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This booklet provides information about the exemption
provisions under Section 408(a) of Title I of the Employee Retirement
Income Security Act (ERISA). The booklet is intended to provide employers,
plan administrators and employee benefit practitioners with the basic
requirements and procedures needed to apply for exemptions from the
prohibited transaction rules of ERISA . Included are discussions of the
statutory criteria for granting an exemption under the law; description of
the procedures for requesting an exemption from the U. S. Department of
Labor; examples of exemption requests; and where to go for assistance with
exemption application requests.
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The Employee Retirement Income Security Act of 1974 (ERISA) prohibits
certain classes of transactions between employee benefit plans and certain
persons defined as parties in interest. The law does, however,
contain a number of statutory exemptions from the prohibited transaction
rules.
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In addition, ERISA gives the Department of Labor
authority to grant administrative exemptions from the prohibited
transaction provisions if the department first finds that the exemption
is:
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Administratively feasible
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In the interest of the plan and of
its participants and beneficiaries
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Protective of the rights of
participants
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Beneficiaries of the plan
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Most of the transactions prohibited by ERISA are likewise prohibited under
the Internal Revenue Code. The Code also contains exemptive authority
similar to that found under ERISA. By virtue of Reorganization Plan No. 4 of
1978, the authority of the Treasury Department to grant exemptions for
prohibited transactions under the Code was largely transferred to the department.
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On August 10, 1990, the department adopted a final exemption procedure
detailing the steps to be taken by applicants in applying for an exemption
and the steps normally taken by the department in considering the
applications. With adoption of those procedures, the department believes the
process for reviewing exemption applications can be expedited.
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The department has gained 20 years of experience with the processing of
large numbers of applications for exemptions from ERISA's prohibited
transaction provisions. Through that experience with a wide variety of
transactions, a number of transactions have emerged which have similar
characteristics. This booklet describes the factors the department ordinarily requires in routine exemption requests.
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Questions or requests for advice about an exemption or
application should be put in writing and directed to the:
U.S. Department of Labor
Employee Benefits Security Administration
Office of Exemption Determinations
200 Constitution Avenue, NW, Suite N-5649
Washington, DC 20210
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The ERISA law contains several specific exemptions whereby plans may engage
in transactions otherwise prohibited by law. In order to use these statutory
exemptions, parties must meet the conditions of the applicable exemption.
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ERISA generally provides statutory exemptions for, among other things, loans
to participants, the provision of services necessary for the operation of a
plan for no more than reasonable compensation, loans to employee stock
ownership plans, and deposits in certain financial institutions regulated by
other State or federal agencies.
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Under ERISA, the department may grant administrative exemptions to an
individual or a class of individuals allowing them to engage in a variety of
transactions involving employee benefit plans.
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The department notes that each application it receives must be considered on
its own merits. Therefore, the fact that an application contains all of the
information described herein does not, in itself, guarantee that an
exemption will be granted. Further, the transactions described herein are
intended to represent the ordinary case; many applications will involve
factors so unique in nature that they must be given special consideration
before the department can make a determination on the case. Nonetheless,
this brochure is intended to assist applicants by describing the information
that is typically required in order to obtain an exemption for a number of
common transactions.
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Class exemptions are administrative blanket exemptions which permit persons
to engage in similar transactions with plans in accordance with the
conditions of the class exemption without asking for an individual
exemption. For information see section 2570.34 of the exemption procedures
in the Appendix.
