Proposed Amendment to Prohibited Transaction Exemption 80-26 (PTE 80-26) for Certain Interest Free Loans to Employee Benefit Plans

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application Number D-10830]

Proposed Amendment to Prohibited Transaction Exemption 80-26 (PTE

80-26) for Certain Interest Free Loans to Employee Benefit Plans

AGENCY: Pension and Welfare Benefits Administration, Department of

Labor.

ACTION: Notice of Proposed Amendment to PTE 80-26.

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SUMMARY: This document contains a notice of pendency before the

Department of Labor (the Department) of a proposed amendment to PTE 80-

26. PTE 80-26 is a class exemption that permits parties in interest

with respect to employee benefit plans to make interest free loans to

such plans, provided the conditions of the exemption are met. The

proposed amendment, if adopted, would affect all employee benefit

plans, their participants and beneficiaries, and parties in interest

with respect to those plans engaging in the described transactions.

DATES: If adopted, the proposed amendment would be effective from

November 1, 1999 through December 31, 2000. Written comments and

requests for a public hearing should be received by the Department on

or before January 13, 2000.

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 Avenue, NW, Washington,

DC 20210, (attention: Y2K Interest Free Loans).

FOR FURTHER INFORMATION CONTACT: Mr. J. Martin Jara, Office of

Exemptions Determinations, Pension and Welfare Benefits Administration,

U.S. Department of Labor, (202) 219-8881. (This is not a toll-free

number); or Wendy McColough, Plan Benefits Security Division, Office of

the Solicitor, U.S. Department of Labor (202) 219-4600. (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 80-26 (45 FR

28545, Apr. 29, 1980) 1. PTE 80-26 provides an exemption

from the restrictions of section 406(a)(1)(B) and (D) and section

406(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA

or the Act) and from 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)(B) and (D) of the Code.

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\1\ A minor correction was made to the title of the final

exemption in a notice published in the Federal Register on May 23,

1980. (45 FR 35040).

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The Department is proposing the amendment 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, 32847, August 10, 1990).2

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\2\ Section 102 of the 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.

In discussion of the exemption, references to section 406 of

ERISA should be read to refer as well to the corresponding

provisions of section 4975 of the Code.

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A. General Background

The prohibited transaction provisions of the Act generally prohibit

transactions between a plan and a party in interest (including a

fiduciary) with respect to such plan. Specifically, section

406(a)(1)(B) and (D) of the Act states that a fiduciary with respect to

a plan shall not cause the plan to engage in a transaction, if he knows

or should know that such transaction constitutes a direct or indirect--

(B) Lending of money or other extension of credit between a plan

and a party in interest; or

(D) Transfer to, or use by or for the benefit of, a party in

interest of any assets of a plan. Accordingly, loans, including

interest free loans, to a plan from a party in interest and the

repayment of such loans may be prohibited by those provisions of the

Act.

In addition, section 406(b)(2) of the Act provides that a fiduciary

with respect to a plan shall not, in his individual or any other

capacity, act in a transaction involving the plan on behalf of a party

(or represent a party) whose interests are adverse to the interests of

the plan or the interests of its participants or beneficiaries.

B. Description of Existing Relief

PTE 80-26 permits the lending of money or other extension of credit

from a party in interest or disqualified person to an employee benefit

plan, and the repayment of such loan or other extension of credit in

accordance with its terms or other written modifications thereof, if:

(a) No interest or other fee is charged to the plan, and no

discount for payment in cash is relinquished by the plan, in connection

with the loan or extension of credit;

(b) The proceeds of the loan or extension of credit are used only:

(1) For the payment of ordinary operating expenses of the plan,

including the payment of benefits in accordance with the terms of the

plan and periodic premiums under an insurance or annuity contract; or

(2) For a period of no more than three days, for a purpose

incidental to the ordinary operation of the plan;

(c) The loan or extension of credit is unsecured; and

(d) The loan or extension of credit is not directly or indirectly

made by an employee benefit plan.

