Proposed Class Exemption to Permit the Restoration of Delinquent Participant Contributions to Plans

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10218]

Proposed Class Exemption to Permit the Restoration of Delinquent

Participant Contributions to Plans

AGENCY: Pension and Welfare Benefits Administration (PWBA), Department

of Labor.

ACTION: Notice of proposed class exemption.

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SUMMARY: This document contains a notice of pendency before the

Department of Labor (the Department) of a proposed class exemption from

the prohibited transaction restrictions of the Employee Retirement

Income Security Act of 1974 (ERISA) and the Internal Revenue Code of

1986 (the Code). The proposed class exemption would provide exemptive

relief for certain transactions involving the failure to transmit

participant contributions to pension plans where such delinquent

amounts are voluntarily restored to such plans with lost earnings. This

exemption is being proposed as part of the Department's Pension Payback

Program, which is targeted at persons who failed to transfer

participant contributions to pension plans, including section 401(k)

plans, within the time frames mandated by the Department's participant

contribution regulation, and thus violated Title I of ERISA. If

granted, the proposed exemption 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 must be

received by the Department on or before April 21, 1996.

ADDRESSES: All written comments (at least three copies) and requests

for a public hearing should be sent to: Office of Exemption

Determinations, Pension

[[Page 9200]]

and Welfare Benefits Administration, Room N-5649, U.S. Department of

Labor, 200 Constitution Avenue, NW., Washington, DC 20210, (attn: D-

10218). Comments received from interested persons will be available for

public inspection in the Public Documents Room, Pension and Welfare

Benefits Administration, U.S. Department of Labor, room N-5638, 200

Constitution Avenue, NW., Washington, DC. Written comments may also be

sent by the Internet to the following address: [email protected].

FOR FURTHER INFORMATION CONTACT: Ms. Lyssa Hall, Office of Exemption

Determinations, Pension and Welfare Benefits Administration, U.S.

Department of Labor, (202) 219-8971, (This is not a toll-free number.);

or William Taylor, Plan Benefits Security Division, Office of the

Solicitor, U.S. Department of Labor, (202) 219-9141. (This is not a

toll-free number.)

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency

before the Department of a proposed class exemption from the

restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of ERISA and

from 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.

The Department is proposing the class exemption on its own motion

pursuant to section 408(a) of ERISA and 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).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 [1995]) generally

transferred the authority of the Secretary of the Treasury to issue

administrative exemptions under section 4975 of the Code to the

Secretary of Labor.

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Review Under the Paperwork Reduction Act of 1995

The collection of information contained in this proposed class

exemption has been submitted to the Office of Management and Budget for

review under section 3507(d) of the Paperwork Reduction Act of 1995. 44

U.S.C. 3507(d). For copies of the OMB submission, contact Mrs. Theresa

O'Malley, U.S. Department of Labor, OASAM/DIRM, Room N-1301, 200

Constitution Ave. NW., Washington, D.C. 20210, 202-219-5095 or via

Internet to [email protected]. Comments are solicited on the

Department's need for this information, specifically to: (1) Evaluate

whether the proposed collection of information is necessary for the

proper performance of the functions of the agency, including whether

the information will have practical utility; (2) evaluate the accuracy

of the agency's estimate of the burden of the proposed collection of

information, including the validity of the methodology and assumptions

used; (3) enhance the quality, utility, and clarity of the information

to be collected; and (4) minimize the burden of the collection of

information on those who are to respond, including through the use of

appropriate automated, electronic, mechanical, or other technological

collection techniques or other forms of information technology, e.g.,

permitting electronic submission of responses. Persons wishing to

comment on the collection of information should direct their comments

to the Office of Information and Regulatory Affairs, OMB, Room 10235,

NEOB, Washington, D.C. 20503, Attn: Desk Officer for PWBA. Comments

must be filed with the Office of Management and Budget within 30 days

of this publication.

Title: Class Exemption To Permit The Restoration of Delinquent

Participant Contributions to Plans.

