Proposed Amendment to Prohibited Transaction Exemption 2002-51
(PTE 2002-51) To Permit Certain Transactions Identified in the
Voluntary Fiduciary Correction Program
[04/06/2005]
Volume 70, Number 65, Page 17476-17479
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11261]
Proposed Amendment to Prohibited Transaction Exemption 2002-51
(PTE 2002-51) To Permit Certain Transactions Identified in the
Voluntary Fiduciary Correction Program
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Notice of proposed amendment to PTE 2002-51.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed amendment to PTE
2002-51 (67 FR 70623 November 25, 2002). PTE 2002-51 is a class
exemption that provides relief from certain prohibited transaction
restrictions imposed by section 4975 of the Internal Revenue Code (the
Code) of 1986 for certain eligible transactions identified in the
Department's Voluntary Fiduciary Correction (VFC) Program, which was
adopted on March 28, 2002. This exemption is being proposed in
conjunction with the Department's Amendment and Restatement of the VFC
Program (revised VFC Program), which is being published simultaneously
in this issue of the Federal Register. The VFC Program allows certain
persons to avoid potential civil actions under the Employee Retirement
Income Security Act of 1974 (ERISA) initiated by the Department and the
assessment of civil penalties under section 502(l) of ERISA in
connection with an investigation or civil action by the Department. If
granted, the proposed amendment to PTE 2002-51 would affect plans,
participants and beneficiaries of such plans and certain other persons
engaging in such transactions.
DATES: Written comments and requests for a public hearing on the
proposed amendment must be received by the Department by June 6, 2005.
ADDRESSES: All written comments and requests for a public hearing
(preferably three copies) concerning the proposed amendment should be
sent to: U.S. Department of Labor, Employee Benefits Security
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington,
DC 20210, (Attention: Amendment to the VFC Program Exemption D-11261).
Comments and requests for a hearing alternatively may be sent by fax to
(202) 219-0204 or submitted electronically to moffitt.betty@dol.gov by
the end of the comment period. All comments received from interested
persons will be available for public inspection in EBSA's Public
Disclosure Room, N-1513, Employee Benefits Security Administration,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210.
FOR FURTHER INFORMATION CONTACT: Brian J. Buyniski, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, Room N-5649, 200 Constitution Avenue, NW.,
Washington, DC 20210, (202) 693-8545 (this is not a toll free number).
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed amendment to PTE 2002-51. PTE 2002-
51 provides relief from 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. The proposed amendment would expand the relief
under the exemption to additional transactions included in the revised
VFC Program. The Department is proposing to amend PTE 2002-51 on its
own motion pursuant to section 4975(c)(2) of the Code, and in
accordance with the procedures set forth in 29 CFR 2570, subpart B (55
FR 32836, August 10, 1990).\1\
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\1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978, 5 U.S.C. App. 1 [1996]) generally
transferred the authority of the Secretary of the Treasury to issue
administrative exemptions under section 4975(c)(2) of the Code of
the Secretary of Labor.
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Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether
a 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) of the Executive
Order, a ``significant regulatory action'' is 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. OMB has
determined that this proposed amendment is not a ``significant
regulatory action'' under Executive Order 12866, section 3(f).
Accordingly, an assessment of the potential costs and benefits under
section 6(a)(3) of that order is not required. In order to better
inform the public, the Department has, however, included a brief
analysis of the applicable costs and benefits of the proposed
amendment.
PTE 2002-51 provides relief from 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. In general, the
exemption enhances the benefits of participation in the VFC Program by
granting relief from excise taxes under section 4975 for breaches of
fiduciary duty that are prohibited transactions. The class exemption
will have positive economic effects by eliminating such excise taxes
and promoting increased participation in the VFC Program. The purpose
of the VFC Program is to encourage the correction of breaches of
fiduciary duty, resulting in the recovery of lost earnings or profits
for the benefit of plan participants and beneficiaries.
