[Federal Register Volume 61, Number 150 (Friday, August 2, 1996)]
[Notices]
[Pages 40459-40462]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19718]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 96-63; Application No. D-10218]
Class Exemption to Permit the Restoration of Delinquent
Participant Contributions to Plans
AGENCY: Pension and Welfare Benefits Administration (PWBA), Department
of Labor.
ACTION: Grant of class exemption.
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SUMMARY: This document contains a final 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
class exemption provides 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 granted as part of
the Department's Pension Payback Program (the 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 or ERISA. The exemption affects plans,
participants and beneficiaries of such plans and certain other persons
engaging in such transactions.
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: On March 7, 1996, the Department of Labor
(the Department) published a notice in the Federal Register (61 FR
9199) of the pendency of a proposed class exemption from the
restrictions of sections 406(a)(1) (A) through (D), 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 proposed 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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The notice gave interested persons an opportunity to submit written
comments or requests for a hearing on the proposed class exemption to
the Department. The Department received one written comment and a
number of telephone inquiries regarding the proposed class exemption
and the Program. There were no requests for a public hearing. Upon
consideration of the comments received, the Department has determined
to grant the proposed class exemption, subject to certain
modifications. These modifications and the comment are discussed below.
Paperwork Reduction Act Analysis
Pursuant to the Paperwork Reduction Act of 1995 (PRA 95), 44 U.S.C.
3507, and 5 CFR Part 1320, the collection of information in this class
exemption was published for public comment on March 7, 1996 (61 FR
9199). No comments were received from the public regarding the
collection of information. OMB has approved this collection, with the
control number 1210-0097, which expires on January 31, 1997. Persons
are not required to respond to this collection of information unless it
displays a currently valid OMB control number.
Discussion of the Comments
Section I(b) of the proposed exemption contained the requirement
that 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.
Pursuant to this condition, an employer who had repaid all delinquent
contributions prior to March 7, 1996 would not meet this condition of
the exemption and thus would be ineligible for the relief provided
under the final class exemption to extend relief to employers who
voluntarily restored delinquent participant contributions prior to
March 7, 1996 but on or after November 28, 1995, the date the Secretary
of Labor announced the Department's ``public awareness campaign'' on
401(k) plans. The commenter stated that the campaign was widely
reported in the press and led many employers to review their current
payroll practices and to voluntarily correct any errors they uncovered
by restoring delinquent amounts plus interest. The commenter further
stated that equity would seem to demand that the Pension Payback
Program, and the attendant relief from any civil and criminal penalties
and any excise taxes that may result from a finding that the
transactions were prohibited should be made available to those
employers who responded to the Secretary's call for increased scrutiny
of 401(k) plans and moved swiftly to resolve a questionable situation.
According to the commenter, companies
[[Page 40460]]
that took precisely the action the Secretary hoped to encourage with
his press conference and awareness campaign should not be denied the
relief available through the Program merely because they responded
quickly, before the March 7, 1996 announcement of the Program and
proposed class exemption.
The Department notes that the purpose of the Program is to benefit
workers by encouraging persons to restore delinquent participant
contributions to pension plans. The Department agrees with the
commenter's views that those persons who voluntarily restore delinquent
participant contributions following the Secretary's announcement of the
Department's ``public awareness campaign'' and who met the other
conditions of the exemption should be entitled to the relief provided
in the exemption. Accordingly, the Department has modified the final
exemption as requested by the commenter.
Section I(a) of the proposed exemption provided that:
(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.
In the preamble to the proposed exemption, (61 FR 9199, 9202) the
Department noted that 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.
A number of telephone callers objected to this requirement.
According to the callers, it would be administratively burdensome and
costly to specifically determine what each participant would have
earned on his or her account balance during the pertinent period. Two
of the callers requested that the Department confirm that the condition
requiring an account by account calculation would be satisfied if an
earnings factor equal to the highest rate of return generated by any of
the investment options offered under the plan during the applicable
period was applied to each of the affected accounts. In the
Department's view, the alternative suggested by the callers would
satisfy the requirements of section I(a), while reducing overall
burdens and costs, since each participant would receive, at a minimum,
the amount that otherwise would have accrued on his or her account.
Several telephone callers expressed confusion regarding eligibility
for exemptive relief under the proposal if the earnings on delinquent
contributions had been repaid prior to the effective date of the
Program. The Department has modified section I(b) of the final
exemption to clarify that exemptive relief is available for the
restoration of earnings on or after November 28, 1995, which are
attributable to delinquent contributions that have been restored to a
plan prior to the effective date of the Program.