Summary: This document contains a notice of pendency before the

Department of a proposed class exemption from the prohibited

transaction restrictions of ERISA and the Code. The proposed class

exemption would provide exemptive relief for certain transactions

involving the failure to transmit participant contributions to pension

plans where such delinquent amounts are voluntarily restored to such

plans with lost earnings. This exemption is being proposed as part of

the Department's Pension Payback Program, which is targeted at persons

who failed to transfer participant contributions to pension plans,

including section 401(k) plans, in accordance with the time frames

described in the Department's participant contribution regulation, and

thus violated Title I of ERISA (29 CFR 2510.3-102). If granted, the

proposed exemption would affect plans, participants and beneficiaries

of such plans and certain other persons engaging in such transactions.

Needs and Uses: ERISA requires that the Department make a finding

that the proposed exemption meets the statutory requirements of section

408(a) before granting the exemption. The Department therefore finds it

necessary to receive certain information from the applicants, and that

participants and beneficiaries receive notice and an opportunity to

comment on the proposed transaction.

Respondents and Proposed Frequency of Response: The Department

staff estimates that approximately 1,772 plan sponsors will seek to

take advantage of this class exemption and/or participate in the

Pension Payback Program. The respondents will be parties in interest to

plans.

Estimated Annual Burden: According to 1992 Form 5500 data,

approximately 172,246 plans (including approximately 139,704 401(k)

plans) permitted participant contributions. We have no hard data on the

number of plan sponsors that might wish to participate in the

conditional compliance program. However, on the basis of preliminary

investigations conducted by the Department, the number of plan sponsors

who fail to transfer participant contributions to pension plans as

required by ERISA appears to be quite small. We estimate only about one

percent of the plans that permit participant contributions will

actually be interested in participating in this program. Consequently,

the number of respondents is 1,722 (.01 x 172,246). We also estimate

that it will take those plan sponsors who are interested in

participating in this program and using the exemption only one hour.

Consequently, the total burden hours are 1,722 (1 x 1,722).

Under the proposed exemption, one condition that must be satisfied

is that all delinquent participant contributions be restored to the

pension plan plus earnings from the date on which such contributions

were paid to, or withheld by, the employer until such money is restored

to the plan. The earnings are calculated at the greater of: (1) The

amount that would have been earned on the participant contributions

during such period if applicable plan provisions had been followed, or

(2) the amount that would have been earned on the participant

contributions during such period using an interest rate equal to the

underpayment rate defined in section 6621(a)(2) of the Code during such

period. In the Department's view, this condition requires that the

earnings be calculated on an account by account basis in order to

mirror the earnings the participants would have otherwise accrued. The

Department's burden hour calculation does not reflect any hours imposed

by this requirement because of a lack of data.

Background

In 1988, the Department published a final regulation defining when

certain monies which a participant pays to, or has withheld by, an

employer for contribution to a plan are ``plan assets'' for purposes of

Title I of ERISA and the related prohibited transaction provisions of

the Code. 53 FR 17628 (May 17, 1988). The final participant

contribution regulation provided that

[[Page 9201]]

the assets of a plan include amounts (other than union dues) that a

participant or beneficiary pays to an employer, or amounts that a

participant has withheld from his or her wages by an employer, for

contribution to the plan as of the earliest date on which such

contributions can reasonably be segregated from the employer's general

assets, but in no event more than 90 days from the date on which such

amounts are received by the employer (in the case of amounts that a

participant or beneficiary pays to an employer) or 90 days from the

date on which such amounts would otherwise have been payable to the

participant in cash (in the case of amounts withheld by an employer

from a participant's wages).2 This final rule was based on a

record developed with respect to a proposed regulation published in

1979. 44 FR 50363 (August 28, 1979).

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2 The Department has taken the position that elective

contributions to an employee benefit plan, whether made pursuant to

a salary reduction agreement or otherwise, constitute amounts paid

to or withheld by an employer (i.e., participant contributions)

within the scope of section 2510.3-102, without regard to the

treatment of such contributions under the Internal Revenue Code. See

53 FR 29660 (August 8, 1988).

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Except as provided in ERISA section 403(b), plan assets are

required to be held in trust by one or more trustees pursuant to

section 403(a) of ERISA.3 In addition, ERISA's fiduciary

responsibility provisions apply to the management of plan assets. Among

other things, ERISA sections 403 and 404 make clear that the assets of

a plan may not inure to the benefit of any employer and shall be held

for the exclusive purpose of providing benefits to participants in the

plan and their beneficiaries, and defraying reasonable expenses of

administering the plan. These basic fiduciary provisions are

supplemented by the per se rules set forth in section 406 which

prohibit certain classes of transactions between plans and persons

defined as parties in interest under section 3(14) of ERISA. The term

``party in interest'' includes a fiduciary and an employer any of whose

employees are covered by the plan.

