[Federal Register Volume 64, Number 117 (Friday, June 18, 1999)]
[Rules and Regulations]
[Pages 33000-33003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15410]


      

[[Page 32999]]

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Part VII

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Department of Labor





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Pension and Welfare Benefits Administration



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29 CFR Part 2509



Interpretive Bulletin 99-1; Payroll Deduction Programs for Individual 
Retirement Accounts

  Federal Register / Vol. 64, No. 117 / Friday, June 18, 1999/ Rules 
and Regulations  

[[Page 33000]]



DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2509

RIN 1210-AA70


Interpretive Bulletin 99-1; Payroll Deduction Programs for 
Individual Retirement Accounts

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Interpretive bulletin.

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SUMMARY: In 1975, the Department of Labor (the Department) issued a 
regulation describing circumstances under which the use of an employer 
payroll deduction program for forwarding employee monies to an 
individual retirement account (IRA) will not constitute an employee 
pension benefit plan subject to Title I of the Employee Retirement 
Income Security Act of 1974, as amended (ERISA). Since the issuance of 
that regulation, the Department has issued several advisory opinions 
answering common questions arising under the regulation. This 
interpretive bulletin codifies the views of the Department provided in 
those advisory opinions and, by restating those views in one, more 
readily available document, is intended to assist employers in their 
efforts to provide retirement savings opportunities to employees by 
means of payroll deduction programs that do not fall within the reach 
of Title I of ERISA.

DATES: Effective January 1, 1975.

FOR FURTHER INFORMATION CONTACT: John Keene at (202) 219-8521, Office 
of Regulations and Interpretations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor, 200 Constitution Ave., NW, 
Room N-5669, Washington, DC 20210. This telephone number is not a toll-
free number.

SUPPLEMENTARY INFORMATION: In order to provide a concise and ready 
reference to its interpretations of ERISA, the Department publishes its 
interpretive bulletins in the Rules and Regulations section of the 
Federal Register. Published in this issue of the Federal Register is 
ERISA Interpretive Bulletin 99-1, which interprets ERISA section 
3(2)(A), 29 U.S.C. 1002(2)(A), and the Department's regulation issued 
thereunder at 29 CFR 2510.3-2(d), and which codifies the advisory 
opinions previously issued by the Department interpreting these 
provisions. The Department is publishing this interpretive bulletin in 
an effort to facilitate the use by employers of payroll withholding as 
a vehicle for encouraging employee savings through individual 
retirement accounts.
    The Department has a strong interest in promoting retirement 
savings by employees. The Department recognizes that some employers 
currently do not provide pension plans for their employees. Although 
retirement savings vehicles like the SIMPLE and the SEP, which impose 
little in the way of administrative burdens or costs on employers, are 
readily available, some employers are reluctant to assume even those 
costs for a variety of reasons. The Department believes that it is 
important that employees of such employers be encouraged to save 
independently for retirement, and it is in the interest of the public 
that employers be encouraged to provide opportunities for employee 
retirement savings. One relatively inexpensive method that employers 
may use to provide employees the opportunity to save for retirement is 
making available to employees the possibility of regular payroll 
deductions that are transmitted directly by the employer to individual 
retirement accounts established by the employees. At present, there are 
relatively few such programs in operation, and some employers have 
indicated that they are reluctant to create payroll withholding 
programs for individual retirement accounts because they are concerned 
that such programs would be considered pension plans covered by ERISA 
and therefore subject to the requirements of Title I of ERISA. The 
Department is concerned that employers may not be aware of or 
understand the long-established views of the Department with respect to 
the ability of employers to establish and maintain employer payroll 
withholding programs without such programs being considered pension 
plans under ERISA. This guidance summarizes and restates those views in 
order to provide employers the Department's views in one convenient, 
easily accessible document.