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For example, class exemptions have been granted covering:
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Transfers of individual life insurance contracts
between plans and their participants (PTE's 92-5 and 92-6)
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Sales of customer notes to plans by their sponsoring
employers (PTE 85-68)
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Interest-free loans made to plans by their sponsoring
employers (PTE 80-26)
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Applications for individual exemptions must, at a minimum, include the
following information:
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Description of the transaction
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Description of relevant safeguards and conditions
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Percentage of assets involved in the exemption
transaction
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Names of persons with investment discretion
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Extent of plan assets already invested in loans to,
property leased by, and securities issued by parties in interest
involved in the transaction
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Copies of all contracts, agreements, instruments and
relevant portions of plan documents and trust agreements bearing on
the exemption transaction
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Information regarding plan participation in pooled
funds when the exemption transaction involves such funds
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Declaration, under penalty of perjury by the
applicant, attesting to the truth of representations made in such
exemption submissions
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Statement of consent by third-party experts
acknowledging that their statements are being submitted to the department
as part of an exemption application
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Sale of Property by Plan to Party-in-Interest or Disqualified Person for
Cash
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C Corporation sponsors a retirement plan for its employees. The Plan owns
an asset, such as a parcel of real property, which it wishes to sell to C
Corporation. These are the factors which the department ordinarily would
consider and that should be addressed by applicants:
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The Plan pays no commissions or other expenses in connection with the sale
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If there is no generally recognized market for the property, the fair market
value of the property must be determined by a Qualified Independent
Appraiser and reflected in a Qualified Appraisal Report. If there is a
generally recognized market for the property, the fair market value of the
property is the value objectively determined by reference to the price on
such market on the date of the transaction (e.g., the closing price on the
New York Stock Exchange)
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If the party in interest engaging in the transaction (or a related entity)
caused the Plan to invest in the property, then the Plan should receive no
less than the greater of its cost of acquiring and holding the property
(e.g., original purchase price, insurance, real estate taxes, etc.) or the
current fair market value of the property at the time of the sale; provided,
however, that a purchase price in excess of such fair market value may not
be required if:
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The applicant provides sufficient documentation that the
Plan's original investment was consistent with ERISA's fiduciary standards
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The sale is made from a one-participant Plan, an IRA not subject to
Title I of ERISA, or an individual account or accounts in the Plan and the
affected participant voluntarily consents to the sale.
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In order to complete our consideration of the application, we need to know
the background history of the property: from whom was it acquired (party in
interest?), date of acquisition, and price paid. Information must also be
furnished concerning whether the property has been used by or leased to
anyone, including parties in interest, since its acquisition by the Plan. We
also need to know why the Plan proposes to sell the property, and whether it
has made any efforts to sell the property to an unrelated third party.
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Where the sale of property eliminates an on-going prohibited transaction
(such as a prohibited lease to a party in interest), we will not grant an
exemption unless the prohibited transaction is corrected (within the meaning
of section 502(i) of ERISA and section 4975 of the Internal Revenue Code and
the regulations there under), and the party in interest pays the appropriate
excise taxes.
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If the sale of the property will result in a contribution to the Plan under
the Code, the applicant must represent that such contribution will not
result in any violation of the requirements for tax-qualification (or, if
there would be a violation, that it will be remedied without any adverse
consequences for the Plan).
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The Huge Corporation, Inc. would like to borrow $100,000 from its pension
plan. These are the factors which the department ordinarily would consider
and that should be addressed by the applicants:
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At the time the loan is made, the sum of the principal amount of the loan,
plus the amount(1) of all other Plan loans and leases to such party in
interest (or a related entity), does not exceed 25% of the aggregate fair
market value of the Plan's (or individually-directed account's) assets. The
aggregate fair market value is to be determined as of the Plan's most recent
valuation date (no more than 12 months before the transaction). This 25%
limitation is a continuing requirement that must be met throughout the term
of the loan.
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The exemption request must include a statement that the terms of the loan
(interest rate, repayment schedule, duration of the loan, etc.) are not less
favorable to the Plan than those obtainable in an arm's-length transaction
between unrelated parties. The exemption request must also set forth the
basis for this determination. To assure comparability with arm's-length
loans, a statement from a third party in the business of lending money under
similar circumstances may be required.
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The loan is secured by collateral having a fair market value, at the time
the loan is made, which is at least 150% of the principal amount of the loan
if the collateral is real property, and at least 200% of the principal
amount of the loan if the collateral is personal property or accounts
receivable.
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The collateral securing the loan has been appraised by a Qualified
Independent Appraiser who has issued a Qualified Appraisal Report.
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The property securing the loan is insured against casualty loss in an amount
not less than the amount of the outstanding principal of the loan (plus
accrued but unpaid interest), and the Plan is a named beneficiary of the
policy.
