[Federal Register Volume 59, Number 248 (Wednesday, December 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31845]


[Federal Register: December 28, 1994]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2509

[Interpretive Bulletin 94-3]


Interpretive Bulletins Relating to the Employee Retirement Income 
Security Act of 1974

agency: Pension and Welfare Benefits Administration, Department of 
Labor.

action: Interpretive Bulletin.

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summary: This document provides guidance on in-kind contributions to 
employee benefit plans under the Employee Retirement Income Security 
Act of 1974 (ERISA) and plans under section 4975 of the Internal 
Revenue Code (the Code). The Supreme Court addressed certain in-kind 
contributions to defined benefit pensions plans in Commissioner of 
Internal Revenue v. Keystone Consolidated Industries, Inc., ____ U.S. 
____, 113 S. Ct. 2006 (1993). The Court in Keystone held that an 
employer's contribution of unencumbered real properties to a tax-
qualified defined benefit pension plan in satisfaction of the 
employer's funding obligation is a ``sale or exchange'' prohibited by 
section 4975(c)(1)(A) of the Code Section 406(a)(1)(A) of ERISA is a 
parallel provision to section 4975(c)(1)(A) of the Code but applies to 
a different group of plans. This document sets forth the Department's 
view that in-kind contributions (i.e., contributions of any property 
other than cash) that reduce an obligation to the plan constitute 
prohibited transactions under section 4975(c)(1)(A) of the Code and 
section 406(a)(1)(A) of ERISA.

effective date: The guidance announced in this bulletin is effective 
January 1, 1975.

for further information contact: Cary L. Gilbert, Office of Regulations 
and Interpretations, Pension and Welfare Benefits Administration, U.S. 
Department of Labor, Rm N-5669, 200 Constitution Ave., N.W., 
Washington, D.C. 20210, telephone (202) 219-8671. This is not a toll-
free number.

supplementary information: In order to provide a concise and ready 
reference to its interpretation of ERISA, the Department of Labor 
publishes its interpretive bulletins in the Rules and Regulations 
sections of the Federal Register.

    Published in this issue of Federal Register is ERISA Interpretive 
Bulletin 94-3, which provides guidance related to in-kind contributions 
to employee benefit plans under ERISA and plans under section 4975 of 
the Code. The Department is publishing this Interpretive Bulletin 
because it believes there is a need for further guidance on this 
subject.

(Sec. 505, Pub.L. 93-406, 88 Stat. 894 (29 U.S.C. 1135)).

