Proposed Amendment to Prohibited Transaction Exemption 93-33 (PTE 93-33) for the Receipt of Certain Services by Individuals for Whose Benefit Individual Retirement Accounts or Retirement Plans for Self- Employed Individuals Have Been Established or Maintained

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application Number: D-10567]

Proposed Amendment to Prohibited Transaction Exemption 93-33 (PTE

93-33) for the Receipt of Certain Services by Individuals for Whose

Benefit Individual Retirement Accounts or Retirement Plans for Self-

Employed Individuals Have Been Established or Maintained

AGENCY: Pension and Welfare Benefits Administration, U.S. Department of

Labor.

ACTION: Notice of Proposed Amendment to PTE 93-33.

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SUMMARY: This document contains a notice of pendency before the

Department of Labor of a proposed amendment to PTE 93-33. PTE 93-33 is

a class exemption that permits the receipt of services at reduced or no

cost by an individual for whose benefit an individual retirement

account (IRA) or, if self-employed, a Keogh Plan, is established or

maintained, or by members of his or her family, from a bank, provided

that the conditions of the exemption are met. The proposed amendment,

if adopted, would affect individuals with beneficial interests in such

plans who receive such services as well as the banks that provide the

services.

DATES: If adopted, the proposed amendment would be effective January 1,

1998. Written comments and requests for a public hearing should be

received by the Department on or before December 7, 1998.

ADDRESSES: All written comments and requests for a public hearing

(preferably three copies) should be addressed to the U.S. Department of

Labor, Office of Exemption Determinations, Pension and Welfare Benefits

Administration, room N-5649, 200 Constitution Ave, NW, Washington, DC

20210, (Attn: D-10567).

FOR FURTHER INFORMATION CONTACT: Ms. Allison Padams Lavigne, Office of

Exemption Determinations, Pension and Welfare Benefits Administration,

U. S. Department of Labor, (202) 219-8971 (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 93-33 (58 FR

31053, May 28, 1993, as amended, 59 FR 22686, May 2, 1994). PTE 93-33

provides relief from the restrictions of sections 406(a)(1)(D) and

406(b) of the Employee Retirement Income Security Act of 1974 (ERISA)

and the sanctions resulting from the application of sections 4975 (a)

and (b), 4975(c)(3) and 408(e)(2) of the Internal Revenue Code of 1986

(the Code) by reason of section 4975(c)(1)(D), (E) and (F) of the

Code.1 The amendment proposed herein was requested in an

exemption application dated January 26, 1998, filed by the American

Bankers Association (the ABA). The ABA is the largest banking trade

association in the United States representing the interests of banking

institutions. Its membership includes community, regional and money

center banks and holding companies, savings associations, trust

companies and savings banks. The application was filed 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).

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\1\ Section 102 of Reorganization Plan No. 4 of 1978 (42 FR

47713, October 17, 1978) generally transferred the authority of the

Secretary of the Treasury to issue administrative exemptions under

section 4975(c)(2) of the Code to the Secretary of Labor.

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PTE 93-33, as amended, permits the receipt of services at reduced

or no cost by an individual for whose benefit an IRA or Keogh Plan is

established or maintained or by members of his or her family, from a

bank pursuant to an arrangement in which the account balance in the IRA

or Keogh Plan is taken into account for purposes of determining

eligibility to receive such services, provided the conditions of the

exemption are met.

The ABA requests an amendment to PTE 93-33 which would expand the

definition of the term ``IRA'' as defined in section III(b) of the

exemption to include any plan account (currently existing or that

Congress may create in the future) subject to the provisions of section

408(e) and/or section 4975 of the Code. The Department has decided not

to expand the definition of the term ``IRA'' to include any plan

account subject to the provisions of section 408(e) and/or section 4975

of the Code because the conditions contained in PTE 93-33, as amended,

were developed based upon the specific characteristics of the IRAs and

Keogh Plans described in section III(b) and (c) respectively. The

Department does not believe that a sufficient showing has been made

that the safeguards contained in the exemption would adequately address

the concerns that the Department may have with regard to an

unidentified class of new accounts.

In the alternative, the ABA requests that the Department expand the

definition of the term ``IRA'' to include

[[Page 56234]]

the following new investment vehicles: Roth IRAs, education IRAs,

Simple Retirement Accounts and Medical Savings Accounts. Section III(b)

of the exemption defines the term ``IRA'' as an individual retirement

account described in Code section 408(a). The definition further states

that, for purposes of this exemption, the term ``IRA'' shall not

include an IRA which is an employee benefit plan covered by Title I of

ERISA, except for a Simplified Employee Pension (SEP) described in

section 408(k) of the Code which provides participants with the

unrestricted authority to transfer their SEP balances to IRAs sponsored

by different financial institutions.

