Amendment to Prohibited Transaction Exemption 80-26 (PTE 80-26) for Certain Interest Free Loans to Employee Benefit Plans, 17917-17920 [E6-5075]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 71, Number 67 (Friday, April 7, 2006)]
[Notices]
[Pages 17917-17920]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-5075]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application Number D-11046]


Amendment to Prohibited Transaction Exemption 80-26 (PTE 80-26) 
for Certain Interest Free Loans to Employee Benefit Plans

AGENCY: Employee Benefits Security Administration, U.S. Department of 
Labor.

ACTION: Adoption of Amendment to PTE 80-26.

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SUMMARY: This document amends PTE 80-26, a class exemption that permits 
parties in interest with respect to employee benefit plans to make 
certain interest free loans to such plans, provided that the conditions 
of the exemption are met. The amendment affects all employee benefit 
plans, the participants and beneficiaries of such plans, and parties in 
interest with respect to those plans engaging in the described 
transactions.

DATES: Effective Date: The amendment to PTE 80-26 is effective December 
15, 2004.

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

SUPPLEMENTARY INFORMATION: On December 15, 2004, notice was published 
in the Federal Register (69 FR 75088) of the pendency before the 
Department of a proposed amendment to PTE 80-26 (45 FR 28545 (April 29, 
1980), as amended at 65 FR 17540 (April 3, 2000) and 67 FR 9485 (March 
1, 2002)).\1\ PTE 80-26 provides an exemption from the restrictions of 
section 406(a)(1)(B) and (D) and section 406(b)(2) of the Employee 
Retirement Income Security Act of 1974 (ERISA or the Act) and from the 
taxes imposed by section 4975(a) and (b) of the Internal Revenue Code 
of 1986 (the Code), by reason of section 4975(c)(1)(B) and (D) of the 
Code.
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    \1\ A minor correction was made to the title of the final 
exemption in a notice published in the Federal Register on May 23, 
1980. (45 FR 35040).
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    The amendment to PTE 80-26 adopted by this notice was proposed by 
the Department on its own motion pursuant to section 408(a) of ERISA 
and section 4975(c)(2) of the Code, and in accordance with the 
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 
32847, August 10, 1990).\2\
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    \2\ Section 102 of the Reorganization Plan No. 4 of 1978 (5 
U.S.C. App. at 214 (2000 ed.) generally transferred the authority of 
the Secretary of the Treasury to issue administrative exemptions 
under section 4975 of the Code to the Secretary of Labor.
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    The notice of pendency gave interested persons an opportunity to 
comment or to request a hearing on the proposed amendment. The 
Department received two comment letters, and no requests for a public 
hearing. Upon consideration of the comments received, the Department 
has determined to grant the proposed amendment, with one minor 
modification. The modification and the comments are discussed below.
    For the sake of convenience, the entire text of PTE 80-26, as 
amended, has been reprinted in this notice.

Executive Order 12866 Statement

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

Paperwork Reduction Act

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

[[Page 17918]]

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

Discussion of the Proposed Exemption and the Comments Received

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

[[Page 17919]]

