[Federal Register Volume 66, Number 189 (Friday, September 28, 2001)]
[Notices]
[Pages 49703-49706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-24395]


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PENSION AND WELFARE BENEFITS ADMINISTRATION

[Application Number D-11034]


Proposed 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: Notice of proposed amendment to PTE 80-26.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed amendment to PTE 80-
26. PTE 80-26 is 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 
proposed amendment, if adopted, would affect all employee benefit 
plans, the participants and beneficiaries of such plans, and parties in 
interest with respect to those plans engaging in the described 
transactions.

DATES: If adopted, the proposed amendment would be effective from 
September 11, 2001 until January 9, 2002. Written comments and requests 
for a public hearing should be received by the Department on or before 
November 13, 2001.

ADDRESSES: All written comments and requests for a public hearing 
(preferably three copies) should be addressed to the U.S. Department of 
Labor, Office of Exemption Determinations, Pension and Welfare Benefits 
Administration, Room N-5649, 200 Constitution Avenue, NW, Washington, 
DC 20210, (Attention: PTE 80-26 Amendment).

FOR FURTHER INFORMATION CONTACT: Mr. Christopher J. Motta, Office of 
Exemption Determinations, Pension and Welfare Benefits Administration, 
U.S. Department of Labor, (202) 219-8881. (This is not a toll-free 
number); or

[[Page 49704]]

Charles Jackson, Plan Benefits Security Division, Office of the 
Solicitor, U.S. Department of Labor, (202) 693-5600. (This is not a 
toll-free number).

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed amendment to PTE 80-26 (45 FR 
28545, April 29, 1980, as amended at 65 FR 17540, April 3, 2000).\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 Revenue Code of 1986 
(the Code), by reason of section 4975(c)(1)(B) and (D) of the Code.
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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 Department is proposing the amendment 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 (5 
U.S.C. App. 1 [1996] 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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A. General Background

    The prohibited transaction provisions of the Act generally prohibit 
transactions between a plan and a party in interest (including a 
fiduciary) with respect to such plan. Specifically, section 
406(a)(1)(B) and (D) of the Act states that a fiduciary with respect to 
a plan shall not cause the plan to engage in a transaction, if he knows 
or should know that such transaction constitutes a direct or indirect--
    (B) Lending of money or other extension of credit between the plan 
and a party in interest; or
    (D) Transfer to, or use by or for the benefit of, a party in 
interest of any assets of the plan.
    Accordingly, unless a statutory or administrative exemption is 
applicable, loans, including interest free loans, to a plan from a 
party in interest and the repayment of such loans may be prohibited.
    In addition, section 406(b)(2) of the Act provides that a fiduciary 
with respect to a plan shall not, in his individual or any other 
capacity, act in a transaction involving the plan on behalf of a party 
(or represent a party) whose interests are adverse to the interests of 
the plan or the interests of its participants or beneficiaries.

B. Description of Existing Relief

    Section I of 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, 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 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.
    On April 3, 2000, PTE 80-26 was amended through the addition of 
sections II and III to that exemption (65 FR 17540). Section II of PTE 
80-26 allowed, from November 1, 1999 through December 31, 2000, 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 written modifications thereof; provided that, among other 
requirements, 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 inability of the plan to liquidate, 
or otherwise access its assets or access data, as a result of a ``Y2K 
problem''. Section III of PTE 80-26, as amended, provides a definition 
of the term ``Y2K problem''.

