary. Section 4975(e)(2) of the Code defines "disqualified person," in relevant part, to include a fiduciary and certain members of the family of a fiduciary. Consequently, you are also classified as a disqualified person under Code section 4975(e)(2)(A). Sections 4975(e)(2)(F) and 4975(e)(6) of the Code state, in relevant part, that the family of a fiduciary shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant. Consequently, your son-in-law is also classified as a disqualified person because he is a member of the family of a fiduciary. The IRA’s purchase of the Notes would be a transaction between STARR and the IRA. Code section 4975(e)(2)(G)(i) defines "disqualified person," in relevant part, to include a corporation of which (or in which) 50 percent or more of the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation is owned indirectly by a fiduciary. In determining indirect stockholdings, Code section 4975(e)(4) requires that for purposes of Code section 4975(e)(2)(G)(i), indirect stockholdings include those which would be taken into account under Code section 267(c), except that members of a family of a fiduciary are members within the meaning of Code section 4975(e)(6). The application of this rule attributes to you the majority stockholdings of your son-in-law. Consequently, STARR is also classified as a disqualified person. The IRA is a plan and STARR is a disqualified person. Based on the facts and representations in your submissions, it is the opinion of the Department of Labor that the IRA's purchase of the Notes from STARR at your direction would be a transaction described in section 4975(c)(1)(A) and (B) of the Code which prohibit a direct or indirect sale or exchange of property and lending of money or other extension of credit between a plan and a disqualified person. This letter constitutes an advisory opinion under ERISA Procedure 76-1. Accordingly, this letter is issued subject to the provisions of such procedure, including section 10 relating to the effect of advisory opinions. Sincerely, Louis J. Campagna Footnotes Under Presidential Reorganization Plan No. 4 of 1978, effective December 31, 1978, the authority of the Secretary of the Treasury to issue interpretations regarding section 4975 of the Code has been transferred, with certain exceptions not here relevant, to the Secretary of Labor and the Secretary of the Treasury is bound by the interpretations of the Secretary of Labor pursuant to such authority. 2007-01A Whether transactions between a broker-dealer and a separate account managed by a QPAM2007-01A Whether transactions between a broker-dealer and a separate account managed by a QPAM under a 401(k) plan fail to satisfy section I(a) of PTE 84-14 where plan participants investing in such account receive investment allocation advice from a subsidiary of the broker-dealer. January 22, 2007 Dear Ms. Nussdorf: This is in response to your request for guidance concerning the application of section I(a) of Prohibited Transaction Exemption (PTE) 84-14 (49 FR 9494, March 13, 1984, as corrected at 50 FR 41430, October 10, 1985, as amended at 70 FR 49305, August 23, 2005).(1) PTE 84-14 permits certain transactions between a party in interest with respect to an employee benefit plan and an investment fund (as defined in section V(b) of PTE 84-14) in which the plan has an interest and which is managed by a qualified professional asset manager (QPAM), if the conditions of the exemption are satisfied. You write on behalf of an investment banking, securities and investment management firm (Firm A). You represent that Firm A is a broker-dealer which is a frequent counterparty to plans and vehicles that hold plan assets. A subsidiary of Firm A (Subsidiary B) provides investment advice for a fee to participants in self-directed individual account plans. You request our views on a scenario under which a participant-directed individual account plan offers a separate account that is managed by a QPAM as one of its investment options. The QPAM is not related to either Firm A or Subsidiary B. You represent that Subsidiary B’s services to the plan are limited to advising participants with respect to allocation of their investments in the plan. Subsidiary B does not have authority or control over any participant accounts and does not participate in the selection or oversight by the plan sponsor of investment options available under the plan. The plan sponsor (or a named fiduciary unrelated to Firm A and Subsidiary B) would possess and exercise the authority to appoint and terminate the QPAM for the plan. Neither Firm A nor Subsidiary B would participate in the negotiation of the terms of the management agreement with the QPAM. You note that, under certain circumstances, a fiduciary who provides investment advice to a plan for a fee may exert so much influence over the plan sponsor (or named fiduciary) so as to have effectively “exercised” authority or control over the operation of the plan or its assets. You ask, however, that the Department assume, for purposes of this opinion, the absence of such influence, control or authority over the plan sponsor (or named fiduciary). You have requested guidance as to whether transactions between Firm A and the investment fund managed by the QPAM as an option under the plan would fail to satisfy the condition in section I(a) of the exemption if plan participants investing in such fund receive investment allocation recommendations from Subsidiary B. You state that, since the plan sponsor (or named fiduciary) of each plan, as opposed to Firm A or Subsidiary B, is the party that possesses and exercises the power to select the investment vehicles that may be managed by a QPAM, and since plan participants, as opposed to Firm A or Subsidiary B, have the power to select investment options under the plan in which to invest, such transactions should fall within the relief provided by PTE 84-14. Section I(a) of PTE 84-14 provides that, at the time of the transaction, the party in interest, or its affiliate (as defined in section V(c)), does not have the authority to appoint or terminate the QPAM as a manager of the plan assets involved in the transaction, or negotiate on behalf of the plan the terms of the management agreement with the QPAM (including renewals or modifications thereof) with respect to the plan assets involved in the transaction. Section V(c) of the exemption defines an affiliate of a person as:
It is the Department’s view that, based upon the circumstances you have described, neither Firm A nor Subsidiary B has the authority to appoint or terminate the QPAM as a manager of plan assets involved in the transaction, or to negotiate the terms of the QPAM’s management agreement. The fact that Subsidiary B provides investment advice for a fee to participants in a plan who invest in a separate account under the plan managed by such QPAM would not cause a transaction between the separate account and Firm A to fail section I(a) of the QPAM class exemption solely by reason of the provision of such participant advice. The Department notes that Part I of PTE 84-14 provides no relief for transactions described in section 406(b) of ERISA. If Subsidiary B is a fiduciary by virtue of rendering investment advice within the meaning of 29 CFR 2510.3-21(c), the provision of such investment advice involving self-dealing will subject the fiduciary adviser to liability under section 406(b) of ERISA. Thus, for example, a violation of section 406(b) would occur if Subsidiary B advised plan participants to invest in a QPAM-managed fund pursuant to an arrangement or understanding with the QPAM which would result in a benefit being conferred upon Firm A or Subsidiary B as a result of such investment. This letter constitutes an advisory opinion under ERISA Procedure 76-1 and is issued subject to the provisions of that procedure, including section 10, relating to the effect of advisory opinions. This opinion relates only to the specific issue addressed herein. Sincerely, Ivan L. Strasfeld Footnotes See also Proposed Amendment to Prohibited Transaction Exemption (PTE) 84-14 for Plan Asset Transactions Determined by Independent Qualified Professional Asset Managers, 70 FR 49312 (August 23, 2005). 2007-02A Whether the 10% test applicable to pooled investment vehiclesWhether the 10% test applicable to pooled investment vehicles under the QPAM class exemption (84-14) does not require consideration of any underlying plan investors in a pooled fund investing in another pooled fund (47KB PDF file - PDF Help) |
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2002-01 ESOP Refinance TransactionsDepartment of Labor - Employee Benefits Security Administration September 26, 2002 Memorandum for: From: Subject: ESOP Refinancing Transactions Issue: What are the obligations of a fiduciary under sections 404(a) and 408(b)(3) of ERISA in connection with the refinancing of an exempt ESOP loan? Background An ESOP is a defined contribution pension plan designed to invest primarily in stock of the sponsoring employer or an affiliate. A leveraged ESOP is an ESOP that finances its purchase of such stock through securities acquisition debt obtained from, or guaranteed by, the sponsoring employer. A leveraged ESOP, operated in accordance with applicable regulations, holds the shares purchased with the proceeds of such a loan in a “suspense account,” and releases them from the suspense account as the loan is repaid according to a set formula that is expressed in terms of number of shares.(1) This release formula requires that in a given year, the number of shares released from the suspense account will be determined by multiplying the number of shares in the suspense account by a fraction. The numerator of that fraction is the amount of principal and interest paid for the year, and the denominator is the sum of the numerator plus the amount of principal and interest to be paid for all future years on the loan.(2) After the shares of stock are released from the suspense account, they are allocated to participants’ accounts. Loan repayment schedules typically are designed to provide for the release of stock from the ESOP suspense account consistent with a specific projected level of benefits or participant contributions. Loan repayment schedules, therefore, are often formulated based on projections as to the future value of shares, the number of participants and, if relevant, levels of participant contributions over the term of the loan. Accordingly, where there are significant deviations from the projections – such as significant increases in the value of the stock held in the ESOP suspense account or significant decreases in the number of participating employees – the release of stock in accordance with original loan terms will result in a level of benefits greater than originally intended by the plan sponsor. Refinancing of the underlying loans is a means by which some plan sponsors have sought to bring future allocations closer to the amounts they originally intended. In general, an ESOP refinancing involves entering into a new loan that extends the repayment schedule and, therefore, the period over which stock will be allocated from the suspense account to individual participants. Typically, the ESOP uses the loan proceeds to retire the original loan and release suspense account shares to the accounts of the participants only as the new, extended, loan is repaid. While all of the shares acquired in the original stock purchase are ultimately released under the extended terms of the new loan, fewer shares are released from the suspense account during the period of the original underlying loan and fewer shares are allocated to participants’ accounts during that same period. Analysis Section 404(a)(1)(A) of ERISA requires, among other things, that a fiduciary of a plan discharge its duties with respect to the plan solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan. Section 404(a)(1)(B) requires that a fiduciary of a plan discharge its duties with respect to the plan solely in the interest of the participants and beneficiaries and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. Section 403(c)(1) requires, in part, and subject to certain exceptions, that the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. Section 406(a)(1)(B) provides, in pertinent part, that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he or she knows or should know that such transaction constitutes a direct or indirect “lending of money or other extension of credit between the plan and a party in interest.” ERISA section 3(14) defines a “party in interest” to include an employer. Section 408(b)(3) provides that a loan to an ESOP is exempt from section 406 (except section 406(b)(3)(3)) if such loan is “primarily for the benefit of participants and beneficiaries of the plan, and . . . such loan is at an interest rate which is not in excess of a reasonable rate.” It is the view of the Department that the requirements of section 408(b)(3) apply to the refinancing of an ESOP loan, as well as to the original loan. Accordingly, an ESOP fiduciary, in order to avoid engaging in a prohibited transaction, must take steps to ensure that a refinancing transaction comports with the requirements of section 408(b)(3) and 29 C.F.R. § 2550.408b-3. § 2550.408b-3(c) addresses the application of the “primary benefit” requirement of section 408(b)(3). In applying the “primary benefit” requirement, paragraph (c)(1) of § 2550.408b-3 provides, among other things, that a fiduciary must consider “[a]ll the surrounding circumstances, including those described in paragraphs (c)(2) and (3) of this section.”(4) Paragraph (c)(2) of that section provides that “[a]t the time that a loan is made, the interest rate for the loan and the price of securities to be acquired with the loan proceeds should not be such that plan assets might be drained off.” Paragraph (c)(3) of that section provides that “[t]he terms of a loan, whether or not between independent parties, must, at the time the loan is made, be at least as favorable to the ESOP as the terms of a comparable loan resulting from arm’s-length negotiations between independent parties.” The preamble to the final regulation explains that the tests encompassed in paragraphs (c)(2) and (3) of § 2550.408b-3 were added to the regulation to illustrate how a determination can be made with respect to whether a transaction meets the primary benefit requirement.(5) The regulation additionally states that the Department will give “special scrutiny” to ESOP loans and that fiduciaries have an obligation to ensure that such loans are “truly arranged primarily in the interest of participants and beneficiaries.” 29 C.F.R. § 2550.408b-3(b)(2). Whether a fiduciary acts in accordance with its responsibilities under sections 404(a)(1)(A) and (B) and 403(c) of ERISA, and whether a particular loan satisfies the requirements of section 408(b)(3) of ERISA, are inherently factual determinations that must be made by the appropriate plan fiduciary based on all relevant facts and circumstances. In determining whether a refinancing is consistent with the fiduciary provisions of Title I of ERISA, the burden is on the fiduciary to establish compliance. However, we note that certain procedures and factors considered by a fiduciary may be appropriate in determining whether to cause an ESOP to engage in a refinancing. Conclusion At a minimum, in determining whether to cause an ESOP to engage in a refinancing, a fiduciary must make a careful assessment of the costs and benefits conferred upon the ESOP and the likely consequences of a failure to refinance, and ensure that the transaction is “arranged primarily in the interest of participants and beneficiaries.” 29 C.F.R. § 2550.408b-3(b)(2). It is the view of the Department that, consistent with the obligation to consider “all the surrounding circumstances” pursuant to § 2550.408b-3(c)(1), an ESOP fiduciary must, in considering any refinancing of an ESOP loan that results in an extension of the period over which stock will be allocated to participant accounts, assess the extent to which the refinancing is consistent with the documents and instruments governing the plan, including loan and related agreements.(6) An ESOP fiduciary, in our view, also should assess the extent to which such an extension is consistent with the reasonable expectations of the plan’s participants and beneficiaries, as might be determined by reference to the plan’s summary plan description or other disclosures describing the funding and benefits of the plan. Although a refinancing may also benefit the employer (for example, by reducing the employer’s cost of providing future pension benefits), the fiduciary must act with undivided loyalty to the participants and beneficiaries of the plan if it is to satisfy the requirements of sections 404(a)(1)(A) and 408(b)(3) of ERISA. The “primary benefit” test set forth in section 408(b)(3) of ERISA and the regulations thereunder require the fiduciary to focus on the benefits of the refinancing transaction to the plan’s participants and beneficiaries. Accordingly, a refinancing would satisfy the primary benefit test if the fiduciary reasonably concludes that the transaction is advantageous to the plan’s participants and beneficiaries after a careful assessment of the costs and benefits of the transaction, and if the terms related to the refinancing are at least as favorable as the terms that would have resulted from an arm’s-length negotiation between independent parties. Often, employers offer a number of inducements for the plan to engage in the refinancing which could support a fiduciary’s conclusion that the transaction is primarily for the benefit of participants and beneficiaries, such as a commitment that shares held in the suspense account will not be applied to repayment of the outstanding portion of the refinanced loan if the ESOP is terminated (often referred to as “event protection”); additional diversification rights for participants; an increase in the amount of the employer’s matching contribution; the payment of a “dividend make-whole” to compensate participants and beneficiaries for the increased use of dividends for loan repayment; and other such inducements. Whether some or all of such inducements are sufficient to satisfy the primary benefit test is highly dependent on the particular facts and circumstances surrounding the transaction. One circumstance of particular importance is whether the sponsoring employer has made an enforceable commitment to make all of the contributions necessary to retire the loan. In such a case, the ESOP may have an unqualified right to receive contributions and to release stock in accordance with the original amortization schedule. As a result, the negative consequences to the ESOP of rejecting a proposed refinancing could be minimal, and the economic value transferred to a sponsoring employer may be substantial, unless the ESOP receives substantial additional consideration for entering into the transaction. Further, we note that the fiduciary has a duty of impartiality to all of the plan’s participants, and may appropriately balance the interests of different classes of participants in evaluating a proposed refinancing, including the potentially varying interests of present and future participants. See Varity Corp. v. Howe, 516 U.S. 489, 514 (1996); Restatement (Second) of Trusts § 183. In our view, however, the fiduciary cannot satisfy the duty of impartiality solely by considering the asserted benefits of the refinancing to future participants (e.g., more generous benefits in later years than the employer would otherwise provide), but must also consider the interests of current participants and beneficiaries. Although a refinancing does not remove shares from the ESOP, those current participants who terminate employment before the full repayment of a refinanced loan may receive fewer shares of stock than they would have received absent the refinancing, and current participants who remain employed by the sponsor must work more years to receive the same number of shares that they would have received absent the refinancing. Accordingly, a fiduciary cannot reasonably assess the costs and benefits conferred upon an ESOP without giving due consideration to the interests of current participants. With respect to the obligations of an ESOP fiduciary under section 404(a)(1), it is the view of the Department that satisfaction of the “primary benefit” requirement of section 408(b)(3) and the regulation with respect to the refinancing of an ESOP loan also typically would serve to satisfy a fiduciary’s obligations to act prudently and solely in the interest of plan participants and beneficiaries under section 404(a)(1). Conversely, a failure to satisfy the “primary benefit” requirement of section 408(b)(3) would also result in a violation of section 404(a)(1). Any questions concerning this matter may be directed to Louis Campagna or Fred Wong, Division of Fiduciary Interpretations at 202.693.8510. Footnotes
2002-02 Plan Amendments Made by Multiemployer TrusteesDepartment of Labor - Employee Benefits Security Administration November 4, 2002 Memorandum for: From: Subject: Plan Amendments Made by Multiemployer Plan Trustees Issue: Were the trustees of two related multiemployer plans subject to ERISA's fiduciary standards when they amended the plans' trust agreement? Background Employer Association X and Labor Union Y established a defined benefit plan (DB plan) in 1955 and, in 1987, a defined contribution plan (DC Plan). Employer contributions to Fund Z fund both plans. Although some DC Plan participants also participate in the DB plan, most do not. In 1989, the DB plan was frozen. No new employees became participants of the DB plan and the existing participants accrued no further benefits. At that time, the trustees believed that the DB plan needed no further contributions. All future contributions were allocated to the DC Plan. By 1999, the DB plan’s funding situation had apparently changed. That year, Employer Association X and Labor Union Y amended the trust agreement to allocate employer contributions to the DB plan in an amount equivalent to the forfeitures in the DC Plan. The collective bargaining agreement under which the plans are maintained only sets a formula for employer contributions to Fund Z; the trust agreement specifies the allocation of contributions among the plans. The trust agreement provides that either Employer Association X and Labor Union Y, or Fund Z’s board of trustees may make amendments. The 1999 reallocation did not prove sufficient to make the DB Plan solvent. In 2002, the trustees voted to amend the trust agreement, this time diverting an additional 20% of the employer contributions to the DB plan. The amendment resolution states that the trustees were acting "in their Settlor capacity." Analysis Section 3(21) of ERISA defines a fiduciary as one who has or exercises discretionary authority or control in the administration or management of an employee benefit plan or its assets. Part 4 of Title I of ERISA establishes the standards pursuant to which any fiduciary is to act, including the duty to act solely in the interests of the participants and beneficiaries of the plan, to be prudent in carrying out her responsibilities, and to avoid engaging in prohibited transactions. Section 3(16) of ERISA, in relevant part, defines the term "plan sponsor" of a plan established or maintained jointly by one or more employers and one or more employee organizations, as the joint board trustees who establish or maintain the plan. In analyzing the extent to which assets of an employee benefit plan may properly be applied toward the payment of certain expenses, the Department has distinguished between activities that are “settlor” in nature (i.e., activities that relate to the establishment, design, and termination of plans) and activities that are fiduciary in nature (i.e., activities involving management of the plan). As indicated in various pronouncements, expenses incurred in connection with the performance of settlor functions would not be reasonable plan expenses as they would be incurred for the benefit of the employer and would involve services for which an employer could reasonably be expected to bear the cost in the normal course of its business or operations.(1) In applying these distinctions, the Department has generally recognized that certain activities that would be settlor activities in the context of a single employer plan might be fiduciary activities in the context of a multiemployer plan.(2) This view was consistent with earlier case law, such as NLRB v. Amax Coal Co., 453 U.S. 322 (1981) which held that employer appointed trustees of a multiemployer plan do not represent the interests of the contributing employers, but act as fiduciaries of the plan. 453 U.S. at 331-334. More recent Supreme Court pronouncements on settlor functions, however, have led several courts to conclude that multiemployer plan trustees may act in a settlor capacity without regard to ERISA's fiduciary standards.(3) For example, the Third Circuit Court of Appeals, in Walling v. Brady(4) and the Sixth Circuit Court of Appeals, in Gard v. Blankenburg,(5) have taken the position that boards of trustees may act as settlors when they amend plans, and that such amendments are not subject to ERISA’s fiduciary responsibility provisions. As the Third Circuit noted in the Walling case, the Supreme Court, in both Lockheed Corp. v. Spink and Wright Corp. v. Schoonejongen,(6) recognized that the use of the term “plan sponsor” is significant. Under ERISA section 3(16), the sponsor of a multiemployer plan is the joint board of trustees that is directed, pursuant to a collective bargaining agreement, to establish one or more employee benefit plans. While the Walling court noted that, notwithstanding Lockheed, there may be situations in which single employer and multiemployer plans should be treated differently, they opined that under the facts of that case, involving the amendment of a multiemployer plan, ERISA’s fiduciary rules did not apply. The facts in Walling are very similar to those in the present case. In Walling, the board of trustees of a multiemployer defined benefit pension plan and group health plan amended the health plan (pursuant to authority granted under the collective bargaining agreement and the plan document) to require that participants pay $100 per month in order to receive benefits and amended the pension plan (also pursuant to authority granted under the collective bargaining agreement and the plan document) to provide an additional $100 benefit to those participants who were also participants in the health plan. The court in Walling, in concluding that the trustees’ amendment of the pension plan fell outside of the scope of ERISA’s fiduciary responsibility provisions, noted that imposing fiduciary duties on a sponsor’s decision to amend a plan, whether the employer in the case of a single-employer plan, or the trustees in the case of a multiemployer plan, would divide the sponsor’s loyalties and make amendment of a plan impossible. In Advisory Opinion 80-8A,(7) we considered the issue of whether trustees who allocate employer contributions to related multiemployer plans established and maintained under the same collective bargaining agreements engage in a fiduciary act in making such allocations. In that opinion, we concluded that where allocations are made pursuant to a fixed formula established in the collective bargaining agreement, which formula is binding on the trustees, the trustees are not, solely by reason of such allocation, engaged in an act described in section 406(b)(2). However, the opinion noted that if the trustees exercise discretion in determining how to allocate employer contributions among the related plans, the trustees were engaging in a transaction involving the plans to which contributions were allocated, or withheld, and that such transactions could violate section 406(b)(2) since the plans may have competing interests as to the fixed pool of money. We note, however, that the opinion expressly reserved the question of whether the trustees would be engaged in a fiduciary violation where the collective bargaining agreement gives the trustees the authority to make prospective changes in the formula under which contributions are allocated among related plans. In the case at hand, the collective bargaining agreements vested broad authority in the trustees to act establish the Fund, as well as the DB Plan and the DC Plan. The trustees also had the authority to amend the Fund and the plans. Pursuant to this authority, the trustees have amended the trust agreement and the plans to provide for the allocation of a portion of the employer contributions to the DB Plan, based on a fixed formula contained in the trust agreement. Once the amendment was properly adopted, the formula became binding on the trustees. Conclusion In our view, where relevant documents (e.g., collective bargaining agreements, trust documents, and plan documents) contemplate that the board of trustees of a multi-employer plan will act as fiduciaries in carrying out activities which would otherwise be settlor in nature, such activities would be governed by the fiduciary provisions of ERISA. In our view, such designation by the plan would result in the board of trustees exercising discretion as fiduciaries in the management or administration of a plan or its assets when undertaking the activities. However, where, as here, the relevant plan documents are silent, then the activities of the board of trustees which are settlor in nature generally will be viewed as carried out by the board of trustees in a settlor capacity, and such activities would not be fiduciary activities subject to Title I of ERISA. Accordingly, it is the view of this Office that the Trustees of the Fund did not violate their fiduciary duties under ERISA in amending the Fund, the DB Plan, and the DC Plan to provide for an allocation of employer contributions to the DB Plan. It is also the view of this Office that, consistent with the plan expense guidance discussed above, it would not be appropriate for a multiemployer plan to pay for expenses attendant to activities that a multiemployer plan trustee carries out in a settlor capacity. Any questions concerning this matter may be directed to Louis Campagna or David Lurie, Division of Fiduciary Interpretations at 202.693.8510. Footnotes
2002-03 Disclosure and Other Obligations Relating to "Float"Department of Labor - Employee Benefits Security Administration November 5, 2002 Memorandum for: From: Subject: Disclosure and other Obligations Relating to “Float” Issue: What does a fiduciary need to consider in evaluating the reasonableness of an agreement under which the service provider will be retaining “float” and what information is a service provider required to disclose to plan fiduciaries with respect to such arrangements in order to avoid engaging in a prohibited transaction? Background A number of financial services providers, such as banks and trust companies, acting as non-discretionary directed trustees or custodians maintain general or “omnibus” accounts to facilitate the transactions of employee benefit plans. The service provider may retain earnings (“float”) resulting from the anticipated short-term investment of funds held in such accounts. Typically, these accounts hold contributions and other assets pending investment directions from plan fiduciaries. In addition, fiduciaries transfer funds to a general account of the financial institution in connection with issuance of a check to make a plan distribution or other disbursement. Funds are then held in the account earning interest until checks are presented for payment. In Advisory Opinion 93-24A, the Department expressed the view that a trustee’s exercise of discretion to earn income for its own account from the float attributable to outstanding benefit checks constitutes prohibited fiduciary self-dealing under section 406(b)(1) of ERISA. Advisory Opinion 93-24A dealt with a situation where there was no disclosure of the float to employee benefit plan customers. In a subsequent information letter to the American Bankers Association (August 11, 1994), the Department indicated that “ . . . if a bank fiduciary has openly negotiated with an independent plan fiduciary to retain float attributable to outstanding benefit checks as part of its overall compensation, then the bank’s use of the float would not be self-dealing because the bank would not be exercising its fiduciary authority or control for its own benefit. Therefore, to avoid problems, banks should, as part of their fee negotiations, provide full and fair disclosure regarding the use of float on outstanding benefit checks.” (Emphasis supplied). In general, the concepts of open negotiation and full and fair disclosure, as used in the 1994 letter, are intended to ensure that service providers provide sufficient information concerning such arrangements so that plan fiduciaries can make informed assessments concerning the prudence of the arrangements. Further, those concepts are intended to ensure that the amount of the service provider's compensation is determined and approved by a fiduciary independent of the service provider so that prohibited self-dealing is avoided.(1) Since the issuance of the letter, Field offices have found, as part of their investigations, a variety of methods by which plan fiduciaries are informed of, and or approve, the practice of plan service providers retaining float as part of their overall compensation. Typically, a service agreement will provide that, in addition to other specifically identified or scheduled fees, the service provider may also receive compensation in the form of earnings on funds awaiting investment or reinvestment or funds pending distribution. According to the investigations, however, there is little or no disclosure of specific information regarding compensation earned in the form of float. Further guidance, therefore, has been requested concerning the obligations of plan fiduciaries and service providers regarding float arrangements and disclosures. Analysis Obligations of Plan Fiduciary - In selecting a service provider, plan fiduciaries must, consistent with the requirements of section 404(a), act prudently and solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan. Except as provided in section 408, plan fiduciaries also have an obligation under section 406(a) not to cause the plan to engage in certain transactions, including a direct or indirect furnishing of goods, services or facilities between the plan and a party in interest. Section 408(b)(2) exempts from the prohibitions of section 406(a) any contract or reasonable arrangement with a party in interest, including a fiduciary, for office space, or legal, accounting or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.(2) In carrying out these responsibilities, the Department has indicated that a plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided. In addition, such process should be designed to avoid self-dealing, conflicts of interest or other improper influence. In circumstances where a service provider may receive compensation in the form of float, we believe the selection and monitoring process engaged in by the responsible fiduciary should include: A review of comparable providers and service arrangements (e.g., quality and costs) to determine whether such providers may credit float to the provider’s own account, rather than the plan. A review of the circumstances under which float may be earned by the service provider. For example, in the case of float on cash awaiting investment, fiduciaries should ensure that their service agreements include time limits within which the provider will implement investment instructions following receipt of cash from the plan. Fiduciaries also should understand that delays in the plan providing investment instruction or delays in implementing investment direction by the service provider would result in increased compensation in the form of float. In the case of float on funds awaiting disbursement, fiduciaries should ensure that their service agreements specify the time at which assets are transferred from the plan to the general account (e.g., the date the check is requested, the date the check is written, or the date the check is mailed). Inasmuch as timing of mailing or distribution of a check may also affect the amount of float, service agreements should provide, if relevant, an indication as to when checks are mailed following a direction to distribute funds. Fiduciaries also should understand that float will be earned on such disbursements until checks are presented for payment by the payee, the timing of which is beyond the control of the plan and service provider. In this regard, fiduciaries should review periodic statements or reports of distribution checks to determine the extent to which checks tend to remain outstanding for unusually long periods of time (e.g., 90 or more days). A review of sufficient information to enable the plan fiduciary to evaluate the float as part of the total compensation to be paid for the services to be rendered under the agreement. In this regard, fiduciaries should request and review the rates the provider generally expects to earn. For example, the provider might indicate that earnings on uncashed checks are generally at money market interest rates. Given the uncertainties with respect to both actual interest rates and the length of the periods during which any given funds may be pending investment or pending disbursement, it is anticipated that any projections by the fiduciary will result in only a rough approximation of the potential float. However, the information on which the approximation is based (e.g., basis for earnings rates and agreement terms relating to maximum periods within which funds will be invested following investment direction, timing of transfers of cash from the plan to the provider's general account following direction to distribute funds, period for mailing checks, extent to which experience shows that distribution checks remain outstanding for unusually long periods of time, etc.) and the approximation itself, will enable a fiduciary both to compare service provider float practices and assess the extent to which float is a significant component of the overall compensation arrangement. Additionally, a plan fiduciary must periodically monitor compliance by the service provider with the terms of the agreement and the reasonableness of compensation under the agreement in order to ensure continuation of the agreement meets the requirements of sections 404(a)(1), 406 and 408(b)(2). Obligations of Service Providers - The primary issue for service providers with float arrangements is whether the provider has disclosed to its employee benefit plan customers sufficient information concerning the administration of its accounts holding float so that the customer can reasonably approve the arrangement based on an understanding of the service provider's compensation. Moreover, the arrangement must not permit the service provider to affect the amount of its compensation in violation of section 406(b)(1) (e.g., by giving the service provider broad discretion over the duration of the float). For example, even where a service provider discloses in its service agreement that additional compensation may be paid to the service provider as a result of float, a prohibited transaction may nonetheless result to the extent that the service provider exercises discretionary authority or control sufficient to cause a plan to pay additional fees to the provider. As noted in Advisory Opinion 93-24A, a fiduciary’s decision to handle plan assets in such a way as to benefit itself constitutes prohibited self-dealing, without regard to the status of the funds after they are placed in a disbursement or other account. It is the view of this Office that, in connection with a service agreement pursuant to which the service provider may be retaining float as part of its compensation, the service provider can avoid self-dealing with respect to such earnings by taking the following steps: Disclose the specific circumstances under which float will be earned and retained. In the case of float on contributions pending investment direction, establish, disclose and adhere to specific time frames within which cash pending investment direction will be invested following direction from the plan fiduciary, as well as any exceptions that might apply. In the case of float on distributions, disclose when the float period commences (e.g., the date check is requested, the date the check is written, the date the check is mailed) and ends (the date on which the check is presented for payment). Also disclose, and adhere to, time frames for mailing and any other administrative practices that might affect the duration of the float period. Disclose the rate of the float or the specific manner in which such rate will be determined. For example, earnings on cash pending investment and earnings on uncashed checks are generally at a money market interest rate. We note that the disclosure of and adherence to the foregoing by service providers will not only reduce the likelihood of prohibited self-dealing, but also will assist plan fiduciaries in discharging their obligations under sections 404(a)(1), 406 and 408(b)(2). Conclusion Float should be regarded by plan fiduciaries and service providers as part of the service provider’s compensation for services to the plan. As such, the plan fiduciary must have an adequate understanding of how the service provider will earn float, and how it contributes to the service provider’s compensation. The service provider must make disclosures sufficient to permit the fiduciary to make an informed decision regarding the proposed float arrangement. In addition, to avoid having the arrangement give rise to self-dealing violations of section 406(b), both parties must avoid giving the service provider discretion to affect the amount of compensation it receives from float. Questions concerning this matter may be directed to Louis Campagna or Fred Wong, Division of Fiduciary Interpretations at 202.693.8510. Footnotes