Background

    Prior to the enactment of ERISA, transactions between plans and 
their sponsors were governed by an ``arms-length'' standard of conduct. 
The arms-length standard required substantial enforcement efforts and 
resulted in sporadic and uncertain effectiveness. As the Court noted in 
Keystone, the arms-length standard permitted abuses such as the 
sponsor's sale of property to the plan at an inflated price or the 
sponsor's satisfaction of a funding obligation by contribution of 
property that was overvalued or nonliquid.
    Congress' response to these abuses included the enactment of 
section 406(a)(1)(A) of ERISA, which prohibits a fiduciary of an 
employee benefit plan covered by part 4 of Title I of ERISA from 
causing the plan to engage in any transaction that the fiduciary knows 
or should know constitutes a direct or indirect sale or exchange of any 
property between the plan and a ``party in interest,'' including the 
sponsoring employer. To further discourage such transactions, Congress 
also enacted section 4975(c)(1)(A) of the Code. Section 4975 imposes a 
two-tier excise tax on ``disqualified persons,'' including plan 
sponsors, who engage, inter alia, in any direct or indirect sale to, or 
exchange of any property with, a plan.\1\
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    \1\The term ``plan'' for purposes of section 4975 of the Code, 
as defined in section 2975(e)(1), is essentially restricted to plans 
qualified under section 401(a) or described in section 403(a) of the 
Code or an individual retirement account or annuity described in 
sections 408(a) or 408(b) of the Code. ERISA section 406 applies to 
employee pension benefit plans as defined by section 3(2) of ERISA, 
as well as employee welfare benefit plans as defined by section 3(1) 
of ERISA. In addition, section 401(a) of ERISA, and section 4975(g) 
of the Code specifically exclude certain types of plans from the 
application of ERISA section 406 and Code section 4975, 
respectively.
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    In Keystone, the Supreme Court resolved a conflict between two 
federal courts of appeals as to whether in-kind contributions to a tax-
qualified defined benefit pension plan are considered prohibited 
transactions under section 4975(c)(1)(A) of the Code. The Court held 
that an employer's contribution of unencumbered real properties to a 
tax-qualified defined benefit pension plan made to satisfy the 
employer's funding obligation is a ``sale or exchange'' prohibited by 
section 4975(c)(1)(A) of the Code.
    The Court in Keystone did not expressly address in-knd 
contributions to plans other than defined benefit pension plans or in-
kind contributions to defined benefit pension plans in excess of 
amounts necessary to reduce the sponsor's funding obligation for the 
year in which the in-kind contribution is made.\2\ Thus, in addition to 
explaining the Department's view of the holding of the Court in 
Keystone, this interpretive bulletin sets forth the Department's 
position with regard to in-kind contributions to plans other than 
defined benefit pension plans and to in-kind contributions that are in 
excess of the statutory minimum funding obligations of section 302 of 
ERISA and section 412 of the Code.
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    \2\In footnote 2 of the Keystone opinion, the Court posited an 
example of property being contributed by an employer with no 
outstanding funding obligation to a pension plan to reward its 
employees for an especially productive year of service. In the 
Department's view, the dicta in footnote 2 of the Court's opinion 
should be read as a reference to in-kind contributions to a defined 
contribution pension plan that is not subject to the minimum funding 
requirements of section 302 of ERISA or section 412 of the Code.
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    Consistent with existing Departmental guidance,\3\ the interpretive 
bulletin provides that in-kind contributions to defined contribution 
pension plans and to welfare benefit plans are prohibited under section 
406(a)(1)(A) of ERISA (and with respect to defined contribution pension 
plans under section 4975(c)(1)(A) of the code) if they reduce an 
obligation to make a contribution that is measured in terms of cash 
amounts, unless a statutory or administrative exemption under section 
408 of ERISA (or section 4975(c)(2) or (d) of the Code) applies. As an 
illustration, the interpretive bulletin provides an example of a profit 
sharing plan under which the employer is required to make annual 
contributions ``in cash or in kind'' equal to a given percentage of the 
employer's net profit for the year. In this example an in-kind 
contribution would constitute a prohibited transaction in the absence 
of an exemption because the amount of the contribution obligation is 
measured in terms of cash amounts (a percentage of profits) even 
through the terms of the plan purport to permit in-kind contributions.
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    \3\DOL Advisory Opinion No. 90-05A (Mar. 29, 1990) (in-kind 
contribution to an employee stock ownership plan).
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    Although this general rule also applies to defined benefit pension 
plans under both ERISA and the Code, the special nature of the funding 
requirements of such plans has led the Department to conclude that 
additional guidance would be useful especially with respect to in-kind 
contributions that are in excess of amounts needed to satisfy the 
plan's funding requirements for the plan year in which the contribution 
is made. The amount of an employer's contribution to a defined benefit 
pension plan is credited to the plan's funding standard account under 
section 302(b) of ERISA and section 412(b) of the Code. A credit not 
needed to reduce the plan's accumulated funding deficiency (as defined 
in section 302(a) of ERISA and section 412(a) of the Code) to zero in 
the plan year in which the contribution is made is carried over for use 
in the following year. The amount of the credit is fixed at the time of 
the contribution. Thus, as explained in the interpretive bulletin, it 
is the Department's position that because an in-kind contribution is 
credited to the plan's funding standard account, it would be a 
prohibited transaction in the absence of an applicable exemption.
    Finally, the interpretive bulletin affirms that the decision 
whether or not to accept a contribution is a fiduciary decision subject 
to the fiduciary standards of section 404 of ERISA.