Background

    Section 3(2)(A) of Title I of ERISA provides that ``any plan, fund, 
or program * * * established or maintained by an employer or by an 
employee organization, or by both,'' shall be a pension plan ``to the 
extent that by its express terms or as a result of surrounding 
circumstances such plan, fund, or program * * * provides retirement 
income to employees, or * * * results in a deferral of income by 
employees for periods extending to the termination of covered 
employment or beyond, regardless of the method of calculating the 
contributions made to the plan, the method of calculating the benefits 
under the plan or the method of distributing benefits from the plan.''
    Under provisions of the Internal Revenue Code of 1986, as amended 
(Code),1 individual taxpayers may establish individual 
retirement accounts or individual retirement annuities (IRAs) that are 
tax-favored if operated within the requirements of the Code. With 
respect to Title I coverage of such IRAs, the Department has published 
a regulation at 29 CFR 2510.3-2(d), establishing a safe harbor under 
which an IRA established by employees and funded through payroll 
deductions will not be considered to be a ``pension plan'' within the 
meaning of section 3(2) of Title I when the conditions of the 
regulation are satisfied. The regulation specifies that an IRA will not 
be considered a ``pension plan'' when there are no contributions made 
by an employer; employees participate in the IRA on a completely 
voluntary basis; and the employer's activities with respect to the IRA 
must be limited solely to permitting, without endorsement, the IRA 
sponsor to publicize its program to employees; collecting contributions 
through payroll deductions or dues checkoffs; and remitting those 
contributions to the IRA sponsor. Finally, the regulation provides that 
the employer may receive no consideration in any form, other than 
reasonable compensation for services actually rendered in connection 
with the payroll deduction or dues checkoff system. If one or more of 
the conditions of the regulation are not met, the employer may be 
considered to have established or maintained a pension plan. If an IRA 
program is a pension plan under Title I of ERISA, it is subject to 
Parts 1, 4, and 5 of Title I of ERISA, dealing with reporting and 
disclosure requirements, fiduciary duties, and enforcement rights. 
Pursuant to ERISA sections 201(6) and 301(a)(7), 29 U.S.C. 1051(6) and 
1081 (a) (7), IRAs are exempt from Parts 2 and 3 of Title I, relating 
to participation, vesting, and funding.2
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    \1\ See generally Code sections 408, 408A.
    \2\ Whether or not an IRA is part of a ``pension plan,'' the 
prohibited transaction provisions of section 4975 of the Internal 
Revenue Code are applicable to transactions by the IRA.
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    As part of the Conference Report on the Taxpayer Relief Act of 
1997, Congress expressed its view that ``employers that choose not to 
sponsor a retirement plan should be encouraged to set up a payroll 
deduction system to help employees save for retirement by making 
payroll deduction contributions to their IRAs.'' H.R. Rep. No. 220, 
105th

[[Page 33001]]

Cong., 1st Sess. at 755 (1997). The Department is aware that some 
employers that would permit payroll deduction contributions to IRAs are 
reluctant to do so if ERISA would require employers to permit employees 
an unlimited choice of IRA sponsors for the payroll deduction IRAs in 
order not to be considered to have established an ERISA plan. 
Similarly, some employers desire to limit the choice of IRA sponsors to 
one entity, but are concerned that doing so might make their payroll 
deduction arrangements ERISA plans. Employers also have raised issues 
concerning the extent to which they may encourage employee savings for 
retirement without being viewed as endorsing an arrangement contrary to 
the limitations in the Department's regulation.
    In response to these specific concerns, and as part of the 
Department's ongoing efforts to encourage retirement savings, the 
Department is hereby summarizing and restating its views on employer 
involvement in providing voluntary payroll deduction systems for 
contributions to IRAs. This bulletin is intended to supplement 29 CFR 
2510.3-2(d) by summarizing and restating the interpretive views of the 
Department, as expressed in advisory opinions since promulgation of the 
regulation, on various aspects of an employer's involvement in IRA 
programs.3 This interpretive bulletin clarifies the 
circumstances under which an employer may facilitate employees' 
voluntary contributions to IRAs by providing an IRA payroll deduction 
program without thereby inadvertently establishing or maintaining an 
employee benefit pension plan within the scope of section 3(2) of 
ERISA.
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    \3\ See Advisory Opinions 77-29A (March 16, 1977), 81-80A (Dec. 
18, 1981), 82-13A (Feb. 17, 1982), 82-18A (March 22, 1982), 82-27A 
(June 16, 1982), 82-53A (Oct. 4, 1982), 83-1A (Jan. 13, 1983), 83-2A 
(Jan. 13, 1983), 83-9A (February 9, 1983), 83-10A (February 9, 
1983), 83-25A (May 24, 1983), 90-20A (June 15, 1990).
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Executive Order 12866

