[Federal Register Volume 59, Number 242 (Monday, December 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31086]
[[Page Unknown]]
[Federal Register: December 19, 1994]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-9834, et al.]
Proposed Exemptions; Alucobond Technologies, Incorporated
Employees' Savings Plan, et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restriction of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
request for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue NW., Washington, D.C.
20210. Attention: Application No. stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue NW., Washington, D.C. 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Alucobond Technologies, Incorporated Employees' Savings Plan (the Plan)
Located in St. Louis, Missouri; Proposed Exemption
[Application No. D-9834]
The Department is considering granting an exemption 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 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code shall not apply to (1) the proposed interest-free loan to the
Plan (the Loan) by Alucobond Technologies, Incorporated (the Employer),
a party in interest with respect to the Plan, and (2) the Plan's
potential repayment of the Loan upon the receipt by the Plan of
payments under Guaranteed Investment Contract No. CG01285A3A (the GIC)
issued by Executive Life Insurance Company (Executive Life); provided
the following conditions are satisfied:
(A) No interest or expenses are paid by the Plan in connection with
the proposed transaction;
(B) The Loan will be repaid only out of amounts paid to the Plan by
Executive Life, its successors, or any other responsible third party;
and
(C) Repayment of the Loan is waived with respect to the amount by
which the Loan exceeds GIC proceeds.
Summary of Facts and Representations
1. The Employer is a diversified manufacturer of aluminum composite
panels, rigid foam P.V.C. panels and polystyrene foamcore boards. The
Employer has offices and/or production sites in St. Louis, Missouri;
Benton, Kentucky and Richmond, Indiana. The Plan is a profit sharing
plan which includes a cash or deferred arrangement under section 401(k)
of the Code. As of December 31, 1993, the Plan had 93 participants and
total assets of approximately $1,098,635. Participants are currently
entitled to direct the investment of their account balances among seven
investment funds which are managed by Scudder Investor Services, Inc.
On February 12, 1988, prior to the implementation of participant
direction, The Boatmen's National Bank of St. Louis (the Bank),\1\ as
trustee for the Plan, made the decision to invest a portion of the
Plan's assets in a collective investment fund maintained by the Bank
and invested primarily in guaranteed investment contracts. The GIC is
held as the sole asset of sub-fund G-11 of the the collective
investment fund. The GIC provided a rate of return of 8.65% per annum
and a maturity date of March 1, 1993.
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\1\Boatmen's Trust Company (Boatmen's) succeeded The Boatmen's
National Bank of St. Louis as the Plan's trustee in 1990.
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2. On April 11, 1991, Executive Life was placed into
conservatorship by the Insurance Commissioner of the State of
California. The Employer represents that, pursuant to the
conservatorship, payouts under the terms of Executive Life's GICs were
suspended.\2\ In February, 1994, Boatmen's, in its capacity as Plan
trustee, elected to participate in the rehabilitation plan for
Executive Life. Although, through the rehabilitation process, the Plan
has received $147,386.00 from Executive Life, the amount of any
additional payments to be received over the next several years is
undetermined. Consequently, Boatmen's has frozen that portion of
participants' accounts which is attributable to the GIC. This freeze
has prevented Plan participants from exercising the rights they would
normally have under the Plan to request distributions and investment
transfers with respect to amounts currently invested in the GIC.\3\ The
Employer represents that the Loan would preserve the Plan's rights with
respect to the GIC, give participants and beneficiaries the ability to
exercise their right to request investment transfers, and provide
immediate liquidity which would facilitate benefit distributions. The
proposed Loan will be made in one lump-sum payment in the amount of the
maturity value\4\ of the GIC, plus post-maturity interest through the
date of the Loan, credited at the rate paid on the Collective Employee
Benefit Trust Fund ``S'';\5\, less any amounts previously received
pursuant to the rehabilitation process and the total amount of periodic
advances already made to the Plan. The Employer represents that the
Loan is non-interest bearing and the Plan will not incur any expenses
in connection with the transaction.
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\2\The Department notes that the decisions to acquire and hold
the GIC are governed by the fiduciary responsibility requirements of
Part 4, Subtitle B, Title I of the Act. In this regard, the
Department is not herein proposing relief for any violations of Part
4 which may have arisen as a result of the acquisition and holding
of the GIC issued by Executive Life.
\3\Following the cessation of payments by Executive Life with
respect to the GIC, the Employer made the decision to make periodic
advances to the Plan to permit the Plan to make distributions to
participants and beneficiaries entitled to distributions as a
consequence of termination of employment. The applicant represents
that, as of November, 1994, the periodic advances to the Plan
totaled approximately $50,618.00. The applicant also represents that
the terms of those periodic advances satisfy the conditions of PTE
80-26 (45 FR 28545, April 29, 1980). This conditional class
exemption permits a party in interest to make an interest-free loan
to an employee benefit plan, and the repayment of such loan.
