DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-8303]
Amendment to Prohibited Transaction Exemption (PTE) 77-7
Involving the Transfer of Individual Life Insurance and
Annuity Contracts to Employee Benefit Plans
Agency: Pension and Welfare Benefits Administration, Department
of Labor.
Action: Adoption of amendment to PTE 77-7, and redesignation as
PTE 92-5.
Summary This document amends PTE 77-7, a class exemption that
permits the transfer of certain individual insurance or annuity
contracts to employee benefit plans by plan participants or by
employers, any of whose employees participate in such plans,
provided specified conditions are met. The amendment affects,
among others, certain participants, beneficiaries and fiduciaries
of plans engaged in the described transactions.
Effective Date The amendment to PTE 77-7 is effective as of October 22, 1986.
For Further Information Contact: Eric Berger of the Office of
Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor, telephone (202)
523-8971 (this is not a toll-free number); or Diane Pedulla of
the Plan Benefits Security Division, Office of the Solicitor,
U.S. Department of Labor, (202) 523-9597. (This is not a
toll-free number.)
Supplementary Information: On July 11, 1991, notice was published
in the Federal Register (56 FR 31681) of the pendency before the
Department of a proposed amendment to PTE 77-7 (42 FR 31575, June
21, 1977). PTE 77-7 provides an exemption from the restrictions
of section 406(a) and 406(b)(1) and (2) 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 1986 (the Code) by reason of section 4975(c)(1)(A) through (E)
of the Code.
The amendment to PTE 77-7 adopted by this notice was
requested in an exemption application dated August 16, 1989, by
the American Council of Life Insurance.1 The exemption
application was submitted pursuant to section 408(a) of the Act
and section 4975(c)(2) of the Code2 and in accordance with ERISA
Procedure 75-1 (40 FR 18471, April 28, 1975).
The notice of pendency gave interested persons an
opportunity to comment on the proposed amendment. Public comments
were received pursuant to the provisions 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.
For the sake of convenience, the entire text of PTE 77-7, as
amended, has been reprinted with this notice. The Department has
redesignated the exemption as PTE 92-5.
<center>Description of the Exemption</center>
PTE 77-7 permits the transfer of certain individual
insurance or annuity contracts to employee benefit plans by plan
participants or by employers, any of whose employees participate
in the plan, provided certain conditions are met. As of the date
PTE 77-7 was granted, section 408(d) of the Act provided that no
exemption could be granted under section 408(a) of the Act for
transactions of the type described in the exemption between a
plan and certain persons such as an owner-employee (as defined in
section 401(c)(3) of the Internal Revenue Code of 1986) or a
shareholder-employee (as defined in section 1379 of the Internal
Revenue Code of 1954). The exemption is, however, applicable to
such persons for purposes of section 4975 of the Code.
The amendment to PTE 77-7 granted pursuant to this notice
expands the coverage of the exemption to include transactions
with owner-employees (as defined in section 401(c)(3) of the
Internal Revenue Code of the 1986) and shareholder-employees (as
defined in section 1379 of the Internal Revenue Code of 1954 as
in effect on the day before the date of the enactment of the
Subchapter S Revision Act of 1982).
The Department notes that all the conditions contained in
PTE 77-7 still must be met under the amendment. These conditions
include a requirement that, the plan pay, transfer, or otherwise
exchange no more than the lesser of (a) the cash surrender value
of the contract; (b) if the plan is a defined benefit plan, the
value of the participant's accrued benefit at the time of the
transaction (determined under any reasonable method); or (c) if
the plan is a defined contribution plan, the value of the
participant's account balance. Additionally, the exemption
requires that, with regard to any plan which is an employee
welfare benefit plan, such plan must not, with respect to the
subject sale, transfer, or exchange, discriminate in form or in
operation in favor of plan participants who are officers,
shareholders, or highly compensated employees.
Written Comments
The Department received three letters supporting the
proposed amendment to PTE 77-7.
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 the Act does not relieve a
fiduciary or other party in interest or disqualified person from
certain other provisions of the Act and the Code, including any
prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of
section 404 of the Act which require, among other things, that a
fiduciary discharge his or her duties respecting the plan solely
in the interests of the participants and beneficiaries of the
plan; nor does it 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) In accordance with section 408(a) of the Act, the
Department makes the following determinations:
(i) The amendment set forth herein is administratively
feasible;
(ii) It is in the interests of plans and of their
participants and beneficiaries; and
(iii) It is protective of the rights of the
participants and beneficiaries of plans;
(3) The class exemption is applicable to a particular
transaction only if the transaction satisfies the conditions
specified in the exemption; and
(4) The amendment is supplemental to, and not in
derogation of, any other provisions of the Act 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.
<center>Exemption</center>
Accordingly, PTE 77-7 is amended 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, as set forth below.
I. Effective January 1, 1975, the restrictions of
sections 406(a) and 406(b)(1) and (2) 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 (E) of the Code, shall not apply to
the sale, transfer, or exchange of an individual life insurance
or annuity contract to an employee benefit plan from a plan
participant on whose life the contract was issued, or from an
employer, any of whose employees are covered by the plan, if:
1. The plan pays, transfers, or otherwise exchanges no
more than the lesser of--
(a) The cash surrender value of the contract;
(b) If the plan is a defined benefit plan, the value of
the participant's accrued benefit at the time of the transaction
(determined under any reasonable method); or
(c) If the plan is a defined contribution plan, the
value of the participant's account balance.
2. Such sale, transfer, or exchange does not involve
any contract which is subject to a mortgage or similar lien which
the plan assumes.
3. Such sale, transfer, or exchange does not contravene
any provision of the plan or trust document.
4. With regard to any plan which is an employee welfare
benefit plan, such plan must not, with respect to such sale,
transfer, or exchange, discriminate in form or in operation in
favor of plan participants who are officers, shareholders, or
highly compensated employees.
II. Effective October 22, 1986, the exemption provided
for transactions described in part I is available for plan
participants who are owner-employees (as defined in section
401(c)(3) of the Internal Revenue Code of 1986) or
shareholder-employees (as defined in section 1379 of the Internal
Revenue Code of 1954 as in effect on the day before the date of
the enactment of the Subchapter S Revision Act of 1982) if the
conditions set forth in part I are met.
Signed at Washington, D.C., this 3rd day of February, 1992.
Alan D. Lebowitz
Deputy Assistant Secretary for
Program Operations
Pension and Welfare Benefits
Administration
U.S. Department of Labor
1 The applicant also requested, and the Department is publishing elsewhere in this issue of the Federal Register, a similar amendment to PTE 77-8 (42 FR 31574, June 21, 1977).
2 Section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713, October 17, 1978), effective December 31, 1978 (44 FR 1065, January 3, 1979), transferred the authority of the Secretary of the Treasury to issue exemptions of this type to the Secretary of Labor.
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