2003-01 Participant Loans to Corporate Directors and OfficersDepartment of Labor - Employee Benefits Security Administration April 15, 2003 Memorandum for: From: Subject: Participant Loans to Corporate Directors and Officers Issue: May a plan administrator deny participant loans to directors and executive officers of the sponsoring employer of the plan on the basis that such loans may violate Section 13(k) of the Securities Exchange Act of 1934 without contravening the requirement of section 408(b)(1) of ERISA that loans be made available to all participants on a reasonably equivalent basis? Law And Analysis Section 402 of the Sarbanes-Oxley Act of 2002 added a new subsection (k) to Section 13 of the Securities Exchange Act of 1934 (the “1934 Act”). Section 13(k) makes it unlawful for any issuer (as defined in Section 2(a)(7) of the Sarbanes-Oxley Act of 2002)(1), directly or indirectly, including through any subsidiary, to extend or maintain credit, to arrange for the extension of credit, or to modify or renew an extension of credit maintained by the issuer on the date of enactment,(2) in the form of a personal loan to or for any director or executive officer (or equivalent thereof). The Department of Labor does not have interpretative authority with respect to the 1934 Act. Section 404 of ERISA requires, among other things, that fiduciaries of employee benefit plans discharge their duties prudently and solely in the interest of the plan’s participants and beneficiaries. Section 404(a)(1)(D) requires that fiduciaries discharge their duties in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of title I of ERISA. Section 406(a)(1)(B) prohibits a fiduciary from causing an employee benefit plan to engage in a loan between the plan and a party in interest. Parties in interest include employees, officers and directors of an employer sponsoring the plan. Section 408(b)(1) exempts from the prohibited transactions provisions of section 406 the making of a loan by an employee benefit plan to a party in interest who is a participant or beneficiary of the plan, provided that certain conditions are satisfied. Among other things, section 408(b)(1)(A) and the Department’s regulations issued thereunder, at 29 CFR § 2550.408b-1, provide that such loans must be made available to all participants and beneficiaries of the plan on a reasonably equivalent basis. Section 514(d) of ERISA provides that nothing in Title I of ERISA shall be construed to alter, amend, modify, invalidate, impair, or supersede any other Federal law. We understand that ERISA practitioners have raised the question of whether section 13(k) of the 1934 Act prohibits directors and executive officers of an employer from taking loans from employee pension benefit plans. It has long been the view of the Department that fiduciaries are responsible for administering their plans to assure compliance with both ERISA and other applicable Federal laws, in recognition of the fact that such other Federal laws are not preempted by ERISA. In our view, a decision to disallow a participant loan based on a reasonable question concerning the legality of the loan would not be a failure to provide loans to all participants on a reasonably equivalent basis and would not affect the plan's compliance with section 408(b)(1) or 29 C.F.R. § 2550.408b-1. Conclusion It is the view of this Office that, in view of the uncertainty concerning the scope of section 13(k) of the 1934 Act, plan fiduciaries of public companies may deny participant loans to officers and directors (or the equivalent thereof) without violating the requirements of section 404(a)(1) or the requirement of section 408(b)(1)(A) and the regulation issued thereunder that loans be available to all participants and beneficiaries on a reasonably equivalent basis. In stating this view, the Department takes no position on the application of section 13(k) of the 1934 Act to participant loans. Any questions concerning this matter may be directed to Louis Campagna or David Lurie, Division of Fiduciary Interpretations, 202.693.8510. Footnotes
2003-02 Application of Participant Contribution Requirements to Multiemployer Defined Contribution Pension PlansDepartment of Labor - Employee Benefits Security Administration May 7, 2003 Memorandum for: From: Subject: Application of Participant Contribution Requirements to Multiemployer Defined Contribution Pension Plans Issue: In the context of a multiemployer defined contribution pension plan, to what extent may collective bargaining, employer participation and similar agreements be taken into account in determining when participant contributions can reasonably be segregated from the general assets of participating employers? Background In 1996, the Department adopted final rules defining when amounts that a participant pays to, or has withheld by, an employer for contribution to an employee benefit plan are “plan assets” for purposes of Title I of ERISA. These rules are set forth at 29 CFR § 2510.3-102 (“Definition of plan assets – participant contributions”). In general, the rules provide that the assets of a plan include amounts that a participant or beneficiary pays to, or amounts that a participant has withheld from his 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.(1) With respect to pension plans, the rules also provide that in no event shall such date be later than the 15th business day of the month following the month in which the amounts were received by the employer (in the case of amounts paid to the employers) or in which the amounts would otherwise have been payable to the participant (in the case of amounts withheld by the employer from a participant’s wages).(2) On the basis of information obtained by, and furnished to, the Department, many multiemployer defined contribution pension plans establish through collective bargaining, employer participation and similar agreements, the form, manner and timing of amounts for contributions to employee benefit plans, including participant contributions to defined contribution pension plans. Frequently, such agreements provide for contributions to be remitted to the plan at specific times, without regard to when any given participating employer might be able to mechanically segregate monies from its general assets. Such practices, therefore, have raised questions concerning the extent to which multiemployer defined contribution pension plan trustees and participating employers must disregard the terms of collective bargaining and employer participation agreements in order to ensure compliance with the terms of the plan assets - participant contribution regulation. Determining when participant contributions to a multiemployer, defined contribution plan become plan assets is critical to understanding the fiduciary obligations of plan trustees and participating employers in handling participant contributions.(3) Analysis In adopting changes to the plan assets – participant contribution rules in 1996, the Department recognized that plan sponsors and fiduciaries must weigh the costs and benefits, as well as risks presented to participants, of processes established for the transmittal and receipt of participant contributions.(4) In this regard, many commenters on the proposed rules, while acknowledging that participant contributions could be segregated quickly and frequently into a trust established to temporarily hold such contributions until they could be reconciled, represented that the costs of establishing and administering such a trust would be considerable, outweighing any additional benefits to participants.(5) Taking such comments into consideration, the Department indicated that, while the final rule significantly reduces the maximum period during which participant contributions may be treated as other than plan assets, the final rule “accommodates employers who are unable reasonably to segregate participant contributions from their general assets more frequently than in what appears to be a fairly standard monthly processing cycle for participant contributions to pension plans.”(6) With regard to multiemployer plans specifically, several commenters on the proposed rules argued that, given the unique nature of such plans, multiemployer plans with participant contributions should either be exempt from the plan asset – participant contribution rules altogether or exempt from the maximum period within which contributions must be made. While the Department did not adopt either of these suggestions, the Department did determine that “the maximum time period for pension plans in the final rule was sufficient to accommodate multiemployer plans." The Department also recognized that transmission of participant contributions may be controlled by pre-existing collective bargaining agreements and, therefore, postponed the application of the final rule’s new maximum period (within which participant contributions must be transmitted to a plan) for collectively bargained pension plans.(7) It is the view of this Office that the provisions of the participant contribution regulation apply in the same way to multiemployer plans that the provisions apply to single employer plans. That is, participant contributions deducted by or paid to an employer become plan assets as soon as they can reasonably be segregated from the employer's general assets. As is the case with single employer plans, if a multiemployer plan maintains a reasonable process for the expeditious and cost-effective receipt of contributions, this process may be taken into account in determining when participant contributions can reasonably be segregated from the employer's general assets. To the extent that a collective bargaining agreement, for example, describes such a process, then the collective bargaining agreement should be considered in determining when participant contributions become plan assets. To be reasonable, a plan's process for receiving participant contributions should take into account how quickly the participating employers can reasonably segregate and forward contributions. The plan fiduciaries should also consider how costly to the plan a more expeditious process would be. These costs should be balanced against any additional income and security the plan and plan participants would realize from a faster system. No matter how reasonable a pension plan's process, however, participants contributions become plan assets no later than the 15th business day of the month following the month in which the amounts were received by the employer (in the case of amounts paid to the employers) or in which the amounts would otherwise have been payable to the participant (in the case of amounts withheld by the employer from a participant’s wages). Thus neither a collective bargaining agreement, nor any other agreement between the plan and an employer, can justify a failure to comply with the maximum periods in the regulation. Conclusion In determining when participant contributions can reasonably be segregated from the general assets of any given contributing employer to a multiemployer defined contribution plan, it is the view of this Office that the time frames established in collective bargaining, employer participation and similar agreements must be taken into account to the extent such agreements represent the considered judgment of the plan’s trustees that such time frames reflect the appropriate balancing of the costs of transmitting, receiving and processing such contributions relative to the protections provided to participants and beneficiaries, provided that any such time frames do not extend beyond the maximum period prescribed in § 2510.3-102(b). As with other fiduciary duties, plan trustees must make such determinations prudently and solely in the interest of plans’ participants and beneficiaries.(8) Questions concerning the information contained in this Bulletin may be directed to Louis Campagna or David Lurie, at 202.693.8510. Footnotes
2003-03 Allocation of Expenses in a Defined Contribution PlanDepartment of Labor - Employee Benefits Security Administration May 19, 2003 Memorandum for: From: Subject: Allocation of Expenses in a Defined Contribution Plan Issue: What rules apply to how expenses are allocated among plan participants in a defined contribution pension plan? Background A number of questions have been raised in the course of investigations and otherwise concerning the propriety of certain expense allocation practices in defined contribution plans. This memorandum is intended to respond to the various requests for guidance from the National and Regional Offices on these issues.(1) The two principal issues raised with respect to the allocation of plan expenses in defined contribution plans involve the extent to which plan expenses are required to be allocated on a pro rata, rather than per capita, basis and the extent to which plan expenses may properly be charged to an individual participant, rather than plan participants as a whole. For purposes of discussing these issues, we assume first that the expenses at issue are proper plan expenses(2) and second that, with respect to the plan as a whole, the amount of the expenses at issue are reasonable with respect to the services to which they relate. Analysis ERISA contains no provisions specifically addressing how plan expenses may be allocated among participants and beneficiaries. The Act and implementing regulations, however, do address certain instances in which a plan may impose charges on particular participants and beneficiaries. For example, section 104(b)(4) provides that the plan administrator may impose a reasonable charge to cover the cost of furnishing copies of plan documents and instruments upon request of a participant or beneficiary.(3) Also, section 602 permits group health plans, subject to certain conditions, to require the payment of 102% of the applicable premium for any period of continuation coverage elected by an eligible participant or beneficiary. Further, the Department’s regulations under sections 404(c) and 408(b)(1) provide that reasonable expenses associated with a participant’s exercise of an option under the plan to direct investments or to take a participant loan may be separately charged to the account of the individual participant.(4) By contrast, regulations may limit the ability of a plan to charge a particular participant or beneficiary by requiring that information be furnished free of charge upon request of a participant or beneficiary.(5) Section 404(a)(1) generally provides, in relevant part, that fiduciaries shall discharge their duties with respect to a plan “solely in the interest of the participants and beneficiaries,” prudently (404(a)(1)(B)), and “in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of [Title I] . . . ” (404(a)(1)(D)). Plan fiduciaries, therefore, would be required to implement allocation of expense provisions set forth in the plan, unless such provisions otherwise violate Title I. Accordingly, plan sponsors and fiduciaries have considerable discretion in determining, as a matter of plan design or a matter of plan administration, how plan expenses will be allocated among participants and beneficiaries. Allocating Expenses Among All Participants - Pro rata v. Per capita In analyzing formulas for allocating expenses among all plan participants, the starting point is a review of the instruments governing the plan. Inasmuch as ERISA does not specifically address the allocation of expenses in defined contribution plans, a plan sponsor, as noted above, has considerable discretion in determining the method of expense allocation. Where the method of allocating expenses is determined by the plan sponsor (i.e., set forth in the plan documents), fiduciaries, consistent with section 404(a)(1)(D), will be required to follow the prescribed method of allocation. The fiduciary’s obligation in this regard does not change merely because the allocation method favors a class (or classes) of participants. When set forth in plan documents, the method of allocating expenses, in effect, becomes part of defining the benefit entitlements under the plan.(6) When the plan documents are silent or ambiguous on this issue, fiduciaries must select the method or methods for allocating plan expenses. A plan fiduciary must be prudent in the selection of the method of allocation. Prudence in such instances would, at a minimum, require a process by which the fiduciary weighs the competing interests of various classes of the plan’s participants and the effects of various allocation methods on those interests. In addition to a deliberative process, a fiduciary’s decision must satisfy the “solely in the interest of participants” standard. In this regard, a method of allocating expenses would not fail to be “solely in the interest of participants” merely because the selected method disfavors one class of participants, provided that a rational basis exists for the selected method.(7) On the other hand, if a method of allocation has no reasonable relationship to the services furnished or available to an individual account, a case might be made that the fiduciary breached his fiduciary duties to act prudently and “solely in the interest of participants” in selecting the allocation method. Further, in the case where the fiduciary is also a plan participant, the selection of the method of allocation may raise issues under the prohibited transaction provisions of section 406 of ERISA where the benefit to the fiduciary is more than merely incidental.(8) For example, if in anticipation of the plan fiduciary’s own divorce, the fiduciary who is also a plan participant decides to change the allocation of expenses related to a determination of whether a domestic relations order constitutes a “qualified” order from the account incurring the expense to the plan as a whole, such change in allocation by the fiduciary could constitute an act of self-dealing under section 406 of ERISA. While a pro rata method of allocating expenses among individual accounts (i.e., allocations made on the basis of assets in the individual account) would appear in most cases to be an equitable method of allocation of expenses among participants, it is not the only permissible method. A per capita method of allocating expenses among individual accounts (i.e., expenses charged equally to each account, without regard to assets in the individual account) may also provide a reasonable method of allocating certain fixed administrative expenses of the plan, such as recordkeeping, legal, auditing, annual reporting, claims processing and similar administrative expenses. On the other hand, where fees or charges to the plan are determined on the basis of account balances, such as investment management fees, a per capita method of allocating such expenses among all participants would appear arbitrary. With regard to services which provide investment advice to individual participants, a fiduciary may be able to justify the allocation of such expenses on either a pro rata or per capita basis and without regard to actual utilization of the services by particular individual accounts. Investment advice services might also be charged on a utilization basis, as discussed below, whereby the expense will be allocated to an individual account solely on the basis of a participant’s utilization of the service. Allocating Expenses to an Individual v. General Plan Expense In contrast to the preceding discussion, which focused on methods of allocating plan expenses among all participants, the following discussion focuses on the extent to which an expense may be allocated (or charged) solely to a particular participant’s individual account, rather than allocated among the accounts of all participants (e.g., on a pro rata or per capita basis). The Department provided some guidance on this issue in Advisory Opinion No. 94-32A. In analyzing the extent to which a plan may charge a participant (or alternate payee) for a determination as to whether a domestic relations order constitutes a “qualified” order, the Department concluded in AO 94-32A that imposing the costs of a QDRO determination solely on the participant (or alternate payee) seeking the QDRO, rather than the plan as a whole, would violate ERISA. Since the issuance of AO 94-32A, the Department has had an opportunity to review the Act and the opinion in the context of a broader array of plan expense allocation issues raised in the course of investigations. On the basis of this review, the Department has determined that neither the analyses or conclusions set forth in that opinion are legally compelled by the language of the statute. Except for the few instances in which ERISA specifically addresses the imposition of expenses on individual participants, the statute places few constraints on how expenses are allocated among plan participants. In this regard, the same principles applicable to determining the method of allocating expenses among all participants, as discussed above, apply to determining the permissibility of allocating specific expenses to the account of an individual participant, rather than the plan as a whole (i.e., among all participants).(9) Examples of Specific Plan Expenses Hardship Withdrawals. Some plans may provide for the allocation of administrative expenses attendant to hardship withdrawal distributions to the participant who seeks the withdrawal. ERISA does not specifically preclude the allocation of reasonable expenses attendant to hardship withdrawals to the account of the participant or beneficiary seeking the withdrawal. Calculation of Benefits Payable under Different Plan Distribution Options. Some defined contribution plans may charge participants for a calculation of the benefits payable under the different distribution options available under the plan (e.g., joint and survivor annuity, lump sum, single life annuity, etc.). ERISA does not specifically preclude the allocation of reasonable expenses attendant to the calculation of benefits payable under different distribution options available under the plan to the account of the participant or beneficiary seeking the information. Benefit Distributions. Some plans provide for the imposition of benefit distribution charges on the participant to whom the distribution is being made. These charges may be assessed for benefit distributions paid on a periodic basis (e.g., monthly check writing expenses). ERISA does not specifically preclude the allocation of reasonable expenses attendant to the distribution of benefits to the account of the participant or beneficiary seeking the distribution. Accounts of Separated Vested Participants. Some plans, with respect to which the plan sponsor generally pays the administrative expenses of the plan, provide for the assessment of administrative expenses against participants who have separated from employment. In general, it is permissible to charge the reasonable expenses of administering a plan to the individual accounts of the plan’s participants and beneficiaries. Nothing in Title I of ERISA limits the ability of a plan sponsor to pay only certain plan expenses or only expenses on behalf of certain plan participants. In the latter case, such payments by a plan sponsor on behalf of certain plan participants are equivalent to the plan sponsor providing an increased benefit to those employees on whose behalf the expenses are paid. Therefore, plans may charge vested separated participant accounts the account’s share (e.g., pro rata or per capita) of reasonable plan expenses, without regard to whether the accounts of active participants are charged such expenses and without regard to whether the vested separated participant was afforded the option of withdrawing the funds from his or her account or the option to roll the funds over to another plan or individual retirement account. Qualified Domestic Relations Orders (QDROs) and Qualified Medical Child Support Order (QMCSOs) Determinations. ERISA does not, in our view, preclude the allocation of reasonable expenses attendant to QDRO or QMCSO determinations to the account of the participant or beneficiary seeking the determination.(10) It should be noted that, pursuant to 29 CFR § 2520.102-3(l), plans are required to include in the Summary Plan Description a summary of any provisions that may result in the imposition of a fee or charge on a participant or beneficiary, or the individual account thereof, the payment of which is a condition to the receipt of benefits under the plan. In addition, § 2520.102-3(l) provides that Summary Plan Descriptions must include a statement identifying the circumstances that may result in the “ . . . offset, [or] reduction . . . of any benefits that a participant or beneficiary might otherwise reasonably expect the plan to provide on the basis of the description of benefits . . .” These requirements are intended to ensure that participants and beneficiaries are apprised of fees and charges that may affect their benefit entitlements. Questions concerning the information contained in this Bulletin may be directed to the Division of Fiduciary Interpretations, Office of Regulations and Interpretations, 202.693.8510. Footnotes
2004-01 Health Savings AccountsDepartment of Labor - Employee Benefits Security Administration April 7, 2004 Memorandum for: From: Subject: Health Saving Accounts Issue: Whether Health Savings Accounts established in connection with employment-based group health plans constitute "employee welfare benefit plans" for purposes of Title I of ERISA? Background Section 3(1) of the Employee Retirement Income Security Act of 1974 (ERISA) defines the term "employee welfare benefit plan" in relevant part to mean "any plan, fund, or program . . . established or maintained by an employer . . . to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness . . . ." Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173 (the Medicare Modernization Act), added section 223 to the Internal Revenue Code (Code) to permit eligible individuals to establish Health Savings Accounts (HSAs).(1) In general, HSAs are established to receive tax-favored contributions by or on behalf of eligible individuals, and amounts in an HSA may be accumulated over the years or distributed on a tax-free basis to pay or reimburse "qualified medical expenses." In order to establish an HSA, an eligible individual, among other conditions, must be covered under a High Deductible Health Plan (HDHP).(2) Contributions to an HSA established by an eligible individual who is an employee may be made by the employee, the employee's employer or both in a given year.(3) Amounts in an HSA may be rolled over to another HSA.(4) If an employer makes contributions to HSAs, the employer must make available a comparable contribution on behalf of all eligible employees with comparable coverage during the same period.(5) However, employers that make contributions to an employee's HSA are not responsible for determining whether HSAs are used for qualified medical expenses or for investing or managing amounts contributed to an employee's HSA.(6) It is our understanding that a number of employers that currently sponsor ERISA-covered group health plans may wish to add an HDHP option and offer programs designed to enable employees to establish HSAs to pay for medical expenses not covered by the HDHP. Questions have been raised about whether, and under what circumstances, HSAs established in connection with employment-based programs would constitute "employee welfare benefit plans" within the meaning of section 3(1) of ERISA. Analysis Congress, in enacting the Medicare Modernization Act, recognized that HSAs would be established in conjunction with employment-based health plans and specifically provided for employer contributions. However, neither the Medicare Modernization Act nor section 223 of the Code specifically address the application of Title I of ERISA to HSAs. Based on our review of Title I, and taking into account the provisions of the Code as amended by the Medicare Modernization Act, we believe that HSAs generally will not constitute employee welfare benefit plans established or maintained by an employer where employer involvement with the HSA is limited, whether or not the employee's HDHP is sponsored by an employer or obtained as individual coverage. Specifically, HSAs meeting the conditions of the safe harbor for group or group-type insurance programs at 29 C.F.R. § 2510.3-1(j)(1)-(4) would not be employee welfare benefit plans within the meaning of section 3(1) of ERISA.(7) Moreover, although contributions or payment of group insurance premiums by an employer would be a significant consideration in determining whether a group or group-type insurance arrangement is an employee welfare benefit plan under section 3(1), such contributions or payments are not necessarily significant in analyzing the status of HSAs under ERISA. As noted above, HSAs are personal health care savings vehicles rather than a form of group health insurance. For example, funds deposited in an HSA generally may not be used to pay health insurance premiums,(8) and the beneficiaries of the account have sole control and are exclusively responsible for expending the funds in compliance with the requirements of the Code. Because of these differences, we regard court precedent on the significance of employer contributions to group or group-type insurance arrangements as inapposite to HSAs. In the group health insurance context, the employer, whether by choosing an insurance policy or creating a self-funded program, typically establishes the type of benefits provided, the conditions for their receipt, and the manner in which claims will be adjudicated. In the context of HSAs, however, the employer may be doing little more than contributing funds to an account controlled solely by the employee. Accordingly, we would not find that employer contributions to HSAs give rise to an ERISA-covered plan where the establishment of the HSAs is completely voluntary on the part of the employees and the employer does not: (i) limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the Code; (ii) impose conditions on utilization of HSA funds beyond those permitted under the Code; (iii) make or influence the investment decisions with respect to funds contributed to an HSA; (iv) represent that the HSAs are an employee welfare benefit plan established or maintained by the employer; or (v) receive any payment or compensation in connection with an HSA. The mere fact that an employer imposes terms and conditions on contributions that would be required to satisfy tax requirements under the Code or limits the forwarding of contributions through its payroll system to a single HSA provider (or permits only a limited number of HSA providers to advertise or market their HSA products in the workplace) would not affect the above conclusions regarding HSAs funded with employer or employee contributions, unless the employer or the HSA provider restricts the ability of the employee to move funds to another HSA beyond those restrictions imposed by the Code. Conclusion HSAs generally will not constitute "employee welfare benefit plans" for purposes of the provisions of Title I of ERISA. Employer contributions to the HSA of an eligible individual will not result in Title I coverage where, as discussed above, employer involvement with the HSA is limited. Finding that an HSA established by an employee is not covered by ERISA does not, however, affect whether an HDHP sponsored by the employer is itself a group health plan subject to Title I. In fact, unless otherwise exempt from Title I (e.g., governmental plans, church plans) employer-sponsored HDHPs will be employee welfare benefit plans within the meaning of ERISA section 3(1) subject to Title I. Questions concerning this matter may be directed to Suzanne Adelman, Division of Coverage, Reporting and Disclosure at 202.693.8523. Footnotes
