PWBA Office of Exemption Determinations

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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