[Federal Register Volume 63, Number 95 (Monday, May 18, 1998)]
[Notices]
[Pages 27330-27334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13145]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10583, et al.]
Proposed Exemptions; McClain's R.V., Inc. 401(k)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
request for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) the name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
Attention: Application No. ______, stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
Pension and Welfare Benefits Administration, U.S. Department of Labor,
Room N-5507, 200 Constitution Avenue, NW, Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (43 FR 47713, October 17, 1978) transferred the authority of
the Secretary of the Treasury to issue exemptions of the type requested
to the Secretary of Labor. Therefore, these notices of proposed
exemption are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
McClain's R.V., Inc. 401(k) Profit Sharing Plan (the Plan) Located in
Lake Dallas, Texas
[Application No. D-10583]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2)
of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale of certain unimproved real
property (the Land) by the Plan to Larry McClain (Mr. McClain), the
sole shareholder of McClain's R.V. Inc., the sponsor of the Plan, and a
party in interest with respect
[[Page 27331]]
to the Plan, provided that the following conditions are satisfied:
(a) the proposed sale will be a one-time cash transaction;
(b) the Plan will receive the greater of: (1) the original
acquisition cost of the Land plus the aggregate holding costs incurred
by the Plan; or (2) the current fair market value of the Land (plus an
appropriate premium related to the adjacency of the Land to other real
property owned by McClain's R.V. Inc.), as established by an
independent qualified appraiser at the time of the sale; and
(c) the Plan will pay no commissions or other expenses associated
with the proposed sale.
Summary of Facts and Representations
1. The Plan is a 401(k) profit sharing plan that was established
effective January 1, 1981. As of December 31, 1996, the Plan had 73
participants and beneficiaries. As of December 31, 1997, the Plan had
total assets of $3,419,103. Chase Texas, N.A. (formerly known as Texas
Commerce Bank) is a directed trustee of the Plan.
The sponsor of the Plan is McClain's R.V. Inc. (the Employer),
which is a subchapter ``C'' corporation, incorporated in the State of
Oklahoma. The Employer sells and services recreational vehicles and
travel trailers. Mr. McClain is the sole shareholder of the Employer
and a Plan participant.
2. On or about November 7, 1985, the Plan purchased the Land from
Mr. Pertells, an independent third party, for approximately $57,000.
This original purchase transaction was made in cash with no extension
of credit involved.
The Land is located at S.W. 2nd Street and Rockwell Avenue in
Oklahoma City, Oklahoma. The Land consists of two tracts which comprise
approximately 21,855 square feet, and is adjacent to certain real
property that is owned by the Employer. The Land has been used
sporadically by the Employer for overflow or customer parking. The
applicant represents that the Employer's customers would occasionally
park on the Land rather than in the Employer's main parking lot. In the
interest of maintaining good customer relations, the Employer did not
require the customers to move their vehicles to the regular parking
area. Additionally, when the Employer's main parking lot was full, the
employees of the Employer would temporarily park their vehicles on the
Land, and would move their vehicles to the Employer's parking lot later
in the day. The applicant represents that the Employer does not require
its employees or customers to pay for parking on the Land or in the
Employer's parking lot.1 As such, there have been no formal
leases or arrangements made between the Plan and the Employer to
compensate the Plan for parking on the Land. Furthermore, the Land has
yielded no other revenue for the Plan from the date of its original
acquisition to the present.2
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\1\ In this regard, the Department notes that section
406(a)(1)(D) of the Act prohibits, in relevant part, a plan
fiduciary from causing a plan to engage in a transaction which
constitutes a direct or indirect transfer to, or use by or for the
benefit of, a party in interest, of any assets of the plan. However,
the Department is not providing any relief herein for any violations
of part 4 of Title I of the Act which may have occurred during the
Plan's ownership of the Land.
