[Federal Register Volume 65, Number 64 (Monday, April 3, 2000)]
[Notices]
[Pages 17540-17542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-8057]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 2000-14; Exemption Application D-
10830]


Amendment to Prohibited Transaction Exemption 80-26 (PTE 80-26) 
for Certain Interest Free Loans to Employee Benefit Plans

AGENCY: Pension and Welfare Benefits Administration, U.S. Department of 
Labor.

ACTION: Adoption of Amendment to PTE 80-26.

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SUMMARY: This document provides a temporary amendment to PTE 80-26, a 
class exemption that permits parties in interest with respect to 
employee benefit plans to make interest free loans to such plans, 
provided the conditions of the exemption are met. The amendment affects 
all employee benefit plans, their participants and beneficiaries, and 
parties in interest with respect to those plans engaging in the 
described transactions.

EFFECTIVE DATE: The amendment to PTE 80-26 is effective from November 
1, 1999 until December 31, 2000.

FOR FURTHER INFORMATION CONTACT: Mr. J. Martin Jara, Office of 
Exemptions Determinations, Pension and Welfare Benefits Administration, 
U.S. Department of Labor, (202) 219-8881. (This is not a toll-free 
number); or Wendy McColough, Plan Benefits Security Division, Office of 
the Solicitor, U.S. Department of Labor (202) 219-4600. (This is not a 
toll-free number).

SUPPLEMENTARY INFORMATION: On November 29, 1999, notice was published 
in the Federal Register (64 FR 66666) of the pendency before the 
Department of a proposed amendment to PTE 80-26 (45 FR 28545, Apr. 29, 
1980).\1\ PTE 80-26 provides an exemption from the restrictions of 
section 406(a)(1)(B) and (D) and section 406(b)(2) of the Employee 
Retirement Income Security Act of 1974 (ERISA or the Act) and from the 
taxes imposed by section 4975(a) and (b) of the Internal

[[Page 17541]]

Revenue Code of 1986 (the Code), by reason of section 4975(c)(1)(B) and 
(D) of the Code in connection with certain interest free loans to 
employee benefit plans.
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    \1\ A minor correction was made to the title of the final 
exemption in a notice published in the Federal Register on May 23, 
1980. (45 FR 35040).
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    The amendment to PTE 80-26 adopted by this notice was proposed by 
the Department 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, 
32847, August 10, 1990).\2\
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    \2\ Section 102 of the 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.
    In the discussion of the exemption, references to section 406 of 
ERISA should be read to refer as well to the corresponding 
provisions of section 4975 of the Code.
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    The notice gave interested persons an opportunity to submit written 
comments or requests for a public hearing on the proposed amendment to 
the Department. The Department received three comments and no requests 
for a public hearing. Upon consideration of the record as a whole, the 
Department has determined to grant the proposed amendment with minor 
modifications.
    For the sake of convenience, the entire text of PTE 80-26, as 
amended, has been reprinted with this notice.

Discussion of the Comments Received

    The Department received three comments with regard to the proposed 
amendment, all generally supporting the grant of the exemption. Two of 
the comments requested additional modifications, as addressed below.
    The proposed amendment limited relief to transactions involving the 
lending of money or other extension of credit from a party in interest 
or disqualified person to an employee benefit plan for a purpose 
incidental to the ordinary operation of the plan which arises in 
connection with the plan's inability to liquidate, or otherwise access 
its assets or data as a result of a Y2K problem. A Y2K problem was 
defined in Section III of the proposed amendment as `a disruption of 
computer operations resulting from a computer system's inability to 
process data because such system recognizes years only by the last two 
digits, causing a ``00'' entry to read as the year ``1900'' rather than 
the year ``2000.'' '
    The Association of Private Pension and Welfare Plans (APPWP) raised 
concerns regarding the language in the preamble to the proposed 
amendment which states that ``* * *'' plan fiduciaries must establish a 
contingency plan that will be implemented in the event that the plans' 
essential operations are affected.'' \3\ The APPWP is concerned that 
this language adds a new standard of liability for plan sponsors and 
other fiduciaries. Accordingly, the APPWP suggests that this sentence 
be restated as follows: ``[a]s in dealing with all situations in which 
plan operations could suffer some level of disruption, plan fiduciaries 
should consider whether to create a contingency plan to be implemented 
in the event that the plan's essential operations are affected by Y2K 
problems.''
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    \3\ 64 FR 66667 (1999).
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    The language in the preamble did not create a new fiduciary 
standard of care. The relevant standard of care is set forth in the Act 
at section 404(a)(1)(B) as follows:

    A fiduciary shall discharge his duties with respect to the plan 
* * * with the care, skill and diligence under the circumstances 
then prevailing that a prudent man acting in like capacity and 
familiar with such matters would use in the conduct of an enterprise 
of like character and with like aims.

The preamble merely stated the Department's view that, given the well-
documented risk that was associated with Y2K, a prudent person 
similarly situated would have established a contingency plan. The 
Department notes that the comprehensiveness of a particular contingency 
plan an employee benefit plan adopts would necessarily depend on the 
facts and circumstances of each case. Accordingly, the Department has 
determined not to adopt the suggested modification to the preamble.
    In addition, the APPWP urged the Department to expand the relief 
under the amendment to include situations such as computer viruses, 
``hacking,'' and other technological problems caused by human 
malfeasance that would impede benefits administration. In this regard, 
the Department does not believe it has sufficient information on the 
record at this time to provide additional relief. However, upon further 
demonstration that there is a need for lending of money to plans in 
such circumstances, the Department would be prepared to consider 
further relief.
    Another commentator noted that the relief proposed is too 
restrictive and requested that the language be liberalized. 
Specifically, the commentator was concerned that the broad relief 
contemplated by the proposal may not be available if such relief is 
conditioned on the establishment by a plan fiduciary of a nexus between 
the cash shortfall and a specific disruption of computer operations. 
The commentator further stated that, given the rippling nature of Y2K 
problems, it may be impossible to determine the specific cause of a 
particular cash shortfall. Accordingly, the commentator urged the 
Department to modify the final exemption to provide that any cash 
shortfall incurred by a plan between November 1, 1999 and December 31, 
2000, should be presumed to be related to a Y2K problem and, thus, 
eligible for relief under the final exemption. After reviewing the 
commentator's suggestion, the Department does not believe that the 
commentator has adequately demonstrated the need for such broad 
exemptive relief. Accordingly, the Department has determined not to 
adopt the commentator's suggestion.
    The commentator also suggested that the three day repayment period 
for interest-free loans made for a purpose incidental to the ordinary 
operation of the plan be eliminated on a permanent basis. 
Alternatively, the commentator suggested that either: (1) The concept 
of ordinary operating expenses be amended to include investment 
transfers and participant loans; or (2) the three day requirement be 
amended to require repayment of such loans over a period of time that 
is materially longer than three days. The Department believes that 
consideration of the issues involved in amending PTE 80-26 as requested 
by the commentator are beyond the scope of the current proceeding. In 
this regard, the Department notes that, pursuant to the requirements of 
section 408(a) of the Act, it is required to offer interested persons 
an opportunity to present their views and an opportunity for a hearing 
prior to amending an exemption. Consequently, the Department has 
determined not to revise the final exemption in this regard.
    Finally, the commentator requested that the Department clarify 
whether the three day repayment requirement for loans used for a 
purpose incidental to the ordinary operation of the plan refers to 
three business days or three calender days. According to the 
commentator, the adoption of ``T plus three'' as the normal settlement 
practice for securities trades means that the proceeds of a sale of 
securities will generally not be received until three business days 
after the trade is executed. Accordingly, to be consistent with the 
prevailing market practice, the commentator urged the Department to 
clarify that ``three days'' means three business days for purposes of 
PTE 80-26. In this regard, it is the view of the Department that the 
phrase

[[Page 17542]]

``three days'' as set forth in section I(b)(2) of PTE 80-26, as 
amended, means three business days, and the final exemption has been 
modified to make this clear.

