[Federal Register Volume 61, Number 46 (Thursday, March 7, 1996)]
[Notices]
[Pages 9199-9203]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5392]
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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: hinz@access.digex.net.
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 tomalley@dol.gov. 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]
BILLING CODE 4510-29-P