The Department has assumed that not all Plan Officials that apply
to the VFC Program will necessarily take advantage of the excise tax
relief provided under the exemption, either by choice or because the
corrected transaction is not an eligible transaction to which this
exemption applies. The Department has assumed that as many as one half
of all applicants who take the opportunity to voluntarily correct a
violation under the Program, or 350 Plan Officials annually, will
choose to avail themselves of the opportunity for excise tax relief.
This amendment to PTE 2002-51 is proposed in connection with the
Amendment and Restatement of the VFC Program (revised VFC Program),
which is published in this issue of the
[[Page 17477]]
Federal Register. This proposed amendment would expand the relief under
the exemption to an additional transaction included in the revised VFC
Program. As described in detail below, the additional eligible
transaction generally includes the purchase of an asset by a plan where
the asset has been determined to be illiquid as described in the
revised VFC Program, and the sale of the illiquid asset by the plan to
a party in interest.
The proposed addition of this eligible transaction may increase
participation in the VFC Program, and utilization of the exemption.
However, the Department is unable to estimate the impact of these
changes because participation in the Program has steadily increased
without any revisions to the Program such as those adopted today. Due
to a lack of information regarding the substantial increases, it is not
possible to identify factors that influence the decision to participate
or to make use of the exemption, or to predict how this proposed
amendment would influence future participation.
Applicants must meet all of the applicable requirements of the
revised VFC Program and must have received a no action letter from EBSA
with respect to the eligible transaction at issue. Additional costs
will accrue to applicants seeking relief under the VFC Program and this
exemption because of the notice requirements. The cost of preparing and
distributing such notices is estimated to be about $31,000 per year
based on the projected use of the exemption by 350 applicants. This
estimate does not take into account any increase related to the
additional eligible transaction. This cost is accounted for in burden
estimates submitted to and approved by OMB pursuant to the Paperwork
Reduction Act (PRA).
Paperwork Reduction Act
The Amended and Restated Voluntary Fiduciary Correction Program
includes a revision to its information collection provisions.
Accordingly, the revisions have been submitted to OMB for review and
approval under the PRA. Because the exemption is used in connection
with the Program, and for ease of public review, the burden of the
Information Collection Request (ICR) in the VFC Program is combined
with the burden of the information collection provisions of the
exemption for purposes of accounting for burden under the PRA. These
information collection provisions are currently approved under OMB
control number 1210-0118. That approval is scheduled to expire on
December 31, 2006. Because the information collection provisions of
this proposed exemption are unchanged from those of existing PTE 2002-
51, no submission is made to OMB in connection with these proposed
amendments.
Background
Title I of ERISA, which establishes certain standards of conduct
for fiduciaries of employee benefit plans covered by ERISA, includes
provisions prohibiting fiduciaries from causing a plan to engage in
certain classes of transactions with persons defined as parties in
interest. Similarly, Title II of ERISA prohibits plans described in
section 4975(e)(1) of the Code from engaging in certain classes of
transactions with persons defined under the Code as disqualified
persons. Generally, such transactions are subject to taxation under
section 4975 of the Code.
The VFC Program was adopted by the Department on a permanent basis
in March 2002.\2\ Under the VFC Program, persons who are potentially
liable for a breach can avoid the possibility of civil investigations
and/or civil actions initiated by the Department for that breach and
the imposition of civil penalties under section 502(l) of ERISA if they
satisfy the conditions for correcting the breach as described in the
VFC Program. The VFC Program was based on the Department's experience
with the Pension Payback Program, 61 FR 9203 (March 7, 1996), and
continued public interest in such correction programs. In response to
comments received on the VFC Program requesting that the Department
provide relief from the excise taxes imposed by section 4975 of the
Code for prohibited transactions, the Department proposed a class
exemption for four of the eligible transactions described in the VFC
Program. A final exemption, PTE 2002-51, was published in the Federal
Register on November 25, 2002. The four eligible transactions described
in the exemption are as follows:
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\2\ 67 FR 15062 (March 28, 2002). Prior to adoption in March
2002, the VFC Program was made available on an interim basis during
which the Department invited and considered public comments on the
Program. (See 65 FR 14164, March 15, 2000).