The Taxpayer Relief Act of 1997 (TRA) established the Roth IRA by

adding section 408A to the Code and the education IRA by adding section

530 to the Code.2 The Small Business Job Protection Act of

1996 amended section 408 of the Code to create the Simple Retirement

Account by adding section 408(p) to the Code.3 The Medical

Savings Account was established by the Health Insurance Portability Act

of 1996 by adding section 220 to the Code.4

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\2\ Taxpayer Relief Act of 1997 (Pub. L. 105-34, title III, sec.

302(a) and sec. 213(a), August 21, 1997, 111 Stat 788)

\3\ Small Business Job Protection Act of 1996 (Pub. L. 104-188,

title I, sec. 1421, August 20, 1996, 110 Stat 1755)

\4\ Health Insurance Portability Act of 1996 (Pub. L. 104-191,

title III, sec. 301(a), August 21, 1996, 110 Stat 1936; amended Pub.

L. 105-34, title XVI, sec. 1602, August 5, 1997, 111 Stat 788)

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Section 408A(a) of the Code provides that, except as provided in

this section, a Roth IRA shall be treated for purposes of this title in

the same manner as an individual retirement plan. Section 408A(b) of

the Code provides that, for purposes of this title, the term Roth IRA

means an individual retirement plan (as defined in section 7701(a)(37))

which is designated at the time of the establishment of the plan as a

Roth IRA.

In Advisory Opinion 98-03A (March 6, 1998), the Department stated

that a Roth IRA which satisfies the definition of an individual

retirement plan contained in section 7701(a)(37)(A) 5 of the

Code is an ``individual retirement account'' described in section

408(a) of the Code for purposes of the definition of the term ``IRA''

contained in section III(b) of PTE 97-11 (62 FR 5855 (February 7,

1997)) 6. Therefore, a Roth IRA, as described above, which

is not an employee benefit plan covered by Title I of ERISA (except for

certain SEPs and Simple Retirement Accounts described in section 408(k)

and 408(p) of the Code, respectively) would be covered by the relief

provided in PTE 97-11, if all conditions therein are met. In this

regard, we note that the definition of the term ``IRA'' used in section

III(b) of PTE 93-33 is identical to the definition of an IRA contained

in section III(b) of PTE 97-11 (except that the definition of the term

``IRA'' in PTE 97-11 was amended to include Simple Retirement

Accounts). Accordingly, since the relevant portion of the definition of

IRA under PTE 97-11 is identical to the language contained in PTE 93-

33, the Department is of the view that a Roth IRA would be covered by

the relief provided in PTE 93-33, if all the conditions therein are

met. Thus, there is no need to specifically amend PTE 93-33 to include

Roth IRAs.

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\5\ Section 7701(a)(37) of the Code defines the term

``individual retirement plan'' to mean: (A) an individual retirement

account described in section 408(a) of the Code, and (B) an

individual retirement annuity described in section 408(b) of the

Code.

\6\ PTE 97-11 permits the receipt of services at reduced or no

cost by an individual for whose benefit an IRA or, if self-employed,

a Keogh Plan, is established or maintained or by members of his or

her family, from a broker-dealer registered under the Securities

Exchange Act of 1934 pursuant to an arrangement in which the account

value of, or the fees incurred for services provided to, the IRA or

Keogh Plan is taken into account for purposes of determining

eligibility to receive such services, provided that the conditions

of the exemption are met. The term ``IRA'' is defined in section

III(b) of PTE 97-11 as an individual retirement account described in

section 408(a) of the Code. For purposes of this exemption, the term

IRA shall not include an IRA which is an employee benefit plan

covered by Title I of ERISA except for a Simplified Employee Pension

(SEP) described in section 408(k) of the Code or a Simple Retirement

Account described in section 408(p) of the Code which provides the

participants with the unrestricted authority to transfer their

balances to IRAs or Simple Retirement Accounts sponsored by

different financial institutions.

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Section 530(b)(1) of the Code provides in part, that the term

``education individual retirement account'' means a trust created or

organized in the United States exclusively for the purpose of paying

the qualified higher education expenses of the designated beneficiary

of the trust (and designated as an education individual retirement

account at the time created or organized). Section 530(b)(1) further

provides: but only if the written governing instrument creating the

trust meets the following requirements:

(A) no contribution will be accepted--(i) unless it is in cash,

(ii) after the date on which such beneficiary attains age 18, or (iii)

except in the case of rollover contributions, if such contributions

would result in aggregate contributions for the taxable year exceeding

$500; (B) the trustee is a bank (as defined in section 408(n) of the

Code or another person who demonstrates to the satisfaction of the

Secretary that the manner in which that person will administer the

trust will be consistent with the requirements of this section or who

has so demonstrated with respect to any individual retirement plan; (C)

no part of the trust assets shall be invested in life insurance

contracts; (D) the assets of the trust shall not be commingled with

other property except in a common trust fund or common investment fund;

and (E) upon the death of the designated beneficiary, any balance to

the credit of the beneficiary shall be distributed within 30 days after

the date of death to the estate of such beneficiary.