    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f)(4), the order 
defines a ``significant regulatory action'' as an action that is likely 
to result in, among other things, a rule raising novel policy issues 
arising out of the President's priorities.
    Pursuant to the terms of the Executive Order, the Department has 
determined that this regulation, which encourages employers to provide 
the opportunity for employees to save for retirement by clarifying the 
applicability of certain regulatory compliance issues, is consistent 
with the President's priorities in encouraging retirement savings, and 
as such is a ``significant regulatory action'' subject to OMB review 
under Executive Order section 3(f)(4).
    According to the Employee Benefits Supplement to the 1993 Current 
Population Survey, over half of the private wage and salary workforce 
does not have employment-based retirement coverage. Employment-based 
retirement coverage arises from three separate components: access to 
coverage made available through employer sponsorship of plans, 
eligibility for coverage through satisfaction of age and service 
requirements, and acceptance of coverage, where employee participation 
in the employer's plan is voluntary.
    Access to coverage is currently shown to differ significantly by 
employer size. Approximately 82% of private wage and salary workers 
employed by employers with 100 or more employees have access to 
coverage. However, only 18% of employers of fewer than 25 employees, 
and 45% of employers of 25 to 99 employees sponsor retirement plans. As 
a result, about 30 million employees of small business do not have 
access to employment-based retirement coverage. Furthermore, only about 
12% of these employees choose to close this gap in retirement coverage 
with an individual retirement account.
    Small employers who do not sponsor retirement plans typically offer 
a few principal reasons for their decision, including the 
administrative complexity and burden associated with retirement plans, 
and the risk of commitment to an ongoing expense in the face of the 
financial uncertainties of the small business environment. Although 
this interpretive bulletin is not expected to impact access to 
employer-provided retirement coverage, it may benefit both employers 
and employees. First, it offers improved access to the Department's 
views concerning the regulatory requirements for payroll deduction 
programs for individual retirement accounts. This may ease concerns 
about the administrative complexity of offering access to individual 
retirement savings vehicles, which normally requires only a very 
limited financial commitment on the part of an employer in the form of 
affording payroll deductions.
    The interpretive bulletin may also facilitate individual savings 
for retirement by those employees whose access to employer-sponsored 
retirement coverage is most limited, by encouraging employers to make 
individual retirement saving programs available in a manner convenient 
to the employees. Although many employees without access to employer-
sponsored coverage are currently permitted to make use of an IRA as an 
alternative method to save for retirement, the Department believes that 
employees may be more likely to make use of an individual retirement 
savings vehicle that is offered in an employment setting and features 
regular withholding, than one which requires making individual 
arrangements with an IRA sponsor.

Small Business Regulatory Enforcement Fairness Act

    The interpretive bulletin being issued here is subject to the 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and has been transmitted to Congress and 
the Comptroller General for review.

Paperwork Reduction Act

    The interpretive bulletin being issued here is not subject to the 
requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.) because it does not contain an ``information collection request'' 
as defined in 44 U.S.C. 3502(3).

List of Subjects in 29 CFR Part 2509

    Employee Benefit Plans, Pensions.

    For the reasons set forth above, 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. Sections 2509.75-10 and 2509.75-2 
issued under 29 U.S.C. 1052, 1053, 1054. Secretary of Labor's Order 
No. 1-87 (52 FR 13139).