Specifically, the exemption states, in relevant part, that 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 4975(c)(1)(B) and
(D) of the Code, shall not apply to the lending of money from a
party in interest to an employee benefit plan, nor to the repayment
of such loan in accordance with its terms, if no interest or other
fee is charged to the plan, the loan is unsecured, and the loan
proceeds are used only for the payment of ordinary operating
expenses of the plan, including the payment of benefits in
accordance with the terms of the plan.
In this proposed exemption the Department expresses no opinion
as to whether the periodic advances satisfy the provisions of PTE
80-26.
\4\The maturity value is defined as the total amount deposited
under the GIC, plus interest at the guaranteed interest rate,
through the date of maturity. The applicant represents that the
maturity value is $297,210.76.
\5\The Employer represents that the annualized rate of return on
the Collective Employee Benefit Trust Fund ``S'' for the period from
October 1, 1993 through September 30, 1994 was 4.0%. It is
represented that, this fund, an investment vehicle offered by
Boatmen's Trust Company, invests in a diversified portfolio of money
market instruments, such as U.S. Treasury Bills, certificates of
deposit, commercial paper, and demand notes, as well as other fixed-
rate and variable-rate fixed income securities.
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3. Repayment of the Loan is limited to payments made to the Plan by
or on behalf of Executive Life, or its successor, or any other
responsible third parties. No other assets of the Plan will be
available for repayment of the Loan. If the payments by or on behalf of
Executive Life are not sufficient to fully repay the Loan, the Employer
will have no recourse against the Plan, or against any participants or
beneficiaries of the Plan, for the unpaid amount. In the event that GIC
proceeds exceed the amount necessary to repay the Loan, the excess will
be distributed to the Plan for the benefit of participants and their
beneficiaries. The Employer represents that it will maintain records of
the proposed Loan for a period of seven years, and such records will be
open for inspection at all times by the Department or any Plan
participant.
4. In summary, the applicant represents that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because: (1) The transaction will preserve the Plan's ability to allow
participant-directed investment re-allocations; (2) The Plan will not
incur any expenses with respect to the transaction; (3) Repayment of
the Loan will be made only from amounts paid to the Plan by Executive
Life, its successor, or any other third party; (4) If the payments by
or on behalf of Executive Life are not sufficient to fully repay the
Loan, the Employer will have no recourse against the Plan, or against
any participants or beneficiaries of the Plan, for the unpaid amount;
and (5) Repayment of the Loan will be waived with respect to the amount
by which the Loan exceeds the amount the Plan receives from GIC
proceeds.
For Further Information Contact: Virginia J. Miller of the
Department, telephone (202) 219-8971. (This is not a toll-free number.)
Regency Marketing Corporation Restated Employees Profit Sharing Plan
and Trust (the Plan) Located in West Bloomfield, Michigan; Proposed
Exemption
[Application No. D-9763]
The Department is considering granting an exemption under 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).
If the exemption is granted, the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply to the proposed
loan (the Loan) of $84,667 by the Plan to Frankenmuth Brewing Company
(Frankenmuth), a disqualified person with respect to the Plan.6
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\6\ Since Randall Heine and his wife, Paula Heine, are the only
participants in the Plan, there is no jurisdiction under Title I of
the Act pursuant to 29 CFR 2510.3-3(b). However, there is
jurisdiction under Title II of the Act pursuant to section 4975 of
the Code.
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This proposed exemption is conditioned upon the following
requirements:
(a) the terms of the Loan are at least as favorable to the Plan as
those obtainable in an arm's length transaction with an unrelated
party;
(b) the Loan does not exceed twenty-five percent of the assets of
the Plan at any time during the duration of the Loan;
(c) the Loan is secured by a first deed of trust on certain real
property (the Property) which has been appraised by an independent,
qualified appraiser to ensure that the fair market value of the
Property is at least 150 percent of the amount of the Loan;
(d) the fair market value of the Property remains at least equal to
150 percent of the outstanding balance of the Loan throughout the
duration of the Loan;
(e) the Plan trustees determine on behalf of the Plan that the Loan
is in the best interests of the Plan and protective of the Plan's
participants and beneficiaries; and
(f) the Plan trustees monitor compliance with the terms and
conditions of the Loan throughout the duration of the transaction,
taking any action necessary to safeguard the Plan's interest, including
foreclosure on the Property in the event of default.
Summary of Facts and Representations
1. Regency Marketing Corporation (Regency) established the Plan on
July 1, 1976. On February 1, 1986, the Plan was frozen due to the
dissolution of Regency. Regency was a Michigan corporation engaged as a
broker of dairy and other related products. As of June 30, 1993, the
Plan had total assets of $1,892,429. Randall Heine and his wife, Paula
Heine, are the only participants in the Plan. Mr. and Mrs. Heine are
the trustees of the Plan (the Trustees) and have sole investment
discretion with regard to the Plan's assets. The Trustees represent
that there will be no new participants in the Plan.