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3 ERISA section 403(b) contains a number of exceptions to

the trust requirements for certain types of assets, including assets

which consist of insurance contracts, and for certain types of

plans. In addition, the Secretary has issued a technical release,

T.R. 92-1, which provides that, with respect to certain welfare

plans (e.g., cafeteria plans), the Department will not assert a

violation of the trust or certain reporting requirements in any

enforcement proceeding, or assess a civil penalty for certain

reporting violations, involving such plans solely because of a

failure to hold participant contributions in trust. 57 FR 23272

(June 2, 1992), 58 FR 45359 (August 27, 1993).

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As previously noted, amounts paid by a participant or beneficiary

to an employer and/or withheld by an employer for contribution to the

plan are participant contributions that become plan assets as of the

earliest date on which such contributions can reasonably be segregated

from the employer's general assets. An employer holding these assets

after that date commingled with its general assets will have engaged in

a prohibited use of plan assets under section 406 of ERISA.

Recent investigations conducted by the Department have revealed

employer delays in transmitting or a failure to transmit to pension

plans amounts that a participant or beneficiary pays to an employer, or

amounts that employers withhold from participants' wages, for

contribution to the plans.4 It appears that many employers who

receive participant contributions are under the misimpression that

current regulation permits a delay of up to 90 days in segregating such

contributions, even if the participant contributions can be reasonably

segregated much sooner. Such delays deprive participants of earnings on

their contributions and increase the risk to participants and their

beneficiaries that their contributions will be lost due to the

employer's insolvency or misappropriation by the employer.

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4 In the Spring of 1995, PWBA began a project to

investigate misuse of employee contributions to employee benefit

plans and in particular 401(k) plans. As of October 31, 1995 there

were 417 employee contribution investigations open and 130 cases

were closed during the year. More than $3.7 million has been

recovered through voluntary compliance in situations where employee

contributions were not placed in trust for participants.

Of the 130 closed employee contribution cases, 44, or 33.8

percent of closed cases, resulted in findings of violations of

ERISA's fiduciary provisions. This compares to a finding of

fiduciary violations in 12 percent of all other closed cases in FY

95.

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In order to better protect the security of participant

contributions to employee benefit plans, the Department determined to

revise the final regulation published in 1988. The proposed regulation

(60 FR 66036, December 20, 1995) revises the 1988 regulation by

changing the maximum period during which participant contributions to

an employee benefit plan may be treated as other than ``plan assets''.

Under the proposed rule, the maximum period for an employer to transmit

participant contributions to the plan would be the same number of days

in which the employer is required to deposit withheld income taxes and

employment taxes under rules promulgated by the IRS.5 The proposed

regulation also solicited comments on the advisability of other

measures that the Department might consider to address the problem of

delays in transmitting participant contributions to plans.

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\5\ See 26 CFR section 31.6302-1.

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In addition to the proposed revision to the participant

contribution regulation, the Department, adopted a conditional

compliance program for those persons who voluntarily restore delinquent

participant contributions to pension plans.

The Pension Payback Program (the Program), which is being published

today, is designed to benefit workers by encouraging persons to restore

delinquent participant contributions to pension plans. This Program is

targeted at persons who failed to transfer participant contributions

plus lost earnings to pension plans, including section 401(k) plans,

within the time frames mandated by the Department's participant

contribution regulation, and thus violated Title I of ERISA. Those who

comply with the terms of the Program will avoid potential ERISA civil

actions initiated by the Department, the assessment of civil penalties

under section 502(1) of ERISA and Federal criminal prosecutions arising

from their failure to timely remit such contributions. The Department

of Justice has indicated its support for the Program. This proposed

class exemption under section 408(a) of ERISA, when finalized, will

govern those transactions described in the Program. However, persons

who participate in the Program may rely on the proposed exemption

notwithstanding any subsequent modifications made in issuing the final

exemption. Thus, on a temporary basis, pending promulgation by the

Department of the final class exemption setting forth the conditions

for retroactive relief, the Department will not pursue enforcement

against persons who comply with the conditions of the Program with

respect to any prohibited transaction liability which may have arisen

as a result of a delay in forwarding participant contributions. The

Internal Revenue Service has advised the Department that it will not

seek to impose the Code section 4975 (a) and (b) sanctions with respect

to any prohibited transaction that is covered by the proposed class

exemption, notwithstanding any subsequent changes to the proposed

exemption when it is finalized, provided that all requirements

specified in the proposed class exemption have been met.