List of Subjects in 29 CFR Part 2509

    Employment benefit plans, Pension and Welfare Plans.
    For the reasons set forth in the preamble, Part 2509 of Title 29 of 
the Code of Federal Regulations is amended as follows:

PART 2509--INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE 
RETIREMENT INCOME SECURITY ACT OF 1974

    1. The authority citation for Part 2509 continues to read as 
follows:

    Authority: 29 U.S.C. 1135. Section 2509.75-1 is also issued 
under 29 U.S.C. 1114. Sections 2509.75-1 and 2509.75-2 are also 
issued under 29 U.S.C. 1052, 1053, 1054. Secretary of Labor's Order 
No. 1-87 (52 FR 13139).

    2. Part 2509 is amended by adding a new Sec. 2509.94-3 to read as 
follows:


Sec. 2509.94-3  Interpretive Bulletin relating to in-kind contributions 
to employee benefit plans.

    (a) General. This bulletin sets forth the views of the Department 
of Labor (the Department) concerning in-kind contributions (i.e., 
contributions of property other than cash) in satisfaction of an 
obligation to contribute to an employee benefit plan to which part 4 of 
Title I of the Employee Retirement Income Security Act of 1974 (ERISA) 
or a plan to which section 4975 of the Internal Revenue Code (the Code) 
applies. (For purposes of this document the term ``plan'' shall refer 
to either or both types of such entities as appropriate). Section 
406(a)(1)(A) of ERISA provides that a fiduciary with respect to a plan 
shall not cause the plan to engage in a transaction if the fiduciary 
knows or should know that the transaction constitutes a direct or 
indirect sale or exchange of any property between a plan and a ``party 
in interest'' as defined in section 3(14) of ERISA. The Code imposes a 
two-tier excise tax under section 4975(c)(1)(A) an any direct or 
indirect sale or exchange of any property between a plan and a 
``disqualified person'' as defined in section 4975(e)(2) of the Code. 
An employer or employee organization that maintains a plan is included 
within the definitions of ``party in interest'' and ``disqualified 
person.''\1\
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    \1\Under Reorganization Plan No. 4 of 1978 (43 FR 47713, October 
17, 1978), the authority of the Secretary of the Treasury to issue 
rulings under the prohibited transactions provisions of section 4975 
of the Code has been transferred, with certain exceptions not here 
relevant, to the Secretary of Labor. Except with respect to the 
types of plans covered, the prohibited transaction provisions of 
section 406 of ERISA generally parallel the prohibited transaction 
of provisions of section 4975 of the Code.
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    In Commissioner of Internal Revenue v. Keystone Consolidated 
Industries, Inc., ____ U.S. ____, 113 S. Ct. 2006 (1993), the Supreme 
Court held that an employer's contribution of unencumbered real 
property to a tax-qualified defined benefit pension plan was a sale or 
exchange prohibited under section 4975 of the Code where the stated 
fair market value of the property was credited against the employer's 
obligation to the defined benefit pension plan. The parties stipulated 
that the property was contributed to the plan free of encumbrances and 
the stated fair market value of the property was not challenged. 113 S. 
Ct. at 2009. In reaching its holding the Court construed section 
4975(f)(3) of the Code (and therefore section 406(c) of ERISA), 
regarding transfers of encumbered property, not as a limitation but 
rather as extending the reach of section 4975(c)(1)(A) of the Code (and 
thus section 406(a)(1)(A) of ERISA) to include contributions of 
encumbered property that do not satisfy funding obligations. Id. at 
2013. Accordingly, the Court concluded that the contribution of 
unencumbered property was prohibited under section 4975(c)(1)(A) of the 
Code (and thus section 406(a)(1)(A) of ERISA) as ``at least both an 
indirect type of sale and a form of exchange, since the property is 
exchanged for diminution of the employer's funding obligation.'' 113 S. 
Ct. at 2012.
    (b) Defined benefit plans. Consistent with the reasoning of the 
Supreme Court in Keystone, because an employer's or plan sponsor's in-
kind contribution to a defined benefit pension plan is credited to the 
plan's funding standard account it would constitute a transfer to 
reduce an obligation of the sponsor or employer to the plan. Therefore, 
in the absence of an applicable exemption, such a contribution would be 
prohibited under section 406(a)(1)(A) of ERISA and section 
4975(c)(1)(A) of the Code. Such an in-kind contribution would 
constitute a prohibited transaction even if the value of the 