Mr. Heine is the majority shareholder of Frankenmuth, a Michigan
corporation with its principal place of business in Frankenmuth,
Michigan. Frankenmuth manufactures beer and ale both under its own
labels as well as under private labels.
2. The Trustees request an administrative exemption from the
Department to permit the Loan to Frankenmuth under the terms and
conditions described herein. Frankenmuth proposes to use the loan
proceeds towards purchasing the Property which will be used for
Frankenmuth's administrative offices.
3. The Loan will be in a principal amount of $84,667. The applicant
states that at no time will the amount of the Loan represent more than
twenty-five percent of the Plan's total assets. The Loan will be
secured by a first deed of trust on the Property, which consists of a
1,250 square foot improved commercial building and the underlying land.
The Property is located at 435 South Main Street, Frankenmuth,
Michigan. The deed of trust will be duly recorded in Saginaw County to
reflect the Plan's security interest in the Property. In addition,
Frankenmuth will insure the Property against casualty loss and
designate the Plan as the loss payee of such insurance.
4. The Loan will have a ten-year term and will be evidenced by a
promissory note (the Note). The Note will require Frankenmuth to make
monthly payments of principal and interest which will be fully
amortized over the ten-year term. Interest will accrue on the Loan at
11.5 percent per annum. The Plan will not be required to pay any
commissions, fees or other expenses in connection with the Loan.
As a condition of the proposed exemption, the terms and conditions
of the Loan must be at least as favorable to the Plan as those which
the Plan could obtain in dealing at arm's length with an unrelated
party. In this regard, NBD Bank, N.A. (NBD), an unrelated entity in
Troy, Michigan, states in a letter, dated September 22, 1994, that NBD
would make a secured loan of $84,667 for an initial term of five years
with a fifteen-year amortization schedule allowing for a balloon
payment at the end of the fifth year. At the end of the first five
years, NBD would approve a new five-year note with a ten-year
amortization schedule. At the end of the tenth year, NBD would then
approve a five-year note with a five-year amortization schedule.
Interest would accrue within a range of 9.25 percent to 11.5 percent
per annum, fixed or floating. In addition, NBD states that it would
charge Frankenmuth a loan fee of one percent or $846. Accordingly, the
applicants represent that Frankenmuth will pay a loan fee of $846 to
the Plan at the inception of the Loan.
5. The Property was appraised by Lewis H. Weiss of Weiss Appraisal
Service (Weiss), an appraisal firm located in Frankenmuth, Michigan.
Mr. Weiss is a licensed real estate appraiser in Michigan and has ten
years of experience appraising all types of property. Mr. Weiss
represents that both he and Weiss are independent of, and unrelated to,
Frankenmuth and the Trustees.
Mr. Weiss placed a fair market value of $127,000 as of August 23,
1994. Mr. Weiss utilized the market data approach of valuation by using
comparable sales of commercial buildings located on the same street as
the Property.
6. The Trustees state that the terms of the Loan compare favorably
with the terms of similar transactions between untreated parties and
would be a better than arm's length transaction as evidenced by the
terms offered by NBD (see Item #5 above). The Trustees represent, that
from the Plan's perspective, the terms of the Loan are better than the
terms offered by NBD because the Loan allows the Plan to receive higher
monthly payments at an interest rate of 11.5 percent over a ten- year
period rather than at a fixed or floating rate between 9.25 and 11.5
percent over a fifteen-year period. The Trustees represent that they
believe that the Loan is in the best interests of the Plan and its
participants and beneficiaries as an investment for the Plan's
portfolio. The Trustees further represent that they will monitor the
Loan throughout its entire duration and will take any appropriate
action necessary to protect the interests of the Plan and its
participants and beneficiaries, including a foreclosure on the Property
in the event of default. The Trustees will monitor the Property to
ensure that the Loan remains secured by collateral worth at least 150
percent of the Loan at all times.
7. In summary, the applicant represents that the proposed
transaction will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) the terms of the Loan will be at least as favorable to the Plan
as those obtainable in an arm's length transaction with an unrelated
party;
(b) the Loan will not exceed twenty-five percent of the assets of
the Plan at any time during the duration of the Loan;
(c) the Loan will be secured by a first deed of trust on certain
real property (the Property) which has been appraised by an
independent, qualified appraiser to ensure that the fair market value
of the Property is at least 150 percent of the amount of the Loan;
(d) the fair market value of the Property will remain at least
equal to 150 percent of the outstanding balance of the Loan throughout
the duration of the Loan;
(e) the Trustees have determined on behalf of the Plan that the
Loan is in the best interest of the Plan and protective of the Plan's
participants and beneficiaries; and
(f) the Trustees will monitor compliance with the terms and
conditions of the Loan throughout the duration of the transaction,
taking any action necessary to safeguard the Plan's interest, including
foreclosure on the Property in the event of default.