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(A) The failure to transmit participant contributions to a pension
plan within the time frames described in the Department's regulations
at 29 CFR 2510.3-102 and/or the failure to transmit participant loan
repayments to a pension plan within a reasonable time after withholding
or receipt by the employer.
(B) The making of a loan by a plan at a fair market interest rate
to a party in interest \3\ with respect to the plan.
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\3\ The Department notes that the term ``party in interest'' was
used in the description of the eligible transactions covered under
PTE 2002-51 although that exemption provided, and this proposed
amendment will provide, relief only from the sanctions imposed under
section 4975 of the Code, which prohibits certain transactions
between a plan and a disqualified person. For purposes of clarity,
references in the exemption to a party in interest will be changed
to disqualified person in the final exemption.
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(C) The purchase or sale of an asset (including real property)
between a plan and a party in interest at fair market value.
(D) The sale of real property to a plan by the employer and
leaseback of such property to the employer, at fair market value and
fair market rental value, respectively.
Based on growing public utilization and over two years experience
in administering the original VFC Program, EBSA has decided to amend
the Program, effective immediately upon publication of a notice which
is being published simultaneously in this issue of the Federal
Register. The Department is amending the VFC Program, in part, to
expand the categories of eligible transactions. Specifically, the
revised VFC Program will, in part, include relief under Title I of
ERISA for the purchase of an asset by a plan where the asset was
determined to be illiquid as described under the revised VFC Program,
either from a party in interest at no greater than fair market value at
that time or from an unrelated third party, and the subsequent sale of
such asset to a party in interest, provided the plan receives the
correction amount as described in Section 5 of the revised VFC Program.
To the extent that the original purchase of an asset by a plan
where the asset was determined to be illiquid as described under the
revised VFC Program was from a person defined as a party in interest
under section 3(14) of ERISA and a disqualified person under section
4975(e)(2) of the Code, the transactions would violate the prohibited
transaction rules under both Title I of ERISA and section 4975 of the
Code. Moreover, as distinguished from the eligible transactions covered
in the VFC Program \4\ and PTE 2002-51, correction as specified in the
revised VFC Program in the case of an asset that was illiquid, as
described under the revised VFC Program, while owned by the plan will
in most instances involve an additional prohibited transaction. In
[[Page 17478]]
this regard, correction under the revised VFC Program would permit the
plan to dispose of the illiquid asset in a sale to a party in interest.
If the party in interest that purchases the illiquid asset from the
plan pursuant to the terms of the revised VFC Program is also a
disqualified person under section 4975(e)(2) of the Code, then the
correction permitted for holding the illiquid asset would violate the
prohibited transaction rules under section 4975 of the Code.
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\4\ Under the VFC Program prior to the current revision,
correction could not be achieved by engaging in a new prohibited
transaction. See VFC Program, 67 FR 15073 (March 28, 2002) Section
2(d).
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The revised VFC Program provides relief for both the original
acquisition of the asset by the plan that was determined to be illiquid
under the revised VFC Program, as well as the correction involving the
sale of such asset to a party in interest, provided all of the
requirements of the revised VFC Program are met. The Department has
determined that it would be appropriate to amend PTE 2002-51 to provide
additional exemptive relief from the sanctions imposed under section
4975 of the Code in conjunction with the revision of the VFC Program.
Proposed Amendment
PTE 2002-51 provided limited exemptive relief from the excise taxes
imposed under section 4975 of the Code for certain eligible
transactions identified in the VFC Program. The proposed amendment to
PTE 2002-51 will provide limited relief for an additional eligible
transaction identified in the revised VFC Program. Specifically, the
proposed amendment to PTE 2002-51 will cover the purchase of an asset
by a plan where the asset has been determined to be illiquid as
described in the revised VFC Program (including real property) from a
party in interest at no greater than fair market value at that time,
and/or the subsequent sale of such asset to a party in interest
provided the plan receives the correction amount as described in
Section 5 of the revised VFC Program.
The Department notes that all the safeguards already embodied in
PTE 2002-51 must be met under the amended class exemption. With respect
to the additional eligible transaction identified above, the amendment
includes a requirement that the plan pay no brokerage fees or
commissions in connection with the sale of the asset to the party in
interest.