in section 408(b)(3) of ERISA or section 4975(d)(3) of the Code are not 
covered by the class exemption.\4\ The commenter states that, since 
section IV(e) only references sections 408(b)(3) of ERISA and 
4975(d)(3) of the Code which generally refer to exemptive relief for 
loans involving ESOPs, but not the regulations promulgated under those 
exemptions which more narrowly define the types of ESOP loans that are 
eligible for exemptive relief under those exemptions, section IV(e) may 
be interpreted as precluding relief for any loan from a party in 
interest to an ESOP.\5\
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    \3\ Section IV(e) of the proposed amendment was incorrectly 
identified therein as section IV(3). This error has been corrected 
in this adopted amendment.
    \4\ Section 408(b)(3) of ERISA provides a statutory exemption 
from the prohibitions set forth in section 406 of ERISA for ``a loan 
to an employee stock ownership plan.'' Section 4975(d)(3) provides a 
statutory exemption from the prohibitions set forth in section 4975 
of the Code for ``any loan to a leveraged employee stock ownership 
plan'' if certain conditions are met.
    \5\ See 29 CFR 2550.408b-3 and 26 CFR 54.4975-7(b). Among other 
things, the regulations limit relief under the statutory exemptions 
to loans that relate to the acquisition of qualifying employer 
securities by an ESOP.
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    In response to the comment, the Department has revised section 
IV(e) of the proposed amendment to more accurately reflect the 
Department's intent. In this regard, the Department intended that 
section IV(e) of PTE 80-26 would preclude relief for loans involving 
ESOPs to the extent that such loans relate to the acquisition by the 
ESOP of employer securities. The Department is therefore revising 
section IV(e) of PTE 80-26 to provide that loans described in section 
408(b)(3) of ERISA and the regulations promulgated thereunder, or 
section 4975(d)(3) of the Code and the regulations promulgated 
thereunder, are not covered by the class exemption.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of ERISA and section 4975(c)(2) of the Code does 
not relieve a fiduciary, or other party in interest or disqualified 
person with respect to a plan, from certain other provisions of ERISA 
and the Code, including any prohibited transaction provisions to which 
the exemption does not apply and the general fiduciary responsibility 
provisions of section 404 of ERISA which require, among other things, 
that a fiduciary act prudently and discharge his or her duties 
respecting the plan solely in the interests of the participants and 
beneficiaries of the plan. Additionally, the fact that a transaction is 
the subject of an exemption does not affect the requirement of section 
401(a) of the Code that the plan must operate for the exclusive benefit 
of the employees of the employer maintaining the plan and their 
beneficiaries;
    (2) This exemption does not extend to transactions prohibited under 
section 406(b)(1) and (3) of the Act or section 4975(c)(1)(E) or (F) of 
the Code;
    (3) In accordance with section 408(a) of ERISA and section 
4975(c)(2) of the Code, the Department makes the following 
determinations:
    (i) The amendment set forth herein is administratively feasible,
    (ii) The amendment set forth herein is in the interests of the plan 
and its participants and beneficiaries,
    (iii) The amendment set forth herein is protective of the rights of 
participants and beneficiaries of the plan;
    (4) The amendment is applicable to a particular transaction only if 
the transaction satisfies the conditions specified in the exemption; 
and
    (5) The amendment will be supplemental to, and not in derogation 
of, any other provisions of ERISA and the Code, including statutory or 
administrative exemptions and transitional rules. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction.

Amendment

    Under section 408(a) of the Act and section 4975(c)(2) of the Code 
and in accordance with the procedures set forth in 29 CFR 2570, Subpart 
B (55 FR 32836, 32847, August 10, 1990), the Department amends PTE 80-
26 as set forth below:

Section I. Retroactive General Exemption

    Effective January 1, 1975 until December 14, 2004 the restrictions 
of section 406(a)(1)(B) and (D) and section 406(b)(2) of the Act, and 
the taxes imposed by section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1)(B) and (D) of the Code, shall not apply to the 
lending of money or other extension of credit from a party in interest 
or disqualified person to an employee benefit plan, nor to the 
repayment of such loan or other extension of credit in accordance with 
its terms or written modifications thereof, if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only--
    (1) For the payment of ordinary operating expenses of the plan, 
including the payment of benefits in accordance with the terms of the 
plan and periodic premiums under an insurance or annuity contract, or
    (2) For a period of no more than three business days, for a purpose 
incidental to the ordinary operation of the plan;
    (c) The loan or extension of credit is unsecured; and
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan.