Notice to Interested Persons
Since Mr. and Mrs. Heine are the only participants in the Plan, it
has been determined that there is no need to distribute the notice of
proposed exemption to interested persons. Comments are due within
thirty days after publication of this notice in the Federal Register.
For Further Information Contact: Kathryn Parr of the Department,
telephone (202) 219-8971. (This is not a toll-free number).
Clarence E. Coker, Jr. and the Clarendon Family Practice, PA Employee
Retirement Plan (the Plan) Located in Manning, South Carolina; Proposed
Exemption
[Application No. D-9736]
The Department is considering granting an exemption 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 29 C.F.R. Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale of approximately eight acres
of unimproved land (the Land) by the Plan to Dr. Clarence E. Coker,
Jr., (Dr. Coker), a party in interest with respect to the Plan;
provided that the following conditions are satisfied:
(a) the proposed sale will be a one-time cash transaction;
(b) the Plan will receive the higher of: (1) the original
acquisition cost7; or (2) the current fair market value plus a
certain premium related to the adjacency of the Land to other real
property owned by Dr. Coker, established at the time of the sale by an
independent qualified appraiser; and
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\7\The original acquisition cost is determined as follows:
(original purchase price + aggregate real estate taxes) - aggregate
rental income = original acquisition cost.
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(c) the Plan will pay no expenses associated with the sale.
Summary of Facts and Representations
1. The Plan is a defined contribution plan that was established
January 1, 1974. The Plan has 13 participants, and as of December 31,
1993, the Plan's total assets were $755,525.96. The sponsor of the Plan
is Clarendon Family Practice, PA (the Employer), which is a South
Carolina subchapter ``C'' corporation engaged in family practice
medicine. The Plan's trustee is Dr. Coker who is also the sole
shareholder of the Employer.
2. On May 18, 1982, the Plan purchased the Land for $41,700 from
Marian K. Thames, an unrelated third party in a one-time cash
transaction. The applicant represents that at the time of initial
acquisition, the Land represented 19.9% of the Plan's total assets. The
Land consists of 8.34 acres of vacant land and is located adjacent to
other property owned by Dr. Coker, individually. The applicant
represents that since 1982 the Land has been rented for approximately
$400 a year to W. D. Harrington, a neighboring farmer who is unrelated
to the Plan and the Employer, as grazing land for animals. The
aggregate rental income received by the Plan for the period 1982-1994
is $5,200. It is represented that the Land has not been used by a party
in interest since it was originally acquired by the Plan. Furthermore,
the Land is not encumbered by any debt.
3. Dr. Coker in his trustee capacity, upon the advise of a certain
certified public accountant, made the original decision to acquire the
Land as a long-term Plan investment.8 With respect to the Land,
the aggregate real estate taxes for the period 1983-1993 were $153.45.
In this regard, the original acquisition cost (the Original Acquisition
Cost) to the Plan for the Land is $36,653.45. The Original Acquisition
Cost was determined as follows $41,700 (original purchase price) +
$153.45 (aggregate real estate taxes) - $5,200 (aggregate rental
income) = $36,653.45.
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\8\The Department expresses no opinion as to whether the Plan's
acquisition and holding of the Land violated any provision of part 4
of title I of the Act.
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4. The Land was appraised on February 11, 1994 (the Appraisal) by
W. Burke Watson, Jr., an independent real estate appraiser certified in
the State of South Carolina (Mr. Watson). Mr. Watson relied on the
direct sales comparison method and estimated that as of February 11,
1994, the fair market value of the Land was $12,500. On July 28, 1994,
in an update to the Appraisal, Mr. Burke stated that adjacency of the
Land to other property owned by Dr. Coker merits a premium (the
Premium) above the fair market value of approximately $500 per acre,
which yields a new purchase price of $17,680 to Dr. Coker in this
transaction.
5. Dr. Coker proposes to purchase the Land from the Plan in a one-
time cash transaction. It is represented that as of December 31, 1993,
the Land represented 1.7 percent of the Plan's assets. The applicant
represents that the Land has been depreciating steadily over the years,
but that this depreciation became evident to Dr. Coker in 1987. As
such, after conferring with the Plan's consultants and administrators
in 1991, Dr. Coker decided that he should sell the Land because of its
steady depreciation and because of its illiquidity. Accordingly, the
Land has been listed for sale with an independent real estate broker
from October 1991 to January 1992, but there was no willing buyer.