C. Discussion of the Proposed Exemption

The Department, on its own motion, proposes an amendment to PTE 80-

26 in order to expand its interest free loan exemption to address

potential Y2K problems. The Y2K problem is a computer problem where

date-dependent computations or operations produce erroneous results

because systems recognize years only by the last two digits, causing a

``00'' entry to be read as the year ``1900'' rather than the year

``2000''. Congress has passed several Acts 3 to address the

Y2K problem and has found that it could incapacitate systems that are

essential to the functioning of markets, commerce, consumer products,

utilities, government, and safety and defense systems, in the United

States and throughout the world.

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\3\ Year 2000 Information and Readiness Disclosure Act, Pub. L.

105-271, 112 Stat. 2386 (1998) (encourages the disclosure and

exchange of information about computer processing problems,

solutions, test practices and test results, and related matters in

connection with Y2K); Y2K Act, Pub. L. 106-37, 106 Stat. 185 (1999)

(established uniform legal standards to provide businesses and

technology product users reasonable incentives to solve Y2K problems

before they develop, encourages continued remediation and testing

efforts, encourages parties to resolve Y2K disputes by alternative

dispute mechanisms, and discourages insubstantial lawsuits).

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Employee benefit plans rely on computers to perform critical

operations such as benefit calculations and

[[Page 66667]]

payments, eligibility, vesting, start dates for required distributions,

normal retirement age, QDROs, ESOP diversification rights, funding

calculations, health claims processing, plan investments, and so on.

Calculations performed by service providers, such as TPAs, insurance

companies, banks, investment managers, and others, having systems that

are not Y2K compliant, may result in a temporary interruption of plan

operations.

To date, PWBA has implemented a comprehensive national outreach

program designed to assist fiduciaries in preparing to address Y2K.

Nevertheless, it remains possible that Y2K related problems could

result in a temporary disruption of computer operations. As a result,

plan fiduciaries must establish a contingency plan that will be

implemented in the event that the plans' essential operations are

affected.

Current information indicates that in some cases small and medium

size businesses are taking a ``wait-and-see'' approach to Y2K and that,

although the financial services sector appears highly prepared, the

industry remains susceptible to secondary risks, such as borrowers

failing to meet their obligations as a result of Y2K. \4\

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\4\ ``Investigating the Year 2000 Problem: The 100 Day Report,''

issued by the United States Senate Special Committee on the Year

2000 Technology Problem on September 22, 1999.

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Furthermore, there is some uncertainty about the cost and

availability of funds to individual depository institutions. Potential

liquidity exigencies created by Y2K might arise from the conversion of

deposits to currency, heightened credit demands, greater lender and

depositor caution, and potential market disruptions. In this regard,

the Board of Governors of the Federal Reserve System established a

special lending program under which Federal Reserve Banks may extend

credit to depository institutions \5\ and, in addition, Congress has

passed the ``Small Business Year 2000 Readiness Act'' \6\ to provide a

loan guarantee program to small businesses.

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\5\ 64 FR 41765 (1999).

\6\ Pub. L. 106-8, 113 Stat. 13 (1999).

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The potential liquidity problem created by Y2K could be detrimental

to employee benefit plans in trying to meet the many demands of plan

participants and beneficiaries. Plan officials need to assure

themselves that sufficient liquidity is available to pay benefits and

administer the plan, including transfers among investment options,

distributions, hardship withdrawals, health claim payments, and loans

to participants and beneficiaries. In addition, employee benefit plans

may incur costs associated with addressing and fixing Y2K problems that

may arise. As a result, the Department has determined to amend PTE 80-

26 to expand its provisions for interest free loans to employee benefit

plans to meet Y2K contingencies.

In the event of a possible Y2K disruption to ordinary plan

operations related to the payment of benefits or insurance premiums,

relief for an interest free loan or extension of credit on an unlimited

basis from a party in interest to deal with these problems would

already be available under the first prong, paragraph (b)(1) of PTE 80-

26.

However, plans may need interest free loans to address potential

Y2K problems that are only incidental to the ordinary operation of the

plan. Specifically, the Department notes that the three day limit on

loans for purposes incidental to the ordinary operation of the plan,

under the second prong, paragraph (b)(2), of PTE 80-26, may not be a

sufficient period of time to address such Y2K contingencies.