\2\ The Department expresses no opinion in this proposed
exemption as to whether the acquisition and the subsequent holding
of the Land by the Plan violated section 404(a) of the Act. Section
404(a) of the Act requires, among other things, that a fiduciary of
a plan must act prudently, solely in the interest of the plan's
participants and beneficiaries, and for the exclusive purpose of
providing benefits to participants and beneficiaries when making
investment decisions on behalf of a plan.
The Department notes further that the decision to propose this
exemption is based on the applicant's representations, as discussed
herein, that any attempts to sell the Land to a third party would
result in further losses to the Plan.
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3. The original decision to purchase the Land as a long term
investment was made by the trustees of the Plan in 1985. The applicant
maintains that at the time the Land was originally purchased, land
values were stable and there was no indication that property values
would plummet shortly thereafter. The trustees also intended to lease
the Land to the Employer for use as necessary, thus providing some
income to the Plan. However, the intended leasing of the Land did not
occur because the trustees were informed that such a lease would
violate the prohibited transaction rules of the Act.
The Plan's estimated aggregate holding costs relating to the Land
for the period 1985-1997 were $3,473.23. This amount includes the
property taxes that were due on the Land for that period, and certain
periodic appraisals of the Land that were paid for by the
Plan.3 Therefore, the Plan's total cost for the acquisition
and holding of the Land was $60,473.23 as of April, 1998.4
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\3\ The applicant represents that the appraisals for the years
1996, 1997 and 1998 have been paid by the Employer.
\4\ This amount represents the sum of the Plan's original
acquisition cost of $57,000 plus the aggregate holding costs of
$3,473.23.
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4. The Land was appraised on January 15, 1998, (the Appraisal) by
Bennie W. Vowell (Mr. Vowell), an independent qualified appraiser
certified in the State of Oklahoma. The Appraisal is an update of an
earlier appraisal of the Land, which was also conducted by Mr. Vowell.
The Appraisal was prepared in accordance with the Uniform Standards of
Professional Appraisal Practice and analyzed appropriate market data
for determining the fair market of the Land, including recent sales of
similar properties as well as the ``highest and best use'' value of the
Land. The Appraisal also considered the adjacency of the Land to real
property owned by the Employer and, accordingly, added a premium to the
value of the Land in any sale to the Employer. The Appraisal concluded
that the fair market value of the Land was $49,000, as of January 15,
1998.
5. Mr. McClain proposes to purchase the Land from the Plan in a
one-time cash transaction. As of December 31, 1997, the Land
represented approximately 1.4 percent of the Plan's total assets. The
applicant represents that the Land has been declining in value since
the original acquisition. This decline in value has been adversely
affecting the value of the participants' accounts in the
Plan.5
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\5\ The applicant represents that a portion of the Land's value
is allocated to each participant's account.
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The applicant represents that the amount Mr. McClain would pay for
the Land in this proposed transaction is in excess of the Land's
current fair market value. If the Land was sold on the open market, it
would not sell for as much as Mr. McClain is willing to pay. In
addition, the Plan's price in a sale of the Land to an independent
third party would not include the adjacency premium, which the
Appraisal indicates is appropriate in a sale to Mr. McClain as a result
of the Employer's ownership of adjacent property. The sale of the Land
to an independent third party at a lower price would cause the Plan and
its participants to suffer a financial loss. Alternatively, if the Land
remains in the Plan, the participants will not be able to invest the
portions of their accounts which are currently attributable to the Land
in other investment vehicles with a higher yield. The applicant thus
maintains that the terms and conditions of the proposed sale are
superior alternatives to selling the Land to a third party or retaining
the Land as a Plan asset.