Description of the Exemption

    PTE 80-26 permits the lending of money or other extension of credit 
from a party in interest or disqualified person to an employee benefit 
plan, and the repayment of such loan or other extension of credit in 
accordance with its terms or other written modifications thereof, 
provided that:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only:
    (1) For the payment of ordinary operating expenses of the plan, 
including the payment of benefits in accordance with the terms of the 
plan and periodic premiums under an insurance or annuity contract; or
    (2) For a period of no more than three days, for a purpose 
incidental to the ordinary operation of the plan;
    (c) The loan or extension of credit is unsecured; and
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan.
    The amendment to PTE 80-26 granted pursuant to this notice 
temporarily broadens the availability of PTE 80-26 to include certain 
interest-free loans to be used for a purpose incidental to the ordinary 
operations of a plan which arise in connection with a Y2K problem, as 
defined in the amendment. The amendment to PTE 80-26 permits these 
loans to be repaid no later than December 31, 2000.

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, including any prohibited transaction provisions to which 
the exemption does not apply and the general fiduciary responsibility 
provisions of section 404 of ERISA which require, among other things, 
that a fiduciary discharge his or her duties respecting the plan solely 
in the interests of the participants and beneficiaries of the plan; 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) This exemption does not extend to transactions prohibited under 
section 406(b)(1) and (3) of the Act or section 4975(c)(1)(E) and (F) 
of the Code;
    (3) In accordance with section 408(a) of the Act and 4975(c)(2) of 
the Code, the Department makes the following determinations:
    (i) The amendment set forth herein is administratively feasible;
    (ii) It is in the interests of plans and of their participants and 
beneficiaries; and
    (iii) It is protective of the rights of participants and 
beneficiaries of plans;
    (4) The amendment is applicable to a particular transaction only if 
the transaction satisfies the conditions specified in the exemption; 
and
    (5) The amendment is supplemental to, and not in derogation of, any 
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.

Exemption

    Accordingly, PTE 80-26 is amended 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 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990), as set forth below:

Section I: General Exemption

    Effective January 1, 1975, the restrictions of section 406(a)(1)(B) 
and (D) and section 406(b)(2) of the Act, and the taxes imposed by 
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(B) 
and (D) of the Code, shall not apply to the lending of money or other 
extension of credit from a party in interest or disqualified person to 
an employee benefit plan, nor to the repayment of such loan or other 
extension of credit in accordance with its terms or written 
modifications thereof, if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only:
    (1) For the payment of ordinary operating expenses of the plan, 
including the payment of benefits in accordance with the terms of the 
plan and periodic premiums under an insurance or annuity contract; or
    (2) For a period of no more than three business days, for a purpose 
incidental to the ordinary operation of the plan;
    (c) The loan or extension of credit is unsecured; and
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan.

Section II: Temporary Exemption

    Effective November 1, 1999 through December 31, 2000, the 
restrictions of section 406(a)(1)(B) and (D) and section 406(b)(2) of 
the Act, and the taxes imposed by section 4975(a) and (b) of the Code 
by reason of section 4975(c)(1)(B) and (D) of the Code, shall not apply 
to the lending of money or other extension of credit from a party in 
interest or disqualified person to an employee benefit plan, nor to the 
repayment of such loan or other extension of credit in accordance with 
its terms or written modifications thereof, if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only 
for a purpose incidental to the ordinary operation of the plan which 
arises in connection with the plan's inability to liquidate, or 
otherwise access its assets or access data as a result of a Y2K 
problem.
    (c) The loan or extension of credit is unsecured;
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan;
    (e) The loan or extension of credit begins on or after November 1, 
1999 and is repaid or terminated no later than December 31, 2000.

Section III: Definition

    For the purposes of section II, a Y2K problem is a disruption of 
computer operations resulting from a computer system's inability to 
process data because such system recognizes years only by the last two 
digits, causing a ``00'' entry to be read as the year ``1900'' rather 
than the year ``2000.''

    Signed at Washington, DC, this 28th day of March, 2000.
Ivan L. Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 00-8057 Filed 3-31-00; 8:45 am]
BILLING CODE 4510-29-P