Therefore, it is represented that the proposed transaction is in the
best interest and protective of the Plan because the transaction will
divest the Plan of an asset that has greatly depreciated in value since
original acquisition, and will enable the Plan to invest in vehicles
with a higher return. The transaction is protective of the Plan because
as a result of the sale the Plan will receive the higher of: a) the
Original Acquisition Cost; or b) the current fair market value plus the
Premium as established at the time of the sale by an independent
qualified appraiser. Furthermore, the applicant represents that any
amounts received by the Plan as a result of the proposed transaction,
which are in excess of the fair market value of the Land will be
treated as a contribution to the Plan, but that this contribution will
not exceed limitations of section 415 of the Internal Revenue Code.
6. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) the proposed sale will be a one-time cash transaction;
(b) the Plan will receive the higher of: 1) the Original
Acquisition Cost; or 2) the current fair market value plus the Premium
as established at the time of the sale by an independent qualified
appraiser; and
(c) the Plan will pay no expenses associated with the sale.
Tax Consequences of Transaction
The Department of Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or an affiliate thereof) results in the plan either paying less or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan, and therefore
must be examined under the applicable provisions of the Internal
Revenue Code, including sections 401(a)(4), 404 and 415.
For Further Information Contact: Ekaterina A. Uzlyan of the Department
at (202) 219-8883. (This is not a toll-free number.)
American Express Incentive Savings Plan (the Plan) Located in New York,
New York; Proposed Exemption
[Application No. D-9813]
The Department is considering granting an exemption 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 29 C.F.R. Part
2570, Subpart B (55 F.R. 32836, 32847, August 10, 1990). If the
exemption is granted the restrictions of sections 406(a), 406 (b)(1)
and (b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of sections 4975(c)(1) (A)
through (E) of the Code, shall not apply to (1) the proposed extensions
of credit (the Loans) to the Plan by American Express Company (the
Employer), the sponsor of the Plan with respect to two guaranteed
investment contracts (the GICs) issued by Confederation Life Insurance
Company (Confederation); (2) the Plan's potential repayment of the
Loans; and (3) the potential purchase of the GICs from the Plan by the
Employer for cash; provided the following conditions are satisfied:
(A) All terms and conditions of such transactions are no less
favorable to the Plan than those which the Plan could obtain in arm's-
length transactions with unrelated parties;
(B) No interest and/or expenses are paid by the Plan in connection
with the transactions;
(C) The proceeds of the Loans are used solely in lieu of payments
due from Confederation with respect to the GICs;
(D) Repayment of the Loans will be restricted to the GIC Proceeds,
defined as the cash proceeds obtained by the Plan from or on behalf of
Confederation with respect to the GICs;
(E) Repayment of the Loans will be waived to the extent that the
Loans exceed the GIC Proceeds; and
(F) In any sale of the GICs to the Employer, the Plan will receive
a purchase price which is no less than the fair market value of the
GICs as of the sale date, and no less than the GICs' accumulated book
value, defined as the total principal deposits plus accrued interest at
the rates guaranteed by the GICs, less previous withdrawals and any
Loans made pursuant to this exemption, as of the sale date.
Summary of Facts and Representations
1. The Plan is a defined contribution 401(k) plan which provides
for individual participant accounts (the Accounts) and participant-
directed investment of the Accounts. The Plan is sponsored by American
Express Company (the Employer), a New York public corporation engaged
in diversified travel and financial services. The trustee of the Plan
is the IDS Trust Company (the Trustee), a wholly-owned subsidiary of
IDS Financial Corporation, which is wholly owned by the Employer. The
Accounts are invested at the directions of individual Plan participants
among nine investment funds, one of which is the ISP Income Fund (the
Income Fund), which invests in, among other things, guaranteed
investment contracts issued by insurance companies.
2. Among the assets in the Income Fund are two guaranteed
investment contracts (the GICs) issued by Confederation Life Insurance
Company (Confederation), a Canadian corporation doing business in the
United States through branches in Michigan and Georgia. Contract #62516
was issued to the Plan by Confederation effective June 28, 1991, upon
an initial principal deposit of $10 million, and it provides for simple
annual interest at the rate of 8.72 percent, with a maturity date of
June 27, 1996. Contract #62764 was issued effective June 1, 1993 upon
an initial principal deposit of $5 million and it provides for simple
annual interest at the rate of 6.06 percent, with a maturity date of
June 30, 1998. Both GICs are single-deposit non-participating contracts
which allow the Plan to make benefit-responsive withdrawals (the
Withdrawals) to fund benefit payments, investment fund transfers,
hardship withdrawals and participant loans (collectively, the
Withdrawal Events). The terms of the GICs provide that interest at the
interest rates guaranteed by each GIC (the Contract Rates) will be
credited to the Plan daily, and if the amount of interest earned
exceeds the amount of Withdrawals, the difference will be paid annually
(the Interest Payments) on the anniversary of a date specified by each
GIC for such Interest Payments. Conversely, if the amount of
Withdrawals exceeds the amount of interest earned during the year, no
anniversary Interest Payment is made. Upon each GIC's maturity date,
Confederation is obligated to make a final cash payment to the Plan
(the Maturity Payment) in the amount of the GIC's principal plus
interest at the Contract Rate, less previous Withdrawals (the Maturity
Value).