Finally, the Department has determined on its own motion to modify
the requirement in section I(a) (1) and (2) of the proposed exemption
which provides that earnings on delinquent participant contributions
shall be calculated from the date that such contributions were paid to
or withheld by the employer. This condition as proposed imposes a more
stringent requirement on the calculation of earnings than required by
the participant contribution regulation.\2\ The Department has
reconsidered this requirement and determined not to require employers
to restore more earnings under the Program than otherwise would have
been required if the participant contributions had been transmitted in
a timely manner. Accordingly, section I(a) (1) and (2) of the final
exemption has been modified to require that earnings on delinquent
contributions be calculated as of the earliest date on which the
participant contributions could have been reasonably segregated from
the employer's general assets as required by the participant
contribution regulation.\3\
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\2\ The final participant contribution regulation, which was
promulgated in 1988, provides that 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
case of amounts withheld by an employer from a participant's wages).
29 CFR 2510.3-102.
The Department notes that a notice of proposed rulemaking was
published in the Federal Register on December 20, 1995 (60 FR 66036)
which would revise 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''.
\3\ The Department notes that corresponding changes have also
been made to the respective provisions of the Pension Payback
Program.
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Discussion of the Exemption
1. Scope
The exemption provides conditional relief from 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, 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 exemption 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 April 5, 1996.\4\
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\4\ The Department notes that this date corresponds to the date
contained in the Program.
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2. Conditions
The exemption contains conditions, as discussed below, which the
Department views as necessary to ensure that any transaction covered by
the exemption are in the interests of plan participants and
beneficiaries and to support a finding that the exemption meets the
statutory standards of section 408(a) of ERISA.
Under the exemption, all delinquent participant contributions must
be restored to the pension plan plus earnings from the earliest date on
which such contributions could have been reasonably segregated from the
employer's general assets 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
[[Page 40461]]
such period using an interest rate equal to the underpayment rate
defined in section 6621(a)(2) of the Code during such period.\5\ 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. As previously
noted, this requirement would not preclude a calculation which used an
earnings factor equal to the highest rate of return generated by any of
the investment options offered under the plan during the applicable
period for each of the affected accounts.
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\5\ 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 exemption requires that 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 received or withheld by an employer from the
employees' wages for the calendar year 1995. For those delinquent
participant contributions restored to plans on or after November 28,
1995, but before March 7, 1996, the total of all outstanding delinquent
participant contributions, excluding earnings, on November 28, 1995
does not exceed the aggregate amount of participant contributions that
were received or withheld by an employer from the employees' wages for
the twelve calendar months immediately preceding November 1995.
Provided that the preceding limitation is met, the exemption also would
permit the restoration on or after November 28, 1995 of any earnings
that are attributable to participant contributions that have been
restored to the plan prior to the effective date of the Program.
Third, the 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.
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 exemption, does not extend to transactions prohibited under
section 406(b)(3) of ERISA or section 4975(c)(1)(F) of the Code.
(3) In accordance with section 408(a) of ERISA and section
4975(c)(2) of the Code, and based upon the entire record, the
Department finds 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 exemption is 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) The class exemption is applicable to a transaction only if the
conditions specified in the class exemption are satisfied.
Exemption
Accordingly, the following exemption is granted 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 earliest date on which such
contributions could have been reasonably segregated from the employer's
general assets (as required by the plan asset-participant contribution
regulation) 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
earliest date on which such contributions could have been reasonably
segregated from the employer's general assets until such money is fully
restored to the plan.
(b) For amounts restored on or after March 7, 1996, 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
[[Page 40462]]
withheld by, the employer for contribution to the plan for calendar
year 1995. For those delinquent participant contributions restored to
plans on or after November 28, 1995, but prior to March 7, 1996, the
total of all outstanding participant contributions on November 28,
1995, 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 the prior twelve calendar
months immediately preceding November 1995. Provided that the preceding
limitation is met, the exemption shall apply without limit to the
restoration on or after November 28, 1995 of any earnings that are
attributable to 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 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 (46 FR 9203).
III. Effective Date: The exemption provides retroactive and
prospective relief for those transactions involving participant
contributions and earnings that are restored to pension plans on or
after November 28, 1995 but 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 6, 1996.
Signed at Washington, D.C. this 30th day of July, 1996.
Olena Berg,
Assistant Secretary, Pension and Welfare Benefits Administration,
Department of Labor.
[FR Doc. 96-19718 Filed 8-1-96; 8:45 am]
BILLING CODE 4510-29-M