The additional eligible transaction may be illustrated by the
following example:
Example: Corporation D sponsors a pension plan for its employees.
Corporation D's plan has total assets of $1,000,000. In June 1999, the
plan purchases undeveloped real property from a party in interest/
disqualified person with respect to the plan for $60,000 (which is the
fair market value of the property at the time). In April 2004, Plan
Officials determine that the property is an illiquid asset in
accordance with the revised VFC Program. A qualified independent
appraiser appraises the property at a current fair market value of
$20,000. To correct the transaction under the revised VFC Program, the
plan sponsor purchases the property from the plan for the Principal
Amount as described in section 5(b)(2) of the revised VFC Program
($60,000), plus Lost Earnings as described in section 5(b)(6) of the
revised VFC Program. Provided that all other requirements of the
revised VFC Program are met and proper application is made to the
appropriate EBSA Regional Office, the plan sponsor receives a no action
letter with respect to the breaches involved in the original purchase
by the plan of the asset and the subsequent sale of the illiquid asset
to a party in interest. Upon compliance with the terms of PTE 2002-51,
as amended, the original purchase by the plan of the asset and the
subsequent sale of the illiquid asset to the plan sponsor will be
exempt from the excise taxes imposed under section 4975 of the Code for
prohibited transactions. For the sake of convenience and clarity, the
Department is restating the entire text of PTE 2002-51 in this notice
of proposed amendment.
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 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, the requirement that all assets of an employee benefit plan be
held in trust by one or more trustees, and the general fiduciary
responsibility provisions of ERISA 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 and
in a prudent fashion; 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) The proposed amendment, if granted, will not extend to
transactions prohibited under section 4975(c)(1)(F) of the Code.
(3) Before this amendment may be granted under section 4975(c)(2)
of the Code, the Department must find that the amendment is
administratively feasible, in the interests of plans and their
participants and beneficiaries, and protective of the rights of
participants and beneficiaries of such plans.
(4) The proposed amendment, if granted, will be supplemental to,
and not in derogation of 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.
(5) If granted, the proposed amendment will be applicable to a
transaction only if the conditions specified in the class exemption are
satisfied.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a public hearing on the proposed amendment to the address
above and within the time period set forth above. All comments received
will be made part of the record and will be available for public
inspection at the above address.
Proposed Amendment
Under 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), the Department proposes to amend Sections I and II of
PTE 2002-51 as set forth below.
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, as
amended and restated, published simultaneously in this issue of the
Federal Register, provided that the applicable conditions set forth in
Sections II, III and IV are met:
A. Failure to transmit participant contributions to a pension plan
within the time frames described in the Department's regulation at 29
CFR section 2510.3-102. (See VFC Program, section 7.A.1.), and/or the
failure to transmit participant loan repayments to
[[Page 17479]]
a pension plan within a reasonable time after withholding or receipt by
the employer.
B. Loan at a fair market interest rate to a party in interest with
respect to a plan. (See VFC Program, section 7.B.1.).
C. Purchase or sale of an asset (including real property) between a
plan and a party in interest at fair market value. (See VFC Program,
sections 7.D.1. and 7.D.2.).
D. Sale of real property to a plan by the employer and the
leaseback of the property to the employer, at fair market value and
fair market rental value, respectively. (See VFC Program, section
7.D.3.).
E. Purchase of an asset by a plan where the asset has been
determined to be illiquid (including real property) as described under
the revised VFC Program from a party in interest at no greater than
fair market value at that time, and/or the subsequent sale of such
asset to a party in interest, provided the plan receives the correction
amount as described in section 5(b) of the Program. (See VFC Program,
as amended, section 7.D.6.).
Section II: Conditions
A. With respect to a transaction involving participant
contributions or loan repayments to pension plans described in Section
I.A., the contributions or repayments were transmitted to the pension
plan not more than 180 calendar days from the date the amounts were
received by the employer (in the case of amounts that a participant or
beneficiary pays to an employer) or the date the amounts otherwise
would have been payable to the participant in cash (in the case of
amounts withheld by an employer from a participant's wages).