contribution is in excess of the sponsor's or employer's funding 
obligation for the plan year in which the contribution is made and thus 
is not used to reduce the plan's accumulated funding deficiency for 
that plan year because the contribution would result in a credit 
against funding obligations which might arise in the future.
    (c) Defined contribution and welfare plans. In the context of 
defined contribution pension plans and welfare plans, it is the view of 
the Department that an in-kind contribution to a plan that reduces an 
obligation of a plan sponsor or employer to make a contribution 
measured in terms of cash amounts would constitute a prohibited 
transaction under section 406(a)(1)(A) of ERISA (and section 
4975(c)(1)(A) of the Code) unless a statutory or administrative 
exemption under section 408 of ERISA (or sections 4975(c)(2) or (d) of 
the Code) applies. For example, if a profit sharing plan required the 
employer to make annual contributions ``in cash or in kind'' equal to a 
given percentage of the employer's net profits for the year, an in-kind 
contribution used to reduce this obligation would constitute a 
prohibited transaction in the absence of an exemption because the 
amount of the contribution obligation is measured in terms of cash 
amounts (a percentage of profits) even though the terms of the plan 
purport to permit in-kind contributions.
    Conversely, a transfer of unencumbered property to a welfare 
benefit plan that does not relieve the sponsor or employer of any 
present or future obligation to make a contribution that is measured in 
terms of cash amounts would not constitute a prohibited transaction 
under section 406(a)(1)(A) of ERISA or section 4975(c)(1)(A) of the 
Code. The same principles apply to defined contribution plans that are 
not subject to the minimum funding requirements of section 302 of ERISA 
or section 412 of the Code. For example, where a profit sharing or 
stock bonus plan, by its terms, is funded solely at the discretion of 
the sponsoring employer, and the employer is not otherwise obligated to 
make a contribution measured in terms of cash amounts, a contribution 
of unencumbered real property would not be a prohibited sale or 
exchange between the plan and the employer. If, however, the same 
employer had made an enforceable promise to make a contribution 
measured in terms of cash amounts to the plan, a subsequent 
contribution of unencumbered real property made to offset such an 
obligation would be a prohibited sale or exchange.
    (d) Fiduciary standards. Independent of the application of the 
prohibited transaction provisions, fiduciaries of plans covered by part 
4 of Title I of ERISA must determine that acceptance of an in-kind 
contribution is consistent with ERISA's general standards of fiduciary 
conduct. It is the view of the Department that acceptance of an in-kind 
contribution is a fiduciary act subject to section 404 of ERISA. In 
this regard, sections 406(a)(1)(A) and (B) of ERISA require that 
fiduciaries discharge their duties to a plan solely in the interests of 
the participants and beneficiaries, for the exclusive purpose of 
providing benefits and defraying reasonable administrative expenses, 
and with the care, skill, prudence, and diligence under the 
circumstances then prevailing that a prudent person acting in a like 
capacity and familiar with such matters would use in the conduct of an 
enterprise of a like character and with like aims. In addition, section 
406(a)(1)(C) requires generally that fiduciaries diversify plan assets 
so as to minimize the risk of large losses. Accordingly, the 
fiduciaries of a plan must act ``prudently,'' ``solely in the 
interest'' of the plan's participants and beneficiaries and with a view 
to the need to diversify plan assets when deciding whether to accept 
in-kind contributions. If accepting an in-kind contribution is not 
``prudent,'' not ``solely in the interest'' of the participants and 
beneficiaries of the plan, or would result in an improper lack of 
diversification of plan assets, the responsible fiduciaries of the plan 
would be liable for any losses resulting from such a breach of 
fiduciary responsibility, even if a contribution in kind does not 
constitute a prohibited transaction under section 406 of ERISA. In this 
regard, a fiduciary should consider any liabilities appurtenant to the 
in-kind contribution to which the plan would be exposed as a result of 
acceptance of the contribution.

    Signed at Washington, DC, this 21st day of December, 1994.
Olena Berg,
Assistant Secretary, Pension and Welfare Benefits Administration, U.S. 
Department of Labor.
[FR Doc. 94-31845 Filed 12-27-94; 8:45 am]
BILLING CODE 4510-29-M