2004-02 Fiduciary Duties and Missing Participants in Terminated Defined Contribution PlansDepartment of Labor - Employee Benefits Security Administration September 30, 2004 Memorandum For: From: Subject: Fiduciary Duties and Missing Participants in Terminated Defined Contribution Plans Issue: What does a plan fiduciary need to do in order to fulfill its fiduciary obligations under ERISA with respect to: (1) locating a missing participant of a terminated defined contribution plan; and (2) distributing an account balance when efforts to communicate with a missing participant fail to secure a distribution election? Background All plan assets must be distributed as soon as administratively feasible after the date of a plan termination in order to effectively complete a plan termination under Internal Revenue Code requirements.(1) Prior to any distribution, the Code requires a plan administrator to contact all participants for affirmative directions regarding distribution of their account balances.(2) This notice requirement extends to all participants, regardless of their length of service or the size of their account balances, because all participants vest in their account balances upon termination of the plan.(3) In the context of terminated defined contribution plans, some participants may be unresponsive to written notices from plan administrators asking for direction regarding the distribution of their account balances: these participants are commonly referred to as missing participants.(4) As a result of participants’ unresponsiveness, plan administrators often are unable to effectively wind–up the plans’ financial affairs and are confronted with an array of issues related to their duties under the fiduciary responsibility provisions of ERISA to search for missing participants and distribute their benefits. The Department has previously issued guidance to fiduciaries of terminated defined contribution plans on the handling of certain missing participant issues. However, Field Offices have, in the course of their investigations, found that plan fiduciaries use a variety of methods in searching for missing participants and distributing account balances when a search proves unsuccessful. Additional guidance, therefore, has been requested concerning the obligations of plan fiduciaries that are confronted with missing participant issues in terminated defined contribution plans.(5) Analysis Consistent with the requirements of section 404(a) of ERISA, a fiduciary must act prudently and solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan. Also, under section 404(a)(1)(D) of ERISA, fiduciaries are required to act in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of Title I and IV. Section 402(b)(4) of ERISA provides that every employee benefit plan shall specify the basis on which payments are made to and from the plan. Section 403(a) of ERISA generally requires that the assets of a plan be held in trust by a trustee. In the case of plan terminations, fiduciaries must also ensure that the allocation of any previously unallocated funds is made in accordance with the provisions of section 403(d) of ERISA. Under Title I of ERISA, the decision to terminate a plan is generally viewed as a “settlor” decision rather than a fiduciary decision relating to the administration of the plan. However, the steps taken to implement this decision, including steps to locate missing participants, are governed by the fiduciary responsibility provisions of ERISA.(6) Further, in our view, while the distribution of the entire benefit to which a participant is entitled ends his or her status as a plan participant and the distributed assets cease to be plan assets under ERISA, a plan fiduciary’s choice of a distribution option is a fiduciary decision subject to the general fiduciary responsibility provisions of ERISA.(7) It is our view that a plan fiduciary must take certain steps in an effort to locate a missing participant or beneficiary before the plan fiduciary determines that the participant cannot be found and distributes his or her benefits in accordance with this Bulletin. These steps are identified below under the heading “Search Methods.” It also is our view that, in determining any additional steps that may be appropriate with regard to a particular participant, a plan fiduciary must consider the size of the participant’s account balance and the expenses involved in attempting to locate the missing participant. Accordingly, the specific steps that a plan fiduciary takes to locate a missing participant may vary depending on the facts and circumstances. This consideration of additional steps is discussed below under the heading “Other Search Options.” Reasonable expenses attendant to locating a missing participant may be charged to a participant’s account, provided that the amount of the expenses allocated to the participant’s account is reasonable and the method of allocation is consistent with the terms of the plan and the plan fiduciary’s duties under ERISA.(8) Whatever decisions are made in connection with locating of missing participants or the distribution of assets on their behalf, plan fiduciaries must be able to demonstrate compliance with ERISA’s fiduciary standards. Search Methods In the context of a defined contribution plan termination, one of the most important functions of the plan’s fiduciaries is to notify participants of the termination and of the plan’s intention to distribute benefits. In most instances, routine methods of delivering notice to participants, such as first class mail or electronic notification, will be adequate. In the event that such methods fail to obtain from the participant the information necessary for the distribution, or the plan fiduciary has reason to believe that a participant has failed to inform the plan of a change in address, plan fiduciaries need to take other steps to locate the participant or a beneficiary. In our view, some search methods involve such nominal expense and such potential for effectiveness that a plan fiduciary must always use them, regardless of the size of the participant’s account balance. A plan fiduciary cannot distribute a missing participant’s benefits in accordance with the distribution options discussed below unless each of these methods proves ineffective in locating the missing participant. However, a plan fiduciary is not obligated to take each of these steps if one or more of them are successful in locating the missing participant. These methods are: Use Certified Mail. Certified mail can be used to easily ascertain, at little cost, whether the participant can be located in order to distribute benefits. Check Related Plan Records. While the records of the terminated plan may not have current address information, it is possible that the employer or another plan of the employer, such as a group health plan, may have more up-to-date information with respect to a given participant or beneficiary. For this reason, plan fiduciaries of the terminated plan must ask both the employer and administrator(s) of related plans to search their records for a more current address for the missing participant. If there are privacy concerns, the plan fiduciary that is engaged in the search can request the employer or other plan fiduciary to contact or forward a letter on behalf of the terminated plan to the participant or beneficiary, requesting the participant or beneficiary to contact the plan fiduciary. Check With Designated Plan Beneficiary. In connection with a search of the terminated plan’s records or the records of related plans, plan fiduciaries must attempt to identify and contact any individual that the missing participant has designated as a beneficiary (e.g., spouse, children, etc.) for updated information concerning the location of the missing participant. Again, if there are privacy concerns, the plan fiduciary can request the designated beneficiary to contact or forward a letter on behalf of the terminated plan to the participant, requesting the participant or beneficiary to contact the plan fiduciary. Use A Letter-Forwarding Service. Both the Internal Revenue Service (IRS) and the Social Security Administration (SSA) offer letter-forwarding services. Plan fiduciaries must choose one service and use it in attempting to locate a missing participant or beneficiary. The IRS has published guidelines under which it will forward letters for third parties for certain “humane purposes,” including a qualified plan administrator’s attempt to locate and pay a benefit to a plan participant.(9) The SSA’s letter forwarding service may be used for similar purposes, and is described on the SSA’s Web site.(10) It is our understanding that to use either the IRS or SSA program, the plan fiduciary/requestor must submit a written request for letter forwarding to the agency, and must provide the missing participant’s social security number or certain other identifying information. Both the IRS and SSA will search their records for the most recent address of the missing participant and will forward a letter from the plan fiduciary/requestor to the missing participant if appropriate. In using these letter-forwarding services to notify a missing participant that he or she is entitled to a benefit, the plan fiduciary’s letter should provide contact information for claiming the benefit. This notice may also suggest a date by which the participant must respond, as neither the IRS nor the SSA will notify the plan fiduciary as to whether the participant was located. Other Search Options In addition to using the search methods discussed above, a plan fiduciary should consider the use of Internet search tools, commercial locator services, and credit reporting agencies to locate a missing participant. Depending on the facts and circumstances concerning a particular missing participant, it may be prudent for the plan fiduciary to use one or more of these other search options. If the cost of using these services will be charged to the missing participant’s account, plan fiduciaries will need to consider the size of the participant’s account balance in relation to the cost of the services when deciding whether the use of such services is appropriate. Distribution Options There will be circumstances when, despite their use of the search methods described above, plan fiduciaries will be unable to locate participants or otherwise obtain directions concerning the distribution of their benefits from terminated defined contribution plans. In these circumstances, plan fiduciaries will nonetheless have to consider distribution options in order to effectuate the termination of the plan.(11) We have set forth below the fiduciary considerations that are relevant to the various options available to plan fiduciaries in the context of missing participants of terminated defined contribution plans. Individual Retirement Plan Rollovers - In our view, plan fiduciaries must always consider distributing missing participant benefits into individual retirement plans (i.e., an individual retirement account or annuity).(12) Establishing an individual retirement plan is the preferred distribution option because it is more likely to preserve assets for retirement purposes than any of the other identified options. Distribution to an individual retirement plan preserves retirement assets because it results in a deferral of income tax consequences for missing participants. A distribution that qualifies as an eligible rollover distribution(13) from a qualified plan, which is handled by a trustee to trustee transfer into an individual retirement plan, will not be subject to immediate income taxation, the 20 percent mandatory income tax withholding requirement, or the 10 percent additional tax for premature distributions that may be required based on the participant’s age and related facts.(14) As we have noted in other contexts, the choice of an individual retirement plan also raises fiduciary issues as to the particular choice of an individual retirement plan trustee, custodian or issuer as well as the selection of an initial individual retirement plan investment to receive the distribution.(15) By regulation, the Department established a safe harbor for plan fiduciaries to satisfy their fiduciary responsibility under section 404(a) of ERISA when selecting individual retirement plan providers and initial investments in connection with the rollover of certain mandatory distributions to individual retirement plans.(16) In general, this regulation applies to distributions of $5,000 or less for separating participants who leave an employer's workforce without making an election to either receive a taxable cash distribution or directly roll over assets into an individual retirement plan or another qualified plan. In our view, the circumstances giving rise to relief under this safe harbor regulation are similar to those confronting fiduciaries of terminated defined contribution plans. Therefore, in the context of making distributions from terminated defined contribution plans on behalf of participants who are determined to be missing or otherwise fail to elect a method of distribution in connection with the termination, fiduciaries who choose investment products that are designed to preserve principal should, as an enforcement matter, be treated as satisfying their fiduciary duties in connection with such distributions, when the fiduciary complies with the relevant requirements of the automatic rollover safe harbor regulation, without regard to the amount involved in the rollover distribution.(17) Alternative Arrangements - If a plan fiduciary is unable to locate an individual retirement plan provider that is willing to accept a rollover distribution on behalf of a missing participant, plan fiduciaries may consider either establishing an interest-bearing federally insured bank account in the name of a missing participant or transferring missing participants’ account balances to state unclaimed property funds. In this regard, fiduciaries should be aware that transferring a participant’s benefits to either a bank account or state unclaimed property fund will subject the deposited amounts to income taxation, mandatory income tax withholding and a possible additional tax for premature distributions. Moreover, interest accrued would also be subject to income taxation. Plan fiduciaries should not use 100% income tax withholding as a means to distribute plan benefits to missing participants. Federally Insured Bank Accounts - Plan fiduciaries may consider establishing an interest bearing federally insured bank account in the name of a missing participant, provided the participant would have an unconditional right to withdraw funds from the account. In selecting a bank and accepting an initial interest rate, with or without a guarantee period, a plan fiduciary must give appropriate consideration to all available information relevant to such selection and interest rate, including associated bank charges. Escheat To State Unclaimed Property Funds - As an alternative, plan fiduciaries may also consider transferring missing participants’ account balances to state unclaimed property funds in the state of each participant’s last known residence or work location. We understand that some states accept such distributions on behalf of missing participants. We also understand that states often provide searchable Internet databases that list the names of property owners and, in some instances, award minimal interest on unclaimed property funds. In prior guidance, the Department concluded that, if a state unclaimed property statute were applied to require an ongoing plan to pay to the state amounts held by the plan on behalf of terminated employees, the application of that statute would be preempted by section 514(a) of ERISA.(18) However, we do not believe that the principles set forth in Advisory Opinion 94-41A, which dealt with a plan fiduciary’s duty to preserve plan assets held in trust for an ongoing plan, prevent a plan fiduciary from voluntarily deciding to escheat missing participants’ account balances under a state’s unclaimed property statute in order to complete the plan termination process. Additionally, we believe that a plan fiduciary’s transfer of a missing participant’s account balance from a terminated defined contribution plan to a state’s unclaimed property fund would constitute a plan distribution, which ends both the property owner’s status as a plan participant and the property’s status as plan assets under ERISA.(19) In deciding between distribution into a state unclaimed property fund and distribution into a federally insured bank account, we believe that a plan fiduciary should evaluate any interest accrual and fees associated with a bank account against the availability of the state unclaimed property fund’s searchable database that may facilitate the potential for recovery. In any event, transfer to state unclaimed property funds must comply with state law requirements. 100% Income Tax Withholding - We are aware that some plan fiduciaries believe that imposing 100% income tax withholding on missing participant benefits, in effect transferring the benefits to the IRS, is an acceptable means by which to deal with the benefits of missing participants. After reviewing this option with the staff of the Internal Revenue Service, we have concluded that the use of this option would not be in the interest of participants and beneficiaries and, therefore, would violate ERISA’s fiduciary requirements. Based on discussions with the IRS staff and our understanding of the IRS’s current data processing, the 100% withholding distribution option would not necessarily result in the withheld amounts being matched or applied to the missing participants’/taxpayers’ income tax liabilities resulting in a refund of the amount in excess of such tax liabilities.(20) This option, therefore, should not be used by plan fiduciaries as a means to distribute benefits to plan participants and beneficiaries. Miscellaneous Issues Fiduciaries have expressed concerns about legal impediments that might hinder the establishment of individual retirement plans or bank accounts on behalf of missing participants. These impediments include perceived conflicts with the customer identification and verification provisions of the USA PATRIOT Act (Act).(21) With regard to this problem, we note that Treasury staff, along with the staff of the other Federal functional regulators,(22) has issued helpful guidance for fiduciaries that are establishing an individual retirement plan or federally insured bank account in the name of a missing participant. This guidance was published in a set of questions and answers on the customer identification and verification provision (CIP) of the Act, “FAQs: Final CIP Rule,” on the regulators’ Web sites.(23) The Federal functional regulators advised the Department that they interpret the CIP requirements of section 326 of the Act and implementing regulations to require that banks and other financial institutions implement their CIP compliance program with respect to an account (including an individual retirement plan or federally insured bank account) established by an employee benefit plan in the name of a former participant (or beneficiary) of such plan, only at the time the former participant or beneficiary first contacts such institution to assert ownership or exercise control over the account. CIP compliance will not be required at the time an employee benefit plan establishes an account and transfers the funds to a bank or other financial institution for purposes of a distribution of benefits from the plan to a separated employee. With regard to the application of state laws, including those governing signature requirements and escheat, we note that such issues are beyond the Department’s jurisdiction. Conclusion Actions taken to implement the decision to terminate a plan, including the search for missing participants, and if search efforts fail, the selection of a distribution option for the benefits of missing participants, are governed by the fiduciary responsibility provisions of ERISA. In fulfilling their duties of prudence and loyalty to missing participants, we believe there are certain search methods which involve such nominal expense and potential for effectiveness that fiduciaries must always use them, regardless of the size of the account balance, as discussed in detail above. We also believe that these duties require that fiduciaries consider establishing individual retirement plans as the preferred method of distribution for the benefits of missing participants. In this regard, the selection of an individual retirement plan provider and the initial investment for an individual retirement plan also constitute fiduciary decisions. If plan fiduciaries are unable to locate an individual retirement plan provider that is willing to accept a rollover distribution, fiduciaries may consider distributing a missing participant’s benefits into a federally insured bank account or transferring a missing participant’s benefit to a state unclaimed property fund; the factors to be considered in choosing between these options are discussed more fully above. Questions concerning the information contained in this Bulletin may be directed to the Division of Fiduciary Interpretations, Office of Regulations and Interpretations, 202.693.8510. Footnotes
2004-03 Fiduciary Responsibilities of Directed TrusteesDepartment of Labor - Employee Benefits Security Administration December 17, 2004 Memorandum For: From: Subject: Fiduciary Responsibilities Of Directed Trustees Issue: In the context of publicly traded securities, what are the fiduciary responsibilities of a directed trustee? Background Many employee pension plans use directed trustees to carry out transactions according to instructions from a named fiduciary of the plan. During investigations of such transactions by the Department, difficult questions may arise regarding the scope of the directed trustee’s fiduciary duties. Recent court decisions, addressing this issue in the context of purchases and holdings of publicly traded employer securities in particular, have focused attention on the nature and scope of a directed trustee’s fiduciary duties. This bulletin provides general guidance to EBSA regional offices regarding the Department’s views on the responsibilities of directed trustees under ERISA, particularly with respect to directions involving employer securities. Fiduciary Status Of Directed Trustee Section 403(a) provides that a plan trustee “shall have exclusive authority and discretion to manage and control the assets of the plan.” Section 3(21)(A) provides that a person is a fiduciary with respect to a plan “to the extent . . . he . . . exercises any authority or control respecting management or disposition of its assets.” A plan trustee, therefore, will, by definition, always be a “fiduciary” under ERISA as result of its authority or control over plan assets. Not all trustees, however, have the same authority or discretion to manage or control the assets of a plan. In this regard, section 403(a) specifically recognizes that a trustee or trustees will have limited authority or discretion when: (1) the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee, in which case the trustees shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to this Act. While section 403(a)(1) does not remove a directed trustee from section 3(21)’s purview, it significantly limits such a trustee’s responsibilities as a plan fiduciary. As the district court in In re Enron Corp. Securities, Derivative & ERISA Litig., 284 F. Supp. 2d 511, 601 (S.D. Tex. 2003), recognized: At least some fiduciary status and duties of a directed trustee are preserved, even though the scope of its exclusive authority and discretion to manage and control the assets of the plan’ has been substantially constricted by the directing named fiduciary’s correspondingly broadened role . . . . The court in In re WorldCom, Inc. ERISA Litig., 263 F. Supp. 2d 745, 762 (S.D.N.Y. 2003) also noted that, while the directed trustee provision serves as a limiting principle, “section 403(a) does not . . . eliminate the fiduciary status or duties that normally adhere to a trustee with responsibility over ERISA assets.” See also FirsTier Bank, N.A. v. Zeller, 16 F.3d 907, 9110 (8th Cir.), cert. denied sub nom, Vercoe v. FirsTier Bank, N.A., 513 U.S. 871 (1994); Herman v. NationsBank Trust Co., 126 F.3d 1354, 1361-62, 1370 (11th Cir. 1997). The duties of a directed trustee under section 403(a)(1) are therefore significantly narrower than the duties generally ascribed to a discretionary trustee under common law trust principles.(1) Determining Whether A Direction Is "Proper" Under section 403(a)(1), a directed trustee is subject to proper directions of a named fiduciary. For purposes of section 403(a)(1), a direction is proper only if the direction is “made in accordance with the terms of the plan” and “not contrary to the Act [ERISA].” Accordingly, when a directed trustee knows or should know that a direction from a named fiduciary is not made in accordance with the terms of the plan or is contrary to ERISA, the directed trustee may not, consistent with its fiduciary responsibilities, follow the direction. In accordance with plan terms Under section 403(a)(1), a directed trustee may not follow a direction that the trustee knows or should know is inconsistent with the terms of the plan. In order to make such determinations, directed trustees necessarily have a duty to request and review all the documents and instruments governing the plan that are relevant to its duties as directed trustee. Accordingly, if a directed trustee either fails to request such documents or fails to review the documents furnished in response to its request and, as a result of such failure, follows a direction contrary to the terms of the plan, the directed trustee may be liable for following such direction because the directed trustee had a duty to request and review pertinent plan documents and, therefore, should have known that the direction was not in accordance with the terms of the plan. If a directed trustee follows an improper direction, as would be the case where the purchase of a particular stock at the direction of the plan’s named fiduciary is contrary to the plan’s investment policy, the directed trustee may be liable for a breach of its fiduciary duty to follow only proper directions. It is the view of the Department that a direction is consistent with the terms of a plan if the documents pursuant to which the plan is established and operated do not prohibit the direction. It is also the view of the Department that if, in the course of reviewing the propriety of a particular direction, a directed trustee determines that the terms of the relevant documents are ambiguous with respect to the permissibility of the direction, the directed trustee should obtain a clarification of the plan terms from the fiduciary responsible for interpreting such terms in order to ensure that the direction is proper. In this regard, the directed trustee may rely on the interpretation of such fiduciary. Not contrary to ERISA Even when a direction is consistent with the terms of the plan, the direction may nonetheless fail to be a proper direction because it is contrary to ERISA. Under section 403(a)(1), a directed trustee may not follow a direction that the trustee knows or should know is contrary to ERISA. For example, the directed trustee cannot follow a direction that the directed trustee knows or should know would require the trustee to engage in a transaction prohibited under section 406 or violate the prudence requirement of section 404(a)(1). The following discussion further clarifies the duties of a directed trustee in this area. Prohibited transaction determinations A directed trustee must follow processes that are designed to avoid prohibited transactions. A directed trustee could satisfy its obligation by obtaining appropriate written representations from the directing fiduciary that the plan maintains and follows procedures for identifying prohibited transactions and, if prohibited, identifying the individual or class exemption applicable to the transaction. A directed trustee may rely on the representations of the directing fiduciary unless the directed trustee knows that the representations are false. Prudence determinations The named fiduciary has primary responsibility for determining the prudence of a particular transaction, whether the transaction involves buying, selling or holding particular assets. Accordingly, as the courts and the Department have long recognized, the scope of a directed trustee’s responsibility is significantly limited. A directed trustee does not, in the view of the Department, have an independent obligation to determine the prudence of every transaction. The directed trustee does not have an obligation to duplicate or second-guess the work of the plan fiduciaries that have discretionary authority over the management of plan assets and does not have a direct obligation to determine the prudence of a transaction. See In re WorldCom ERISA Litig., 263 F. Supp. 2d at 761; Herman v. NationsBank Trust Co., 126 F.3d at 1361-62, 1371 (directed trustee does not have a direct obligation of prudence under ERISA section 404; its obligation is simply “to make sure” the “directions were proper, in accordance with the terms of the plan, and not contrary to ERISA”). Duty to act on non-public information The directed trustee’s obligation to question market transactions involving publicly traded stock on prudence grounds is quite limited. The primary circumstance in which such an obligation could arise is when the directed trustee possesses material non-public information regarding a security. If a directed trustee has material non-public information that is necessary for a prudent decision, the directed trustee, prior to following a direction that would be affected by such information, has a duty to inquire about the named fiduciary’s knowledge and consideration of the information with respect to the direction. For example, if a directed trustee has non-public information indicating that a company’s public financial statements contain material misrepresentations that significantly inflate the company’s earnings, the trustee could not simply follow a direction to purchase that company’s stock at an artificially inflated price. Generally, the possession of non-public information by one part of an organization will not be imputed to the organization as a whole (including personnel providing directed trustee services) where the organization maintains procedures designed to prevent the illegal disclosure of such information under securities, banking or other laws.(2) If, despite such procedures, the individuals responsible for the directed trustee services have actual knowledge of material non-public information, the directed trustee, prior to following a direction that would be affected by such information, has a duty, as indicated above, to inquire about the named fiduciary’s knowledge and consideration of the information with respect to the direction. Similarly, if the directed trustee performs an internal analysis in which it concludes that the company’s current financial statements are materially inaccurate, the directed trustee would have an obligation to disclose this analysis to the named fiduciary before making a determination whether to follow a direction to purchase the company’s security. The directed trustee would not have an obligation to disclose reports and analyses that are available to the public. Duty to act on public information Absent material non-public information, a directed trustee, given its limited fiduciary duties as determined by statute, will rarely have an obligation under ERISA to question the prudence of a direction to purchase publicly traded securities at the market price solely on the basis of publicly available information. Three considerations counsel in favor of this view: (1) markets generally are assumed to be efficient so that stock prices reflect publicly available information and known risks; (2) in the case of employer securities, the securities laws impose substantial obligations on the company, its officers, and its accountants to state their financial records accurately; and (3) ERISA section 404 requires the instructing fiduciary to adhere to a stringent standard of care.(3) Furthermore, because stock prices fluctuate as a matter of course, even a steep drop in a stock’s price would not, in and of itself, indicate that a named fiduciary’s direction to purchase or hold such stock is imprudent and, therefore, not a proper direction. In limited, extraordinary circumstances, where there are clear and compelling public indicators, as evidenced by an 8-K filing with the Securities and Exchange Commission (SEC), a bankruptcy filing or similar public indicator, that call into serious question a company’s viability as a going concern,(4) the directed trustee may have a duty not to follow the named fiduciary’s instruction without further inquiry.(5) For example, if a company filed for bankruptcy under circumstances which make it unlikely that there would be any distribution to equity-holders, or otherwise publicly stated that it was unlikely to survive the bankruptcy proceedings in a manner that would leave current equity-holders with any value, the directed trustee would have an obligation to question whether the named fiduciary has considered the prudence of the direction.(6) It also is the view of the Department that, in situations where a fiduciary who is a corporate employee gives an instruction to buy or hold stock of his or her company subsequent to the company, its officers or directors, being formally charged by state or Federal regulators with financial irregularities, the directed trustee, taking such facts into account, may need to decline to follow the direction or may need to conduct an independent assessment of the transaction in order to assure itself that the instruction is consistent with ERISA.(7) If, however, an independent fiduciary was appointed to manage the plan’s investment in company stock, a directed trustee could follow the proper directions of the independent fiduciary without having to conduct its own independent assessment of the transaction. Effect Of Questioning Directions On Fiduciary Status It is the view of the Department that the nature and scope of a directed trustee’s fiduciary responsibility, as discussed herein, does not change merely because the directed trustee, in carrying out its duties, raises questions concerning whether a direction is “proper” or declines to follow a direction that the directed trustee does not believe is a proper direction within the meaning of section 403(a)(1). For example, information provided to a named fiduciary concerning the prudence of a direction is not investment advice for purposes of ERISA §3(21)(A)(ii). Similarly, if a named fiduciary changes a direction in response to a directed trustee’s inquiries or information, the directed trustee’s fiduciary responsibility with respect to the changed direction remains governed by section 403(a)(1). The directed trustee does not become primarily responsible for the prudence of the direction. Co-Fiduciary Duties Under ERISA section 405(a)(1), a fiduciary is liable for the breach of another fiduciary if the fiduciary “participates knowingly” in the breach of the other fiduciary. Accordingly, if a directed trustee has knowledge of a fiduciary breach, the directed trustee may be liable as a co-fiduciary unless the directed trustee takes reasonable steps to remedy the breach. Thus, if the directed trustee knew that the named fiduciary was failing to discharge its obligations in accordance with ERISA’s requirements, it could not simply follow directions from the breaching fiduciary. Efforts to remedy a breach (or to prevent an imminent breach) may include reporting the breach to other fiduciaries of the plan or the Department of Labor. Conclusion Although its responsibilities are significantly limited under the statute, a directed trustee is a fiduciary under ERISA and must exercise its duties prudently and solely in the interest of the plan participants and beneficiaries. Particularly in the context of purchasing, selling or holding publicly traded securities on a generally recognized market, the trustee may follow the named fiduciary’s directions absent extraordinary circumstance as discussed above. Footnotes