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The Plan's security interest must be perfected in the manner required by
applicable state law. For example, if recording is required for perfection,
the security agreement must be recorded with the appropriate government
officials.
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Unless the loan is from an individually-directed account or a non-Title I
IRA, a Qualified Independent Fiduciary who has the experience necessary to
effectively review and monitor loans of this type:
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Has reviewed the terms of the loan
and compared the terms with the terms for similar loans between
unrelated parties
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Has examined the Plan's overall
investment portfolio, considered the Plan's liquidity and
diversification requirements, in light of the proposed transaction,
and determined whether the proposed transaction complies with the
Plan's investment objectives and policies
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Has stated that he/she believes that
the proposed transaction is in the best interests of the Plan and its
participants and beneficiaries and has explained in detail the reasons
for such opinion
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Has agreed to monitor the loan and
the conditions of the exemption on behalf of the Plan throughout the
term of the loan, taking all appropriate actions to safeguard the
interests of the Plan and has stated that he/she has been or will be
given the authority to so act.
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The Great Big Corporation, Inc. sponsors a pension plan for its employees.
The Corporation wishes to sell a parcel of land to the Plan, which then will
be leased back to the Corporation. These are the factors that the department
ordinarily would consider and that should be addressed by the applicants:
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At the time that the sale and leaseback transactions are effectuated, the
sum of the fair market value of the property, plus the amount(2)
of all other Plan loans and leases to such party in interest (or a related
entity), does not exceed 25% of the aggregate fair market value of the
Plan's assets. The aggregate fair market value is to be determined as of the
Plan's most recent valuation date (no more than 12 months before the
transaction). This 25% limitation is a continuing requirement which must be
met throughout the term of the lease.
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Both the fair market value of the property acquired by the Plan and the fair
market rental value of the property to be leased to the party in interest
have been appraised by a Qualified Independent Appraiser and reflected in a
Qualified Appraisal Report.
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The exemption request must include a representation that the terms of the
lease (e.g., rent, duration, allocation of expenses, etc.) are not less
favorable to the Plan than those obtainable in an arm's-length transaction
between unrelated parties. The exemption request must also set forth the
basis for this determination.
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A Qualified Independent Fiduciary who has the experience necessary to
effectively review and monitor transactions of this type:
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Has reviewed the terms of the purchase by the Plan
and of the lease and compared them with the terms of similar
transactions involving unrelated parties
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Has examined the Plan's overall investment portfolio,
considered the Plan's liquidity and diversification requirements in
light of the proposed transactions, and determined whether the
proposed transactions comply with the Plan's investment objectives and
policies
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Has stated that he/she believes the proposed
transactions are in the best interests of the Plan and its
participants and beneficiaries and has explained in detail the reasons
for such opinion
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Has agreed to monitor the lease on behalf of the Plan
throughout the term of the lease, taking all appropriate actions to
safeguard the interests of the Plan and has stated that he/she has
been or will be given the authority to so act.
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The lease must provide for periodic adjustments (no less frequently than
every year) to the rents payable there under, so that the rents will be no
less than the fair market rental value of the leased premises at the time of
the adjustment. Generally, the initial rent will be the floor
rental during the term of the lease, even if the fair market rental
value has decreased. The adjustment may be made by using the consumer price
index, or by retaining a Qualified Independent Appraiser satisfactory to the
Qualified Independent Fiduciary. The Qualified Independent Fiduciary will
determine which method is appropriate for making such adjustment. (The
method need not be the same for all periods.)
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The Power Corporation, Inc. wishes to raise capital by issuing, to all
holders of its stock, Rights which will entitle such stockholders to
acquire additional shares. The Power Corporation's profit sharing plan
currently owns shares of stock of the Corporation, and, thus, is entitled
to acquire these Rights. These are the factors that the department ordinarily would consider and that should be addressed by the applicants:
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The Plan's acquisition of the stock rights results
from a business decision on behalf of the Plan's sponsor (or its
affiliate) in its capacity as issuer of the securities, and not in its
capacity as Plan fiduciary.
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The Plan is treated in the same manner as any other
holder of the affected class of securities.
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If the Plan provides for individually-directed
investment of the assets in each participant's account, all decisions
with respect to the Plan's acquisition, holding and control of the
rights are made by the individual Plan participants.
