(a) General. This bulletin sets forth the views of the Department of
Labor (the Department) concerning in-kind contributions (i.e.,
contributions of property other than cash) in satisfaction of an
obligation to contribute to an employee benefit plan to which part 4 of
title I of the Employee Retirement Income Security Act of 1974 (ERISA)
or a plan to which section 4975 of the Internal Revenue Code (the Code)
applies. (For purposes of this document the term ``plan'' shall refer to
either or both types of such entities as appropriate). Section
406(a)(1)(A) of ERISA provides that a fiduciary with respect to a plan
shall not cause the plan to engage in a transaction if the fiduciary
knows or should know that the transaction constitutes a direct or
indirect sale or exchange of any property between a plan and a ``party
in interest'' as defined in section 3(14) of
ERISA. The Code imposes a two-tier excise tax under section
4975(c)(1)(A) an any direct or indirect sale or exchange of any property
between a plan and a ``disqualified person'' as defined in section
4975(e)(2) of the Code. An employer or employee organization that
maintains a plan is included within the definitions of ``party in
interest'' and ``disqualified person.'' \1\
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\1\ Under Reorganization Plan No. 4 of 1978 (43 FR 47713, October
17, 1978), the authority of the Secretary of the Treasury to issue
rulings under the prohibited transactions provisions of section 4975 of
the Code has been transferred, with certain exceptions not here
relevant, to the Secretary of Labor. Except with respect to the types of
plans covered, the prohibited transaction provisions of section 406 of
ERISA generally parallel the prohibited transaction of provisions of
section 4975 of the Code.
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In Commissioner of Internal Revenue v. Keystone Consolidated
Industries, Inc., ____ U.S. ____, 113 S. Ct. 2006 (1993), the Supreme
Court held that an employer's contribution of unencumbered real property
to a tax-qualified defined benefit pension plan was a sale or exchange
prohibited under section 4975 of the Code where the stated fair market
value of the property was credited against the employer's obligation to
the defined benefit pension plan. The parties stipulated that the
property was contributed to the plan free of encumbrances and the stated
fair market value of the property was not challenged. 113 S. Ct. at
2009. In reaching its holding the Court construed section 4975(f)(3) of
the Code (and therefore section 406(c) of ERISA), regarding transfers of
encumbered property, not as a limitation but rather as extending the
reach of section 4975(c)(1)(A) of the Code (and thus section
406(a)(1)(A) of ERISA) to include contributions of encumbered property
that do not satisfy funding obligations. Id. at 2013. Accordingly, the
Court concluded that the contribution of unencumbered property was
prohibited under section 4975(c)(1)(A) of the Code (and thus section
406(a)(1)(A) of ERISA) as ``at least both an indirect type of sale and a
form of exchange, since the property is exchanged for diminution of the
employer's funding obligation.'' 113 S. Ct. at 2012.
(b) Defined benefit plans. Consistent with the reasoning of the
Supreme Court in Keystone, because an employer's or plan sponsor's in-
kind contribution to a defined benefit pension plan is credited to the
plan's funding standard account it would constitute a transfer to reduce
an obligation of the sponsor or employer to the plan. Therefore, in the
absence of an applicable exemption, such a contribution would be
prohibited under section 406(a)(1)(A) of ERISA and section 4975(c)(1)(A)
of the Code. Such an in-kind contribution would constitute a prohibited
transaction even if the value of the contribution is in excess of the
sponsor's or employer's funding obligation for the plan year in which
the contribution is made and thus is not used to reduce the plan's
accumulated funding deficiency for that plan year because the
contribution would result in a credit against funding obligations which
might arise in the future.
(c) Defined contribution and welfare plans. In the context of
defined contribution pension plans and welfare plans, it is the view of
the Department that an in-kind contribution to a plan that reduces an
obligation of a plan sponsor or employer to make a contribution measured
in terms of cash amounts would constitute a prohibited transaction under
section 406(a)(1)(A) of ERISA (and section 4975(c)(1)(A) of the Code)
unless a statutory or administrative exemption under section 408 of
ERISA (or sections 4975(c)(2) or (d) of the Code) applies. For example,
if a profit sharing plan required the employer to make annual
contributions ``in cash or in kind'' equal to a given percentage of the
employer's net profits for the year, an in-kind contribution used to
reduce this obligation would constitute a prohibited transaction in the
absence of an exemption because the amount of the contribution
obligation is measured in terms of cash amounts (a percentage of
profits) even though the terms of the plan purport to permit in-kind
contributions.
Conversely, a transfer of unencumbered property to a welfare benefit
plan that does not relieve the sponsor or employer of any present or
future obligation to make a contribution that is measured in terms of
cash amounts would not constitute a prohibited transaction under section
406(a)(1)(A) of ERISA or section 4975(c)(1)(A) of the Code. The same
principles apply to defined contribution plans that are not subject to
the minimum funding requirements of section 302 of ERISA or section 412
of the Code. For example, where a profit sharing or stock bonus plan, by
its terms, is funded solely at the discretion of the sponsoring
employer, and the employer is not otherwise obligated to make a
contribution measured in terms of cash amounts, a contribution of
unencumbered real property would not be a prohibited sale or exchange
between the plan and the employer. If, however, the same employer had
made an enforceable promise to make a contribution measured in terms of
cash amounts to the plan, a subsequent contribution of unencumbered real
property made to offset such an obligation would be a prohibited sale or
exchange.
(d) Fiduciary standards. Independent of the application of the
prohibited transaction provisions, fiduciaries of plans covered by part
4 of title I of ERISA must determine that acceptance of an in-kind
contribution is consistent with ERISA's general standards
of fiduciary conduct. It is the view of the Department that acceptance
of an in-kind contribution is a fiduciary act subject to section 404 of
ERISA. In this regard, sections 406(a)(1)(A) and (B) of ERISA require
that fiduciaries discharge their duties to a plan solely in the
interests of the participants and beneficiaries, for the exclusive
purpose of providing benefits and defraying reasonable administrative
expenses, and with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. In addition, section
406(a)(1)(C) requires generally that fiduciaries diversify plan assets
so as to minimize the risk of large losses. Accordingly, the fiduciaries
of a plan must act ``prudently,'' ``solely in the interest'' of the
plan's participants and beneficiaries and with a view to the need to
diversify plan assets when deciding whether to accept in-kind
contributions. If accepting an in-kind contribution is not ``prudent,''
not ``solely in the interest'' of the participants and beneficiaries of
the plan, or would result in an improper lack of diversification of plan
assets, the responsible fiduciaries of the plan would be liable for any
losses resulting from such a breach of fiduciary responsibility, even if
a contribution in kind does not constitute a prohibited transaction
under section 406 of ERISA. In this regard, a fiduciary should consider
any liabilities appurtenant to the in-kind contribution to which the
plan would be exposed as a result of acceptance of the contribution.
[59 FR 66736, Dec. 28, 1994]