2006-01 The Distribution to Plans of Settlement Proceeds Relating to Late Trading and Market TimingDepartment of Labor - Employee Benefits Security Administration Date: April 19, 2006 Memorandum For: From: Subject: The Distribution To Plans Of Settlement Proceeds Relating To Late Trading And Market-Timing Issue: What are the duties and responsibilities under ERISA of independent distribution consultants (IDCs), plan service-providers and fiduciaries with respect to the allocation and distribution of mutual fund settlement proceeds to plans and plan participants? Background Pursuant to Orders entered by the Securities and Exchange Commission (SEC) in several SEC enforcement matters alleging late trading and market timing activities, SEC distribution funds have been created for the purpose of making distributions to investors who suffered losses as a result of the conduct alleged in the matters. For each relevant mutual fund or series of funds, an independent distribution consultant (IDC) has been or will be appointed pursuant to SEC Orders to establish a plan to distribute the monies from the settlement fund to appropriate fund shareholders, subject to the SEC’s approval. A number of ERISA-covered plans will be entitled to settlement proceeds by virtue of their mutual fund investments. In some cases, plans will be the shareholder of record and receive their settlement distribution directly from the settlement fund. In other cases, an intermediary, e.g., a broker-dealer, underwriter, and/or record-keeper, will be the shareholder of record and plans, as well as non-plan investors, will receive their settlement distribution based on their interest in an “omnibus account” operated by the intermediary. When an intermediary is involved, we understand that distribution plans may provide an intermediary with the option of either receiving the settlement proceeds in a lump sum and making the requisite distribution of proceeds to the individual investors in its omnibus account or providing the IDC the necessary client and transaction records, based on which the IDC will make distributions to the individual investors. In other instances, we understand that distribution plans will provide that the IDC will allocate and distribute settlement proceeds directly to all beneficial shareholders, including plans. Under certain settlement agreements, mutual fund companies or settling parties may agree to pay the costs associated with allocations and distributions made by the IDCs with respect to omnibus account clients of intermediaries. However, in most instances it is anticipated that settlements will not provide for the costs associated with allocations among plans or, at the plan level, among plan participants and beneficiaries. A number of issues have been raised by IDCs, intermediaries, plan sponsors, plan-level fiduciaries, and others regarding the application of ERISA’s fiduciary responsibility rules to the distribution and allocation of these settlement proceeds. Among the issues raised are questions about whether and/or when settlement proceeds will become “plan assets” under ERISA and when an intermediary or other plan service-provider may become a “fiduciary” by virtue of its receipt and investment of such proceeds. Other issues concern the duties of a plan fiduciary with respect to the allocation of such proceeds among plans and participants and beneficiaries. This bulletin provides general guidance to EBSA regional offices regarding the Department’s views on the application of ERISA’s fiduciary rules to parties involved in the distribution and allocation of mutual fund settlement proceeds to employee benefit plans and among the participants and beneficiaries of such plans. Analysis Independent Distribution Consultants (IDCs) – Allocation among shareholders In light of the fact that some ERISA-covered employee benefit plans, as investors in the relevant mutual funds, will be entitled to a portion of the mutual fund settlement proceeds, questions have been raised as to whether an IDC, in developing and implementing a distribution plan, is subject to ERISA’s fiduciary rules. It is the view of the Department that the development and implementation of settlement fund distribution plans will not, in and of itself, cause an IDC to become a fiduciary under ERISA. Section 3(21) of ERISA defines a fiduciary as one who has or exercises discretionary authority or control in the administration or management of an employee benefit plan or exercises any authority or control respecting management or disposition of its assets. In determining whether particular funds constitute plan assets, the Department has issued regulations describing what constitutes plan assets with respect to a plan’s investment in other entities and with respect to participant contributions. See 29 C.F.R. § § 2510.3-101 and 2510.3-102. The Department also has indicated that the assets of an employee benefit plan generally are to be identified in other situations on the basis of “ordinary notions of property rights.” As discussed above, IDCs are appointed pursuant to SEC Orders to establish a plan to distribute the monies from the settlement fund to affected shareholders, and prior to implementation, distribution plans must be approved by the SEC. The IDC, in this capacity, has not been engaged to act on behalf of an employee benefit plan or plans and is not an agent of the plans. Moreover, we have been informed by the SEC that no mutual fund investor, including employee benefit plan investors, has an interest in or claims against settlement fund proceeds prior to their distribution to the affected shareholders. For these reasons, in our view, under the regulations and applying ordinary notions of property rights, settlement fund proceeds, in whole or in part, would not constitute plan assets prior to their distribution by an IDC to affected plan shareholders or intermediaries acting on their behalf. Accordingly, an IDC, in developing and implementing a distribution plan, would not be exercising any authority or control in the administration or management of an employee benefit plan or its assets. Therefore, the development and implementation of settlement fund distribution plans will not, in and of itself, cause an IDC to become a fiduciary under ERISA. This conclusion would not be affected by the fact that the IDC, as part of its distribution plan, applied a de minimis threshold for determining which shareholders, including plans, received distributions, or imposed conditions on the receipt of a distribution, such as conditioning receipt on the use of a particular allocation methodology at the participant-level or furnishing a report to the IDC on how the distributed funds were allocated among participants. Intermediaries – Allocation among omnibus account clients Unlike IDCs acting under the auspices of the SEC, intermediaries, in receiving settlement fund proceeds, will be acting on behalf of their omnibus account clients, including employee benefit plan clients. The omnibus account clients, therefore, will have a beneficial interest in the settlement fund proceeds received by the intermediary, without regard to whether determinations have been made as to the specific entitlement of each omnibus account client. Accordingly, applying ordinary notions of property rights, settlement fund proceeds received by intermediaries on behalf of employee benefit plan clients will constitute plan assets and, as such, will be required to be held in trust and managed in accordance with the fiduciary responsibility provisions of Part 4 of Title I of ERISA. Without regard to whether an intermediary was a fiduciary with respect to an employee benefit plan prior to receiving a distribution of settlement proceeds, an intermediary receiving proceeds on behalf of an employee benefit plan would, in the view of the Department, be assuming fiduciary responsibilities upon receipt of such proceeds as a result of having discretionary authority or control respecting administration or management of an ERISA plan or exercising any authority or control respecting management or disposition of plan assets. The Department notes that the decision by an intermediary, who is not otherwise a fiduciary, to decline to receive a settlement fund distribution on behalf of its omnibus account clients would not, in and of itself, be viewed as a fiduciary decision. The intermediary’s decision or related actions, however, may nonetheless give rise to fiduciary liability if such actions adversely affect the plan’s right to receive proceeds in accordance with the IDC’s plan of distribution. As noted above, an intermediary in receipt of settlement fund proceeds will be required to hold the proceeds in trust and manage those proceeds in accordance with the fiduciary responsibility provisions of Part 4 of Title I. Among other things, an intermediary in discharging its responsibilities to act prudently and solely in the interest of plan participants and beneficiaries, in accordance with section 404(a) of ERISA, may have to invest the proceeds pending the development and/or implementation of a plan for distributing the proceeds to individual omnibus account clients. In such instances, the intermediary may also be responsible for developing and/or implementing a plan for allocating settlement proceeds among individual omnibus account clients. If an IDC, as part of its distribution plan approved by the SEC, makes available to an intermediary or requires, as a condition to the distribution, that the intermediary utilize a particular methodology for allocating settlement fund proceeds among individual omnibus account clients, the Department will, as an enforcement matter, view the application of such methodology to the allocation of settlement fund proceeds among individual omnibus account clients as satisfying the requirements of section 404(a) with respect to the methodology for allocating assets to employee benefit plans. We note that while the use of a particular allocation methodology may be considered prudent, fiduciaries also need to ensure that implementation of the methodology (e.g., making allocations and distributions in accordance with such methodology) is carried out in a prudent manner. In some instances, the intermediary will be responsible both for developing and implementing the plan for allocating proceeds among its omnibus account clients. As fiduciaries, intermediaries must be prudent in the selection of the method of allocating the proceeds among its clients in an omnibus account, including plans. Prudence in such instances would, at a minimum, require a process by which the fiduciary chooses a methodology where the proceeds of the settlement would be allocated, where possible, to the affected clients in relation to the impact the late trading and market timing activities may have had on the particular plan. However, prudence would also require a process by which the fiduciary weighs the costs and ultimate benefit to the clients associated with achieving that goal. For example, there may be instances where the cost of allocating an amount to a particular plan may exceed the projected amount of the proceeds with respect to which the plan might be entitled under a prudent methodology. In such instances (i.e., where the cost to the plan is projected to exceed the benefit to the plan), an allocation plan would not be considered imprudent merely because it included an objective formula pursuant to which amounts otherwise allocable to a plan are forfeited and reallocated among other omnibus account clients, provided that any such formula applies to all omnibus account clients, not just employee benefit plans, and does not permit the exercise of discretion by the intermediary. Further, it is our view that an allocation plan would not fail to be “solely in the interest of participants,” for purposes of section 404(a)(1), merely because the allocation methodology does not result in an exact reflection of transactional activity of the clients, provided such method is reasonable, fair and objective. For example, if a fiduciary determines that it would be more cost-effective to do so, it may allocate the proceeds among clients in an omnibus account according to the average share or dollar balance of the clients’ investment in the mutual fund during the relevant period. In some instances, the services rendered by intermediaries in connection with the receipt, allocation and/or distribution of settlement fund proceeds may involve services or compensation not contemplated in the service provider agreement between the employee benefit plan(s) and the intermediary. While an intermediary may charge plans for any direct expenses incurred in connection with receipt, allocation and/or distribution of settlement fund proceeds, an intermediary, as a plan fiduciary, cannot compensate itself from plan assets beyond direct expenses without violating the prohibited transaction rule of section 406 of ERISA. If the receipt, allocation and/or distribution services of the intermediary, and compensation for such services, are carried out in accordance with the directions and approval of appropriate plan fiduciaries, the intermediary may be able to avoid fiduciary status and issues relating to self-dealing under ERISA. However, determinations as to whether approval by a plan fiduciary has occurred would be factual in nature and would involve considerations such as language in relevant service contracts or whether the intermediary has disclosed to its employee benefit plan clients sufficient information concerning its proposed administration of the settlement proceeds so that the plan client reasonably can approve the arrangement based upon its understanding of the arrangement and related expenses. In some instances, an intermediary may receive settlement proceeds with respect to plans that have, since the event leading to the settlement, hired a new record keeper or intermediary for investments made by the plan. In such instances, the intermediary in receipt of the proceeds would still be considered a fiduciary with respect to plan assets in its possession and would be expected to transfer the assets to the plan’s new record keeper or to an appropriate fiduciary of the plan. An intermediary may also receive proceeds on behalf of plans that have terminated. In such instances, an intermediary should make reasonable efforts to deliver such assets to a responsible plan fiduciary (most likely, the plan sponsor) for distribution to plan participants or other appropriate disposition. If the intermediary is unable to locate a responsible plan fiduciary after a reasonable and diligent search, the intermediary may reallocate such proceeds among its other clients. Under no circumstances may an intermediary retain such assets for its own use. Plan Fiduciary – Allocation among participants and beneficiaries The following discussion focuses on the obligations of the plan fiduciary in allocating settlement fund proceeds among the plan’s participants and beneficiaries. For purposes of this discussion, the fiduciary might be the plan sponsor, intermediary or other person charged with allocating the proceeds among participants and beneficiaries. Similar to the allocation of settlement fund proceeds among plans, if an IDC, as part of its distribution plan approved by the SEC, requires, as a condition to the distribution, that the fiduciary utilize a particular methodology for allocating settlement fund proceeds among plan participants and beneficiaries, the Department will, as an enforcement matter, view the application of such methodology to the allocation of proceeds among participants and beneficiaries as satisfying the requirements of section 404(a) with respect to the methodology for allocating assets to participants and beneficiaries. If an IDC’s distribution plan provides, but does not require the use of, a methodology for allocating proceeds among plan participants and beneficiaries, the Department also will, as an enforcement matter, view the use of such methodology as satisfying the requirements of section 404(a)(1)(A) and (B) of ERISA with respect to a methodology for allocating assets to participants and beneficiaries. As noted above, while the use of a particular allocation methodology may be treated as prudent, fiduciaries also need to ensure that implementation of the IDC allocation methodology (e.g., making allocations to participants and beneficiaries in accordance with the methodology) is carried out in a prudent manner. In the absence of guidance in the IDC’s distribution plan with respect to allocations to a plan’s participants and beneficiaries, fiduciaries must select a method or methods for allocating proceeds. In this regard, a plan fiduciary must be prudent in the selection of a method of allocating settlement proceeds among plan participants. Prudence in such instances, at a minimum, would require a process by which the fiduciary chooses a methodology where the proceeds of the settlement would be allocated, where possible, to the affected participants in relation to the impact the market timing and late trading activities may have had on the particular account. However, prudence would also require a process by which the fiduciary weighs the costs to the plan or the participant accounts and ultimate benefit to the plan or the participants associated with achieving that goal. In addition, a fiduciary’s decision must satisfy the “solely in the interest of participants” standard of section 404(a)(1) of ERISA. In this regard, a method of allocation would not fail to be “solely in the interest of participants” merely because the selected method may be seen as disadvantaging some affected participants or groups of participants. In deciding on an allocation method, the plan fiduciary may properly weigh the competing interests of various participants or classes of plan participants (e.g., affected versus current participants) and the effects of the allocation method on those participants provided a rational basis exists for the selected method and such method is reasonable, fair and objective. For example, if a fiduciary determines that plan records are insufficient to reasonably determine the extent to which participants invested in mutual funds during the relevant period should be compensated, the fiduciary may properly decide to allocate the proceeds to current participants invested in the mutual fund based upon a reasonable, fair and objective allocation method. Similarly, if a plan fiduciary determines that the cost to allocate the proceeds among participants whose accounts were invested in the mutual fund during the entirety of the relevant period approximates the amount of the proceeds, the fiduciary may properly decide to allocate the proceeds to current participants invested in the mutual fund based upon a reasonable, fair and objective allocation method. As plan assets, the proceeds of the settlement may not be used to benefit employers, fiduciaries or other parties in interest with respect to the plan. Sections 403(c) and 406 of ERISA. Such proceeds should not be used to offset an employer’s future contributions to the plan, unless such use is permissible under the terms of the plan and would not violate applicable provisions of the Internal Revenue Code (e.g., such as when amounts involved would be considered “forfeitures” under the terms of the plan). However, we believe that a plan fiduciary, consistent with its obligations under sections 404 and 406, may reasonably conclude that certain participant-level allocations that are not “cost-effective” (e.g., allocations to participant accounts of de minimis amounts) may instead be used for other permissible plan purposes, such as the payment of reasonable expenses of administering the plan. It is the view of the Department that compliance with ERISA’s fiduciary rules generally will require that a fiduciary accept a distribution of settlement proceeds. The Department recognizes, however, that in rare instances the cost attendant to the receipt and distribution of such proceeds may exceed the value of such proceeds to the plan’s participants. In such instances, and provided that there is no other permissible use for such proceeds by the plan (e.g., payment of plan administrative expenses), it might be appropriate for a plan fiduciary to not accept the settlement distribution. Conclusion SEC settlement fund proceeds resulting from market timing and late trading activities will not be considered “plan assets” until distributed from the settlement fund. A party will be a fiduciary to the extent it exercises any authority or control over such plan assets following distribution by an IDC. Settlement fund proceeds will upon distribution to a plan or an intermediary constitute plan assets and, therefore, will be required to be held in trust and managed in accordance with ERISA’s fiduciary responsibility rules. In general, as an enforcement matter, plan fiduciaries and intermediaries will be considered to satisfy their fiduciary duty to prudently select a method for allocating settlement proceeds if they utilize an allocation methodology provided or required by an IDC in a distribution plan approved by the SEC. While plan fiduciaries generally have flexibility in designing a methodology for allocating settlement fund proceeds among the plan’s participants and beneficiaries, plan fiduciaries must ensure that the selected methodology does not otherwise violate the prudence and “solely in the interest” requirements of section 404(a). Finally, plan fiduciaries should document appropriately the plan’s receipt and use of such settlement proceeds and work closely with their record-keepers and other service-providers in completing the process. Questions concerning the information contained in this Bulletin may be directed to the Division of Fiduciary Interpretations, Office of Regulations and Interpretations, 202.693.8510. Footnotes
2006-02 Health Savings Accounts - Q&AsDepartment of Labor - Employee Benefits Security Administration Date: October 27, 2006 Memorandum For: From: Subject: Health Savings Accounts - ERISA Q&As Background In general, a Health Savings Account (HSA) is an account established pursuant to section 223 of the Internal Revenue Code (Code) to pay or reimburse the qualified medical expenses of eligible individuals. Although the requirements for tax qualified HSAs are found in the Code, questions regarding the application of the Employee Retirement Income Security Act of 1974 (ERISA) to HSAs arise because employers may establish and contribute to an employee's HSA. On April 7, 2004, the Department of Labor's Employee Benefits Security Administration issued Field Assistance Bulletin (FAB) 2004-01 addressing the status of HSAs under ERISA. That guidance explained that HSAs generally will not constitute "employee welfare benefit plans" covered by Title I of ERISA where employer involvement with the HSA is limited. In FAB 2004-01, the Department specifically indicated that employer contributions to HSAs would not give rise to an ERISA-covered plan where the establishment of the HSA is completely voluntary on the part of the employees and the employer does not: limit the ability of eligible individuals to move their funds to another HSA or impose conditions on utilization of HSA funds beyond those permitted under the Code; make or influence the investment decisions with respect to funds contributed to an HSA; represent that the HSA is an employee welfare benefit plan established or maintained by the employer; or receive any payment or compensation in connection with an HSA. Since the issuance of FAB 2004-01, the Department has received a number of recurring questions about the guidance and the evolving practices regarding the offering of HSAs. The following provides further guidance on many of the frequently asked questions raised with the Department. Questions And Answers In the absence of an employee's affirmative consent, may an employer open an HSA for an employee and deposit employer funds into the HSA without violating the condition in the FAB that requires that the establishment of an HSA by an employee be "completely voluntary"? Yes. The intended purpose of the "completely voluntary" condition in FAB 2004-01 is to ensure that any contributions an employee makes to an HSA, including salary reduction amounts, will be voluntary. HSA accountholders have sole control and are exclusively responsible for expending HSA funds and generally may move the funds to another HSA or otherwise withdraw the funds. The fact that an employer unilaterally opens an HSA for an employee and deposits employer funds into the HSA does not divest the HSA accountholder of this control and responsibility and, therefore, would not give rise to an ERISA-covered plan so long as the conditions described in FAB 2004-01 are met. -------------------------------------------------------------------------------- If an employer maintains a high deductible health plan (HDHP) for its employees, can the employer limit the HSA providers that it allows to market their HSA products in the workplace or select a single HSA provider to which it will forward contributions without making the HSA part of the employer's ERISA-covered group health plan? Yes. As stated in FAB 2004-01, an employer may offer an HSA to its employees without establishing an ERISA-covered plan in one of two ways. The employer may rely on the group-type insurance safe harbor in 29 C.F.R. § 2510.3-1(j), in which case the employer cannot make contributions to the HSA, or it may rely on the separate conditions outlined in FAB 2004-01, in which case the employer may or may not elect to make employer contributions to the HSA. If the employer relies on the group-type insurance safe harbor in 29 C.F.R. § 2510.3-1(j), it cannot "endorse" the HSA provider. In the Department's view, an employer would not be considered to "endorse" an HSA within the meaning of the regulation merely by limiting the HSA providers that it allows to market their HSA products in the workplace or selecting a single HSA provider to which it will forward contributions. Employers may also provide employees general information on the advisability of using an HSA in conjunction with the HDHP without "endorsing" the program. See generally Interpretive Bulletin 99-1, 29 C.F.R. § 2509.99-1. The separate conditions in FAB 2004-01, though including completely voluntary employee participation and employer neutrality in not representing that the HSA is an employee welfare benefit plan established or maintained by the employer, do not include the group-type insurance safe harbor's prohibition on employer "endorsement." As explained in FAB 2004-01, an employer could limit the HSA providers that it allows to market their HSA products in the workplace or select a single HSA provider to which it will forward contributions and still satisfy the conditions outlined in the FAB without converting the HSA into an ERISA-covered plan. -------------------------------------------------------------------------------- Would an employer be viewed as "making or influencing" the HSA investment decisions of employees, within the meaning of the FAB, merely because the employer selects an HSA provider that offers some or all of the investment options made available to the employees in their 401(k) plan? No. The mere fact that an employer selects an HSA provider to which it will forward contributions that offers a limited selection of investment options or investment options that replicate the investment options available to employees under their 401(k) plan would not, in the view of the Department, constitute the making or influencing of an employee's investment decisions giving rise to an ERISA-covered plan, so long as employees are afforded a reasonable choice of investment options and employees are not limited in moving their funds to another HSA. The selection of a single HSA provider that offers a single investment option would not, in the view the Department, afford employees a reasonable choice of investment options. -------------------------------------------------------------------------------- If contributions to an HSA are made through a cafeteria plan, would the savings that benefit the employer from non-payment of FICA and FUTA taxes on those contributions be considered "payment or compensation received in connection with an HSA" that would subject the HSA to Title I coverage? No. The Department does not view an employer's non-payment of FICA and FUTA taxes on amounts contributed to an HSA as "payment or compensation" for purposes of the guidance issued in FAB 2004-01. -------------------------------------------------------------------------------- Can an employer pay the fees associated with the HSA that the employee would normally be expected or required to pay without causing the HSA to become an ERISA-covered plan? Yes. As stated in the FAB, the mere fact that an employer contributes to an HSA does not result in the HSA being an ERISA-covered plan. Therefore, the Department does not believe that an employer paying fees associated with an HSA that the employee would otherwise be required to pay would make that HSA an ERISA-covered plan. -------------------------------------------------------------------------------- May an HSA vendor offer an HSA product it offers to the public to its own employees without the HSAs being considered employee benefit plans covered by ERISA? Yes. Offering HSA products that the employer offers to the public in the regular course of business would not mean the HSA provider established or is maintaining the HSA as an employer to provide benefits to its employees. -------------------------------------------------------------------------------- If the employer limits the number of HSA vendors to which it will forward contributions, may the employer receive a discount on another product from one of the selected HSA vendors? No. In the Department's view, receiving a discount on another product from an HSA vendor selected by the employer would constitute the employer receiving a "payment" or "compensation" in connection with an HSA. In the Department's view, the arrangement would also give rise to fiduciary and prohibited transaction issues. -------------------------------------------------------------------------------- Are HSAs subject to the prohibited transaction provisions of section 4975 of the Internal Revenue Code? Yes. Although the Department believes that HSAs meeting the conditions of FAB 2004-01 generally will not be ERISA-covered plans, the Medicare Modernization Act specifically provided that HSAs will be subject to the prohibited transaction provisions in section 4975 of the Code. In that regard, the Department's plan asset regulation at 29 C.F.R. § 2510.3-102 states, in relevant part, that "[f]or purposes of [certain specified provisions of ERISA] and section 4975 of the Internal Revenue Code only . . . the assets of the plan include amounts . . . that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his 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." (Emphasis added). As a result, employers who fail to transmit promptly participants' HSA contributions may violate the prohibited transaction provisions of section 4975 of the Code. See Code § 4975(c)(1)(D) (prohibited transactions include the "transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan"). -------------------------------------------------------------------------------- Do the class prohibited transaction exemptions for owners of individual retirement accounts (IRAs) apply to accountholders of HSAs? No. The class exemptions issued by the Department for products and services offered owners of IRAs, PTE 97-11, PTE 93-33, PTE 93-1, do not apply to HSA accountholders. -------------------------------------------------------------------------------- Is it a prohibited transaction for an HSA provider to offer a cash incentive for establishing an HSA with that provider? No, if the provider deposits the incentive into the HSA. The Department stated in Advisory Opinion 2004-09A that, in certain situations, an HSA provider would not violate the prohibited transaction provisions under Code section 4975(c) or ERISA section 406 where the HSA provider offers an incentive to individuals for establishing an HSA with that provider by depositing cash directly into the individual's HSA. A cash contribution to an HSA generally would not be considered a "sale or exchange of property" or "a transfer of plan assets" for purposes of the prohibited transaction provisions of the Code. Because the cash contribution goes to the HSA and not the HSA account holder, the HSA's receipt of the cash contribution also would not be considered an act of self dealing on the part of the HSA account holder nor a receipt by the HSA account holder in his or her individual capacity of any consideration from a party dealing with the HSA. -------------------------------------------------------------------------------- May an HSA vendor provide a line of credit for HSA expenses to an HSA accountholder choosing its HSA? The Internal Revenue Service has issued guidance permitting eligible individuals to use debit, credit, or stored-value cards to receive distributions from an HSA for qualified medical expenses. See IRS Notice 2004-2, Q&A 37. Subsequent guidance by the Service explains that, under section 223(e)(2) of the Code, account beneficiaries, HSA trustees, and HSA custodians may not enter into certain "prohibited transactions" with an HSA. See IRS Notice 2004-50, Q&A 67, 68. For example, an account beneficiary may not borrow or pledge the assets of the HSA or receive a benefit in his or her own individual capacity as a result of opening or maintaining an HSA because such a transaction would constitute a prohibited transfer to or use of the HSA assets by or for the benefit of the account beneficiary. See Advisory Opinion 89-12A. Whether a credit card arrangement between a vendor and owner of an HSA results in a prohibited transaction would depend on specific facts and circumstances. A prohibited transaction would not result merely from an HSA accountholder directing the payment of HSA funds to the credit line vendor to reimburse the vendor for HSA expenses paid with a credit card. 2006-03 Periodic Benefit Statements - Pension Protection Act of 2006Department of Labor - Employee Benefits Security Administration Date: December 20, 2006 Memorandum For: From: Subject: Periodic Pension Benefit Statements - Pension Protection Act of 2006 Background Section 105 of the Employee Retirement Income Security Act (ERISA) sets forth the requirements applicable to the furnishing of pension benefit statements to plan participants and beneficiaries. Section 508(a) of the Pension Protection Act of 2006 (PPA)(1) amended section 105, making a number of significant changes to the pension benefit statement requirements for both individual account plans and defined benefit plans. Among other things, the amendments to section 105 establish an affirmative obligation to automatically furnish pension benefit statements – at least once each quarter, in the case of individual account plans that permit participants to direct their investments; at least once each year, in the case of individual account plans that do not permit participants to direct their investments; and at least once every three years in the case of defined benefit plans. The amendments also increase the amount of information required to be contained in pension benefit statements for both individual account and defined benefit plans. The amendments to section 105 are generally applicable to plan years beginning after December 31, 2006, with special rules for plans maintained pursuant to collective bargaining agreements.(2) Section 508(b) of the PPA requires the Department to develop one or more model pension benefit statements within one year of the date of enactment of the PPA (i.e., by August 18, 2007). Since the enactment of the PPA, representatives of plan sponsors, service providers and others in the employee benefits community have raised a number of interpretive and compliance issues concerning the new pension benefit statement provisions. In particular, concerns have been expressed about the imminent effective date, the absence of guidance, and the cost and burdens attendant to pension benefit statement compliance efforts prior to the adoption of pension benefit statement regulations and the issuance of model pension benefit statements by the Department. In recognition of the foregoing concerns, including the fact that major changes in what, how, and when pension benefit statement information is furnished to participants and beneficiaries may, in the absence of regulatory guidance from the Department, result in plan sponsors, plans, or participants and beneficiaries (in the case of individual account plans) incurring excessive or unnecessary compliance costs, the Department is providing general guidance in this Bulletin for EBSA’s national and regional offices, as well as plan sponsors and administrators, concerning good faith compliance with the pension benefit statement provisions pending the issuance of regulations. Good Faith Compliance The Department has not yet issued regulations or other guidance concerning compliance with the pension benefit statement provisions of section 105 of ERISA, as amended by section 508(a) of the PPA. Until such regulations or guidance is issued, the Department will, as an enforcement matter, treat a plan administrator as satisfying the requirements of section 105 if the administrator has acted in good faith with a reasonable interpretation of those requirements. This Bulletin provides the Department’s views as to what constitutes good faith compliance with certain requirements of section 105. Issues 1. Form of furnishing statements. In the case of individual account plans that provide for participant direction of investments, to what extent can the benefit statement requirements be satisfied by using multiple documents or sources for the required information? It appears that, in the case of individual account plans that provide for participant direction, the information required to be included in pension benefit statements will, in many instances, involve multiple service providers, each of whom is a source for some, but not all, of the required information. For example, the plan administrator may be the source for information on vesting, whereas the plan’s recordkeeper or brokerage firm may be the source for investment-related account information. We understand that, in the short term, compiling all the required information for disclosure in a single document may be impractical for plans. Pending the issuance of further guidance, it is the view of the Department that good faith compliance with the pension benefit statement provisions does not preclude the use of multiple documents or sources for benefit statement information, provided that participants and beneficiaries have been furnished notification that explains how and when the information required by section 105 will be furnished or made available to participants and beneficiaries. Such notification should be written in a manner calculated to be understood by the average plan participant, furnished in any manner that a pension benefit statement could be furnished under this Bulletin (see issue two, below), and furnished in advance of the date on which a plan is required to furnish the first pension benefit statement pursuant to section 105(a)(1)(A)(i) of ERISA. 2. Manner of furnishing statements. To what extent can the pension benefit statement requirements be satisfied using electronic media? Section 105(a)(2)(A)(iv) provides that a pension benefit statement may be delivered in written, electronic, or other appropriate form to the extent such form is reasonably accessible to the participant or beneficiary. In the Technical Explanation of the PPA, prepared by the staff of the Joint Committee on Taxation, the Committee explains, by way of example, that regulations relating to the furnishing of pension benefit statements, “could permit current benefit statements to be provided on a continuous basis through a secure plan web site for a participant or beneficiary who has access to the web site.”(3) With regard to the use of electronic media generally, the Department has issued a regulation, at 29 C.F.R. § 2520.104b-1(c), setting forth conditions under which a plan administrator will be deemed to satisfy the requirement, in section 2520.104b-1(b), that certain disclosures be furnished using “measures reasonably calculated to ensure actual receipt of the material.” While the furnishing of the required pension benefit statement information in accordance with the safe harbor prescribed in paragraph (c) of section 2520.104b-1 would constitute good faith compliance with section 105, the Department notes that such manner of furnishing is not the exclusive means by which plan administrators could, in the absence of guidance to the contrary, satisfy their obligation to furnish pension benefit statement information. In this regard, we note that the Department of the Treasury and Internal Revenue Service recently issued guidance, at 26 C.F.R. § 1.401(a)-21,(4) relating to the use of electronic media to provide certain notices and documents required to be furnished to participants by retirement plans under the Internal Revenue Code. For purposes of section 105 of ERISA, the Department, pending further guidance and a review of the provisions of section 2520.104b-1(c), will view the furnishing of pension benefit statements in accordance with the provisions of section 1.401(a)-21, as good faith compliance with the requirement to furnish pension benefit statements to participants and beneficiaries. With regard to pension plans that provide participants continuous access to benefit statement information through one or more secure web sites, the Department will view the availability of pension benefit statement information through such media as good faith compliance with the requirement to furnish benefit statement information, provided that participants and beneficiaries have been furnished notification that explains the availability of the required pension benefit statement information and how such information can be accessed by the participants and beneficiaries In addition, the notification must apprise participants and beneficiaries of their right to request and obtain, free of charge, a paper version of the pension benefit statement information required under section 105. Such notification should be written in a manner calculated to be understood by the average plan participant, furnished in any manner that a pension benefit statement could be furnished under this Bulletin, and furnished both in advance of the date on which a plan is required to furnish the first pension benefit statement pursuant to section 105(a)(1)(A)(i) and (ii) of ERISA and annually thereafter. 