Discussion of the Proposed Exemption

1. Scope

The proposed exemption would provide conditional relief from the

restrictions of sections 406(a)(1) (A)

[[Page 9202]]

through (D), 406(b)(1) and 406(b)(2) of ERISA and 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, for

transactions that result from a person's failure to transmit

participant contributions to pension plans within the time frames

required by the participant contribution regulation, provided that such

delinquent contributions are restored to the plans together with lost

earnings.

The Department notes that the proposal only provides relief for

those transactions involving delinquent participant contributions and

earnings that are restored to pension plans no later than September 7,

1996. The payments to the plan must relate to amounts paid by

participants to, or withheld by, an employer for contribution to a plan

no later than 30 days following the date of announcement of the

Program.6 The Department believes that it is appropriate to

propose limited relief in order to provide employers with the

opportunity to restore delinquent participant contributions plus

earnings to plans and to modify their withholding practices without

fear of legal action or excise taxes.

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\6\ The Department notes that this date corresponds to the date

contained in the Program.

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2. Proposed Conditions

The proposal contains conditions, as discussed below, which the

Department views as necessary to ensure that any transaction covered by

the proposed exemption would be in the interests of plan participants

and beneficiaries and to support a finding that the proposed exemption

meets the statutory standards of section 408(a) of ERISA.

Under the proposed exemption, all delinquent participant

contributions must be restored to the pension plan plus earnings from

the date on which such contributions were paid to, or withheld by, the

employer until such money is restored to the plan. The earnings are

calculated at the greater of: (1) The amount that would have been

earned on the participant contributions during such period if

applicable plan provisions had been followed, or (2) the amount that

would have been earned on the participant contributions during such

period using an interest rate equal to the underpayment rate defined in

section 6621(a)(2) of the Code during such period.7 In the

Department's view, this condition requires that the earnings be

calculated on an account by account basis in order to mirror the

earnings the participants would have otherwise accrued.

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7 The underpayment rate defined in section 6621(a)(2) is

based on the Federal short-term rate determined quarterly by the

Secretary of the Treasury and is designed to reflect market rates of

interest rather than serve as a penalty. Courts have applied rates

determined under section 6621 in awarding prejudgment interest in

cases under title I of ERISA. Martin v. Harline, No. 87-NC-115J (D.

Utah Mar. 31, 1992) 15 Emp. Ben. Cases (BNA) 1138, 1153; Whitfield

v. Cohen, 686 F. Supp. 188, 193 (E.D.N.Y. 1988); Whitfield v.

Tomasso, 682 F. Supp. 1287, 1306 (E.D.N.Y. 1988).

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Second, the proposal requires that the total of all outstanding

delinquent participant contributions on the date of announcement of the

Program, excluding earnings, does not exceed the aggregate amount of

participant contributions that were received or withheld by an employer

from the employees' wages for calendar year 1995. Provided that the

preceding limitation is met, the proposal also would permit the

restoration of any earnings on participant contributions that have been

restored to the plan prior to the effective date of the Program.

Third, the proposed exemption requires that the person meet the

requirements set forth in paragraphs (2) through (6) of the Program.

Those requirements include, among other things, that: (1) The person

notify the Department in writing of its intention to participate in the

Program and provide written evidence demonstrating that participant

contributions and earnings have been restored to the plan; (2) the

person notify affected participants (and send a copy to the Department)

that prior delinquent contributions and lost earnings have been

restored to their accounts pursuant to participation in the Program;

(3) at the time of notification to the Department of the person's

determination to participate in the Program, neither the Department nor

any other Federal agency has informed such person of its intention to

investigate or examine the plan or otherwise make inquiry with respect

to the status of participant contributions under the plan; and (4) the

person must certify in writing, under oath, that it is in compliance

with the requirements of the Program and, to its knowledge, not the

subject of any criminal investigation or prosecution involving any

offense against the United States; has not been convicted of any

criminal offense involving employee benefit plans or any other offense

involving financial misconduct, nor entered into a consent decree with

the Department or have been found by a court of competent jurisdiction

to have violated any fiduciary responsibility provision of ERISA.