3. The Employer represents that on August 11, 1994, the Canadian
insurance regulatory authorities placed Confederation into a
liquidation and winding-up process, and on August 12, 1994, the
insurance authorities of the State of Michigan commenced legal action
to place the U.S. operations of Confederation into a rehabilitation
proceeding. As a result of these actions, the Withdrawals and Interest
Payments with respect to the GICs have been suspended.9 The
Employer represents that it cannot be determined accurately whether, to
what extent, or at what time the Withdrawals and Interest Payments will
be resumed. The Employer desires to alleviate the Plan's participants
of the risks associated with continued investment in the GICs, to
prevent any losses of the Income Fund's investments in the GIC, and to
provide the Plan with the cash which otherwise would have been provided
by the Withdrawals and Interest Payments. Accordingly, the Employer
proposes to make the Loans to the Plan from time to time in the amounts
due the Plan under the GICs as Withdrawals and Interest Payments. Upon
the stated maturity date of each GIC, the Employer intends either (1)
to purchase each GIC from the Plan (the Sale), or, alternatively, (2)
to make a Loan to the Plan in the amount of the GIC's Maturity Value,
depending upon the circumstances prevailing at such time. The Employer
is requesting an exemption to permit these transactions under the terms
and conditions described herein.
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\9\ The Department notes that the decisions to acquire and hold
the GICs are governed by the fiduciary responsibility requirements
of Part 4, Subtitle B, Title I of the Act. In this proposed
exemption, the Department is not proposing relief for any violations
of Part 4 which may have arisen as a result of the acquisition and
holding of the GICs.
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3. The Loans and their repayment, and any potential sale of the
GICs to the Employer will be made pursuant to a written agreement (the
Agreement) between the Trustee and the Employer.
The Loans: Under the Agreement, the Employer agrees to make the
Loans over the remaining terms of the GICs at such times and in such
amounts as required to enable the Income Fund to fully fund the
Withdrawal Events and to fully realize the Interest Payments, in lieu
of the same amounts which otherwise would be paid to the Plan by
Confederation as Withdrawals and Interest Payments. Accordingly, the
amount of each Loan will be determined on the basis of the GIC's
principal plus interest at the Contract Rate, less previous
Withdrawals, as of the date of the Loan. Each Loan will also be reduced
by any amounts actually received by the Plan, with respect to the
particular Withdrawal Event or Interest Payment due, from Confederation
or any other party making payment with respect to Confederation's
obligations under the GICs. In addition to the Loans in lieu of
Withdrawals and Interest Payments, the Agreement authorizes the
Employer, as an alternative to purchasing the GICs (as described below
in section 4) to make a final Loan with respect to each GIC upon the
GIC's Maturity Date in the amount of the GIC's Maturity Value. Any
final Loan upon the maturity of each GIC will be made within thirty
days of the Maturity Date in the amount of the GIC's Maturity Value
plus post-maturity interest as described in section 4 below. The
Employer will receive no interest or fees for any of the Loans, and the
Plan will incur no expenses related to the Loans.
The Repayments: The Agreement provides that the repayments of the
Loans (the Repayments) with respect to each GIC are restricted to the
cash amounts, if any, which the Plan receives with respect to the GIC
from Confederation, any state insurance guaranty funds, any successor
to Confederation, or any other third party making payments with respect
to Confederation's obligations under the GICs (collectively, the GIC
Proceeds). The GIC Proceeds available to make the Repayments also
include, in the event of any purchase of either GIC, as described
below, the purchase price of the GIC (the Purchase Price). In this
regard, in the event of any such sale of a GIC, Repayments of Loans
with respect to that GIC will be accomplished by crediting the total
amount of outstanding Loans against the Purchase Price. In any event,
to the extent the Loans exceed total GIC Proceeds, the Repayments will
be waived.