3. Dates for furnishing statements. Because the new pension benefit statement provisions are applicable as of the first plan year beginning after December 31, 2006, what is the earliest date on which non-collectively bargained pension plans will be required to automatically furnish benefit statements that comply with the new provisions? With regard to individual account plans that permit participants and beneficiaries to direct the investment of assets in their account, section 105(a)(1)(A)(i) requires that a pension benefit statement be furnished at least once each calendar quarter. For calendar year plans subject to this provision, the first pension benefit statement would be required for the quarter ending March 31, 2007. If a plan operated on a fiscal year basis, with the first plan year (after December 31, 2006) beginning on July 1, 2007, the first pension benefit statement required to comply with the new requirements would be required to be furnished for the quarter ending September 30, 2007. Plans that do not provide participants or beneficiaries a right to direct their investments are required, pursuant to section 105(a)(1)(A)(ii), to furnish pension benefit statements at least once each calendar year. Whether on a calendar year or fiscal year basis, the first pension benefit statement for such plans that is required to comply with the new requirements would be required to be furnished for the calendar year ending December 31, 2007. Pending the issuance of further guidance, it is the view of the Department that the furnishing of pension benefit statement information not later than 45 days following the end of the period (calendar quarter or calendar year) will constitute good faith compliance with the requirement to furnish a pension benefit statements in accordance with section 105(a)(1)(A)(i) and (ii). Defined benefit plans generally are required, pursuant to section 105(a)(1)(B)(i), to furnish participants a pension benefit statement at least once every three years. The first pension benefit statement complying with the new requirements, therefore, would be due for the 2009 plan year, provided that the plan does not elect to comply with the alternative notice requirement in section 105(a)(3)(A). The alternative notice requirement for defined benefit plans provides that the requirements of section 105(a)(1)(B)(i) shall be treated as met with respect to a participant if at least once each year the administrator provides the participant notice of the availability of the pension benefit statement and the ways in which the participant may obtain such statement. If a plan elects to take advantage of the alternative notice provision in section 105(a)(3)(A), the required notification must be furnished not later than December 31, 2007. It is the view of the Department that, in the absence of guidance to the contrary, similar principles would apply in determining good faith compliance by plans maintained pursuant to one or more collective bargaining agreements, with respect to which PPA section 508(c)(2) provides special rules for determining the date on which the provisions of section 105 are effective. 4. Right to direct investments. Will an individual account plan that does not otherwise provide participants the right to direct the investment of assets in their accounts be subject to the requirement to furnish statements quarterly (section 105(a)(1)(A)(i)) merely because the plan permits participants to take participant loans from the plan? Pending issuance of further guidance, a reasonable interpretation of section 105(a)(1)(A)(i) would be that a participant loan feature does not, standing alone, cause a plan to be a plan that provides participants the right to direct the investment of assets in their accounts. 5. Limitations or restrictions on right to direct investments. Section 105(a)(2)(B)(ii)(I) requires that the pension benefit statement of an individual account plan that permits participant investment direction include “an explanation of any limitations or restrictions on any right of the participant or beneficiary under the plan to direct an investment.” What types of limitations and restrictions, if any, need not be included in benefit statements? In the absence of guidance to the contrary, a reasonable interpretation of section 105(a)(2)(B)(ii)(I) would be that benefits statements must include limitations and restrictions on participants' or beneficiaries' rights imposed "under the plan," but need not include limitations and restrictions imposed by investment funds, other investment vehicles, or by state or federal securities laws. 6. Investment principles. Section 105(a)(2)(B)(ii)(II) requires that the pension benefit statement of an individual account plan that permits participant investment direction include “an explanation . . . of the importance, for the long-term retirement security of participants and beneficiaries, of a well-balanced and diversified investment portfolio, including a statement of the risk that holding more than 20 percent of a portfolio in the security of one entity (such as employer securities) may not be adequately diversified[.]” In the absence of a model benefit statement, is there language that a plan might use to satisfy this requirement? It is the view of the Department that, in the absence of guidance to the contrary, the use of the following language will constitute good faith compliance with the requirements of section 105(a)(2)(B)(ii)(II): To help achieve long-term retirement security, you should give careful consideration to the benefits of a well-balanced and diversified investment portfolio. Spreading your assets among different types of investments can help you achieve a favorable rate of return, while minimizing your overall risk of losing money. This is because market or other economic conditions that cause one category of assets, or one particular security, to perform very well often cause another asset category, or another particular security, to perform poorly. If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified. Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk. In deciding how to invest your retirement savings, you should take into account all of your assets, including any retirement savings outside of the Plan. No single approach is right for everyone because, among other factors, individuals have different financial goals, different time horizons for meeting their goals, and different tolerances for risk. It is also important to periodically review your investment portfolio, your investment objectives, and the investment options under the Plan to help ensure that your retirement savings will meet your retirement goals. 7. Notification of diversification rights. May an individual account plan that, prior to January 1, 2007, provides participants and beneficiaries diversification rights at least equal to the new rights conferred under section 204(j), satisfy the notice obligations under section 101(m) of ERISA by providing information concerning the importance of a diversified portfolio in connection with the furnishing of the first quarterly pension benefit statement information required by section 105(a)(1)(A)(i)? Yes. The Department believes that the information required to be disclosed to participants and beneficiaries pursuant to section 101(m) is most significant for those participants and beneficiaries acquiring new diversification rights under section 204(j). For this reason the Department continues to believe that participants and beneficiaries in plans conferring new diversification rights as of January 1, 2007, should be furnished information concerning such rights and the importance of maintaining a diversified portfolio as soon as possible following January 1, 2007.(5) With regard to individual account plans that, prior to January 1, 2007, provide participants and beneficiaries diversification rights at least equal to those conferred under section 204(j), the Department is persuaded that the furnishing of the 101(m) notice as a stand-alone disclosure may result both in confusion to participants and beneficiaries and distribution costs that, in many instances, will be passed on to the plan’s participants and beneficiaries. In view of the fact that the periodic pension benefit statement required to be furnished pursuant to section 105(a)(1)(A)(i) is required, pursuant to section 105(a)(2)(B)(ii)(II), to contain information similar to that required by section 101(m)(2) concerning the importance of maintaining a diversified portfolio, and the fact that the pension benefit statement required to be furnished pursuant to section 105(a)(1)(A)(i) is required to be furnished within a few months of the furnishing of the 101(m) notice, the Department will treat a plan administrator’s compliance with the periodic benefit statement requirements of section 105(a)(1)(A)(i) as satisfying the notice requirements of section 101(m) if, prior to January 1, 2007, the individual account plan provided participants and beneficiaries diversification rights at least equal to those conferred under section 204(j). 8. Department of Labor Web site. Section 105(a)(2)(B)(ii)(III) requires that the pension benefit statement of an individual account plan that permits participant direction of investment include a notice directing participants and beneficiaries to the Internet web site of the Department of Labor for sources of information on individual investing and diversification. What Internet address should plan administrators use for this requirement? For purposes of section 105(a)(2)(B)(ii)(III), plan administrators may use the following Internet address for pension benefit statements: www.dol.gov/ebsa/investing.html. Questions concerning this matter may be directed to Jeff Turner or Suzanne Adelman, at 202.693.8523. Footnotes
2007-01 Statutory Exemption for Investment AdviceDepartment of Labor - Employee Benefits Security Administration Date: February 2, 2007 Memorandum For: From: Subject: Statutory Exemption For Investment Advice Background Section 3(21)(A)(ii) includes within the definition of “fiduciary” a person that renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of a plan, or has any authority or responsibility to do so.(1) The prohibited transaction provisions of ERISA and the Internal Revenue Code (Code) prohibit an investment advice fiduciary from using the authority, control or responsibility which makes it a fiduciary to cause itself, or a party in which it has an interest that may affect its best judgment as a fiduciary, to receive additional fees. As a result, in the absence of a statutory or administrative exemption, fiduciaries are prohibited from rendering investment advice to plan participants regarding investments that result in the payment of additional advisory and other fees to the fiduciaries or their affiliates. The growth of participant directed individual account plans has increased recognition of the importance of investment advice to participants in such plans. Accordingly, employers and other fiduciaries have raised questions concerning their responsibilities in connection with offering investment advice programs. In response to these questions, the Department has issued various forms of guidance concerning when a person would be a fiduciary by reason of rendering investment advice and when the provision of investment advice may result in prohibited transactions.(2) The Pension Protection Act of 2006 (PPA)(3) amended both ERISA and the Code to add a statutory exemption relating to the provision of investment advice. Specifically, section 601 of the PPA added a statutory exemption under section 408(b)(14) of ERISA (and section 4975(d)(17) of the Code(4)). Section 408(b)(14) applies to the provision of investment advice under an “eligible investment advice arrangement, “ as defined in paragraph (2) of section 408(g) (also added by the PPA), to participants and beneficiaries of a defined contribution plan that permits them to direct the investment of their accounts in the plan. If the conditions of section 408(g) are met, section 408(b)(14) exempts from the prohibited transaction rules the provision of investment advice, the investment transaction entered into pursuant to the advice, and the direct or indirect receipt of fees or other compensation by the fiduciary adviser or an affiliate in connection with the provision of advice or the transaction pursuant to the advice. An “eligible investment advice arrangement” is an arrangement that either provides that any fees (including any commission or other compensation) received by the fiduciary adviser for investment advice or with respect to the investment of plan assets do not vary depending on the basis of any investment option selected, or uses a computer model under an investment advice program that meets the requirements set forth in section 408(g)(3). Paragraph (10) of section 408(g) addresses the responsibility and liability of plan sponsors and other fiduciaries in the context of investment advice provided pursuant to the statutory exemption. Subject to certain requirements, section 408(g)(10) provides that a plan sponsor or other person who is a plan fiduciary, other than a fiduciary adviser, is not treated as failing to meet the fiduciary requirements of ERISA solely by reason of the provision of investment advice as permitted by the statutory exemption. This provision does not exempt a plan sponsor or a plan fiduciary from fiduciary responsibility under ERISA for the prudent selection and periodic review of the selected fiduciary adviser. The provision does make clear, however, that plan sponsors and other persons who are fiduciaries do not have a duty under ERISA to monitor the specific investment advice given by a fiduciary adviser to any particular recipient of the advice. Since the enactment of section 408(b)(14) and 408(g) of ERISA, the Department has received a number of inquiries concerning the status of its prior guidance on investment advice and the scope of the statutory exemption for investment advice. This Bulletin provides guidance to EBSA’s national and regional offices on the following specific issues. Issues
No. It is the view of the Department that enactment of section 408(b)(14) and 408(g) allows the provision of investment advice to plan participants under circumstances that would, in the absence of an exemption, have constituted a prohibited transaction prior to the enactment of the PPA. Except for providing that persons who develop or market computer models described in section 408(g)(3) or who market investment advice programs using such models are fiduciaries, and requiring advisers to expressly acknowledge their fiduciary status,(5) sections 408(b)(14) and 408(g) do not alter ERISA’s framework for determining fiduciary status or recast otherwise permissible forms of investment advice as prohibited for purposes of section 406. For this reason, it is the view of the Department that the new provisions do not invalidate or otherwise affect prior guidance of the Department relating to investment advice and that such guidance continues to represent the views of the Department.(6) Guidance of particular note in this regard includes: Interpretive Bulletin 96-1 (29 CFR § 2509.96-1), in which the Department identified categories of investment-related information and materials that do not constitute investment advice; Advisory Opinion Nos. 97-15A and 2005-10A, in which the Department explained that a fiduciary investment adviser could provide investment advice with respect to investment funds that pay it or an affiliate additional fees without engaging in a prohibited transaction if those fees are offset against fees that the plan otherwise is obligated to pay to the fiduciary; and Advisory Opinion 2001-09A in which the Department concluded that the provision of fiduciary investment advice, under circumstances where the advice provided by the fiduciary with respect to investment funds that pay additional fees to the fiduciary is the result of the application of methodologies developed, maintained and overseen by a party independent of the fiduciary, would not result in prohibited transactions. It is the view of the Department that, with the exception of certain requirements in subparagraph (A)(i) – (iii) of section 408(g)(10) regarding compliance with the conditions of the statutory exemption, the same fiduciary duties and responsibilities apply to the selection and monitoring of an investment adviser for participants and beneficiaries in a participant directed individual account plan, regardless of whether the program of investment advice services is one to which the statutory exemption applies. Subparagraph (A) of section 408(g)(10) provides that a plan fiduciary shall not be treated as failing to meet the requirements of Part 4 of title I of ERISA solely by reason of the provision of investment advice within the meaning of section 3(21)(A)(ii) or solely by reason of contracting or arranging for the provision of investment advice pursuant to an “eligible investment advice arrangement” but subject to subparagraph (B), which addresses a fiduciary’s duty to select and review the investment advice provider prudently. This principle is consistent with the Department’s guidance provided in Interpretive Bulletin 96-1 regarding the provision of investment advice generally. See 29 CFR § 2509.96-1(e). Accordingly, it is the view of the Department that a plan sponsor or other fiduciary will not fail to meet the requirements of Part 4 of title I of ERISA solely by reason of offering a program of investment advice services to participants or beneficiaries that is not an “eligible investment advice arrangement.” Subparagraph (B) of section 408(g)(10), however, makes clear that, without regard to subparagraph (A), plan fiduciaries have a duty to prudently select and periodically monitor the advisory program. Subparagraph (B) of section 408(g)(10) further clarifies that fiduciaries have no duty to monitor the specific investment advice given by the fiduciary adviser to any particular recipient of advice. As with subparagraph (A), it is the view of the Department that the principles described in subparagraph (B) of section 408(g)(10) are consistent with those set forth in § 2509.96-1(e) and, therefore, equally applicable to plan fiduciaries who select a program of investment advice services with respect to which relief under the investment advice statutory exemption is not required. Thus, it is the view of the Department that a plan sponsor or other fiduciary that prudently selects and monitors an investment advice provider will not be liable for the advice furnished by such provider to the plan’s participants and beneficiaries, whether or not that advice is provided pursuant to the statutory exemption under section 408(b)(14).(7) Although the Interpretive Bulletin does not address the monitoring of specific investment advice provided to a particular plan participant or beneficiary, the Department believes that fiduciaries selecting advisory programs are subject to the same fiduciary duty to prudently select and monitor investment advisers regardless of whether the advice arrangement was established under the section 408(b)(14) exemption. Accordingly, it is the view of the Department that, like fiduciaries offering exempted advice arrangements, fiduciaries offering programs of investment advice services with respect to which exemptive relief is not required have no duty to monitor the specific investment advice given by the investment advice provider to any particular recipient of the advice. With regard to the prudent selection of service providers generally, the Department has indicated that a fiduciary should engage in an objective process that is designed to elicit information necessary to assess the provider’s qualifications, quality of services offered and reasonableness of fees charged for the service. The process also must avoid self dealing, conflicts of interest or other improper influence. In applying these standards to the selection of investment advisers for plan participants, we anticipate that the process utilized by the responsible fiduciary will take into account the experience and qualifications of the investment adviser, including the adviser’s registration in accordance with applicable federal and/or state securities law, the willingness of the adviser to assume fiduciary status and responsibility under ERISA with respect to the advice provided to participants, and the extent to which advice to be furnished to participants and beneficiaries will be based upon generally accepted investment theories. In monitoring investment advisers, we anticipate that fiduciaries will periodically review, among other things, the extent to which there have been any changes in the information that served as the basis for the initial selection of the investment adviser, including whether the adviser continues to meet applicable federal and state securities law requirements, and whether the advice being furnished to participants and beneficiaries was based upon generally accepted investment theories. Fiduciaries also should take into account whether the investment advice provider is complying with the contractual provisions of the engagement; utilization of the investment advice services by the participants in relation to the cost of the services to the plan; and participant comments and complaints about the quality of the furnished advice. With regard to comments and complaints, we note that to the extent that a complaint or complaints raise questions concerning the quality of advice being provided to participants, a fiduciary may have to review the specific advice at issue with the investment adviser. Subparagraph (C) of section 408(g)(10) makes clear that plan assets can be used to pay reasonable expenses in providing investment advice to participants and beneficiaries. Again, this provision is consistent with the long held view of the Department, as set forth in § 2509.96-1(e), provided that the service provider rendering investment advice is selected and monitored prudently. Consistent with this guidance, fiduciaries selecting programs of investment advice services with respect to which exemptive relief is not required may use plan assets to pay reasonable expenses in providing investment advice (and/or investment education) to plan participants and beneficiaries. The investment advice exemption provided by section 408(b)(14) applies only to investment advice provided by a “fiduciary adviser” under an “eligible investment advice arrangement.” Section 408(g)(2)(A)(i) includes within the meaning of “eligible investment advice arrangement” an arrangement that, among other things, provides that any fees (including any commission or other compensation) received by the fiduciary adviser for investment advice or with respect to the sale, holding, or acquisition of any security or other property for purposes of investment of plan assets do not vary depending on the basis of any investment option selected. The term “fiduciary adviser” is defined in section 408(g)(11)(A) to mean a person who is a fiduciary of the plan by reason of providing investment advice and who is a registered investment adviser, a bank or similar financial institution, an insurance company, or a registered broker dealer; an affiliate(8) of such registered investment adviser, bank, insurance company, or broker dealer; or an employee, agent or registered representative of any such entity. It is clear from section 408(g)(2)(A)(i) that only the fees or other compensation of the fiduciary adviser may not vary. In this regard we note that, in contrast to other provisions of section 408(b)(14) and section 408(g), section 408(g)(2)(A)(i) references only the fiduciary adviser, not the fiduciary adviser or an affiliate. Inasmuch as a person, pursuant to section 408(g)(11)(A), can be a fiduciary adviser only if that person is a fiduciary of the plan by virtue of providing investment advice, an affiliate of a registered investment adviser, a bank or similar financial institution, an insurance company, or a registered broker dealer will be subject to the varying fee limitation only if that affiliate is providing investment advice to plan participants and beneficiaries. Also, consistent with past Departmental guidance (see discussion of issue 1), if the fees and compensation received by an affiliate of a fiduciary that provides investment advice do not vary or are offset against those received by the fiduciary for the provision of investment advice, no prohibited transaction would result solely by reason of providing investment advice and thus there would be no need for a prohibited transaction exemption.(9) It is the view of the Department, therefore, that, for purposes of section 408(g)(2)(A)(i), Congress did not intend for the requirement that fees not vary depending on the basis of any investment options selected to extend to affiliates of the fiduciary adviser, unless, of course, the affiliate is also a provider of investment advice to a plan. We further note that although section 408(g)(11)(A) generally limits ”fiduciary advisers” to certain types of entities, it also permits employees, agents, or registered representatives of those entities to also qualify as fiduciary advisers if they satisfy the requirements of applicable insurance, banking, and securities laws relating to the provision of the advice. See section 408(g)(11)(A)(vi). As with affiliates, such an individual must, for purposes of section 408(g)(11)(A), not only be an employee, agent, or registered representative of one of those entities, but also must provide investment advice in his or her capacity as employee, agent, or registered representative. It is the view of the Department that when an individual acts as an employee, agent or registered representative on behalf of an entity engaged to provide investment advice to a plan, that individual, as well as the entity, must be treated as the fiduciary adviser for purposes of section 408(g)(11)(A).(10) In such instances, therefore, both the individual and the entity would be treated as fiduciary advisers and subject to the limitations of section 408(g)(2)(A)(i).(11) In general, a party seeking to avail itself of a statutory or administrative exemption from the prohibited transaction provisions bears the burden of establishing compliance with the conditions of the exemption. With regard to the exemptive relief accorded an “eligible investment advice arrangement” within the meaning of section 408(g)(2)(A)(i), it is the expectation of the Department that parties offering investment advisory services will maintain, and be able to demonstrate compliance with, policies and procedures designed to ensure that fees and compensation paid to fiduciary advisers, at both the entity and individual level, do not vary on the basis of any investment option selected. Moreover, it is anticipated that compliance with such policies and procedures will be reviewed as part of the annual audit required by section 408(g)(5)(A) and addressed in the report referred to in section 408(g)(5)(B). Questions concerning the information contained in this Bulletin may be directed to the Division of Fiduciary Interpretations, Office of Regulations and Interpretations, 202.693.8510. Footnotes
2007-02 ERISA Coverage of IRC§403(b) Tax-Sheltered Annuity ProgramsDepartment of Labor - Employee Benefits Security Administration Date: July 24, 2007 Memorandum For: Issue: How do the Department of the Treasury/Internal Revenue Service regulations governing Internal Revenue Code § 403(b) tax-sheltered annuity programs affect the status of such programs under the Department of Labor's safe harbor regulation at 29 C.F.R. § 2510.3-2(f)? Background A tax-sheltered annuity (TSA) program under section 403(b) of the Internal Revenue Code (Code), also known as a “403(b) plan,” is a retirement plan for employees of public schools, employees of certain tax-exempt organizations, and certain ministers. Under a 403(b) plan, employers may purchase for their eligible employees annuity contracts or establish custodial accounts invested only in mutual funds for the purpose of providing retirement income. Annuity contracts must be purchased from a state licensed insurance company, and the custodial accounts must be held by a custodian bank or IRS approved non-bank trustee/custodian. The annuity contracts and custodial accounts may be funded by employee salary deferrals, employer contributions, or both. Although not subject to the qualification requirements of section 401 of the Code, some of the requirements that apply to qualified plans also apply, with modifications, to 403(b) plans. These TSA programs, if established or maintained by an employer engaged in commerce or in any industry or activity affecting commerce, generally are “pension plans” within the meaning of section 3(2) of ERISA and covered by Title I pursuant to section 4(a) of ERISA.(1) The terms “establish” or “maintain” are not defined in ERISA, and uncertainty as to the application of ERISA to TSA programs funded entirely with employee contributions prompted the Department of Labor in 1979 to issue a “safe harbor” regulation at 29 C.F.R. § 2510.3-2(f). The safe harbor at § 2510.3-2(f) states that a program for the purchase of annuity contracts or custodial accounts in accordance with provisions set forth in section 403(b) of the Code and funded solely through salary reduction agreements or agreements to forego an increase in salary, are not “established or maintained” by an employer under section 3(2) of the Act, and, therefore, are not employee pension benefit plans subject to Title I, provided that certain factors are present. These factors are: (1) that participation of employees is completely voluntary, (2) that all rights under the annuity contract or custodial account are enforceable solely by the employee or beneficiary of such employee, or by an authorized representative of such employee or beneficiary, (3) that the involvement of the employer is limited to certain optional specified activities, and (4) that the employer receive no direct or indirect consideration or compensation in cash or otherwise other than reasonable reimbursement to cover expenses properly and actually incurred in performing the employer's duties pursuant to the salary reduction agreements. In this latter regard, if an employer, or a person acting in the interest of an employer, receives, for example, other consideration from an annuity contractor, the employer could be deemed to have “established or maintained” a plan. The safe harbor allows the employer to engage in a range of activities to facilitate the operation of the program. The employer may permit annuity contractors–including agents or brokers who offer annuity contracts or make available custodial accounts–to publicize their products, may request information concerning proposed funding media, products, or annuity contractors, and may compile such information to facilitate review and analysis by the employees. The employer may enter into salary reduction agreements and collect annuity or custodial account considerations required by the agreements, remit them to annuity contractors, and maintain records of such collections. The employer may hold one or more group annuity contracts in the employer’s name covering its employees and exercise rights as representative of its employees under the contract, at least with respect to amendments of the contract. The employer may also limit funding media or products available to employees, or annuity contractors who may approach the employees, to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances.(2) The Department of the Treasury/Internal Revenue Service has issued final regulations at 26 C.F.R. 1.403(b)-0 et seq. (July 2007) reflecting legislative changes made to § 403(b) since the existing regulations were adopted in 1964. The § 403(b) regulations also incorporate interpretive positions that the Department of the Treasury/Internal Revenue Service have taken in other guidance on § 403(b). This Bulletin is intended to provide guidance to EBSA’s national and regional offices concerning the extent to which compliance with the updated regulations would cause employers to exceed the limitations on employer involvement permitted under the Department of Labor’s safe harbor for tax-sheltered annuity programs at 29 C.F.R. § 2510.3-2(f). Analysis The new § 403(b) regulations have not led the Department of Labor to change its view on the principles that apply in determining whether any given TSA program is covered by Title I of ERISA. Even though the differences between the tax rules for TSA programs and those governing other ERISA-covered pension plans may have diminished, the Department's safe harbor regulation at 29 C.F.R. § 2510.3-2(f) remains operative. The new § 403(b) regulations allow significant flexibility regarding the employer's functions in the structure and operation of the arrangement. Thus, compliance with the new § 403(b) regulations will not necessarily cause a TSA program to become covered by Title I of ERISA. The Department has acknowledged that employers have an interest separate from acting as their employees’ authorized representatives in ensuring that the annuity contracts and custodial accounts in TSA programs are tax compliant. The Code’s qualification requirements impose obligations directly on employers in connection with the employees’ annuity contracts and custodial accounts. If individual contracts or accounts fail to satisfy the tax qualification requirements, even if due to actions or errors of an employee or annuity contractor, the employer can be liable to the IRS for potentially substantial penalty taxes, correction fees, and employment taxes on employee salary deferrals. Accordingly, in the Department’s view, the safe harbor at section 2510.3-2(f) subsumes certain employer activities designed to ensure that a TSA program continues to be tax compliant under section 403(b) of the Code. The Department of Labor has issued advisory opinions and other guidance on whether specific employer functions are compatible with the safe harbor. The Department believes that the safe harbor allows an employer to conduct administrative reviews of the program structure and operation for tax compliance defects. Such reviews may include discrimination testing and compliance with maximum contribution limitations under the Treasury regulations. As noted in previous guidance issued by the Department, the employer may also fashion and propose corrections; develop improvements to the plan's administrative processes that will obviate the recurrence of tax defects; obtain the cooperation of independent entities involved in the program needed to correct tax defects; and keep records of its activities.(3) A program could fit within the section 2510.3-2(f) safe harbor and include terms that require employers to certify to an annuity provider a state of facts within the employer's knowledge as employer, such as employee addresses, attendance records or compensation levels. The employer may also transmit to the annuity provider another party's certification as to other facts, such as a doctor's certification of the employee's physical condition. The employer could not, however, consistent with the safe harbor, have responsibility for, or make, discretionary determinations in administering the program. Examples of such discretionary determinations are authorizing plan-to-plan transfers, processing distributions, satisfying applicable qualified joint and survivor annuity requirements, and making determinations regarding hardship distributions, qualified domestic relations orders (QDROs), and eligibility for or enforcement of loans.(4) An important requirement in the Treasury regulations is that a TSA program must be maintained pursuant to a “written defined contribution plan” that satisfies the Code’s regulatory requirements and contains all the material terms and conditions for benefits under the plan. An employer, by adopting such a written plan, does not automatically establish a Title I plan. Compiling the benefit terms of the contracts and the responsibilities of the employer, annuity providers and participants is a function similar to the information collection and compilation activities expressly permitted under the Department’s TSA safe harbor. Indeed, the preamble to the final Treasury regulations makes clear that the “plan” required to satisfy the Code does not have to be a single document, but may incorporate by reference other documents, including insurance policies and custodial account agreements and other documents governing the contracts and accounts prepared by the annuity providers. 26 C.F.R. § 1.403(b)-3(b)(3). The Department of Labor expects that the written plan for a TSA program that complies with the safe harbor would consist largely of the separate contracts and related documents supplied by the annuity providers and account trustees or custodians. An employer’s development and adoption of a single document to coordinate administration among different issuers, and to address tax matters that apply, such as the universal availability requirement in Code section 403(b)(12)(A)(ii), without reference to a particular contract or account, would not put the TSA program out of compliance with the safe harbor. Because the Treasury regulations allow a plan to allocate responsibility for performing administrative functions to persons other than the employer, the relevant documents should identify the parties that are responsible for administrative functions, including those related to tax compliance. The documents should correctly describe the employer’s limited role and allocate discretionary determinations to the annuity provider or participant or other third party selected by the provider or participant. In addition, an employer seeking to take advantage of the safe harbor may periodically review the documents making up the plan for conflicting provisions and for compliance with the Code and the Treasury regulations. Negotiating with annuity providers or account custodians to change the terms of their products for other purposes, such as setting conditions for hardship withdrawals, would be a form of employer involvement outside the safe harbor. A tax-sheltered annuity program will not, in the Department’s view, become covered by Title I of ERISA merely because the written plan conforms to the new § 403(b) regulations by limiting employees to exchanges of contract funds only among providers who have adopted the written plan, or transfers from the program of a former employer to that of the current employer. Under the safe harbor, the employer may limit funding media or products available to employees, or annuity providers who may approach the employee, to a number designed to afford employees a reasonable choice in light of all relevant circumstances. The Code-mandated restrictions on transfers of funds may, however, require the employer to allow providers to offer a wider variety of products in order to afford employees a reasonable choice in light of all relevant circumstances for purposes of the safe harbor. Alternately, an employer may limit the number of providers to which it will forward salary reduction contributions as long as employees may transfer all or a part of their funds to any provider whose annuity contract or custodial account complies with the Code requirements and who agrees to the plan's division of tax compliance responsibilities among the employer, provider and participant. Finally, in the event an employer decides that it does not want to continue to perform the ministerial and administrative functions required under the § 403(b) regulations, the Department does not believe that the employer's determination to terminate a TSA program in compliance with the Treasury regulations will cause a program not otherwise covered by Title I of ERISA to become covered. Conclusion The Department is of the view that tax-exempt employers will be able to comply with the requirements in the new § 403(b) regulations and remain within the Department’s safe harbor for TSA programs funded solely by salary deferrals. We note, however, that the new § 403(b) regulations offer employers considerable flexibility in shaping the extent and nature of their involvement under a tax-sheltered annuity program. The question of whether any particular employer, in complying with the § 403(b) regulations, has established or maintained a plan covered under Title I of ERISA must be analyzed on a case-by-case basis applying the criteria set forth in 29 C.F.R. § 2510.3-2(f) and section 3(2) of ERISA. Questions concerning the information contained in this Bulletin may be directed to the Division of Coverage, Reporting and Disclosure, Office of Regulations and Interpretations, 202.693.8523. Footnotes