Section II: Temporary Exemption

    Effective November 1, 1999 through December 31, 2000, the 
restrictions of section 406(a)(1)(B) and (D) and section 406(b)(2) of 
the Act, and the taxes imposed by section 4975(a) and (b) of the Code, 
by reason of section 4975(c)(1)(B) and (D) of the Code, shall not apply 
to the lending of money or other extension of credit from a party in 
interest or disqualified person to an employee benefit plan, nor to the 
repayment of such loan or other extension of credit in accordance with 
its terms or written modifications thereof, if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only 
for a purpose incidental to the ordinary operation of the plan which 
arises in connection with the plan's inability to liquidate, or 
otherwise access its assets or access data as a result of a Y2K 
problem.
    (c) The loan or extension of credit is unsecured;
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan; and
    (e) The loan or extension of credit begins on or after November 1, 
1999 and is repaid or terminated no later than December 31, 2000.

Section III. September 11, 2001 Market Disruption Exemption

    Effective September 11, 2001 through January 9, 2002, the 
restrictions of section 406(a)(1)(B) and (D) and section 406(b)(2) of 
the Act, and the taxes imposed by section 4975(a) and (b) of the Code, 
by reason of section 4975(c)(1)(B) and (D) of the Code, shall not apply 
to the lending of money or other extension of credit from a party in 
interest or disqualified person to an employee benefit plan, nor to the

[[Page 17920]]

repayment of such loan or other extension of credit in accordance with 
its terms or written modifications thereof, if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only 
for a purpose incidental to the ordinary operation of the plan which 
arises in connection with difficulties encountered by the plan in 
liquidating, or otherwise accessing its assets, or accessing its data 
in a timely manner as a direct or indirect result of the September 11, 
2001 disruption;
    (c) The loan or extension of credit is unsecured;
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan; and
    (e) The loan or extension of credit begins on or after September 
11, 2001, and is repaid or terminated no later than January 9, 2002.

Section IV. Prospective General Exemption

    Effective as of December 15, 2004, the restrictions of section 
406(a)(1)(B) and (D) and section 406(b)(2) of the Act, and the taxes 
imposed by section 4975(a) and (b) of the Code, by reason of section 
4975(c)(1)(B) and (D) of the Code, shall not apply to the lending of 
money or other extension of credit from a party in interest or 
disqualified person to an employee benefit plan, nor to the repayment 
of such loan or other extension of credit in accordance with its terms 
or written modifications thereof, if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only--
    (1) for the payment of ordinary operating expenses of the plan, 
including the payment of benefits in accordance with the terms of the 
plan and periodic premiums under an insurance or annuity contract, or
    (2) for a purpose incidental to the ordinary operation of the plan;
    (c) The loan or extension of credit is unsecured;
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan;
    (e) The loan is not described in section 408(b)(3) of ERISA and the 
regulations promulgated thereunder (29 CFR 2550.408b-3) or section 
4975(d)(3) of the Code and the regulations promulgated thereunder (26 
CFR 54.4975-7(b)); and
    (f)(1) Any loan described in section IV(b)(1) that is entered into 
on or after April 7, 2006 and that has a term of 60 days or longer must 
be made pursuant to a written loan agreement that contains all of the 
material terms of such loan.
    (2) Any loan described in (b)(2) of this paragraph that is entered 
into for a term of 60 days or longer must be made pursuant to a written 
loan agreement that contains all of the material terms of such loan.

Section V: Definitions

    (a) For purposes of section II, a ``Y2K problem'' is a disruption 
of computer operations resulting from a computer system's inability to 
process data because such system recognizes years only by the last two 
digits, causing a ``00'' entry to be read as the year ``1900'' rather 
than the year ``2000.''
    (b) For purposes of section III, the ``September 11, 2001 
disruption'' is the disruption to the United States financial and 
securities markets and/or the operation of persons providing 
administrative services to employee benefit plans, resulting from the 
acts of terrorism that occurred on September 11, 2001.
    (c) For purposes of this exemption, the terms ``employee benefit 
plan'' and ``plan'' refer to an employee benefit plan described in 
ERISA section 3(3) and/or a plan described in section 4975(e)(1) of the 
Code.

    Signed at Washington, DC, this 3rd day of April, 2006.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
[FR Doc. E6-5075 Filed 4-6-06; 8:45 am]
BILLING CODE 4510-29-P