4. With respect to the maturity of each GIC, the Agreement enables
the Employer to retain the flexibility to decide upon each GIC's
maturity whether to make a final Loan in the amount of the Maturity
Value, if not paid when due by or on behalf of Confederation, or to
purchase the GIC from the Plan. The Employer represents that it is
unclear under current conditions whether the purchase of the two GICs
by the Employer would jeopardize the ability of the Plan and/or the
Employer to successfully assert rights to protection under the
insurance guaranty fund laws of the various states. The Employer is
concerned that, if the two GICs are transferred from the Plan prior to
resolution of issues related to guaranty fund protection, various state
guaranty fund associations may deny the full range of protection which
would have been conferred on the Plan and its participants through such
insurance guaranty laws. For these reasons, the Employer would like to
wait until the maturity date of each GIC to determine whether to
purchase the GIC from the Plan or to make a Loan to the Plan in the
amount of the GIC's Maturity Value. The Agreement requires the Employer
to make its decision with respect to the maturity of each GIC, and to
consummate the Loan or purchase transaction, within thirty business
days after the maturity date of each GIC, during which the GIC's
Maturity Value will earn interest (Post-Maturity Interest) at the
prevailing 30-day U.S. Treasury bill rate, from the date of maturity to
the date of the loan or purchase. In the event the Employer chooses to
purchase either of the GICs, the purchase price will be cash in the
amount of the GIC's Maturity Value plus Post-Maturity Interest. The
Plan will not incur any expenses related to any sale of the GICs. In
the event the Employer chooses to make a final Loan upon the Maturity
of each GIC, each Loan will be in the amount of the GIC's Maturity
Value plus Post-Maturity Interest.
5. In summary, the Employer represents that the proposed
transactions satisfy the criteria of section 408(a) of the Act for the
following reasons:
(1) The transactions will enable the Plan to recover all amounts
due with respect to the GICs;
(2) The Loans will enable the Plan to resume the ability to fund
benefit payments, participant loans, hardship withdrawals, and
investment fund transfers within the Plan;
(3) Repayment of the Loans will be restricted to the GIC Proceeds;
(4) The Repayments will be waived to the extent the Loans exceed
the GIC Proceeds; and
(5) No interest and/or expenses will be incurred by the Plan with
respect to any of the transactions.
For further information contact: Ron Willett of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Bermo, Inc. Profit Sharing Plan and Trust (the Plan), Located in Circle
Pines, Minnesota; Proposed Exemption
[Application No. D-9826]
The Department is considering granting an exemption 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 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1) (A) through (E) of
the Code, shall not apply to the proposed series of loans (the Loans),
originated within a five year period, by the Plan to Bermo, Inc. (the
Employer), a party in interest with respect to the Plan, provided that
the following conditions are met:
(a) The total amount of outstanding Loans shall not exceed 25
percent of the Plan's total assets at any time during the transaction;
(b) All terms and conditions of the Loans are at least as favorable
to the Plan as those which the Plan could obtain in an arm's length
transaction with an unrelated third party;
(c) Each Loan will be: (1) for a maximum term of forty-eight months
fully amortized and payable in equal monthly installments of principal
and interest, (2) the Loan proceeds shall be used exclusively by the
Employer to purchase new equipment (the Equipment) used by the Employer
in the course of its business, (3) collateralized by the Equipment and
other assets owned by the Employer such that at all times each Loan
will be collateralized in an amount equal to at least 200% of the
outstanding balance of such Loan, (4) equal to no more than 80% of the
purchase price of the Equipment financed, and (5) guaranteed personally
by Fred Berdass, the principal shareholder of the Employer.
(d) The value of the collateral offered by the Employer will be
determined by a qualified independent appraiser;
(e) Prior to the granting of each Loan, an independent qualified
fiduciary determines, on behalf of the Plan, that each Loan is feasible
and in the best interests of the Plan and protective of the Plan and
its participants and beneficiaries;
(f) The independent fiduciary will conduct a review of the terms
and conditions of the exemption and the Loans, including the applicable
interest rate, the sufficiency of the collateral, the financial
condition of the Employer and compliance with the 25 percent of the
Plan asset maximum total Loan amount prior to approving each
disbursement under the Loan agreement;
(g) The independent fiduciary will monitor the terms and conditions
of the exemption and the loans; and
(h) The independent fiduciary is authorized to take whatever action
is appropriate to protect the Plan's rights throughout the duration of
the exemption and throughout the duration of any Loan granted pursuant
to this exemption.
Temporary Nature of Exemption
The exemption, if granted, is temporary and will expire five years
from the date of the publication in the Federal Register of the Final
Grant of the proposed exemption. Subsequent to the expiration of this
exemption, the Plan may hold any Loans originated during this five year
period until the Loans are repaid or otherwise terminated.
Summary of Facts and Representations
1. The Plan is defined contribution plan having 63 participants and
total assets of $4,621,936 as of September 39, 1995. Richfield Bank &
Trust Company of Richfield, Minnesota serves as the Plan's trustee (the
Trustee).
2. The Employer is a closely held corporation engaged in the metal-
stamping business. The shareholders of the Employer are Fred P. Berdass
and members of his family. In the regular course of its business, the
Employer purchases equipment for its operations. The Employer maintains
its principal place of business in Circle Pines, Minnesota.