6. Therefore, the applicant represents that the proposed
transaction is in the best interest and protective of the Plan because
the transaction will enable the Plan to divest of an asset that has
depreciated in value and generated no income to the Plan. The Plan will
be able to reinvest the proceeds in other investments with higher rates
of return. The transaction is protective of the Plan,
[[Page 27332]]
because the Plan will receive the greater of: (a) the total cost of the
Land; or (b) the current fair market value of the Land (plus an
appropriate premium related to the Land's adjacency to the Employer's
property) as established by an independent qualified appraiser at the
time of the sale. The Plan will not pay any commissions or other
expenses associated with the sale. Furthermore, the applicant
represents that any amounts received by the Plan as a result of the
proposed transaction, which are in excess of the fair market value of
the Land will be treated as a contribution to the Plan, but that this
contribution will not exceed limitations of section 415 of the Internal
Revenue Code.
7. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 408(a) of the Act and
section 4975(c)(2) of the Code because:
(a) the proposed sale will be a one-time cash transaction;
(b) the Plan will receive the greater of: (i) the total cost of the
Land; or (ii) the current fair market value of the Land (plus an
appropriate premium related to the Land's adjacency to the Employer's
property) as established by an independent qualified appraiser at the
time of the sale;
(c) the Plan will not pay any commissions or other expenses
associated with the proposed sale; and
(d) the sale of the Land to the Employer will enable the Plan to
divest of an illiquid asset which has depreciated in value and yielded
no income. Also, the sale will enable the Plan to reinvest the sale
proceeds in investments with higher rates of return.
Tax Consequences of Transaction
The Department of the Treasury has determined that if a transaction
between a qualified employee benefit plan and its sponsoring employer
(or an affiliate thereof) results in the plan either paying less or
receiving more than fair market value, such excess may be considered to
be a contribution by the sponsoring employer to the plan, and therefore
must be examined under the applicable provisions of the Internal
Revenue Code, including sections 401(a)(4), 404 and 415.
For Further Information Contact: Ekaterina A. Uzlyan of the
Department at (202) 219-8883. (This is not a toll-free number.)
Karen J. Hartley Profit Sharing Plan (P/S Plan) and Karen J. Hartley
Money Purchase Pension Plan and Trust Agreement (M/P Plan,
Collectively; the Plans) Located in Eugene, Oregon
[Application Nos. D-10588 and D-10589]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 4975(c)(2) of the Code and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990.) If the exemption is granted, the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to
the proposed loan (the Loan) by the Plans to Karen J. Hartley (Ms.
Hartley), the trustee and sole participant of the Plans and, a
disqualified person with respect to the Plans; 6 provided
that the following conditions will be met:
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\6\ Pursuant to CFR 2510.3-3(b) and (c), the Department has no
jurisdiction with respect to the Plans under Title I of the Act.
However, there is jurisdiction under Title II of the Act pursuant to
section 4975 of the Code.
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1. The Loan will be structured such that each Plan will lend up to
25% of its assets. However, the aggregate amount of the Loan will not
exceed $40,000 at any time;
2. The outstanding balance of the Loan will at no time exceed 25%
of the Plans' aggregate assets;
3. The Plans will bear no expenses with respect to the proposed
transaction;
4. The terms and conditions of the Loan will be at least as
favorable to the Plans as those obtainable in arm's-length transaction
with an unrelated party; and
5. The Loan will be adequately secured by collateral, which at all
times will be equal to 100% of the outstanding principal amount of the
Loan plus 6 months interest at the Loan's interest rate of 8.2%. In the
event the collateral amount falls below this required amount, this
proposed exemption, if granted, will no longer be available.
Summary of Facts and Representations
1. The P/S Plan was established on January 1, 1989, and the M/P
Plan was adopted on January 1, 1993. Ms. Hartley is the sole
participant 7 and trustee of both Plans. Ms. Hartley has
investment discretion over the Plans' assets. Charles Schwab and
Company (Schwab) is the current custodian of the Plans. As of January
31, 1998, the P/S Plan had total assets of $142,171.59, and the M/P
Plan had total assets of $35,031.71. Thus, as of January 31, 1998, the
aggregate balance of the Plans' assets was $177,203.30. Ms. Hartley is
a sole proprietor engaged in the practice of law in Eugene, Oregon.
