April 14, 1999
DO-99-015
MEMORANDUM
TO: Designated Agency Ethics Officials
FROM: Stephen D. Potts
Director
SUBJECT: 18 U.S.C. § 208 and defined benefit pension plans
Under 18 U.S.C. § 208, an employee may not participate in a particular
matter in which the employee or certain others specified in the
statute have a financial interest, if the matter would have a direct
and predictable effect on the financial interest. The Office of
Government Ethics (OGE) in OGE Formal Advisory Letter 83 x 1,
addressed the question "whether, or under what circumstances, a
federal employee's vested rights in a private corporation's pension
plan constitute a 'financial interest' under 18 U.S.C. § 208." In the
opinion, we stated that although the facts of each situation must be
examined separately, the typical pension plan is so closely linked to
the sponsoring organization that a Government employee with a vested
interest in the plan has a financial interest under § 208 in matters
affecting the sponsoring organization unless the employee demonstrates
otherwise. In accordance with 83 x 1, OGE's Public Financial
Disclosure: A Reviewer's Reference, originally published in 1994,
offers similar guidance on this issue.
Subsequently, in September 1995, OGE published a proposed regulation
that contained an interpretation of section 208 as well as a number of
exemptions from the application of section 208. See 60 Fed. Reg.
47208-47233 (September 11, 1995).(1) The preamble to that regulation,
which was reviewed and approved by the Office of Legal Counsel at the
Department of Justice, includes a discussion on page 47214 of the
applicability of section 208 to employee pension interests. The
purpose of this DAEOgram is to summarize that discussion in order to
update and refine our previous guidance on this issue, and to address
questions that have arisen about the continuing validity of our
original advice in 83 x 1.
Most pension plans fall within one of two categories. A defined
benefit plan is a type of retirement plan under which an employer
makes payments to an investment pool which it holds and invests for
all participating employees. Defined benefit plans are the obligation
of the employer. Under this type of plan, participants receive a
defined or specified benefit upon retirement, such as an annual income
that is a specific percentage of the compensation received by the
participant during a certain period of his employment. A defined
contribution plan is a retirement plan that establishes an individual
account for each participant. Under this type of plan, each
participant will receive a retirement benefit that is based upon
contributions to, and income generated by, the account. The amount the
employee will receive under a defined contribution plan may vary
depending upon the gains, losses, and expenses that are attributable
to the account. Typically, the employer is the sponsoring organization
of either type of pension plan.
In applying section 208 to pension plan interests, we may be concerned
about an employee's participation in a Government matter that could
have an effect on the sponsoring organization that is responsible for
funding or maintaining the Government employee's pension plan. This
concern normally arises with defined benefit plans, rather than
defined contribution plans, because the sponsor of a defined benefit
plan is obligated to fund the plan. For matters affecting the sponsor
of a defined contribution plan, an employee's interest is not
ordinarily a disqualifying financial interest under section 208
because the sponsor is not obligated to fund the employee's pension
plan.
However, with defined benefit plans, the sponsor may be so closely
linked to the pension plan and the particular matter in which the
employee would participate may be so significant, that the matter
affecting the sponsor of the plan also will affect the sponsor's
ability or willingness to pay the employee's pension. This might be
the case, for example, when an employee is assigned to participate in
important litigation involving a company that is his former employer
and that maintains a defined benefit pension plan in which he has a
vested interest. If the litigation could result in the dissolution of
the sponsor organization and its subsequent inability to pay the
employee's pension, the employee's interest in his pension would be a
disqualifying financial interest under section 208. The employee would
be disqualified from participating in the conduct of the litigation
absent the issuance of a waiver under 18 U.S.C. § 208(b)(1).
OGE believes that, as a practical matter, most Governmental matters in
which an employee would participate are unlikely to have a direct and
predictable effect on the plan sponsor's ability or willingness to pay
the employee's pension.(2) For example, an employee who worked for IBM
and who has an interest in a defined benefit plan sponsored by IBM may
participate in the decision to deny an award of a $500,000 contract to
IBM for the purchase of computers. Although the decision affects IBM,
given the large size and financial strength of the company, the denial
is unlikely to have an effect on the ability or willingness of IBM to
pay the employee's pension. In such a case, the employee's interest in
his defined benefit plan would not be a disqualifying financial
interest under section 208.
In conclusion, we recommend that agencies no longer automatically
presume that employees have a conflict of interest in matters
affecting the sponsor of their defined benefit plans. If an employee
is assigned to participate in a particular matter that affects the
sponsor of his defined benefit plan, the employee will not ordinarily
have a disqualifying financial interest in his defined benefit plan
under section 208, unless the matter would have a direct and
predictable effect on the sponsor's ability or willingness to pay the
employee's pension benefit. Accordingly, ethics officials need not
routinely issue waivers or require recusals for matters affecting the
sponsors of defined benefit plans and should continue to examine each
situation on an individual basis.(3)
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1. The regulation was published as a final regulation on December 18,
1996 at 61 Fed. Reg. 66830 et seq. It is codified at 5 C.F.R. part
2640.
2. For situations where an employee does have a disqualifying
financial interest in an employee benefit plan, OGE has issued an
exemption at 5 C.F.R. § 2640.201(c). Under this exemption, an employee
may participate in a particular matter of general applicability that
affects a State or local government sponsor of a pension plan. The
exemption does not apply to matters involving a State or local
government as a party, or to any matters involving a corporate or
other nongovernmental sponsor of a pension plan.
3. Under 5 C.F.R. § 2635.502(b)(1)(i), an employee has a covered
relationship with a person with whom he has a "business, contractual
or other financial relationship that involves other than a routine
consumer transaction." A vested interest in a defined benefit plan
funded and maintained by a former employer would create a covered
relationship. Therefore, in such cases, an employee should comply with
the requirements of section 2635.502(a) when acting in matters
involving his former employer who is the sponsor of the plan.