    2. Add a new Sec. 2509.99-1 to read as follows:


Sec. 2509.99-1  Interpretive Bulletin Relating to Payroll Deduction 
IRAs.

    (a) Scope. This interpretive bulletin sets forth the Department 
of Labor's (the Department's) interpretation of section 3(2)(A) of 
the Employee Retirement Income Security Act of 1974, as amended, 
(ERISA) and 29 CFR 2510.3-2(d), as applied to payroll deduction 
programs established by employers 1 for the purpose of 
enabling employees to make voluntary contributions to individual 
retirement accounts or individual retirement annuities (IRAs)

[[Page 33002]]

described in section 408(a) or (b) or section 408A of the Internal 
Revenue Code (the Code).
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    \1\ The views expressed in this Interpretive Bulletin with 
respect to payroll deduction programs of employers are also 
generally applicable to dues checkoff programs of employee 
organizations.
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    (b) General. It has been the Department's long-held view that an 
employer who simply provides employees with the opportunity for 
making contributions to an IRA through payroll deductions does not 
thereby establish a ``pension plan'' within the meaning of section 3 
(2) (A) of ERISA. In this regard, 29 CFR 2510.3-2 (d) sets forth a 
safe harbor under which IRAs will not be considered to be pension 
plans when the conditions of the regulation are satisfied. Thus, an 
employer may, with few constraints, provide to its employees an 
opportunity for saving for retirement, under terms and conditions 
similar to those of certain other optional payroll deduction 
programs, such as for automatic savings deposits or purchases of 
United States savings bonds, without thereby creating a pension plan 
under Title I of ERISA. The guidance provided herein is intended to 
clarify the application of the IRA safe harbor set forth at 29 CFR 
2510.3-2 (d) and, thereby, facilitate the establishment of payroll 
deduction IRAs.
    (c) Employee Communications. (1) It is the Department's view 
that, so long as an employer maintains neutrality with respect to an 
IRA sponsor in its communications with its employees, the employer 
will not be considered to ``endorse'' an IRA payroll deduction 
program for purposes of 29 CFR 2510.3-2(d).2 An employer 
may encourage its employees to save for retirement by providing 
general information on the IRA payroll deduction program and other 
educational materials that explain the advisability of retirement 
savings, including the advantages of contributing to an IRA, without 
thereby converting the program under which the employees' wages are 
withheld for contribution into the IRAs into an ERISA covered plan. 
However, the employer must make clear that its involvement in the 
program is limited to collecting the deducted amounts and remitting 
them promptly to the IRA sponsor and that it does not provide any 
additional benefit or promise any particular investment return on 
the employee's savings.
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    \2\ The Department has specifically stated, in its Advisory 
Opinions, that an employer may demonstrate its neutrality with 
respect to an IRA sponsor in a variety of ways, including (but not 
limited to) by ensuring that any materials distributed to employees 
in connection with an IRA payroll deduction program clearly and 
prominently state, in language reasonably calculated to be 
understood by the average employee, that the IRA payroll deduction 
program is completely voluntary; that the employer does not endorse 
or recommend either the sponsor or the funding media; that other IRA 
funding media are available to employees outside the payroll 
deduction program; that an IRA may not be appropriate for all 
individuals; and that the tax consequences of contributing to an IRA 
through the payroll deduction program are generally the same as the 
consequences of contributing to an IRA outside the program. The 
employer would not be considered neutral, in the Department's view, 
to the extent that the materials distributed to employees identified 
the funding medium as having as one of its purposes investing in 
securities of the employer or its affiliates or the funding medium 
in fact has any significant investments in such securities. If the 
IRA program were a result of an agreement between the employer and 
an employee organization, the Department would view informational 
materials that identified the funding medium as having as one of its 
purposes investing in an investment vehicle that is designed to 
benefit an employee organization by providing more jobs for its 
members, loans to its members, or similar direct benefits (or the 
funding medium's actual investments in any such investment vehicles) 
as indicating the employee organization's involvement in the program 
in excess of the limitations of 29 CFR 2510.3-2(d).
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    (2)The employer may also do the following without converting a 
payroll deduction IRA program into an ERISA plan: An employer may 
answer employees' specific inquiries about the mechanics of the IRA 
payroll deduction program and may refer other inquiries to the 
appropriate IRA sponsor. An employer may provide to employees 
informational materials written by the IRA sponsor describing the 
sponsor's IRA programs or addressing topics of general interest 
regarding investments and retirement savings, provided that the 