2007-03 Periodic Pension Benefit Statements For Non-Participant Directed Individual Account PlansField Assistance Bulletin No. 2007-03 Date: October 12, 2007 Memorandum For: On December 20, 2006, the Department of Labor issued Field Assistance Bulletin (FAB) 2006-03 providing guidance for the Employee Benefits Security Administration’s national and regional offices concerning good faith compliance with the pension benefit statement provisions of section 105 of ERISA, as amended by the Pension Protection Act of 2006. In FAB 2006-03, the Department indicated, among other things, that, pending the issuance of further guidance, the furnishing of pension benefit statement information not later than 45 days following the end of the relevant period (calendar quarter or calendar year) will constitute good faith compliance with the requirement to automatically furnish pension benefit statements by individual account plans. Since the issuance of FAB 2006-03, it has come to the attention of the Department that many individual account plans that do not permit participants and beneficiaries to direct the investment of assets in their individual accounts may not be able to comply within the 45-day period set forth in the FAB. It is represented that many of these plans are profit sharing plans and the sponsors of those plans do not determine or contribute profit sharing contributions until after the sponsor’s business tax return is completed. Similarly, non-participant directed individual account plans sponsored by partnerships cannot make contribution determinations until completion of the partnership tax return. It also is represented that many such plans are dependent on securing third-party valuations for those assets that do not have a readily ascertainable value. Compliance with the 45-day good faith period, therefore, would appear to be impossible or very expensive for many of these plans unless the benefit statements were based on data from the end of the prior plan year. It is further represented that much of the required information is compiled in connection with the preparation of the plan’s Form 5500 Annual Return/Report and, accordingly, the time frame for furnishing benefit statements should correspond to the required filing of the plan’s Form 5500. In view of the foregoing, and pending the issuance of further guidance, the Department is providing the following additional guidance. Plan administrators of individual account plans that do not provide for participant direction of investments will be treated as acting in good faith compliance with a reasonable interpretation of section 105(a)(1)(A)(ii) of ERISA when statements are furnished to participants and beneficiaries on or before the date on which the Form 5500 Annual Return/Report is filed by the plan (but in no event later than the date, including extensions, on which the Annual Return/Report is required to be filed by the plan) for the plan year to which the statement relates. This guidance supersedes the guidance provided in FAB 2006-03 as it relates to the dates for furnishing pension benefit statements to participants and beneficiaries of individual account plans that do not permit participants and beneficiaries to direct the investment of assets in their individual accounts. Questions concerning this matter may be directed to Jeff Turner or Suzanne Adelman, at 202.693.8523. 2007-04 Supplemental health insurance coverage as excepted benefits under HIPAA and related legislation excepted benefits under sections 732(c)(3) and 733(c)(4) of ERISA?Field Assistance Bulletin No. 2007-04 December 7, 2007 Memorandum For: Issue: What are the circumstances under which supplemental health insurance coverage satisfies the requirements for excepted benefits under sections 732(c)(3) and 733(c)(4) of ERISA? Background: HIPAA Health Reform and Related Legislation Titles I and IV of the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191, 110 Stat. 1936 (HIPAA) amended the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code (Code), and the Public Health Service Act (PHS Act) to improve portability, access, and continuity with respect to group health plan coverage provided in connection with employment. These laws include limitations on preexisting condition exclusions, require issuance of certificates of creditable coverage, provide special enrollment rights, and prohibit discrimination on the basis of any health factor. Later amendments to these laws provide protections relating to mental health parity, hospital lengths of stay following childbirth, and post-mastectomy coverage. Regulations issued by the Departments of Labor, the Treasury, and Health and Human Services (the Departments) on these group market provisions are contained in 29 CFR Part 2590, 26 CFR Part 54, and 45 CFR Parts 144 and 146. Additional reforms were provided in the PHS Act for health coverage in the individual market and are contained in 45 CFR Parts 144 and 148. In general, these health reform provisions apply to group health plans (generally plans established or maintained by employers or employee organizations, or both) and health insurance issuers in the group or individual market. However, these provisions do not apply to certain excepted benefits. In general, if all benefits under a plan or coverage are excepted benefits, then the plan and any health insurance coverage under the plan does not have to comply with the health reform requirements, and the coverage may not qualify as creditable coverage. Supplemental Health Insurance Coverage One category of excepted benefits is supplemental excepted benefits. Benefits are supplemental excepted benefits only if they are provided under a separate policy, certificate, or contract of insurance and are either Medicare supplemental health insurance, TRICARE supplemental programs, or similar supplemental coverage provided to coverage under a group health plan. The phrase “similar supplemental coverage provided to coverage under a group health plan” is not defined in the statute or regulations. However, the regulations clarify that one requirement to be similar supplemental coverage is that the coverage must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles (but similar supplemental coverage does not include coverage that becomes secondary or supplemental only under a coordination-of-benefits provision). 29 CFR 2590.732 (c)(5)(i)(C), 26 CFR 54.9831-1(c)(5 )(i)(C), and 45 CFR 146.145(c)(5)(i)(C). Coordination of Administration Various situations have come to the attention of the Departments that raise concerns about whether all of the coverage that is being marketed as similar supplemental coverage actually qualifies as such. Section 104 of HIPAA requires the Secretaries of Labor, the Treasury, and Health and Human Services to ensure that guidance under HIPAA issued by the Departments that relates to the same matter be administered so as to have the same effect at all times. In accordance with section 104 of HIPAA, each of the Departments is issuing guidance concerning the requirements for “similar supplemental coverage” that qualifies as benefits excepted from the requirements of HIPAA. The guidance being issued has been developed on a coordinated basis by the Departments. HHS is also issuing guidance on similar supplemental coverage for the individual market. Discussion In order to prevent issuers from avoiding compliance with ERISA’s health reform provisions by issuing multiple insurance contracts in connection with a plan, this bulletin establishes an enforcement safe harbor under which supplemental health insurance will be considered excepted benefits for purposes of Part 7 of ERISA. Similar supplemental coverage that does not meet the standards for this safe harbor may be subject to enforcement actions by the Department. To fall within the safe harbor, a policy, certificate, or contract of insurance must be issued by an entity that does not provide the primary coverage under the plan and must be specifically designed to fill gaps in primary coverage. In addition, the Department believes that the value of the supplemental coverage must be significantly less than the value of the primary coverage that it supplements. To fall within the enforcement safe harbor, the cost of supplemental coverage may not exceed 15 percent of the cost of the plan’s primary coverage. The Department will determine cost in the same manner as the “applicable premium” is calculated under a COBRA continuation provision.(1) Some plans subject to HIPAA titles I or IV are not subject to the COBRA continuation coverage requirements, such as plans maintained by an employer with 20 or fewer employees. For these plans, the Department will compute cost as if they were subject to COBRA. (For insured coverage – all supplemental coverage and primary coverage to the extent insured – the COBRA cost is, for purposes of this bulletin, the cost of the insurance coverage.) Issuers of Medicare supplemental health insurance (commonly referred to as “Medigap”) generally are subject to prohibitions against discrimination based on enrollees’ or potential enrollees’ health status. Accordingly, to fall within the enforcement safe harbor, the coverage may not differentiate among individuals in eligibility, benefits, or premiums based upon any health factor of the individual. Conclusion For purposes of enforcing ERISA’s health reform provisions, the Department will treat coverage as “similar supplemental coverage provided to coverage under a group health plan” under 29 CFR 2590.732(c)(5)(i)(C), within the enforcement safe harbor, if it is a separate policy, certificate, or contract of insurance and if it satisfies all of the following requirements: Independent of Primary Coverage. The supplemental policy, certificate, or contract of insurance must be issued by an entity that does not provide the primary coverage under the plan. For this purpose, entities that are part of the same controlled group of corporations or part of the same group of trades or businesses under common control, within the meaning of section 52(a) or (b) of the Code, are considered a single entity. Supplemental for Gaps in Primary Coverage. The supplemental policy, certificate, or contract of insurance must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles, but does not include a policy, certificate, or contract of insurance that becomes secondary or supplemental only under a coordination-of-benefits provision. Supplemental in Value of Coverage. The cost of coverage under the supplemental policy, certificate, or contract of insurance must not exceed 15 percent of the cost of primary coverage. Cost is determined in the same manner as the applicable premium is calculated under a COBRA continuation provision. Similar to Medicare Supplemental Coverage. The supplemental policy, certificate, or contract of insurance that is group health insurance coverage must not differentiate among individuals in eligibility, benefits, or premiums based on any health factor of an individual (or any dependent of the individual). Questions concerning the information contained in this Bulletin may be directed to the Office of Health Plan Standards and Compliance Assistance at 202.693.8335. Footnotes Under the COBRA rules, plans are generally permitted to charge up to 102 percent of the applicable premium. Thus, COBRA cost for purposes of this bulletin is 100 percent of the applicable premium, not 102 percent of the applicable premium that the plan is generally permitted to charge under the COBRA rules. 2008-01 Fiduciary Responsibility for Collection of Delinquent ContributionsField Assistance Bulletin No. 2008-01 February 1, 2008 Memorandum For: Issue: What are the responsibilities of named fiduciaries and trustees of ERISA-covered plans for the collection of delinquent employer and employee contributions? Background A number of pension plan investigations have revealed agreements that purport to relieve the financial institutions serving as plan trustees of any responsibility to monitor and collect delinquent contributions. The investigations have revealed circumstances where no other trust agreement or plan document assigns those obligations to another trustee or imposes the obligations on a named fiduciary with the authority to direct a trustee. In other cases, the plan documents and trust agreements are silent or ambiguous on the matter. Questions have been raised as to whether, and if so, to what extent, trust agreements and other instruments may define the scope of trustee undertakings and exclude responsibilities for monitoring the plan’s receipt of contributions, determining when they are delinquent and taking appropriate steps for collection. Employer contributions are delinquent when they are due and owing to the plan under the documents and instruments governing the plan but have not been transmitted to the plan in a timely manner.1 The Department has taken the position that employer contributions become an asset of the plan only when the contribution has been made.2 However, when an employer fails to make a required contribution to a plan in accordance with the plan documents, the plan has a claim against the employer for the contribution, and that claim is an asset of the plan. Participant contributions that are withheld from wages or paid to the employer are delinquent if they become plan assets while still in the hands of the employer. Under the Department’s regulations, participant contributions become plan assets in the hands of the employer on the earliest date that the amount withheld from the participant’s pay or paid to the employer reasonably can be segregated from the employer’s general assets. With respect to an employee pension benefit plan, this date can be no later than the 15th business day of the month following the month in which participant contribution amounts were withheld from the employee’s paychecks or paid to the employer.3 Analysis The duty to enforce valid claims held by a trust has long been considered a trustee responsibility under common law. IIA Austin W. Scott & William E. Fratcher, The Law of Trusts § 177 (4th ed. 1989); Restatement (Third) of Trusts, § 76 (2007). See also George G. Bogert & George T. Bogert, The Law of Trusts and Trustees § 583 at p.355 (2d rev. ed. 1980) (where the settlor retains possession of trust assets, “the trustee must hold the settlor to [his] obligation”); Scott 175, at 1415 (“trustee is under a duty to take such steps as are reasonable to secure control of the trust property and to keep control of it”). The Supreme Court affirmed that the collection of contributions is a trustee responsibility under ERISA in Central States, Southeast and Southwest Areas Pension Fund v. Central Transport, 472 U.S. 559, 571 (1985). The Court noted that: One of the fundamental common-law duties of a trustee is to preserve and maintain trust assets, and this encompasses “determin[ing] exactly what property forms the subject-matter of the trust [and] who are the beneficiaries.” The trustee is thus expected to “use reasonable diligence to discover the location of the trust property and to take control of it without unnecessary delay.” A trustee is similarly expected to “investigate the identity of the beneficiary when the trust documents do not clearly fix such party” and to “notify the beneficiaries under the trust of the gifts made to them” (citations omitted). Section 404(a) of ERISA requires that a fiduciary discharge his duties prudently and solely in the interests of the participants and beneficiaries of the plan. The steps necessary to discharge a duty to collect contributions will depend on the facts of each case. In determining what collection actions to take, a fiduciary should weigh the value of the plan assets involved, the likelihood of a successful recovery, and the expenses expected to be incurred. Among other factors, the fiduciary may take into account the employer’s solvency in deciding whether to expend plan assets to pursue a claim. Diduck v. Kaszycki & Sons Contractors, 874 F. 2d 912 (2nd Cir. 1989). The Department of Labor has also long held the view that if the plan is not making systematic, reasonable and diligent efforts to collect delinquent employer contributions, or the failure to collect delinquent contributions is the result of an arrangement, agreement or understanding, express or implied, between the plan and a delinquent employer, such failure to collect delinquent contributions may be deemed to be a prohibited transactions under section 406 of ERISA.4 Section 402(a)(1) provides that every employee benefit plan shall be established and maintained pursuant to a written instrument, and that the instrument “shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.”5 Section 403(a) of ERISA provides, with certain exceptions, that all assets of an employee benefit plan must be held in trust by one or more trustees, who are to be named in the plan or trust instrument or appointed by a person who is a named fiduciary. Section 403(a) further provides that “upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan . . . .” A plan trustee, therefore, will, by definition, always be a “fiduciary” under ERISA as a result of its authority or control over plan assets and, accordingly, is required to discharge its trustee responsibilities prudently and solely in the interest of the plan’s participants and beneficiaries. Although trust documents cannot excuse trustees from their duties under ERISA, ERISA clearly gives named fiduciaries the authority to appoint multiple trustees and to allocate trustee responsibilities among those trustees (including directed trustees). Section 403(a) recognizes two exceptions to the general rule that exclusive authority and discretion to manage and control the assets of a plan must be vested in one or more plan trustees. The first exception, at section 403(a)(1), applies when “the plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee.” In such instances, the trustee, commonly referred to as a “directed trustee,” is subject to the proper directions of the named fiduciary. As the Department noted in Field Assistance Bulletin No. 2004-03 (Dec. 17, 2004), directed trustees are fiduciaries, and as such, are subject to ERISA’s fiduciary rules, but the scope of their duties is “significantly narrower than the duties generally ascribed to a discretionary trustee under common law trust principles.” The second exception to the “exclusive authority” provision in section 403(a)(1) applies when the authority to manage, acquire or dispose of plan assets is delegated to one or more investment managers pursuant to section 402(c)(3). Additionally, section 405(b)(1)(B) provides, in relevant part, that, except as set forth in section 403(a)(1), if the assets of a plan are held by two or more trustees they shall jointly manage and control the assets of a plan except that nothing shall preclude any agreement, authorized by the trust instrument, allocating specific responsibilities, obligations, or duties among trustees, in which event a trustee to whom certain responsibilities, obligations, or duties have not been allocated shall not be liable either individually or as a trustee for any loss resulting to the plan arising from the acts or omissions on the part of another trustee to whom such responsibilities, obligations or duties have been assigned. Similarly, in those cases where the assets of a plan are held in more than one trust, a trustee is responsible only for those acts or omissions of the trustees of the trust for which it is trustee.6 Thus, in accordance with the statutory framework described above, authority over a plan’s assets subject to the trust requirement of section 403(a) of ERISA, including a plan’s legal claim for delinquent contributions, must be assigned to i) a plan trustee with discretionary authority over the assets, ii) a directed trustee subject to the proper and lawful directions of a named fiduciary, or iii) an investment manager. Accordingly, it is the view of the Department that a named or functional fiduciary who has authority to appoint the plan’s trustee(s) must ensure that the obligation to collect contributions is appropriately assigned to a trustee, unless the plan expressly provides that the trustee will be a directed trustee with respect to contributions pursuant to section 403(a)(1) or the authority to collect contributions is delegated to an investment manager pursuant to section 403(a)(2). Thus, although a fiduciary may enter into a trust agreement under which a particular trustee is not responsible for monitoring and collecting contributions, if no trustee or investment manager has this responsibility, the fiduciary with authority to hire the trustees may be liable for plan losses due to a failure to collect contributions because the fiduciary failed to specifically allocate this responsibility.7 These situations should be evaluated on the basis of all the facts and circumstances. Where the provisions in trust instruments and plan documents are ambiguous, they should generally be interpreted in a manner that corresponds to the statutory scheme, rather than in a manner that relieves all of the trustees and investment managers from responsibility.8 Reliance on plan, trust and other governing documents to define the responsibilities of plan fiduciaries, however, may not be completely determinative if the provisions in the documents are inconsistent with the actions of the parties. For example, if a nominally directed trustee routinely assumes discretionary responsibility, the trustee cannot seek to limit its liability with respect to the exercise of that discretion on the basis that it is a directed trustee. Similarly, a trustee cannot alter its status as fiduciary through a contractual provision that defines its trustee duties as non-fiduciary in nature. If a particular trustee is not responsible for monitoring and collecting contributions under the terms of the trust instrument, that trustee (including a directed trustee) nonetheless would have an obligation under sections 404 and 405(a) to take appropriate steps to remedy a situation where the trustee knows that no party has assumed responsibility for the collection and monitoring of contributions and that delinquent contributions are going uncollected. As explained in Field Assistance Bulletin No. 2004-03, a fiduciary, pursuant to section 405(a)(1), is liable for the breach of another fiduciary if the fiduciary “participates knowingly” in the breach of the other fiduciary. In addition, under section 405(a)(2), a fiduciary is liable for a breach of another fiduciary if the fiduciary’s failure to comply with section 404(a)(1) in the administration of his specific fiduciary responsibilities enables the other fiduciary to commit a breach. Under section 405(a)(3), a fiduciary is liable for a breach of another fiduciary if the fiduciary has knowledge of the breach of the other fiduciary, unless the fiduciary takes reasonable efforts under the circumstances to remedy the breach. Efforts to remedy may, depending on the circumstances, include advising the named fiduciary or the Department of Labor of the breach, reporting the breach to other fiduciaries of the plan, directly taking actions to enforce the contribution obligation on behalf of the plan, seeking an amendment of the relevant plan and trust documents, or seeking a court order mandating a proper allocation of fiduciary responsibility over contributions. The documents and instruments governing a plan cannot serve to absolve a co-fiduciary from liability for failing to take steps to remedy a known breach of another fiduciary.9 Whether and to what extent information concerning the failure of an employer to forward contributions to a plan constitutes knowledge of a breach that would give rise to co-fiduciary liability will depend upon the facts and circumstances of each case. Conclusion The responsibility for collecting contributions is a trustee responsibility. If a plan has two or more trustees, the duty may be allocated to a single trustee. A plan may also provide that a named fiduciary may direct a trustee as to this responsibility or may appoint an investment manager to take on this duty. To the extent the nature and scope of the trustee’s responsibilities are specifically limited in the plan documents or trust agreement, it is generally the responsibility of the named fiduciary with the authority to hire and monitor trustees to assure that all trustee responsibilities with respect to the management and control of the plan’s assets (including collecting delinquent contributions) have been properly assigned to a trustee or investment manager. Footnotes
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DOL Interpretive Letter |
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Receipt of Fees from Mutual Fund Distributors and Investment AdvisorsU.S. Department of Labor August 20, 1997 Judith A. McCormick Dear Ms. McCormick: This is in response to your request for an information letter on behalf of the American Bankers Association (ABA), confirming that the principles enunciated in Advisory Opinions 97-15A and 97-16A (May 22, 1997) would apply in the case of a bank that acts as a directed trustee of an employee benefit plan. A.O. 97-15A concerned a bank that served both as a directed trustee and as a trustee with investment discretion. A.O. 97-16A involved a plan recordkeeper. Both opinions addressed the receipt of fees by the trustee or recordkeeper from mutual funds (or their distributors or investment advisors) in connection with the investment of plan assets in the mutual funds as part of a combined program of investment options and services offered to plans, commonly referred to as a "bundled services" product. In general, you have described a typical "bundled services" product as a comprehensive program of administrative, custodial, and investment services offered by affiliated and non-affiliated entities to pension plans, most typically participant-directed defined contribution plans. Such a program may be offered by a single financial institution or through an arrangement in which multiple vendors contract with each other to offer a bundle of plan services. The plan services typically include, but are not limited to, custodial trustee services, participant level record-keeping, participant communications and educational materials and programs, voice response system access to accounts for participants, plan documentation, including prototype plans, summary plan descriptions and annual reports, tax compliance assistance, administrative assistance in processing plan distributions and loans, and a menu of investment options, typically consisting of mutual funds from one or more mutual fund families. You described typical situations in which a financial institution (the bank) may offer to plans a bundled services product in which it acts as a directed trustee and which includes as investment options mutual funds from one or more mutual fund families. Pursuant to the bank’s contracts with the mutual funds (or their distributors or investment advisors), the bank may provide subtransfer agent, administrative and/or shareholder services to or on behalf of the mutual funds in connection with the purchase of mutual fund shares by the plans. In return for these services, the mutual fund (or its distributor or investment advisor) pays a fee to the bank (frequently pursuant to a plan adopted under Securities and Exchange Commission Rule 12b-1) based on percentage of the mutual fund’s assets attributable to plan investments in the fund. Generally, the bank reserves the right to add, delete, or substitute individual mutual funds or mutual fund families to or from the investment menu, but otherwise has and exercises no investment discretion. In A.O. 97-15A, the Department explained that, although a directed trustee is necessarily a fiduciary, if the trustee acts pursuant to a direction in accordance with section 403(a)(1) or 404(c) of ERISA, and does not exercise any authority or control to cause a plan to invest in a mutual fund, the mere receipt by the trustee of a fee or other compensation from the mutual fund in connection with such investment would not in and of itself violate sections 406(b)(1) or (b)(3). The Department indicated, however, that because the trustee in that case had reserved the right to add or remove mutual fund families that it made available to the plans, the Department could not conclude that the trustee would not exercise any discretionary authority or control to cause the plans to invest in mutual funds that pay a fee or other compensation to the trustee. The Department further noted that the trustee in that case fully disclosed to the plans its fee arrangements with the mutual fund families, and agreed to apply any fees it received from the mutual funds to the benefit of the plans, either as a dollar-for-dollar offset against the fees the plans were obligated to pay for trustee or recordkeeping services, or as amounts credited directly to the plans. Under these circumstances, the Department concluded that the trustee would not violate sections 406(b)(1) or (b)(3) because it would not be dealing with plan assets in its own interest or for its own account, or receiving the payments from the mutual funds for it s own personal account. In A.O. 97-16A, the Department opined that a recordkeeper that offered plans a bundled services product would not exercise discretionary authority or control over the management of a plan or its assets solely as a result of deleting or substituting a mutual fund from its program of investment options and services it offered to the plans, provided that the appropriate plan fiduciary in fact makes the decision to accept or reject the change. The Department emphasized that, in order to be able to make that decision, the plan fiduciary must be provided advance notice of the change, including any changes in the fees received by the recordkeeper, and afforded a reasonable period of time within which to decide whether to accept or reject the change and, in the event of a rejection, secure a new service provider. In that case, the recordkeeper provided at least 120 days following notice of a proposed change in funds within which to reject the change and secure a new service provider. The Department noted, however, that what constitutes a reasonable period of time within which to terminate a bundled services arrangement and change service providers is inherently a factual question which must be determined by the appropriate plan fiduciary in light of the particular facts and circumstances in each case. The opinions expressed in A.O. 97-15A and A.O. 97-16A are limited to the facts presented and may be relied upon only by the parties to whom they were issued. See Advisory Opinion Procedure 76-1, Section 10, 41 Fed. Reg. 36281 (Aug. 27, 1976). Nevertheless, it is the view of the Department that the foregoing legal principles, as expressed in A.O. 97-15A and A.O. 97-16A, would apply in the case of a bank that serves as a directed trustee for employee benefit plans in the context of a bundled services product as described above. We hope that this information is helpful to you. Sincerely, Bette J. Briggs Chief, |
ERISA Procedures | ||||||
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76-1 Advisory Opinion Requests: Establishes procedures for requesting ERISA opinions from Labor DepartmentDepartment of Labor - Advisory Opinion Procedure August 27, 1976 41 FR 36281 It is the practice of the Department of Labor (the Department) to answer inquiries of individuals or organizations affected, directly or indirectly, by the Employee Retirement Income Security Act of 1974 (Pub. L. 93-406, hereinafter "the Act") as to their status under the Act and as to the effect of certain acts and transactions. The answers to such inquiries are categorized as "information letters" and "advisory opinions." This "ERISA Procedure" (ERISA Proc. 76-1) describes the general procedures of the Department in issuing Information letters and advisory opinions under the Act, and is designed to promote efficient handling of inquiries and to facilitate prompt responses. Section 7 of this Procedure (instructions to individuals and organizations requesting advisory opinions relating to prohibited transactions and common definitions) is reserved. This section will set forth the procedures to be followed to obtain an advisory opinion relating to prohibited transactions and common definitions, such as whether a person is a party in interest and a disqualified person. In general, this section will incorporate a revenue Procedure to be published by the Internal Revenue Service. This advisory opinion procedure consists of rules of agency procedure and practice, and is therefore excepted under 5 USC 552(b)(3)(A) of the Administrative Procedure Act from the ordinary notice and comment provisions for agency rulemaking. Accordingly, the Procedure is effective August 27, 1976. Sec. 1. Purpose. The purpose of this ERISA Procedure is to describe the general Procedures of the Department of Labor (the Department) in issuing information letters and advisory opinions to individuals and organizations under the Employee Retirement Income Security Act of 1974 (Pub. L. 93-406), hereinafter referred to as "the Act." This ERISA Procedure also informs individuals and organizations, and their authorized representatives, where they may direct requests for information letters and advisory opinions, and outline procedures to be followed in order to promote efficient handling of their inquiries. Sec. 2. General practice. It is the practice of the Department to answer inquiries of individuals and organizations, whenever appropriate, and in the interest of sound administration of the Act, as to their status under the Act and as to the effects of their acts or transactions. One of the functions of the Department is to issue information letters and advisory opinions in such matters. Sec. 3. Definitions.