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\7\ The applicant represents that each of the Plans will have no
other participants during the Loan's existence, from its initial
making until the outstanding principal balance has been paid in
full, and the Loan is terminated.
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2. The Loan will have a ten year duration and a fixed interest rate
of 8.2% per annum. The Loan will be payable in equal monthly
installments of principal and interest. The promissory note (the Note)
which will evidence the Loan provides for no penalty, premium or
prepayment charge in the event of a full or partial prepayment. The
Loan will be structured such that each Plan will lend up to 25% of its
assets. However, the aggregate amount of the Loan will at no time
exceed $40,000. Furthermore, the outstanding principal balance of the
Loan will at no time exceed 25% of the Plans' aggregate assets.
Ms. Hartley represents that the terms of the Loan will comply with
section 72(p) of the Code.8 The Loan proceeds will be used
by Ms. Hartley to acquire a dwelling unit, which shall be her principal
residence.
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\8\ In this regard, section 72(p)(1) of the Code treats a loan
from a qualified plan to a participant as a ``premature
distribution'' unless the loan meets certain conditions to qualify
for ``exception for certain loans'' contained in section 72(p)(2) of
the Code. However, with respect to the Loan, the Department has no
jurisdiction to determine whether the requirements of section 72(p)
of the Code are met.
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3. The Loan will be secured by cash or cash equivalents, such as
money market funds and/or certificates of deposit (the Collateral). The
Collateral amount will at all times equal 100% of the outstanding
principal amount of the Loan, plus 6 months of interest on such
principal at the rate of 8.2% per annum. The Collateral will be
maintained in a separate account with Schwab (the Collateral Account).
The applicant represents that at no time will the Collateral Account
contain less than the amount of assets required to fully secure the
Loan, in accordance with this proposed exemption. In the event that the
amount in the Collateral Account falls below the required amount, as
specified herein, the proposed exemption, if granted, will no longer be
available.
A security agreement (Security Agreement) will be signed by the
parties to create a perfected security interest for the Plans in the
Collateral. Ms. Hartley will perfect the Plans' security interest by a
proper filing of a state financing statement with the Corporation
Division
[[Page 27333]]
of the State of Oregon. Ms. Hartley will retain rights to and
possession of the Collateral, subject to the terms of the Security
Agreement and the rights and obligations of Schwab, through its
maintenance of the Collateral Account.
4. Ms. Hartley will monitor the Collateral. On a monthly basis, Ms.
Hartley will receive from Schwab a statement for the Collateral Account
(Schwab Statement). Ms. Hartley will determine if the amount in the
Collateral Account contains at least the required Collateral amount.
On an annual basis, Ms. Hartley will examine the Schwab Statements
for the Collateral Account, and will determine whether the amount in
the Collateral Account exceeds the required amount of the Collateral.
This determination may be made using monthly interest amortization
tables, or a computer program. If the Collateral Account exceeds the
required Collateral amount (an Excess Amount), Ms. Hartley may transfer
the Excess Amount to her personal account, as long as the required
Collateral amount remains in the Collateral Account. Alternatively, Ms.
Hartley may leave any portion of the Excess Amount in the Collateral
Account. However, any Excess Amount in the Collateral Account shall not
modify the required Collateral amount.
If the Loan is ever in default, Ms. Hartley as trustee for the
Plans will seek to remedy the default and use all legal means available
in the State of Oregon.
5. With respect to the rights of the Plans as a secured creditor,
the Security Agreement contains the following provisions. Section 4.2
of the Security Agreement states that the Debtor (i.e., Ms. Hartley)
shall not remove the Collateral from the Collateral Account without the
written consent of the Secured Party (i.e., the Plans). Section 4.3 of
the Security Agreement also states that the Debtor agrees to execute
and file a financing statement and do whatever may be necessary under
the applicable provisions contained in the Uniform Commercial Code for
the State of Oregon to perfect and continue the Secured Party's
interest in the Collateral. Section 4.4 of the Security Agreement
provides that the Debtor will not sell or otherwise transfer or dispose
of any interest in the Collateral without the prior written consent of
the Secured Party. Furthermore, Section 4.5 of the Security Agreement
provides that, among other things, except where it has received the
prior written consent of the Secured Party, the Debtor shall keep the
Collateral free from any adverse liens or other security interests. The
Debtor will not use or permit anyone to use the Collateral in violation
of any statute, ordinance, or state or federal regulation, and the
Secured Party may examine and inspect the Collateral at any time.