Accordingly, beginning November 1, 1999 and ending December 31, 2000,

the proposed amendment to PTE 80-26 would permit certain interest free

loans for an extended period of no more than fourteen months. All loans

made pursuant to this amendment must be repaid by December 31, 2000.

Examples of transactions that may require loans or other extensions

of credit for a period longer than three days due to temporary cash

flow problems or computer malfunctions created by Y2K would include:

(1) The transfer of all or part of a participant's account balance from

one investment option to another; (2) participant loans; (3) temporary

overdraft protection; (4) failure of a plan's internal computer

systems; and (5) the crediting of dividends or interest by a bank

trustee prior to receipt of such dividends or interest.

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, including any prohibited transaction provisions to which

the exemption does not apply and the general fiduciary responsibility

provisions of section 404 of ERISA 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) This exemption does not extend to transactions prohibited under

section 406(b)(1) and (3) of the Act or section 4975(c)(1)(E) and (F)

of the Code.

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

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

exemption is administratively feasible, in the interests of the plan

and of its participants and beneficiaries, and protective of the rights

of participants and beneficiaries of the plan;

(4) If granted, the proposed amendment is applicable to a

particular transaction only if the transaction satisfies the conditions

specified in the exemption; and

(5) 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 or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction.

Written Comments and Hearing Request

The Department invites all interested persons 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

received 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 exemption. Comments received will be available for public

inspection at the above address.

Proposed Amendment

Under section 408(a) of the Act 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, 32847, August 10, 1990), the Department

proposes to amend PTE 80-26 as set forth below:

Section I: General Exemption

Effective January 1, 1975, the restrictions of section 406(a)(1)(B)

and (D) and section 406(b)(2) of the Act, and the taxes imposed by

section 4975(a) and (b) of the Code, by reason of section

[[Page 66668]]

4975(c)(1)(B) and (D) of the Code, shall not apply to the lending of

money or other extension of credit from a party in interest or

disqualified person to an employee benefit plan, nor to the repayment

of such loan or other extension of credit in accordance with its terms

or written modifications thereof, if:

(a) No interest or other fee is charged to the plan, and no

discount for payment in cash is relinquished by the plan, in connection

with the loan or extension of credit;

(b) The proceeds of the loan or extension of credit are used only:

(1) For the payment of ordinary operating expenses of the plan,

including the payment of benefits in accordance with the terms of the

plan and periodic premiums under an insurance or annuity contract; or

(2) For a period of no more than three days, for a purpose

incidental to the ordinary operation of the plan;

(c) The loan or extension of credit is unsecured; and

(d) The loan or extension of credit is not directly or indirectly

made by an employee benefit plan.

Section II: Temporary Exemption

Effective November 1, 1999 through December 31, 2000, the

restrictions of section 406(a)(1)(B) and (D) and section 406(b)(2) of

the Act, and the taxes imposed by section 4975(a) and (b) of the Code

by reason of section 4975(c)(1)(B) and (D) of the Code, shall not apply

to the lending of money or other extension of credit from a party in

interest or disqualified person to an employee benefit plan, nor to the

repayment of such loan or other extension of credit in accordance with

its terms or written modifications thereof, if:

(a) No interest or other fee is charged to the plan, and no

discount for payment in cash is relinquished by the plan, in connection

with the loan or extension of credit;

(b) The proceeds of the loan or extension of credit are used only

for a purpose incidental to the ordinary operation of the plan which

arises in connection with the plan's inability to liquidate, or

otherwise access its assets or data as a result of the Y2K problem.

(c) The loan or extension of credit is unsecured;

(d) The loan or extension of credit is not directly or indirectly

made by an employee benefit plan;

(e) The loan or extension of credit begins on or after November 1,

1999 and is repaid or terminated no later than December 31, 2000.

Section III: Definition

For the purposes of section II, a Y2K problem is a disruption of

computer operations resulting from a computer system's inability to

process data because such system recognizes years only by the last two

digits, causing a ``00'' entry to be read as the year ``1900'' rather

than the year ``2000.''

Signed at Washington, DC, this 23rd day of November, 1999.

Ivan L. Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 99-30932 Filed 11-26-99; 8:45 am]

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