material does not itself suggest that the employer is other than 
neutral with respect to the IRA sponsor and its products; the 
employer may request that the IRA sponsor prepare such informational 
materials and it may review such materials for appropriateness and 
completeness. The fact that the employer's name or logo is displayed 
in the informational materials in connection with describing the 
payroll deduction program would not in and of itself, in the 
Department's view, suggest that the employer has ``endorsed'' the 
IRA sponsor or its products, provided that the specific context and 
surrounding facts and circumstances make clear to the employees that 
the employer's involvement is limited to facilitating employee 
contributions through payroll deductions.3
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    \3\ For example, if the employer whose logo appeared on the 
promotional materials provided a statement along the lines of in the 
first sentence of footnote 5, the employer would not be considered 
to have endorsed the IRA product.
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    (d) Employer Limitations on the number of IRA sponsors offered 
under the program. The Department recognizes that the cost of 
permitting employees to make IRA contributions through payroll 
deductions may be significantly affected by the number of IRA 
sponsors to which the employer must remit contributions. It is the 
view of the Department that an employer may limit the number of IRA 
sponsors to which employees may make payroll deduction contributions 
without exceeding the limitations of 29 CFR 2510.3-2(d), provided 
that any limitations on, or costs or assessments associated with an 
employee's ability to transfer or roll over IRA contributions to 
another IRA sponsor is fully disclosed in advance of the employee's 
decision to participate in the program. The employer may select one 
IRA sponsor as the designated recipient for payroll deduction 
contributions, or it may establish criteria by which to select IRA 
sponsors, e.g., standards relating to the sponsor's provision of 
investment education, forms, availability to answer employees' 
questions, etc., and may periodically review its selectees to 
determine whether to continue to designate them. However, an 
employer may be considered to be involved in the program beyond the 
limitations set forth in 29 CFR 2510.3-2(d) if the employer 
negotiates with an IRA sponsor and thereby obtains special terms and 
conditions for its employees that are not generally available to 
similar purchasers of the IRA. The employer's involvement in the IRA 
program would also be in excess of the limitations of the regulation 
if the employer exercises any influence over the investments made or 
permitted by the IRA sponsor.
    (e) Administrative fees. The employer may pay any fee the IRA 
sponsor imposes on employers for services the sponsor provides in 
connection with the establishment and maintenance of the payroll 
deduction process itself, without exceeding the limitations of 29 
CFR 2510.3-2(d). Further, the employer may assume the internal costs 
(such as for overhead, bookkeeping, etc) of implementing and 
maintaining the payroll deduction program without reimbursement from 
either employees or the IRA sponsor without exceeding the limits of 
the regulation. However, if an employer pays, in connection with 
operating an IRA payroll deduction program, any administrative, 
investment management, or other fee that the IRA sponsor would 
require employees to pay for establishing or maintaining the IRA, 
the employer would, in the view of the Department, fall outside the 
safe harbor and, as a result, may be considered to have established 
a ``pension plan'' for its employees.
    (f) Reasonable Compensation for Services. 29 CFR 2510.3-2(d) 
provides that an employer may not receive any consideration in 
connection with operating an IRA payroll deduction program, but may 
be paid ``reasonable compensation for services actually rendered in 
connection with payroll deductions or dues checkoffs.'' Employers 
have asked whether ``reasonable compensation'' under section 2510.3-
2(d) includes payments from an IRA sponsor to an employer for the 
employer's cost of operating the IRA payroll deduction program. It 
is the Department's view that the IRA sponsor may make such 
payments, to the extent that they constitute compensation for the 
actual costs of the program to the employer. However, ``reasonable 
compensation'' does not include any profit to the employer. See 29 
CFR 2510.3-1(j), relating to group or group-type insurance programs. 
For example, if an IRA sponsor offers to pay an employer an amount 
equal to a percentage of the assets contributed by employees to IRAs 
through payroll deduction, such an arrangement might exceed 
``reasonable compensation'' for the services actually rendered by 
the employer in connection with the IRA payroll deduction program. 
An employer will also be considered to have received consideration 
that is not ``reasonable compensation'' if the IRA sponsor agrees to 
make or to permit particular investments of IRA contributions in 
consideration for the employer's agreement to make a payroll 
deduction program available to its employees, or if the IRA sponsor 
agrees to extend credit to or for the benefit of the employer in 
return for the employer's making payroll deduction available to the 
employees.
    (g) Additional rules when employer is IRA sponsor or affiliate 
of IRA sponsor. Under