C. Discussion of the Proposed Exemption

    The Department, on its own motion, proposes to amend PTE 80-26 in 
order to expand its interest free loan exemption to address potential 
liquidity problems faced by many employee benefit plans due to the 
tragic events that occurred on September 11, 2001. In this regard, as a 
result of the terrorist attacks on the World Trade Center and the 
Pentagon, all major stock markets in the United States were closed from 
September 11, 2001 to September 14, 2001. Among other things, the 
shutdown prevented the buying, selling and/or trading of securities on 
these markets.
    The terrorist incidents of September 11, 2001 have led to temporary 
disruptions in the financial and securities markets that may have an 
impact on employee benefit plans. Temporary impairments to 
communication systems, pricing and valuation operations, and 
marketplace liquidity, could interfere with the operation of employee 
benefit plans.\3\
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    \3\ In this regard, the Department recognized in a release dated 
September 14, 2001 (Release No. 01-36) that plan fiduciaries may 
encounter an array of problems with respect to the investment of 
employee benefit plan assets upon the reopening of the securities 
markets. Under these circumstances, plan fiduciaries may in good 
faith find it necessary and prudent to take extraordinary steps in 
order to safeguard plan assets and to facilitate the return to 
orderly markets. The Department further stated that, in taking these 
steps, plan fiduciaries should be sensitive to ensuring that the 
temporary procedures adopted, and the decisions made, are documented 
and adequately protect the interests of plans and their participants 
and beneficiaries.
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    The Department notes that, following the September 11, 2001 
incidents, telephone communications systems in lower Manhattan 
experienced partial or total interruptions that could prevent, for 
example, the immediate transmission of valuation information necessary 
to effectuate a participant's withdrawal request from a plan investment 
option. In such instance, a party in interest could provide a liquidity 
loan to a plan to facilitate the prompt execution of a participant's 
investment instructions.
    In addition, satisfaction of plan participant withdrawal 
instructions occurring shortly after September 11, 2001, may require 
the plan fiduciary to liquidate portfolio assets during a period of 
fluctuating market conditions. In such instance, the proposed amendment 
would provide added flexibility in satisfying participant withdrawal 
requests.
    Lastly, the Department notes that the September 11, 2001 incidents 
may have rendered certain asset valuation systems temporarily 
inoperable. The resulting delays with respect to the availability of 
certain portfolio valuations also may have affected the ability of 
plans to promptly satisfy participant investment instructions.
    As a result, the Department has determined to amend PTE 80-26 to 
expand its provisions for interest free loans to employee benefit 
plans. Accordingly, beginning September 11, 2001 and ending January 9, 
2002, the proposed amendment to PTE 80-26 would permit certain interest 
free loans with repayment periods of up to 120

[[Page 49705]]

days to address plan liquidity needs arising in connection with the 
September 11, 2001 attacks on the World Trade Center and the Pentagon.

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) or (F) of 
the Code;
    (3) Before an exemption may be granted under section 408(a) of 
ERISA and 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 protective of the rights 
of participants and beneficiaries of the plan;
    (4) If granted, the proposed amendment is applicable to a 
particular transaction only if the transaction satisfies the conditions 
specified in the exemption; and
    (5) The proposed amendment, if granted, will be 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.

Written Comments and Hearing Request

    The Department invites all interested persons to submit written 
comments or requests for a public hearing on the proposed amendment to 
the address and within the time period set forth above. All comments 
received will be made a part of the record. Comments and requests for a 
hearing should state the reasons for the writer's interest in the 
proposed exemption. Comments received will be available for public 
inspection at the above address.

Proposed Amendment

    Under 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), the Department proposes to 
amend PTE 80-26 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; and
    (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. September 11, 2001 Market Disruption Exemption
    Effective September 11, 2001 through January 9, 2002, 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 difficulties encountered by the plan in 
liquidating, or otherwise accessing its assets, or accessing its data 
in a timely manner as a direct or indirect result of the September 11, 
2001 disruption;
    (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; and
    (e) The loan or extension of credit begins on or after September 
11, 2001, and is repaid or terminated no later than January 9, 2002.
Section IV: Definitions
    (a) For 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

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only by the last two digits, causing a ``00'' entry to be read as the 
year ``1900'' rather than the year ``2000''.
    (b) For purposes of Section III, the September 11, 2001 disruption 
is the disruption to the United States financial and securities markets 
and/or the operation of persons providing administrative services to 
employee benefit plans, resulting from the acts of terrorism that 
occurred on September 11, 2001.

    Signed at Washington, DC, this 25st day of September, 2001.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Pension and Welfare 
Benefits Administration, Department of Labor.
[FR Doc. 01-24395 Filed 9-27-01; 8:45 am]
BILLING CODE 4510-29-P