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With respect to Plans other than those providing for
individually-directed accounts, a Qualified Independent Fiduciary who
is qualified to review and monitor transactions of this type:
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Has examined the Plan's overall investment
portfolio, considered the Plan's liquidity and diversification
requirements, and considered the Plan's investment objectives and
policies in light of the receipt of the stock rights
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Will exercise the authority for all decisions
regarding the acquisition, holding and control of the rights,
including the decision as to whether the Plan should exercise or
sell the rights acquired through the offering.
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If the receipt of employer securities upon exercise
of the stock rights would otherwise violate section 407 of ERISA, the
exemption will include additional relief for the receipt and holding
of such securities provided that the securities are disposed of by the
Plan within an agreed-upon period of time from their receipt by the
Plan or another prohibited transaction exemption is obtained. (There
is a general prohibition on the acquisition of additional employer
securities by a defined benefit plan or welfare plan if the plan
already holds qualifying employer securities up to the limit imposed
under ERISA.)
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The Gray Company sponsors a defined benefit plan. The Company would like to
lease a parcel of land owned by the Plan to use as a parking lot. These are the
factors the department ordinarily would consider and that should be addressed by
the applicants:
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At the time the lease is entered into, the sum of the fair market value of
the leased property, plus the amount(4) of all other Plan loans and leases to
such party in interest (or a related entity) does not exceed 25% of the
aggregate fair market value of the Plan's assets, such aggregate fair market
value to be determined as of the Plan's most recent valuation date (but no
more than 12 months before the transaction). This 25% limitation is a
continuing requirement that must be met throughout the term of the lease.
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The fair market rental value of the property to be leased to the party in
interest has been appraised by a Qualified Independent Appraiser and
reflected in a Qualified Appraisal Report.
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The exemption request must include a representation that the terms of the
lease (rent, duration, allocation of expenses, etc.) are not less favorable
to the Plan than those obtainable in an arm's-length transaction between
unrelated parties. The exemption request must also set forth the basis for
this determination (e.g., comparable to the terms of similar leases between
unrelated parties).
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A Qualified Independent Fiduciary who has the experience necessary to
effectively review and monitor leases of this type:
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Has reviewed the terms of the lease and compared them with terms of
similar leases between unrelated parties
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Has examined the Plan's overall investment portfolio, considered the
Plan's liquidity and diversification requirements in light of the proposed
transaction, and determined whether the proposed transaction complies with the
Plan's investment objectives and policies
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Has stated that he/she believes the proposed transaction is in the best
interests of the Plan and its participants and beneficiaries and has explained
in detail the reason for such opinion
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Has agreed to monitor the lease and the conditions of the exemption on
behalf of the Plan throughout the term of the lease, taking all appropriate
actions to safeguard the interests of the Plan and has stated that he/she has
been or will be given the authority to so act.
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The lease must provide for periodic adjustments (no less frequently than
every year) to the rents payable there under, so that the rents will be no less
than the fair market rental value of the leased premises at the time of the
adjustment. Generally, the initial rent will be the floor rental
during the term of the lease, even if the fair market rental value has
decreased. The adjustment may be made by using the consumer price index, or by
retaining a Qualified Independent Appraiser satisfactory to the Qualified
Independent Fiduciary. The Qualified Independent Fiduciary will determine which
method is appropriate for making such adjustment. (The method need not be the
same for all periods).
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Qualified Independent Fiduciary -
A Qualified Independent Fiduciary is any individual or entity
which is qualified (i.e., knowledgeable as to its duties and responsibilities as
an ERISA fiduciary and knowledgeable as to the subject transaction) to serve in
that capacity and which is independent of the party in interest engaging in the
transaction and its affiliates.
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Thus, for example, the independent fiduciary cannot be an affiliate of the
person engaging in the transaction under the exemption.