Notice to Interested Persons

Because many participants, plans, fiduciaries, and parties in

interest with respect to plans could be considered interested persons,

the only practical form of notice of the proposed exemption is

publication in the Federal Register.

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 ERISA and 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 to which the exemption does not expressly apply and the

general fiduciary responsibility provisions of section 404 of ERISA.

Section 404 requires, in part, 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 in accordance

with section 404(a)(1)(B) of ERISA. Nevertheless, the Department notes

that those persons who comply with the conditions of the Pension

Payback Program will avoid potential ERISA civil actions initiated by

the Department resulting from their failure to timely remit participant

contributions to pension plans.

(2) The proposed exemption, if granted, will not extend to

transactions prohibited under section 406(b)(3) of ERISA or section

4975(c)(1)(F) of the Code.

(3) Before this exemption may be granted under section 408(a) of

ERISA and section 4975(c)(2) of the Code, the Department must find that

the exemption is administratively feasible, in the interests of plans

and of participants and beneficiaries and protective of the rights of

participants and beneficiaries of such plans.

(4) The proposed exemption, 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 class exemption will be applicable to

a transaction only if the conditions specified in the class exemption

are satisfied.

[[Page 9203]]

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

requests for a public hearing on the proposed exemption to the address

above and within the time period set forth above. Comments received

will be made part of the record and will be available for public

inspection at the above address.

Proposed Exemption

The Department has under consideration the granting of the

following class exemption, under the authority of section 408(a) of

ERISA and 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).

I. The restrictions of sections 406(a)(1) (A) through (D),

406(b)(1) and 406(b)(2) of ERISA and 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

transactions that result from a person's failure to transmit

participant contributions to a pension plan within the time frames

required by the plan asset--participant contribution regulation (29 CFR

2510.3-102), provided that the following conditions are met:

(a) All delinquent participant contributions are restored to the

pension plan plus the greater of:

(1) The amount that otherwise would have been earned on the

participant contributions from the date on which such contributions

were paid to, or withheld by, the employer until such money is fully

restored to the plan, had such contributions been invested in

accordance with applicable plan provisions, or

(2) The amount the participant would have earned on the participant

contributions during such period using an interest rate equal to the

underpayment rate defined in section 6621(a)(2) of the Code from the

date on which such contributions were paid to, or withheld by, the

employer until such money is fully restored to the plan.

(b) The total of all outstanding delinquent participant

contributions on March 7, 1996, excluding earnings, does not exceed the

aggregate amount of participant contributions that were paid to, or

withheld by, the employer for contribution to the plan for calendar

year 1995. Provided that the preceding limitation is met, the proposed

exemption shall apply without limit to the restoration of any earnings

on delinquent participant contributions that have been restored to the

plan prior to the effective date of the Program.

(c) The conditions set forth in paragraphs (2) through (6) of the

Program are met.

II. Definitions: For purposes of this proposed exemption:

(a) The term ``plan'' means an employee pension benefit plan

described in section 3(2) of ERISA.

(b) The term ``person'' means a person as that term is defined in

section 3(9) of ERISA.

(c) The term ``Program'' means the Pension Payback Program

published by the Department on March 7, 1996.

III. Effective Date: If granted, the proposed exemption provides

retroactive and prospective relief for those transactions involving

participant contributions and earnings that are restored to pension

plans no later than September 7, 1996. Such restorative payments must

relate to amounts paid to, or withheld by, an employer for contribution

to a plan no later than April 5, 1996.

Signed at Washington, D.C. this 4th day of March, 1996.

Alan D. Lebowitz,

Deputy Assistant Secretary for Program Operations, Department of Labor,

Pension and Welfare Benefits Administration.

[FR Doc. 96-5392 Filed 3-6-96; 8:45 am]

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