B. With respect to the transactions described in Sections I.B.,
I.C., I.D., or I.E., the plan assets involved in the transaction, or
series of related transactions, did not, in the aggregate, exceed 10
percent of the fair market value of all the assets of the plan at the
time of the transaction.
C. The fair market value of any plan asset involved in a
transaction described in Sections I.C., I.D., or I.E. was determined in
accordance with section 5 of the VFC Program.
D. The terms of a transaction described in Sections I.B., I.C.,
I.D., or I.E., were at least as favorable to the plan as the terms
generally available in arm's-length transactions between unrelated
parties.
E. With respect to any transaction described in Section I, the
transaction was not part of an agreement, arrangement or understanding
designed to benefit a party in interest.
F. (1) With respect to any transaction described in Section I, the
applicant has not taken advantage of the relief provided by the VFC
Program and this exemption for a similar type of transaction(s)
identified in the current application during the period which is three
years prior to submission of the current application.
(2) Notwithstanding the foregoing, Section II.F.(1) shall not apply
to an applicant provided that:
(a) The applicant was a broker-dealer registered under the
Securities Exchange Act of 1934, a bank supervised by the United States
or a State thereof, a broker-dealer or bank subject to foreign
government regulation, an insurance company qualified to do business in
a State, or an affiliate thereof;
(b) The applicant was a party in interest (including a fiduciary)
solely by reason of providing services to the plan or solely by reason
of a relationship to such service provider described in section
3(14)(F), (G), (H) or (I) of ERISA (and/or the corresponding provisions
of section 4975 of the Code);
(c) Neither the applicant nor any affiliate (i) was a fiduciary
(within the meaning of section 3(21)(A) of ERISA) with respect to the
assets of the plan involved in the transaction and (ii) used its
discretion to cause the plan to engage in the transaction;
(d) Individuals acting on behalf of the applicant had no actual
knowledge or reason to know that the transaction was not exempt
pursuant to a statutory or administrative exemption under ERISA and/or
the Code; and
(e) Prior to the transaction, the applicant established written
policies and procedures that were reasonably designed to ensure
compliance with the prohibited transaction rules and the applicant
engaged in periodic monitoring for compliance.
G. With respect to a transaction involving a sale of an illiquid
asset under the VFC Program by the plan to a party in interest
described in Section I.E., the plan paid no brokerage fees, or
commissions in connection with the sale of the asset.
Section III: Compliance With the Revised VFC Program
A. The applicant has met all of the applicable requirements of the
revised VFC Program.
B. EBSA has issued a no action letter to the applicant pursuant to
the revised VFC Program with respect to a transaction described in
Section I.
Section IV: Notice
A. Written notice of the transaction(s) for which the applicant is
seeking relief pursuant to the revised VFC Program, and this exemption,
and the method of correcting the transaction, was provided to
interested persons within 60 calendar days following the date of the
submission of an application under the revised VFC Program. A copy of
the notice was provided to the appropriate Regional Office of the
United States Department of Labor, Employee Benefits Security
Administration within the same 60-day period, and the applicant
indicated the date upon which notice was distributed to interested
persons. Plan assets were not used to pay for the notice. The notice
included an objective description of the transaction and the steps
taken to correct it, written in a manner reasonably calculated to be
understood by the average Plan participant or beneficiary. The notice
provided for a period of 30 calendar days, beginning on the date the
notice was distributed, for interested persons to provide comments to
the appropriate Regional Office. The notice included the address and
telephone number of such Regional Office.
B. Notice was given in a manner that was reasonably calculated,
taking into consideration the particular circumstances of the plan, to
result in the receipt of such notice by interested persons, including
but not limited to posting, regular mail, or electronic mail, or any
combination thereof. The notice informed interested persons of the
applicant's participation in the revised VFC Program as amended and
intention of availing itself of relief under the exemption.
Signed at Washington, DC, this 30th day of March, 2005.
Ivan L. Strasfeld,
Director of Exemption Determinations, Employee Benefits, Security
Administration, U.S. Department of Labor.
[FR Doc. 05-6626 Filed 4-5-05; 8:45 am]
BILLING CODE 4510-29-P
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