The Education IRA is subject to disqualification provisions which

are similar to those in section 408(e)(2) and (4) of the Code that are

applicable to IRAs described in section 408(a) of the Code.7

In addition, as with section 408(a) IRAs, the Education IRA balance can

be transferred to different sponsoring institutions.8

Further, the TRA amended the definition of plans as defined in section

4975(e)(1) of the Code to include an educational IRA described in

section 530 of the Code. Based on the ABA's representations, it appears

that Education IRAs share many of the same characteristics as those

IRAs covered by the exemption. Thus, the Department sees merit in the

ABA's request, and, accordingly, has modified the definition of IRA in

section III(b) of PTE 93-33 to include Education IRAs.

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\7\ See section 530(e) of the Code.

\8\ See section 530(d)(5) of the Code.

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Simple Retirement Accounts are defined in section 408(p) of the

Code as an individual retirement plan (as defined in section

7701(a)(37))--(A) with respect to which the requirements of paragraphs

(3), (4) and (5) are met; and (B) with respect to which the only

contributions allowed are contributions under a qualified salary

reduction arrangement. Simple Retirement Accounts are funded by

employee contributions and matching employer contributions.9

Section 408(p)(7) of the Code provides that participants of Simple

Retirement Accounts have the unrestricted authority to transfer their

account balances without cost or penalty to Simple Retirement Accounts

sponsored by different financial institutions. In its application, the

ABA noted that the Department modified the definition of the term

``IRA'' under PTE 97-11 to include Simple Retirement Accounts. The

Department agrees with the ABA and has modified section III(b) under

the proposed amendment to include Simple Retirement Accounts.

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\9\ See section 408(p)(2)(A) of the Code.

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Finally, the ABA represents that a Medical Savings Account is a

tax-exempt trust or custodial account established to pay medical

expenses.

[[Page 56235]]

The ABA exemption application included a copy of IRS Notice 96-53,

1996-51 I.R.B. 5, (December 6, 1996) (the Notice) which describes the

Medical Savings Accounts. Although the Notice states that a number of

the rules that apply to Medical Savings Account also apply to IRAs, the

Notice also states that Medical Savings Accounts differ from IRAs in

important respects. In this regard, neither the ABA application nor the

Notice discuss these differences. In addition, the Department does not

believe that a sufficient showing has been made that the safeguards and

conditions currently contained in PTE 93-33 are relevant in the context

of Medical Savings Accounts. Consequently, the Department has

determined not to propose the requested relief for Medical Savings

Accounts.

Notice to Interested Persons

Because many participants in IRAs and Keogh Plans and banks could

conceivably be considered interested persons, the only practical form

of notice is publication in the Federal Register.

General Information

The attention of interested persons is directed to the following:

(1) Before an 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 the

IRAs and Keogh Plans and their participants and beneficiaries and

protective of the rights of the participants and beneficiaries of such

plans.

(2) The proposed amendment if granted, will be supplemental to, and

not in derogation of, any 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 exemption is not dispositive of whether the transaction

is in fact a prohibited transaction.

(3) If granted, the proposed amendment will be applicable to a

transaction only if the conditions specified in the class exemption are

met.

Written Comments and Hearing Request

All interested persons are invited to submit written comments or

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

and within the time period set forth above. All comments will be made a

part of the record. Comments and requests for a hearing should state

the reasons for the writer's interest in the proposed amendment.

Comments received will be available for public inspection with the

referenced application at the above address.

Proposed Amendment

Under 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), the Department proposes to

amend PTE 93-33 as set forth below:

Section III(b) is amended to read: ``The term IRA means an

individual retirement account described in Code section 408(a) or an

education individual retirement account described in section 530 of the

Code. For purposes of this exemption, the term ``IRA'' shall not

include an IRA which is an employee benefit plan covered by Title I of

ERISA, except for a Simplified Employee Pension (SEP) described in

section 408(k) of the Code or a Simple Retirement Account described in

section 408(p) of the Code which provides participants with the

unrestricted authority to transfer their balances to IRAs or Simple

Retirement Accounts sponsored by different financial institutions.''

Signed at Washington, DC this 6th day of October, 1998.

Alan D. Lebowitz,

Deputy Assistant Secretary for Program Operations, Pension and Welfare

Benefits Administration, U.S. Department of Labor.

[FR Doc. 98-28214 Filed 10-20-98; 8:45 am]

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