6. Ms. Hartley desires to enter into the loan transaction because
the transaction is administratively feasible, protective and in the
best interest of the Plans. The Plans will bear no expenses with
respect to the proposed transaction. The Loan will not exceed 25% of
each of the Plan's total net assets, and the aggregate amount of the
Loan will not exceed $40,000. In addition, the outstanding balance of
the Loan will at no time exceed 25% of the Plans' aggregate assets. The
Loan will be adequately secured by the Collateral, which at all times
will be equal to 100% of the outstanding principal amount of the Loan
plus 6 months interest. Also, Ms. Hartley represents that the Loan is
consistent with the Plans' liquidity needs and investment objectives,
including the Plans' overall investment strategy to invest only in so-
called ``socially responsible investments''.9
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\9\ The Department is providing no opinion in this proposed
exemption as to whether particular investments or investment
strategies would be considered ``socially responsible'' in nature.
In this regard, the Department notes that the Internal Revenue
Service (IRS) has taken the view that investment strategies for
qualified retirement plans may raise questions with regard to the
exclusive benefit rule under section 401(a) of the Code if, among
other things, the safeguards and diversity that a prudent investor
would adhere to are not present. [See, for example, IRS Rev. Rul.
73-532, 1973-2 C.B. 128]
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With respect to the terms and conditions of the Loan, Washington
Mutual Bank in Eugene, Oregon (the Bank), in a letter dated April 2,
1998, has certified that it would enter into a similar loan with Ms.
Hartley (the Bank Loan). Specifically, the original amount of the Bank
loan would be $40,000. The Bank Loan would be payable in equal monthly
payments of principal and interest, in the same amount as the Loan,
over a 10 year period at an interest rate of 8.2%. Therefore, Ms.
Hartley represents that the terms of the Loan will be at least as
favorable to the Plans as those obtainable in arm's-length transaction
with an unrelated party, as indicated by the letter from the Bank.
7. In summary, the applicant represents that the transaction
satisfies the statutory criteria of section 4975(c)(2) of the Code
because:
A. The Plans will bear no expenses with respect to the proposed
transaction;
B. The Loan will not exceed 25% of each of the Plan's total net
assets. In addition, the aggregate amount of the Loan will not exceed
$40,000;
C. The outstanding principal balance of the Loan will at no time
exceed 25% of the Plans' aggregate assets;
D. The terms and conditions of the Loan will be at least as
favorable to the Plans as those obtainable in arm's-length transaction
with an unrelated party;
E. The Loan will be adequately secured by the Collateral, which at
all times will be equal to 100% of the principal amount of the Loan
plus 6 months interest at the Loan's interest rate of 8.2%. In the
event the Collateral Amount falls below this required amount, the
proposed exemption, if granted, will no longer be available; and
F. Ms. Hartley is the sole participant of the Plans and she desires
that this transaction be consummated.
Notice to Interested Persons
Because Ms. Hartley is the sole participant of the Plans, it has
been determined that there is no need to distribute the notice of
proposed exemption to interested persons. Comments and requests for a
hearing are due thirty (30) days from the date of publication of this
notice in the Federal Register.
For Further Information Contact: Ekaterina A. Uzlyan of the
Department at (202) 219-8883. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which among other things require a fiduciary to
discharge his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries and
[[Page 27334]]
protective of the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 13th day of May, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 98-13145 Filed 5-15-98; 8:45 am]
BILLING CODE 4510-29-P