Sec. 4. Individuals and organizations who may request advisory opinions or information letters.
Sec. 5. Discretionary Authority to Render Advisory Opinions.
This list is not all inclusive and the department may decline to issue advisory opinions relating to other sections of the Act whenever warranted by the facts and circumstances of a particular case. The Department may, when it is deemed appropriate and in the best interest of sound administration of the Act, issue information letters calling attention to established principles under the Act, even though the request that was submitted was for an advisory opinion. Sec. 6. Instructions to individuals and organizations requesting advisory opinions from the Department.
Sec. 7. Instructions to individuals and organizations requesting advisory opinions relating to prohibited transactions and common definitions.
Sec. 8. Conferences at the Department of Labor. If a conference has been requested, and the Department determines that a conference is necessary or appropriate, the individual or organization or the authorized representative will be notified of the time and place of the conference. A conference will normally be scheduled only when the Department in its sole discretion deems it will be necessary or appropriate in deciding the case. If conferences are being arranged with respect to more than one request for an opinion letter involving the same individual or organization, they will be so scheduled as to cause the least inconvenience to the individual or organization. Sec. 9. Withdrawal of requests. The individual or organization's request for an advisory opinion may be withdrawn at any time prior to receipt of notice that the Department intends to issue an adverse opinion. Even though a request is withdrawn, all correspondence and exhibits will be retained by the Department and will not be returned to the individual or organization. Sec. 10. Effect of Advisory Opinion. An advisory opinion is an opinion of the Department as to the application of one or more sections of the Act, regulations promulgated under the Act, interpretive bulletins, or exemptions. The opinion assumes that all material facts and representations set forth in the request are accurate, and applies only to the situation described therein. Only the parties described in the request for opinion may rely on the opinion, and they may rely on the opinion only to the extent that the request fully and accurately contains all the material facts and representations necessary to issuance of the opinion and the situation conforms to the situation described in the request for opinion. Sec. 11. Effect of Information Letters. An information letter issued by the Department is informational only and is not binding on the Department with respect to any particular factual situation. Sec. 12. Public inspection.
Sec. 13. Effective date. This procedure is effective August 27, 1976, the date of its publication in the Federal Register. Signed at Washington, D.C. this 24 day of August 1976. James D. Hutchinson Voluntary Correction ProgramsEmployee Benefit Plan Voluntary Correction Programs The Internal Revenue Service, US Department of Labor, and Pension Benefit Guaranty Corporation have adopted voluntary correction programs which permit employee benefit plan sponsors and other plan officials to correct certain categories of errors and misfilings with either no, or reduced, penalties, while preserving the plan's tax qualification.
The IRS retirement plan correction program (Employee Plans Compliance Resolution System, covered under Revenue Procedure 2003-44), helps employer sponsors protect participant benefits and keep their plans within the requirements of the Internal Revenue Code. This revenue procedure combined and revised a series of previous IRS remedial programs for correcting plan qualification defects. The program covers qualified retirement plans, Section 403(b) arrangements, SEPs, and SIMPLE IRAs, for a variety of plan qualification failures and violations, including: operational failures, for failure to comply with terms of plan documents; plan document failures, in which retirement plan provisions violate IRS qualification requirements; demographic failures, in which IRS nondiscrimination requirements are not met in the plan document; and the diversion or misuse of plan assets.
The Employee Benefits Security Administration has two voluntary self-correction programs for plan administrators who need help in meeting ERISA requirements: the Delinquent Filer Voluntary Compliance Program promotes, through the assessment of reduced civil penalties, plan administrator compliance with annual reporting obligations under Title I of the Employee Retirement Income Security Act of 1974; the Voluntary Fiduciary Compliance Program allows plan participants and beneficiaries and certain other persons engaging prohibited transactions under the Employee Retirement Income Security Act of 1974 to self‑correct the violations, and avoid potential civil actions by the DOL.
PBGC provides incentives to self-correct late filings, or other errors involving missed premium deadlines and underpaid premiums.
Voluntary Fiduciary Correction Program FAQsVoluntary Fiduciary Correction Program (VFCP) March 28, 2002 (67 FR 15062)
Agency: Pension and Welfare Benefits Administration, Labor Department. Action: Permanent adoption of the VFCP. Frequently Asked Questions about the Voluntary Fiduciary Correction Program What is the Voluntary Fiduciary Correction Program (VFCP)? The VFCP is a voluntary enforcement program that encourages the correction of possible violations of Title I of ERISA. The program allows plan officials to identify and fully correct certain transactions such as prohibited purchases, sales and exchanges, improper loans, delinquent participant contributions, and improper plan expenses. The program includes 15 specific transactions and their acceptable means of correction, eligibility requirements, and application procedures. If an eligible party documents the acceptable correction of a specified transaction, the U.S. Department of Labor Employee Benefits Security Administration (EBSA) will issue a no-action letter. Why did the U.S. Department of Labor create the VFCP? In part, the U.S. Department of Labor developed the VFCP in response to requests from the employee benefits community for a formal program that would reduce the risk of enforcement action and the imposition of the Section 502(l) penalty. Most of EBSA's investigations are resolved by fiduciaries taking corrective action after EBSA identifies violations. The U.S. Department of Labor recognized that as the private benefit system evolves, there is a need for innovation in voluntary compliance. Publication of the VFCP provides an opportunity to inform plan fiduciaries of their obligations so that complete and fully acceptable corrections may be made without discussion or negotiation with the U.S. Department of Labor. Who is eligible to participate in the program? The U.S. Department of Labor will consider an application if neither the plan nor the applicant is under investigation and if the application contains no evidence of potential criminal violations as determined by EBSA. How long will the U.S. Department of Labor operate the program? The U.S. Department of Labor expects to operate the program indefinitely. What if the U.S. Department of Labor receives an application from a plan sponsor that has not adequately corrected a violation? The U.S. Department of Labor may need to negotiate with the sponsor for full correction. In that case, the Section 502(l) penalty may apply to amounts restored pursuant to the negotiation. Depending on the facts, EBSA may also need to conduct a civil or criminal investigation or take other action, such as seeking removal of persons from positions of authority with respect to a plan. Are there any civil penalties involved in the program? If the applicant complies with the conditions of the program, no Section 502(l) penalty would apply to correction amounts paid to the plan or to participants. However, the U.S. Department of Labor is not precluded from referring information regarding the transaction to the IRS as required by Section 3003(c) of ERISA, or from imposing civil penalties under Section 502(c)(2) of ERISA based on the failure or refusal to file a timely, complete and accurate annual report Form 5500. Will the new program provide any certainty to the applicant if he or she complies with the conditions? Yes. The U.S. Department of Labor acknowledged the need for plan sponsors and their service providers to know that the U.S. Department of Labor would take no further action if the applicant satisfied the terms of the program. Under those circumstances, the U.S. Department of Labor will issue a no-action letter to the applicant. The no-action letter states that the U.S. Department of Labor will not initiate a civil investigation under Title I of ERISA regarding the applicant's responsibility for any transaction described in the no-action letter, nor assess a Section 502(l) penalty. However, the issuance of a no-action letter does not affect the ability of any other government agency, or any other person, to enforce their rights. How do I apply for relief? The program includes application procedures. Briefly, one must submit a written narrative and supporting documents describing the transaction and its correction, proof of restoration of losses, and an executed penalty of perjury statement. Where do I apply? Applications should be mailed to the appropriate EBSA regional office. How can I find out more about the program? Interested parties may contact the appropriate EBSA regional office. Regional coordinator's assigned to the program will assist you with your questions. Information about the VFCP can also be obtained by calling EBSA's Toll-Free number at 1.866.444.EBSA (3272) How can I comment on the program? Comments may be addressed in writing to:
How do I determine when participant contributions to pension plans are late? The Department's regulation relating to the definition of Plan Assets - Participant Contributions (29 CFR 2510.3-102) describes a general rule and a maximum time period for pension benefit plans. The general rule provides that 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 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. The maximum time period for pension benefit plans for transmitting participant contributions shall in no event be later than the 15th business day of the month following the month in which the participant contribution amounts are received by the employer (in the case of amounts that a participant or beneficiary pays to an employer) or the 15th business day of the month following the month in 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). The date when participant contributions reasonably can be segregated from the employer's general assets usually will be earlier than the maximum time period for pension plans in the regulation. Thus, when contributions reasonably can be segregated from the employer's general assets in a shorter time period, delay in forwarding the contributions, even a delay that does not exceed the maximum time period under the regulation, may cause a breach of fiduciary duty under Title I of ERISA that may be corrected under the Voluntary Fiduciary Correction Program (VFCP). Moreover, where the contributions have been delinquent longer than the maximum time period and the contributions could have been segregated earlier than the maximum time period, the loss date (as defined in the program), for purposes of calculating lost earnings (as defined in the program), is the date on which the contributions reasonably could have been segregated and not the maximum time period. How do I show the earliest date contributions can be segregated for purposes of preparing a VFCP application? Program applicants are reminded that the program requires that the applicant document, under its particular circumstances, the earliest date on which the contributions reasonably could have been segregated from the employer's general assets. This documentation may consist of the plan sponsor's past withholding and remittance history, the sponsor's withholding and remittance process, and the minimum period between withholding and remittance. Participant contributions to the plan were delinquent, but the dollar amount to correct is very small. Do I have to participate in the VFCP? If participant contributions are delinquent, plan officials must take appropriate action to correct the violation. Although plan officials are not required to file an application with the Department under the VFCP to correct a violation, the VFCP is available to correct a loss of any amount resulting from a transaction covered by the program. Participation in the VFCP is voluntary. However, if you do not file an application with the Department, you cannot obtain the relief available under the program. Moreover, if the Department discovers the violation on audit, and the correction was not complete for purposes of the program, a civil penalty may be assessed on any additional amount required by the Department to fully correct the violation following the Department's audit of the plan. Can I use the VFCP to correct a failure to forward participant loan repayments to a plan in a timely fashion? Yes. In Advisory Opinion 2002-02A, the Department concluded that, while not subject to the participant contribution regulation (29 C.F.R. § 2510.3-102), participant loan repayments paid to or withheld by an employer for purposes of transmittal to an employee benefit plan are sufficiently similar to participant contributions to justify, in the absence of regulations providing otherwise, the application of principles similar to those underlying the final participant contribution regulation for purposes of determining when such repayments become assets of the plan. Specifically, the Advisory Opinion concluded that participant loan repayments paid to or withheld by an employer for purposes of transmittal to the plan become plan assets as of the earliest date on which such repayments can reasonably be segregated from the employer's general assets. Given the similar treatment of participant contributions and loan repayments, the Department has determined that it is appropriate to permit delinquent participant loan repayments to be corrected under the VFCP in the same manner as delinquent participant contributions. I have determined that participant contributions to the pension plan were delinquent and I want to correct under the program. How do I determine what rate of return to use for calculating earnings on the delinquent contributions? In order to correct under the program, you will need to calculate the lost earnings on the delinquent contributions. For purposes of correction under the program, the rate of return to use is the highest of:
The plan investments are selected by the plan fiduciaries. How do I calculate the overall rate of return for the plan? Where there are no distributions or expense disbursements during the period of delinquency, the overall rate of return for the plan is calculated by subtracting the amount of plan assets on the date contributions were due under the Department's regulation from the amount of plan assets on the date the delinquent contributions are repaid to the plan, but not including the addition of the delinquent contributions, divided by the amount of assets on the date the contributions were due. Where there have been distributions or expense disbursements during the period of delinquency, applicants may demonstrate the actual average rate of return of all the investments of the plan where they have evidence to show such rate of return. In the alternative, applicants may, for administrative convenience, calculate the overall rate of return by using a fraction where the numerator is the amount of plan assets on the date the contributions are repaid minus the amount of plan assets on the date contributions were due, but not including the addition of the delinquent contributions, plus any distributions and expense disbursements made between the date the contributions were repaid and the date the contributions were due, and the denominator is the amount of assets on the date the contributions were due. The plan investments are participant directed. How do I calculate the rate of return for purposes of determining lost earnings on delinquent contributions? When calculating the rate of return for participant-directed plans, it is necessary to calculate the rate of return for each individual participant account. The same method used for calculating the overall plan rate of return for a plan where the investments are selected by the plan fiduciaries is used for each participant account. For administrative convenience, the applicant may use the highest rate of return of any plan investment option as the rate of return for each individual participant account. If the plan investments are participant directed and certain participants have not designated any investment options, what rate of return do I use for those participants for purposes of determining earnings on delinquent contributions? For those participants in a participant-directed plan who have not designated any investment options, the applicant may use the plan's overall rate of return for those participants during the period of the delinquency. How do I determine what is the restoration of profits amount for purposes of determining earnings on delinquent contributions? The restoration of profits amount is the amount earned by the fiduciary or party in interest on the use of the monies that should have been forwarded to the plan for the duration of the delinquency. If the purpose for which the monies were used and the earnings thereon are ascertainable, then those actual earnings are the amount of the restoration of profits. What is the IRC §6621 rate and how do I find out what the rate was for the applicable time period? Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and underpayments. The VFCP uses the underpayment rate as the rate of return that must be examined for determining lost earnings where it is not possible to ascertain the restoration of profits amount. The Internal Revenue Service publishes the §6621(a)(2) rate quarterly. The rate announcements can be found on the internet. Participant Notice Voluntary Correction ProgramPension Benefit Guaranty Corporation May 3, 2004 (FR 04-10406)
Voluntary Correction Program RIN 1212-AB00 Agency: Pension Benefit Guaranty Corporation Action: Notice Effective Date: May 3, 20024 Summary The Pension Benefit Guaranty Corporation ("PBGC") is announcing a Participant Notice Voluntary Correction Program ("VCP"). This program, which generally covers Participant Notices for the 2002 or 2003 plan year that were not issued as required, is designed to encourage plan administrators to correct recent compliance failures without penalty and to facilitate plan administrators' future compliance. The PBGC will not pursue any failure to provide a pre-2002 Participant Notice unless there is a 2002 or 2003 participant Notice failure that is covered by the VCP but that does not meet the requirements for penalty relief under the VCP. Elsewhere in today's Federal Register, the PBGC is proposing a new Participant Notice penalty policy. Dates To meet the requirements for penalty relief under the Participant Notice Voluntary Correction Program with respect to a Participant Notice failure for the 2002 or 2003 plan year, the plan administrator must: (1) Issue a VCP corrective notice by the 2004 Participant Notice due date (for calendar year plans, generally October 4, 2004, November 15, 2004, or December 15, 2004); and (2) notify the PBGC within 30 days after the 2004 Participant Notice due date. For further information contact: Harold J. Ashner, Assistant General Counsel, or Catherine B. Klion, Attorney, Office of the General Counsel, Pension Benefit Guaranty Corporation, 1200 K Street, NW., Washington, DC 20005-4026; 202-326-4024 (TTY/TDD users may call the Federal relay service toll-free at 1-800-877-8339 and ask to be connected to 202-326-4024.) Supplementary information Overview of Participant Notice Requirements Section 4011 of the Employee Retirement Income Security Act of 1974 ("ERISA") requires certain underfunded plans to issue a notice to participants of the plan's funding status and the limits on the PBGC's guarantee ("Participant Notice"). The Participant Notice helps to ensure that participants better understand the financial status of their plans and the consequences that plan underfunding may have on their promised benefits. The PBGC's implementing regulations are at 29 CFR part 4011. In general, a plan administrator must issue a Participant Notice for a plan year if a variable rate premium (which is tied to plan underfunding) is payable for that plan year, unless the plan meets the "DRC Exception Test" for that plan year or for the prior plan year. However, the Job Creation and Worker Assistance Act of 2002 (JCWAA) made a temporary change to the premium interest rate that did not apply for purposes of determining whether a Participant Notice was required. Therefore, a plan administrator may be required to provide a Participant Notice for the 2002 or 2003 plan year even if a variable rate premium is not payable for that plan year. The Pension Funding Equity Act of 2004 (PFEA), which was signed into law by the President on April 10, 2004, changes the rules for determining the required interest rate for premium payment years beginning in 2004 or 2005. Under PFEA, plan administrators may use the premium interest rate for purposes of determining whether a Participant Notice is required. Thus, a plan administrator may be required to issue a Participant Notice for the 2004 or 2005 plan year only if a variable rate premium is payable for that plan year. A Participant Notice for a plan year is due in that plan year-"two months after the due date (with extensions) for the plan's Form 5500 for the prior plan year. (The due date for a plan's Participant Notice for a plan year is keyed to the due date for the plan's Summary Annual Report for the prior plan year so that the two documents may be issued together.) For calendar year plans, common due dates for the 2004 Participant Notice are therefore October 4, 2004, November 15, 2004, and December 15, 2004. There are a variety of rules governing who is entitled to receive the Participant Notice and the form, content, and manner of issuance of the Participant Notice. Plan administrators are required to certify on the annual PBGC premium filing (Form 1 or Form 1-EZ) that, for the prior plan year: (1) A Participant Notice was not required to be issued; (2) a Participant Notice was issued as required; or (3) an explanation is attached (e.g., because a required Participant Notice was issued late). See appendix A for a detailed explanation of the requirements governing Participant Notices. Compliance and Enforcement Background The Participant Notice requirement went into effect in the 1995 plan year for large plans (generally plans with more than 100 participants) and in the 1996 plan year for small plans (generally plans with 100 or fewer participants). In the first few years after the requirement went into effect, plan administrators of only a relatively small number of defined benefit plans had to provide a Participant Notice, reflecting the fact that plans were better funded at that time. The PBGC conducted compliance surveys and found that both large plan and small plan compliance was high for those plan years. In the last several years, however, because of low interest rates and poor investment returns, more plans have become underfunded and, therefore, many plan administrators have been required to issue a Participant Notice for the first time. Recent PBGC audits have found higher rates of noncompliance with the Participant Notice requirement than in prior years. Much of the noncompliance appears to have resulted from a lack of awareness or understanding of the applicable requirements rather than from an attempt to avoid disclosure. Nonetheless, plan participants deserve to know if their plans are underfunded. As a result, the PBGC is expanding its Participant Notice enforcement program with a view toward more actively auditing compliance and assessing penalties for noncompliance. Overview of Voluntary Correction Program As a transition to this expanded enforcement program, the PBGC is launching a Participant Notice Voluntary Correction Program ("VCP") designed to encourage plan administrators to correct past compliance failures and to facilitate their future compliance with Participant Notice requirements. The VCP generally covers Participant Notice failures for the 2002 and 2003 plan years. Under this program, the PBGC will not assess penalties for failure to provide a 2002 or 2003 Participant Notice as required if the failure is corrected in accordance with the guidelines in this notice. (The VCP focuses on the 2002 and 2003 plan years in part because the PBGC is concerned that some plan administrators may have misunderstood the effect of JCWAA on their Participant Notice obligations for those plan years.) The PBGC will not pursue failures to provide a pre-2002 Participant Notice unless there is a 2002 or 2003 by the VCP but that does not meet the requirements for penalty relief under the VCP. Focusing the PBGC's enforcement resources primarily on 2002 and later Participant Notice failures will concentrate those resources effectively and limit disclosures to plan years that are most relevant to participants. The PBGC anticipates that many plan administrators will want to participate in the VCP as a precaution, even in the absence of a known Participant Notice failure. Participation in the VCP will not affect the likelihood that a plan will be selected for audit of compliance with the requirement to issue a post-VCP Participant Notice (see "Participant Notices Covered by VCP"), with the PBGC premium requirement, or with any other PBGC requirement. Participant Notices Covered by VCP The VCP covers any Participant Notice for a plan's 2002 or 2003 plan year: (1) That is due before May 7, 2004; and (2) that is not, as of May 7, 2004, the subject of a PBGC audit proceeding. For purposes of determining whether the VCP covers a plan's Participant Notice, the date the Participant Notice is due is determined without regard to any deadline extension resulting from a disaster relief notice. For example, if a calendar year plan's 2003 Participant Notice was originally due on December 15, 2003, but as a result of a disaster relief notice the due date was extended to May 14, 2004, the VCP would cover the plan's 2003 Participant Notice because the extension to May 14, 2004, would be disregarded. Requirements for VCP Penalty Relief For any Participant Notice that is covered by the VCP, the PBGC will not assess a penalty if the plan administrator, in accordance with the guidelines in this notice: (1) Issues a VCP corrective notice; and (2) notifies the PBGC that it is participating in the VCP. (If the only failure was a late issuance corrected before May 7, 2004, see "Special rule for late 2002/2003 notices already corrected.") VCPCorrective Notice The PBGC believes that many of the plans that will participate in the VCP to correct a Participant Notice failure for 2002 or 2003 will also be required to issue a Participant Notice for 2004. Accordingly, the PBGC has structured the VCP corrective notice requirements to enable such plans to issue a single notice that meets the requirements for a VCP corrective notice and for the 2004 Participant Notice. This approach will minimize the confusion for participants that could result from the issuance of multiple notices at or about the same time. The VCP corrective notice must meet all of the requirements that apply to the 2004 Participant Notice (or, if the plan is not required to issue a 2004 Participant Notice, all of the requirements that would apply if it were required), except as otherwise provided in the guidelines in this notice. Normally the 2004 Participant Notice would have to include the "funded current liability percentage" for the 2003 plan year or for the 2004 plan year. Under the VCP, whether the plan administrator is correcting only a 2002 failure, only a 2003 failure, or both a 2002 and a 2003 failure, the VCP corrective notice: (1) Must include the funded current liability percentage for the 2002 plan year and for the 2003 plan year, and (2) may include as well the funded current liability percentage for the 2004 plan year. In all other respects, the VCP corrective notice must contain the information required in a 2004 Participant Notice (e.g., current information on funding waivers, missed contributions, and limitations on the PBGC's guarantee). Although the plan administrator is not required to inform participants that it had a Participant Notice failure for the 2002 or 2003 plan year (or for both), or that it is participating in a "voluntary correction program," a plan administrator may choose to include that information in the VCP corrective notice. Appendix B contains a model VCP corrective notice that plan administrators may use to meet VCP requirements. The PBGC will treat a VCP corrective notice that is issued in accordance with the guidelines in this notice as meeting the requirements for the 2004 Participant Notice. Plan administrators should take special note that because the VCP corrective notice is tied to the requirements for the 2004 Participant Notice rather than to the requirements for the 2002 or 2003 Participant Notice that was not issued as required, the VCP corrective notice is required to be issued only to those persons entitled to receive the plan's 2004 Participant Notice (or that would be entitled to receive the plan's 2004 Participant Notice if it were required). Thus, there is no need to issue the VCP corrective notice to those persons who were entitled to receive the 2002 or 2003 Participant Notice that was not issued as required but who are not entitled to receive the 2004 Participant Notice (e.g., a participant whose entire benefit has been annuitized or paid out in a lump sum). Notice to PBGC The plan administrator must notify the PBGC that it is participating in the VCP no later than the 30th day after the due date for issuing the VCP corrective notice. The notification must include a copy of the VCP corrective notice and the name and telephone number of a person for the PBGC to contact with any questions. Plan administrators may notify the PBGC electronically through the PBGC's Web site at http:// www.pbgc.gov/participantnotice, by fax at 202-336-4197, or by mail, commercial delivery service, or hand at Contracts and Control Review Department, Pension Benefit Guaranty Corporation, 1200 K Street, NW., Suite 580, Washington, DC 20005-4026. The PBGC will promptly issue a written acknowledgment of the notification. Plan administrators should keep the acknowledgment as proof of meeting the VCP requirement of notifying the PBGC. Special Rule for Late 2002/2003 Notices Already Corrected If a plan administrator's only failure with respect to a 2002 or 2003 Participant Notice was late issuance and the failure has been corrected before May 7, 2004, the PBGC will treat the plan administrator as having participated in the VCP and will assess no penalty for that 2002 or 2003 failure (and will not pursue any pre-2002 Participant Notice failure) without requiring that the plan administrator issue a VCP corrective notice or notify the PBGC of the plan's participation in the VCP. Effect of VCP on Certification Requirements Ordinarily, a plan administrator that filed an erroneous certification on the annual PBGC premium filing as to whether a Participant Notice was required for the prior plan year and, if so, whether it was issued as required would have to file an amended certification. However, if the plan administrator notifies the PBGC of the plan's participation in the VCP, the PBGC will treat the notification as effectively amending any erroneous certification filed on or before May 7, 2004, with respect to a 2002 or 2003 Participant Notice. The PBGC will take no enforcement action based on the erroneous prior certification if the plan administrator of a plan that meets the requirements for penalty relief under the VCP amends (or effectively amends) the erroneous prior certification. meet the requirements for VCP penalty relief will be required to check a box on the 2005 PBGC premium filing notifying the PBGC of the plan's participation in the VCP. This requirement is in addition to the Notice to PBGC requirement described above that must be met to qualify for VCP penalty relief, except under "Special rule for late 2002/2003 notices already corrected." Compliance Assistance The PBGC has developed written guidance on the requirements of the VCP, including a Fact Sheet and Frequently Asked Questions. All information related to the VCP and to Participant Notice requirements generally is available on the PBGC's Web site at http://www.pbgc.gov/ participantnotice. In addition, plan administrators seeking guidance on Participant Notice compliance questions, including questions about the VCP, may submit questions electronically through that Web site or call the toll-free telephone number at the PBGC's Practitioner Customer Service Center (1-800-736-2444). Plan administrators may also contact the PBGC to request appropriate modifications to the VCP requirements on a case-by-case basis. For example, in the case of a 2002 or 2003 "partial" failure such as a failure to provide the notice to some of the participants or a failure to include in the notice some required information, the PBGC will work with the plan administrator to determine what type of correction, if any, would be needed to address the partial failure in order to qualify for penalty relief under the VCP. Future Participant Notice Penalties Elsewhere in today's Federal Register, the PBGC is proposing a new Participant Notice penalty policy. The PBGC intends to publish its final Participant Notice penalty policy as soon as practicable after considering public comments. Compliance With Rulemaking Guidelines The PBGC has determined, in consultation with the Office of Management and Budget, that this Notice is a "significant regulatory action" under Executive Order. The Office of Management and Budget has therefore reviewed this notice under Executive Order 12866. The collection of information requirements under the VCP have been approved by the Office of Management and Budget under control numbers 1212-0009 (expires December 31, 2006) and 1212-0050 (expires November 30, 2004). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. Because this action deals only with a general statement of PBGC enforcement policy, it is not subject to the notice and comment rulemaking requirements or delayed effective date requirements under section 553 of the Administrative Procedure Act. Because no general notice of proposed rulemaking is required, the Regulatory Flexibility Act does not apply. See 5 U.S.C. 601(2), 603, 604. Issued in Washington, DC, this 3rd day of May, 2004. Bradley D. Belt Appendix A
Appendix B
Prohibited Transaction Class Exemption 2002-51Department of Labor March 28, 2002 (67 FR 15083)
Class Exemption Agency: Department of Labor, Employee Benefits Security Administration Action: Grant of Class Exemption Effective Date: November 25, 2002 Exemption Section I: Eligible Transactions 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 the following eligible transactions described in section 7 of the Voluntary Fiduciary Correction (VFC) Program (67 FR 15061, March 28, 2002), provided that the applicable conditions set forth in Sections II, III and IV are met:
Section II: Conditions
(2) Notwithstanding the foregoing, Section II.F.(1) shall not apply to an applicant provided that:
Section III: Compliance with VFC Program
Section IV: Notice
Signed at Washington, DC, this 11th day of November, 2002. Ivan L. Strasfeld, [FR Doc. 02-29799 Filed 11-22-02; 8:45 am] |
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794 IRS Determination LettersDepartment of Labor - Advisory Opinion Procedure Department of the Treasury (Rev. April 1994) Favorable Determination Letter Introduction This publication explains the significance of your favorable determination letter, points out some features that may affect the qualified status of your employee retirement plan and nullify your determination letter without specific notice from us, and provides general information on the reporting requirements for your plan. An example of a determination letter is included. Significance of a Favorable Determination Letter An employee retirement plan qualified under Internal Revenue Code section 401(a) (qualified plan) is entitled to favorable tax treatment. For example, contributions made in accordance with the plan document are generally currently deductible. However, participants will not include these contributions into income until the time they receive a distribution from the plan, at which time special income averaging rates for lump sum distributions may serve to reduce the tax liability. In some cases, taxation may be further deferred by rollover to another qualified plan or individual retirement arrangement. (See Publication 575, Pension and Annuity Income, for further details.) Finally, plan earnings may accumulate free of tax. Employee retirement plans that fail to satisfy the requirements under Code section 401(a) are not entitled to favorable tax treatment. Therefore, many employers desire advance assurance that the terms of their plans satisfy the qualification requirements. The Internal Revenue Service provides such advance assurance by means of the determination letter program. A favorable determination letter indicates that, in the opinion of the Service, the terms of the plan conform to the requirements of Internal Revenue Code section 401(a). In addition, a favorable determination letter may indicate that, on the basis of other information provided in your application, it has been demonstrated that the plan satisfies certain nondiscrimination requirements of Code section 401(a). See the following topic, Limitations of a Favorable Determination Letter, for more details. Limitations of a Favorable Determination Letter A favorable determination letter is limited in scope and may also have a limited useful life. A determination letter generally applies to qualification requirements regarding the form of the plan. A determination letter may also apply to other qualification requirements pertaining to the prohibition against discrimination in favor of highly compensated employees. These requirements are generally referred to as the coverage and nondiscrimination requirements. They include the nondiscrimination requirements of section 401(a)(4) of the Code, the minimum coverage requirements of section 410(b), and certain related requirements. The extent to which a determination letter applies to the coverage and nondiscrimination requirements depends on the terms of the plan, the scope of the determination you requested, and the additional information you supplied with your application. Your determination letter will contain specific statements that will describe the scope of reliance represented by the letter. In addition, the following apply generally to all determination letters: The determination letter may not include a statement regarding the minimum coverage requirements of Code section 410(b); this means that you have demonstrated that the plan satisfies these requirements by satisfying the ratio-percentage test.