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The Qualified Independent Fiduciary must represent in writing its
qualifications to serve in that capacity, and must also detail any relationship
it may have with the party in interest engaging in the transaction with the
Plan, or its affiliates, in order to determine whether such Fiduciary may be
subject to improper influence by a party to the transaction other than the Plan,
or whether such Fiduciary has an interest which may conflict with the interests
of the Plan for which it acts. In addition, the Qualified Independent Fiduciary
must represent that it understands its ERISA duties and responsibilities in
acting as a fiduciary with respect to the Plan.
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The general rule for individual exemption requests involving a financial
institution serving as the Qualified Independent Fiduciary is that less than 1%
of the financial institution's deposits and less than 1% of its outstanding
loans (both in dollar amounts) are attributable to the deposits and loans of the
party in interest and its affiliates.
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If an individual is to serve as the Qualified Independent Fiduciary, less
than 1% of his/her annual income (generally measured on the basis of the prior
year's income) may be derived from the party in interest and its affiliates.
Fixed, non-discretionary retirement income would not be included for purposes of
this test.
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If a firm is to serve as the Qualified Independent Fiduciary, less than 1%
of that firm's annual income (generally measured on the basis of the prior
year's income) may come from business derived from the party in interest and its
affiliates.(5)
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Qualified Independent Appraiser -
A Qualified Independent Appraiser is any individual or entity
qualified to serve in that capacity and which is independent of the party in
interest engaging in the transaction and its affiliates.
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The Qualified Independent Appraiser must represent in writing its
qualifications to serve in that capacity, and must also detail any
relationship it may have with the party in interest engaging in the
transaction with the Plan, or its affiliates, that could enable the party in
interest or its affiliates to control or materially influence the actions of
the Appraiser, or vice versa.
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If the property in question is real property, the appraiser should be an
M.A.I., or a member of a similar sanctioning body.
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If the property is an asset other than real property, the appraiser must
demonstrate that he/she has experience in valuing assets of that type.
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If an individual is to serve as the Qualified Independent Appraiser, less
than 1% of his/her annual income (generally measured on the basis of the
prior year's income, but including amounts received for performing the
appraisal) may be derived from the party in interest and its affiliates.
Fixed, non-discretionary retirement income would not be included for
purposes of this test.
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If an entity is to serve as the Qualified Independent Appraiser, less than
1% of that firm's annual income (generally measured on the basis of the
prior year's income, but including amounts received for performing the
appraisal) may come from business derived from the party in interest and its
affiliates.
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Qualified Appraisal Report -
The appraisal must be in writing and set forth the methods used in
determining the fair market value and the reasons used for the valuation in
light of those methods.
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The appraisal should be no more than one year old; if an appraisal report
older than one year is submitted, there must be a written update by the
Qualified Independent Appraiser reaffirming the prior appraisal as of the
date of the transaction.
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The document submitted by the Qualified Independent Appraiser should
describe the methodology used to determine the fair market value of the
property, and explain why such methodology best represented the fair market
value of the property.
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The appraisal must take into account any special benefit that the party in
interest (or its affiliate) may derive from the property such as the fact
that it owns an adjacent parcel of property or would gain voting control
over a company.
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In the case of a loan, such amount will be the outstanding principal
amount. In the case of a lease, such amount will be the fair market value of the
leased property determined by a Qualified Independent Appraiser and reflected in
a Qualified Appraisal Report.
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In the case of a loan, such amount will be the outstanding principal
amount. In the case of a lease, such amount will be the fair market value of the
leased property determined by a Qualified Independent Appraiser and reflected in
a Qualified Appraisal Report.
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This prohibited transaction involves stock rights, which are not
considered qualifying employer securities under ERISA. In these cases, the stock
rights are issued to the Plan by reason of its being a holder of stock of the
employer, which is a qualifying employer security. When a business decision is
made to issue stock rights to all shareholders of the employer, the Plan's
acquisition and holding of such rights would be prohibited in the absence of an
administrative exemption.
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In the case of a loan, such amount will be the outstanding principal
amount. In the case of a lease, such amount will be the fair market value of the
leased property determined by a Qualified Independent Appraiser and reflected in
a Qualified Appraisal Report.
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While in certain cases the department
has permitted an independent
fiduciary to receive as much as 5% of its annual income from the party in
interest and its affiliates, these cases have involved unusual circumstances, and the general standard of independence
remains a 1% test.
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