[[Page 33003]]

certain circumstances, an employer that offers IRAs in the normal 
course of its business to the general public or that is an affiliate 
4 of an IRA sponsor may provide its employees with the 
opportunity to make contributions to IRAs sponsored by the employer 
or the affiliate through a payroll deduction program, without 
exceeding the limitations of Sec. 2510.3-2(d). If the IRA products 
offered to the employees for investment of the payroll deduction 
contributions are identical to IRA products the sponsor offers the 
general public in the ordinary course of its business, and any 
management fees, sales commissions, and the like charged by the IRA 
sponsor to employees participating in the payroll deduction program 
are the same as those charged by the sponsor to employees of non-
affiliated employers that establish an IRA payroll deduction 
program, the Department has generally taken the position that this 
alone will not cause the employer to be sufficiently involved in the 
IRA program as an employer or to have received consideration of the 
type prohibited under Sec. 2510.2(d)(iv) to warrant the program 
being considered outside the safe harbor of the 
regulation.5 Under such circumstances, the employer, in 
offering payroll deduction contribution opportunities to its 
employees, would appear to be acting generally as an IRA sponsor, 
rather than as the employer of the individuals who make the 
contributions.6
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    \4\ For purposes of this interpretive bulletin, the definition 
of ``affiliate'' in ERISA section 407(d)(7) applies.
    \5\ While the funding medium offered by an employer that is an 
IRA sponsor or an affiliate of an IRA sponsor might be considered an 
employer security when offered to its own employees, the fact that 
informational materials provided to employees identify the funding 
medium as having as one of its purposes investing in securities of 
the employer would not, in the Department's view, involve the 
employer beyond the limits of 29 CFR 2510.3-2(d). Neither would the 
fact that the funding medium may actually be so invested. However, 
the Department would consider that an employer may have exceeded the 
limitation of 2510.3-2(d) if the informational materials the 
employer provides to employees suggest that the employer, in 
providing the IRA payroll deduction program for purposes of 
investing in employer securities, is acting as an employer in 
relation to persons who participate in the program, rather than as 
an IRA sponsor acting in the course of its ordinary business of 
making IRA products available to the public.
    \6\ However, if an employer that is an IRA sponsor waives 
enrollment and management fees for its employees' IRAs, and it 
normally charges those fees to members of the public who purchase 
IRAs, the employer would be considered to be so involved in the 
program as to be outside the safe harbor of the regulation.

    Signed at Washington, DC, this 14th day of June, 1999.
Richard M. McGahey,
Assistant Secretary, Pension and Welfare Benefits Administration, U.S. 
Department of Labor.
[FR Doc. 99-15410 Filed 6-17-99; 8:45 am]
BILLING CODE 4510-20-P