Become familiar with the terms of the determination letter. Please call the contact person listed on the determination letter if you do not understand any terms in your determination letter. Retention of Information. Whether a plan qualifies is determined from the information in the written plan document and the supporting information submitted by the employer. Therefore, you must retain copies of any demonstrations or other information submitted with your application. Such demonstrations determine the extent of reliance provided by your determination letter. Failure to retain such Information may limit the scope of reliance on issues for which demonstrations were provided. The determination letter will not provide reliance if:
Law changes affecting the plan. In general, a determination letter is issued based on the law in effect at the time the application is received. However, your letter may include a statement indicating any exception to this rule. Amendments to the plan. A favorable determination letter may no longer apply if there is a change in a statute, regulation, or revenue ruling applicable to the qualification of the plan. However, the determination letter will continue to apply for years before the effective date of the statute, regulation, or revenue ruling. If the letter no longer applies to the plan, the plan must be amended to comply with the new requirements to maintain its qualified status. Generally, if a regulation changes, the amendment must be adopted by the end of the first plan year beginning after the adoption date of the regulation. Generally, if a revenue ruling changes, the amendment must be adopted by the end of the first plan year beginning after the publication date of the revenue ruling. Generally the amendment must be effective not later than the first day of such plan year. Amendments required by Internal Revenue Code sections 401(a)(17) and 401(a)(31). If the plan is a master or prototype or regional prototype plan, the determination letter may be relied on with respect to the direct rollover requirements of Internal Revenue Code section 401(a)(31) and the $150,000 compensation limitation of Internal Revenue Code section 401(a)(17), only if the sponsor amends the master or prototype or regional prototype plan on behalf of all adopting employers to satisfy these requirements by December 31, 1994. In the case of individually designed plans, letters issued under Rev. Proc. 93-39 consider these requirements. Extended Reliance. In general, individually designed plans (not master or prototype, or regional prototype plans) submitted for a determination letter before July 1, 1994 need not be amended for, or comply in operation with subsequent Treasury regulations or other guidance (for example, revenue rulings, notices, etc.) issued by the Service after the date of the plan determination letter until the last day of the last plan year commencing prior to January 1, 1999, unless specifically stated otherwise. However, plans must be amended by any date(s) established for plan amendment by subsequent legislation. If the determination letter is dated after June 30, 1994, this extended reliance will apply only d so stated in the determination letter. Similar reliance applies to master and prototype or regional prototype plans if the plan sponsor requested a notification or opinion letter before April 1, 1991. Plan Must Qualify in Operation Generally, a plan qualifies in operation if it continues to satisfy the coverage and nondiscrimination requirements and is maintained according to the terms on which the favorable determination letter was issued. Changes in facts and other bases on which the determination letter was issued may mean that the determination letter may no longer be relied upon. Some examples of the effect of a plan's operation on a favorable determination are: Not meeting nondiscrimination in amount requirement. If the determination letter states that the plan satisfies the nondiscrimination in amount requirement of section 1.401(a)(4)-1(b)(2) of the regulations on the basis of a design-based safe harbor, the plan will generally continue to satisfy this requirement in operation n the plan is maintained according to its terms. If the determination letter states that the plan satisfies the nondiscrimination in amount requirement on the basis of a nondesign-based safe harbor or a general test, and the plan subsequently fails to meet this requirement in operation, the letter may no longer be relied upon with respect to this requirement. Not meeting minimum coverage requirements. If the determination letter does not include a statement regarding the minimum coverage requirements of Code section 410(b), this means that the plan satisfies these requirements by satisfying the ratio-percentage test. However, if the plan subsequently fails to satisfy the ratio-percentage test in operation, the letter may no longer be relied upon with respect to the coverage requirements. Likewise, if the determination letter states the plan satisfies the average benefit test, the letter may no longer be relied on with respect to the coverage requirements once the plan fails to satisfy the average benefit test in operation. Changes in testing methods. If the determination letter is based in part on a demonstration that a coverage or nondiscrimination requirement is satisfied, and, in the operation of the plan, the method used to test that this requirement continues to be satisfied is changed (or is required to be changed because the facts have changed) from the method employed in the demonstration, the letter may no longer be relied upon with respect to this requirement. Contributions or benefits in excess of the limitations under Code section 415. A retirement plan may not provide retirement benefits or, in the case of a defined contribution plan, contributions and other additions, that exceed the limitations specified in Internal Revenue Code section 415. Your plan contains provisions designed to provide benefits within these limitations. Please become familiar with these limitations for your plan will be disqualified if these limitations are exceeded. Top heavy minimums. If this plan primarily benefits employees who are highly compensated, it may be a top heavy plan and must provide certain minimum benefits and vesting for lower compensated employees. If your plan provides the accelerated benefits and vesting only for years during which the plan is top heavy, failure to identify such years and to provide the accelerated vesting and benefits will disqualify the plan. Actual deferral percentage or contribution percentage tests. If this plan provides for cash or deferred arrangements, employer matching contributions, or employee contributions, the determination letter does not consider whether special discrimination tests described in Code section 401(k)(3) or 401(m)(2) have been satisfied in operation. Reporting Requirements Most plan administrators or employers who maintain an employee benefit plan must file an annual return/report with the Internal Revenue Service. The following is a general discussion of the forms to be used for this purpose. See the instructions to each form for specific information: Form 5500-EZ, Annual Return of One Participant (Owners and their Spouses) Pension Benefit Plans - generally for a "One-participant Plan', which is a plan that covers only:
If Form 5500-EZ cannot be used, the one-participant plan should use Form 5500-C/R, Return/Report of Employee Benefit Plan. Note. A "one-participant" plan that has no more than $100,000 in assets at the end of the plan year is not required to file a return. However, Form 5500-EZ must be filed for any subsequent year in which plan assets exceed $100,000. If two or more one-participant plans have more than $100,000 in assets, a separate Form 5500-EZ must be filed for each plan. A "Final" Form 5500-EZ must be filed if the plan is terminated or if assets drop below $100,000 and you wish to stop filing Form 5500-EZ. Form 5500, Annual Return/Report Of Employee Benefit Plan - for a pension benefit plan with 100 or more participants at the beginning of the plan year. Form 5500-C/R, Return/Report of Employee Benefit Plan - for each pension benefit plan with more than one but fewer than 100 participants at the beginning of the plan year. Form 5500-C/R takes the place of separate Forms 5500-C and 5500-R. Filing only the first two pages of Form 5500-C/R constitutes the filing of Form 5500-R for plan years for which Form 5500-C is not filed. Note. Keogh (HR-10) plans having over $100,000 in assets are required to file an annual return even if the only participants are owner-employees. The term "owner-employee' includes a partner who owns more than 10% interest in either the capital or profits of the partnership. This applies to both defined contribution and defined benefit plans. When to file. Forms 5500 and 5500-EZ must be filed annually. Form 5500-C must be filed for (i) the initial plan year, (ii) the year a final return/report would be filed, and (iii) at three-year intervals. Form 5500-R pages 1 and 2 of Form 5500-C/R) must be filed in the years when 5500-C is not filed. However, 5500-C will be accepted in place of 5500-R. Form 5330 for prohibited transactions - Transactions between a plan and someone having a relationship to the plan (disqualified person) are prohibited, unless specifically exempted from this requirement. A few examples are loans, sales and exchanges of property, leasing of property, furnishing goods or services, and use of plan assets by the disqualified person. Disqualified persons who engage in a prohibited transaction for which there is no exception must file Form 5330 by the last day of the seventh month after the end of the tax year of the disqualified person. Form 5330 for tax on nondeductible employer contributions to qualified plans - If contributions are made to this plan in excess of the amount deductible, a tax is imposed upon the excess contribution. Form 5330 must be filed by the last day of the seventh month after the end of the employer's tax year. Form 5330 for tax on excess contributions to cash or deferred arrangements or excess employee contributions or employer matching contributions - If a plan includes a cash or deferred arrangement (Code section 401(k)) or provides for employee contributions or employer matching contributions (Code section 401(m)), then excess contributions that would cause the plan to fail the actual deferral percentage or the actual contribution percentage test are subject to a tax unless the excess is eliminated within 2 1/2 months after the end of the plan year. Form 5330 must be filed by the due date of the employer's tax return for the plan year in which the tax was incurred. Form 5330 for tax on reversions of plan assets - Under Code section 4980, a tax is payable on the amount of any employer reversion of plan assets. Form 5330 must be filed by the last day of the month following the month in which the reversion occurred. Form 5310-A for certain transactions - Under Code section 6058(b), an actuarial statement is required at least 30 days before a merger, consolidation, or transfers (including spin-offs) of assets to another plan. This statement is required for all plans. However, penalties for non-filing will not apply to defined contribution plans for which:
Penalties will also not apply if the assets transferred are less than three percent of the assets of the plan involved in the transfer (spin-off), and the transaction is not one of a series of two or more transfers (spin-off transactions) that are, in substance, one transaction. The purpose of the above discussions is to illustrate some of the principal filing requirements that apply to pension plans. This listing is not an exclusive listing of all returns and schedules that must be filed. Disclosure. The Internal Revenue Service will process the returns and provide the Department of Labor and the Pension Benefit Guaranty Corporation with the necessary information and copies of the returns on microfilm for disclosure purposes. Example - IRS Determination LetterExample - IRS Determination Letter Department of the Treasury In reply refer to: 75260006 Springfield AS 99001 Dec. 04, 1987 LTR 835AU 73-0793565P 0000 74 001 Input 0p: 75018508 00016 Flimflam & Jones, P.C. 1000 Ajax Life Bldg PLANO AS 99103 District Office Code and Case Serial Number: 73737028 EP Name of Plan: Flimflam & Jones Profit Sharing Plan Application Form: 5301 Date Amended: 030386 Employer Identification Number: 73-0793565 Plan Number: 001 File Number: 730000488 Dear Applicant: Based on the information supplied, we have made a favorable determination on your application identified above. Please keep this letter in your permanent records. Continued qualification of the plan will depend on its effect in operation under its present form. (See Section 1.401-1(b)(3) of the Income Tax Regulations.) The status of the plan in operation will be reviewed periodically. The enclosed document describes some events that could occur after you receive this letter that would automatically nullify it without specific notice from us. The document also explains how operation of the plan may affect a favorable determination letter, and contains information about filing requirements. This letter relates only to the status of your plan under the Internal Revenue Code. It is not a determination regarding the effect of other federal or local statutes. This determination is not a ruling on the effect of reclamination on the deferred percentage test. If you have any questions, please contact E P Tech Assistor at 703-754-1234. Sincerely your, James P. Huttonski Enclosures: US Treasury Notice 2004-8 - Abusive Roth IRA TransactionU.S. Treasury Notice 2004-8 December 31, 2003
Notice 2004-8 Part III - Administrative, Procedural and Miscellaneous December 31, 2003 U.S. Treasury Notice Abusive Roth IRA Transactions Notice 2004-8 The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, that taxpayers are using to avoid the limitations on contributions to Roth IRAs. This notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, as well as substantially similar transactions, as listed transactions for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 301.6111-2(b)(2) and 301.6112-1(b)(2) of the Procedure and Administration Regulations. This notice also alerts parties involved with these transactions of certain responsibilities that may arise from their involvement with these transactions. Background Section 408A was added to the Internal Revenue Code by section 302 of the Taxpayer Relief Act of 1997, Pub. L. 105-34, 105th Cong., 1st Sess. 40 (1997). This section created Roth IRAs as a new type of nondeductible individual retirement arrangement (IRA). The maximum annual contribution to Roth IRAs is the same maximum amount that would be allowable as a deduction under § 219 with respect to the individual for the taxable year over the aggregate amount of contributions for that taxable year to all other IRAs. Neither the contributions to a Roth IRA nor the earnings on those contributions are subject to tax on distribution, if distributed as a qualified distribution described in § 408A(d)(2). A contribution to a Roth IRA above the statutory limits generates a 6 - percent excise tax described in § 4973. The excise tax is imposed each year until the excess contribution is eliminated. Facts In general, these transactions involve the following parties: (1) an individual (the Taxpayer) who owns a pre-existing business such as a corporation or a sole proprietorship (the Business), (2) a Roth IRA within the meaning of § 408A that is maintained for the Taxpayer, and (3) a corporation (the Roth IRA Corporation), substantially all the shares of which are owned or acquired by the Roth IRA. The Business and the Roth IRA Corporation enter into transactions as described below. The acquisition of shares, the transactions or both are not fairly valued and thus have the effect of shifting value into the Roth IRA. Examples include transactions in which the Roth IRA Corporation acquires property, such as accounts receivable, from the Business for less than fair market value, contributions of property, including intangible property, by a person other than the Roth IRA, without a commensurate receipt of stock ownership, or any other arrangement between the Roth IRA Corporation and the Taxpayer, a related party described in § 267(b) or 707(b), or the Business that has the effect of transferring value to the Roth IRA Corporation comparable to a contribution to the Roth IRA. Analysis The transactions described in this notice have been designed to avoid the statutory limits on contributions to a Roth IRA contained in § 408A. Because the Taxpayer controls the Business and is the beneficial owner of substantially all of the Roth IRA Corporation, the Taxpayer is in the position to shift value from the Business to the Roth IRA Corporation. The Service intends to challenge the purported tax benefits claimed for these arrangements on a number of grounds. In challenging the purported tax benefits, the Service will, in appropriate cases, assert that the substance of the transaction is that the amount of the value shifted from the Business to the Roth IRA Corporation is a payment to the Taxpayer, followed by a contribution by the Taxpayer to the Roth IRA and a contribution by the Roth IRA to the Roth IRA Corporation. In such cases, the Service will deny or reduce the deduction to the Business; may require the Business, if the Business is a corporation, to recognize gain on the transfer under § 311(b); and may require inclusion of the payment in the income of the Taxpayer (for example, as a taxable dividend if the Business is a C corporation). See Sammons v. United States, 433 F.2d 728 (5th Cir. 1970); Worcester v. Commissioner, 370 F.2d 713 (1st Cir. 1966). Depending on the facts of the specific case, the Service may apply § 482 to allocate income from the Roth IRA Corporation to the Taxpayer, Business, or other entities under the control of the Taxpayer. Section 482 provides the Secretary with authority to allocate gross income, deductions, credits or allowances among persons owned or controlled directly or indirectly by the same interests, if such allocation is necessary to prevent evasion of taxes or clearly to reflect income. The § 482 regulations provide that the standard to be applied is that of a person dealing at arm's length with an uncontrolled person. See generally § 1.482-1(b) of the Income Tax Regulations. To the extent that the consideration paid or received in transactions between the Business and the Roth IRA Corporation is not in accordance with the arm's length standard, the Service may apply § 482 as necessary to prevent evasion of taxes or clearly to reflect income. In the event of a § 482 allocation between the Roth IRA Corporation and the Business or other parties, correlative allocations and other conforming adjustments would be made pursuant to § 1.482-1(g). Also see, Rev. Rul. 78-83, 1978-1 C.B. 79. In addition to any other tax consequences that may be present, the amount treated as a contribution as described above is subject to the excise tax described in § 4973 to the extent that it is an excess contribution within the meaning of § 4973(f). This is an annual tax that is imposed until the excess amount is eliminated. Moreover, under § 408(e)(2)(A), the Service may take the position in appropriate cases that the transaction gives rise to one or more prohibited transactions between a Roth IRA and a disqualified person described in § 4975(e)(2). For example, the Department of Labor has advised the Service that, to the extent that the Roth IRA Corporation constitutes a plan asset under the Department of Labor's plan asset regulation (29 C.F.R. § 2510.3-101), the provision of services by the Roth IRA Corporation to the Taxpayer's Business (which is a disqualified person with respect to the Roth IRA under § 4975(e)(2)) would constitute a prohibited transaction under § 4975(c)(1)(C). Further, the Department of Labor has advised the Service that, if a transaction between a disqualified person and the Roth IRA would be a prohibited transaction, then a transaction between that disqualified person and the Roth IRA Corporation would be a prohibited transaction if the Roth IRA may, by itself, require the Roth IRA Corporation to enter into the transaction. Listed Transactions The following transactions are identified as "listed transactions" for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2) and 301.6112-1(b)(2) effective December 31, 2003, the date this document is released to the public: arrangements in which an individual, related persons described in § 267(b) or 707(b), or a business controlled by such individual or related persons, engage in one or more transactions with a corporation, including contributions of property to such corporation, substantially all the shares of which are owned by one or more Roth IRAs maintained for the benefit of the individual, related persons described in § 267(b)(1), or both. The transactions are listed transactions with respect to the individuals for whom the Roth IRAs are maintained, the business (if not a sole proprietorship) that is a party to the transaction, and the corporation substantially all the shares of which are owned by the Roth IRAs. Independent of their classification as "listed transactions," these transactions may already be subject to the disclosure requirements of § 6011 (§ 1.6011-4), the tax shelter registration requirements of § 6111 (§§ 301.6111-1T and 301.6111-2), or the list maintenance requirements of § 6112 (§ 301.6112-1). Substantially similar transactions include transactions that attempt to use a single structure with the intent of achieving the same or substantially same tax effect for multiple taxpayers. For example, if the Roth IRA Corporation is owned by multiple taxpayers' Roth IRAs, a substantially similar transaction occurs whenever that Roth IRA Corporation enters into a transaction with a business of any of the taxpayers if distributions from the Roth IRA Corporation are made to that taxpayer's Roth IRA based on the purported business transactions done with that taxpayer's business or otherwise based on the value shifted from that taxpayer's business to the Roth IRA Corporation. Persons required to register these tax shelters under § 6111 who have failed to do so may be subject to the penalty under § 6707(a). Persons required to maintain lists of investors under § 6112 who have fail to do so (or who fail to provide such lists when requested by the Service) may be subject to the penalty under § 6708(a). In addition, the Service may impose penalties on participants in this transaction or substantially similar transactions, including the accuracy related penalty under § 6662, and as applicable, persons who participate in the reporting of this transaction or substantially similar transactions, including the return preparer penalty under § 6694, the promoter penalty under § 6700, and the aiding and abetting penalty under § 6701. The Service and the Treasury recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the type of transaction described in this notice. These taxpayers should consult with a tax advisor to ensure that their transactions are disclosed properly and to take appropriate corrective action. Drafting Information The principal author of this notice is Michael Rubin of the Employee Plans, Tax Exempt and Government Entities Division. However, other personnel from the Service and Treasury participated in its development. Mr. Rubin may be reached at (202) 283-9888 (not a toll-free call). Footnotes
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Miscellaneous Laws |
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Pension Protection Act of 2006Economic Growth and Tax Relief Reconciliation Act of 2001(Sections Made Permanent by Section 811 of the Pension Protection Act of 2006) TITLE VI - Pension and Individual Retirement Arrangement ProvisionsSubtitle A - Individual Retirement Accounts Sec. 601. Modification of IRA contribution limits. Subtitle B - Expanding Coverage Sec. 611. Increase in benefit and contribution limits. Subtitle C - Enhancing Fairness for Women Sec. 631. Catch-up contributions for individuals age 50 or over. Subtitle D - Increasing Portability for Participants Sec. 641. Rollovers allowed among various types of plans. Subtitle E - Strengthening Pension Security and Enforcement PART I - GENERAL PROVISIONSSec. 651. Repeal of 160 percent of current liability funding limit. PART II–TREATMENT OF PLAN AMENDMENTS REDUCING FUTURE BENEFIT ACCRUALSSec. 659. Excise tax on failure to provide notice by defined benefit plans significantly reducing future benefit accruals. Subtitle F - Reducing Regulatory Burdens Sec. 661. Modification of timing of plan valuations. Subtitle A – Individual Retirement Accounts Sec. 601. Modification Of IRA Contribution Limits.
Sec. 602. Deemed IRAs Under Employer Plans.
Subtitle B – Expanding Coverage Sec. 611. Increase In Benefit And Contribution Limits.
Sec. 612. Plan Loans For Subchapter S Owners, Partners, And Sole Proprietors.
Sec. 613. Modification Of Top-Heavy Rules.
Sec. 614. Elective Deferrals Not Taken Into Account For Purposes Of Deduction Limits.
Sec. 615. Repeal Of Coordination Requirements For Deferred Compensation Plans Of State And Local Governments And Tax-Exempt Organizations.
Sec. 616. Deduction Limits.
Sec. 617. Option To Treat Elective Deferrals As After-Tax Roth Contributions.
Sec. 618. Nonrefundable Credit To Certain Individuals For Elective Deferrals And IRA Contributions.
Sec. 619. Credit For Pension Plan Startup Costs Of Small Employers.
Sec. 620. Elimination Of User Fee For Requests To IRS Regarding Pension Plans.
Sec. 621. Treatment Of Nonresident Aliens Engaged In International Transportation Services.
Subtitle C – Enhancing Fairness for Women Sec. 631. Catch-Up Contributions For Individuals Age 50 Or Over.
Sec. 632. Equitable Treatment For Contributions Of Employees To Defined Contribution Plans.
Sec. 633. Faster Vesting Of Certain Employer Matching Contributions.
Sec. 634. Modification To Minimum Distribution Rules. The Secretary of the Treasury shall modify the life expectancy tables under the regulations relating to minimum distribution requirements under sections 401(a)(9), 408(a)(6) and (b)(3), 403(b)(10), and 457(d)(2) of the Internal Revenue Code to reflect current life expectancy. Sec. 635. Clarification Of Tax Treatment Of Division Of Section 457 Plan Benefits Upon Divorce.
Sec. 636. Provisions Relating To Hardship Distributions.
Sec. 637. Waiver Of Tax On Nondeductible Contributions For Domestic Or Similar Workers.
Subtitle D – Increasing Portability for Participants Sec. 641. Rollovers Allowed Among Various Types Of Plans.
Sec. 642. Rollovers Of IRAs Into Workplace Retirement Plans.
Sec. 643. Rollovers Of After-Tax Contributions.
Sec. 644. Hardship Exception To 60-Day Rule.
Sec. 645. Treatment Of Forms Of Distribution.
Sec. 646. Rationalization Of Restrictions On Distributions.
Sec. 647. Purchase Of Service Credit In Governmental Defined Benefit Plans.
Sec. 648. Employers May Disregard Rollovers For Purposes Of Cash-Out Amounts.
Sec. 649. Minimum Distribution And Inclusion Requirements For Section 457 Plans.
Subtitle E – Strengthening Pension Security and Enforcement Part I – General Provisions Sec. 651. Repeal Of 160 Percent Of Current Liability Funding Limit.
Sec. 652. Maximum Contribution Deduction Rules Modified And Applied To All Defined Benefit Plans.
Sec. 653. Excise Tax Relief For Sound Pension Funding.
Sec. 654. Treatment Of Multi-employer Plans Under Section 415.
Sec. 655. Protection Of Investment Of Employee Contributions To 401(K) Plans.
Sec. 656. Prohibited Allocations Of Stock In S Corporation ESOP.
Sec. 657. Automatic Rollovers Of Certain Mandatory Distributions.
Sec. 658. Clarification Of Treatment Of Contributions To Multi-employer Plan.
PART II – TREATMENT OF PLAN AMENDMENTS REDUCING FUTURE BENEFIT ACCRUALSSec. 659. Excise Tax On Failure To Provide Notice By Defined Benefit Plans Significantly Reducing Future Benefit Accruals.
Subtitle F – Reducing Regulatory Burdens Sec. 661. Modification Of Timing Of Plan Valuations.
Sec. 662. ESOP Dividends May Be Reinvested Without Loss Of Dividend Deduction.
Sec. 663. Repeal Of Transition Rule Relating To Certain Highly Compensated Employees.
Sec. 664. Employees Of Tax-Exempt Entities.
Sec. 665. Clarification Of Treatment Of Employer-Provided Retirement Advice.
Sec. 666. Repeal Of The Multiple Use Test.
Tax Relief and Health Care Act of 2006Title III: Health Savings Accounts SEC. 301. SHORT TITLE. This title may be cited as the "Health Opportunity Patient Empowerment Act of 2006". SEC. 302. FSA AND HRA TERMINATIONS TO FUND HSAs.
SEC. 303. REPEAL OF ANNUAL DEDUCTIBLE LIMITATION ON HSA CONTRIBUTIONS.
SEC. 304. MODIFICATION OF COST-OF-LIVING ADJUSTMENT. Paragraph (1) of section 223(g) (relating to cost-of living adjustment) is amended by adding at the end the following new flush sentence:
SEC. 305. CONTRIBUTION LIMITATION NOT REDUCED FOR PART - YEAR COVERAGE.
SEC. 306. EXCEPTION TO REQUIREMENT FOR EMPLOYERS TO MAKE COMPARABLE HEALTH SAVINGS ACCOUNT CONTRIBUTIONS.
SEC. 307. ONE-TIME DISTRIBUTION FROM INDIVIDUAL RETIREMENT PLANS TO FUND HSAs.
Medicare Prescription Drug Improvement Act of 2003TITLE XII - TAX INCENTIVES FOR HEALTH AND RETIREMENT SECURITYSEC. 1201. HEALTH SAVINGS ACCOUNTS.
SEC. 1202. EXCLUSION FROM GROSS INCOME OF CERTAIN FEDERAL SUBSIDIES FOR PRESCRIPTION DRUG PLANS.
SEC. 1203. EXCEPTION TO INFORMATION REPORTING REQUIREMENTS RELATED TO CERTAIN HEALTH ARRANGEMENTS.
Approved December 8, 2003. |