3. The Department granted two previous exemptions (Prohibited
Transaction Exemption (PTE) 82-9, 47 FR 2431, January 15, 1982 and PTE
87-77, 52 FR 29905, August 12, 1987) to permit loans (the Exempt Loans)
by the Plan to the Employer. Under the terms of the exemption, the Plan
could make loans on a recurring basis to the Employer for a period of
five years. The proceeds from the Exempt Loans were used by the
Employer for the purchases of machinery and equipment. Each Exempt Loan
was collateralized by specific equipment and assets owned by the
Employer. The maximum length of any Exempt Loan was 48 months, and the
interest rate was one percent above the prime rate. The balance on
total Exempt Loans did not exceed 25 percent of the fair market value
of the Plan's assets. An independent fiduciary acted on behalf of the
Plan and certified that each Exempt Loan was an appropriate investment
for the Plan.
The Trustee has confirmed that all payments of principal Loans were
received by the Trustee on a timely basis and each Exempt Loan was paid
in full in accordance with the terms of PTE 82-9 and PTE 87-77.
4. The Plan now proposes to make a series of Loans over a five year
period to the Employer. The proceeds from the Loans will be used by the
Employer to purchase the Equipment. Each Loan will be collateralized by
a promissory note and security agreement which provide the Plan with a
first lien on the Equipment. In addition, the Loan will be
collateralized by specific equipment or assets which are owned by the
Employer. At all times each Loan will be collateralized in an amount at
least equal to 200 percent of the outstanding balance of such loan. The
amount of each Loan will not exceed 80% of the purchase price of the
Equipment excluding tax and transportation. In addition, Mr. Berdass
will personally guarantee each Loan.
The maximum length of any Loan will be 48 months and will have an
interest rate of at least one percent above the prevailing prime rate
of interest of the Trustee which is the prevailing interest rate earned
on similar loans made by the Trustee to unrelated third parties. The
outstanding Loan balance will not exceed 25 percent of the market value
of the assets of the Plan. The Employer will adequately insure the
Equipment and all other collateral against fire and all other relevant
hazards with the Plan being named beneficiary of the insurance.
4. Lake Elmo Bank, of Lake Elmo, Minnesota (the Bank) will serve as
the independent fiduciary with respect to the proposed Loans. The Bank
represents that it is qualified to act as an independent fiduciary with
respect to the Loan transactions and that is understands that its
responsibility as an ERISA fiduciary. In addition, the Bank represents
that it has no pre-existing relationship with the Employer nor with Mr.
Berdass, and that the income derived from the Employer and related
parties, including the income derived from serving in the capacity of
independent fiduciary will not exceed 1% of the Bank's gross income.
5. In its capacity as independent fiduciary, the Bank represents
that it will determine the appropriateness and suitability of each Loan
prior to the consummation of each Loan transaction. In this regard, the
Bank will review the independent appraisals of the Equipment and the
assets pledged to secure the Loans and confirm the sufficiency of such
appraisals. The Bank states that the Loans are appropriate investments
for the Plan and are in the best interests of the Plan's participants
and beneficiaries and are protective of their interests. The Bank
further states that the terms of the Loans are at least equal to terms
available between the Plan and an unrelated third party. The Bank
represents that it will enforce the terms of the Loan including, but
not limited to, making demand for timely payment, bringing suit or
other appropriate process against the Employer in the event of default
and monitoring the performance of each Loan. In addition, the Bank has
examined Mr. Berdass's personal financial statements and is assured
that as guarantor of the Loans, Mr. Berdass will continue to have the
financial stability to personally assure the repayment of all Loans
granted pursuant to the proposed exemption.
6. In summary, the applicant represents that the proposed
transaction meets the statutory criteria for an exemption under section
408(a) of the Act because: (a) the rate of return to the Plan on the
Loans will equal the prevailing rate earned on similar loans made by
the Trustee; (b) the Plan's interests with respect to the Loans will be
represented by an independent fiduciary who will monitor the Loans as
well as the conditions of the exemption, and will take all appropriate
actions necessary to safeguard the best interests of the Plan; (c) the
Plan's independent fiduciary has reviewed the terms and conditions of
the proposed exemption and has determined that the Loans are in the
best interest of the Plan's participants and beneficiaries; (d) The
independent fiduciary will review and approve each Loan prior to making
any disbursements; (e) the Loans will at all times be secured by the
Equipment and other assets of the Employer which will be valued at not
less than 200% of the Loan; (f) the aggregate balance of the
outstanding loans will not exceed 25% of the value of the Plan's
assets; and (g) the proposed exemption will be of a temporary nature,
not to exceed five years.
For Further Information Contact: Allison K. Padams of the
Department, telephone (202) 219-8971. (This is not a toll-free number.)
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 and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or 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 among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; 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) Before an exemption may be granted under section 408(a) of the
Act and/or section 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;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or 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; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 14th day of December, 1994.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 94-31086 Filed 12-16-94; 8:45 am]
BILLING CODE 4510-29-P
