[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