Appendix E - Employee Benefit Law

Interagency Referral Agreement for ERISA Violations

INTERAGENCY AGREEMENT

Procedures for Cooperation Between the Federal Financial Institution Regulatory Agencies and the Department of Labor in the Enforcement of the Employee Retirement Income Security Act of 1974

The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency and Office of Thrift Supervision (the federal financial institution regulatory agencies) as part of their supervision of the institutions regulated by them, conduct examinations and perform other functions which occasionally disclose possible violations of the Employee Retirement Income Security Act of 1974 (ERISA). The Department of Labor (DOL) is charged with the administration, interpretation and enforcement of standards of conduct and responsibility of fiduciaries of employee benefit plans under ERISA.

Section 3004(b) of ERISA provides that the Secretary of Labor may utilize the facilities or services of any department, agency, or establishment of the United States, with the lawful consent of such department, agency, or establishment, and each department, agency or establishment of the United States is authorized and directed to cooperate with the Secretary of Labor and, to the extent permitted by law, to provide such information and facilities as the Secretary may request for his assistance in the performance of his functions under ERISA. This agreement is executed pursuant to that authority.

1. To the maximum extent consistent with law and dependent upon the availability of resources, the federal financial institution regulatory agencies shall provide written notification to the DOL of possible violations of ERISA of a significant nature, which are discovered in the course of their supervision of institutions subject to their respective jurisdiction.
2. A possible violation shall be considered significant when, in the view of the appropriate federal financial institution regulatory agency, it falls within the following circumstances:

a. Where the financial institution does not serve as plan administrator or plan sponsor, as those terms are defined in ERISA Section 3(16), possible violations of:

(1) Title I, Part 4, Section 404, relating to fiduciary duties (including transactions directed by named fiduciaries or qualified investment managers), except where the transaction amounts, individually or in combination with other questionable transactions, constitute less than $100,000;

(2) Title I, Part 4 Section 405, relating to liability for breach of co-fiduciary duties (including transactions directed by named fiduciaries or qualified investment managers), except where the transaction amounts, individually or in combination with other questionable transactions, constitute less than $100,000;

(3) Title I, Part 4, Sections 406 and 407(a), relating to prohibited transactions, except where the threat of loss to the plan participants is de minimis;

(4) Title I, Part 4, Section 411, relating to prohibition against certain persons holding certain positions;

(5) Title I, Part 4, Section 412, relating to the bonding requirements as applicable to the financial institution itself.

b. Where the financial institution, in respect to a plan, also serves as plan administrator or plan sponsor, the agencies shall provide written notification of possible violations of the ERISA sections enumerated in a. above and, in addition, shall provide written notification of possible violations of Title I, Part 1, of ERISA relating to reporting and disclosure.

3. The written notification to the DOL shall include the following:

a. The name of the financial institution.

b. The name of the plan.

c. A brief description of the nature of the possible violation, and any corrective action requested by the federal financial institution regulatory agency and/or initiated by the federal financial institution regulatory agency.

4. The DOL agrees that any information received from the federal financial institution regulatory agencies pursuant to this agreement shall, to the extent permissible by law, be held in strict confidence and may be used for investigative purposes only; and that no other use of such information shall be made without the express written authorization of the agency that supplied such information.
5. The written notification shall be sent to the Director of Enforcement, Employee Benefits Security Administration, U.S. Department of Labor, Washington, D.C. 20210.

ERISA Section 3
(29 USC 1002)

For purposes of this subchapter:

1. The terms "employee welfare benefit plan" and "welfare plan" mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 186(c) of this title (other than pensions on retirement or death, and insurance to provide such pensions).
2. Except
1. as provided in subparagraph (B), the terms "employee pension benefit plan" and "pension plan" mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program -
1. Provides retirement income to employees, or
2. 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.
2. The Secretary may by regulation prescribe rules consistent with the standards and purposes of this chapter providing one or more exempt categories under which -
1. Severance pay arrangements, and
2. Supplemental retirement income payments, under which the pension benefits of retirees or their beneficiaries are supplemented to take into account some portion or all of the increases in the cost of living (as determined by the Secretary of Labor) since retirement, shall, for purposes of this subchapter, be treated as welfare plans rather than pension plans. In the case of any arrangement or payment a principal effect of which is the evasion of the standards or purposes of this chapter applicable to pension plans, such arrangement or payment shall be treated as a pension plan.
3. The term "employee benefit plan" or "plan" means an employee welfare benefit plan or an employee pension benefit plan or a plan which is both an employee welfare benefit plan and an employee pension benefit plan.
4. The term "employee organization" means any labor union or any organization of any kind, or any agency or employee representation committee, association, group, or plan, in which employees participate and which exists for the purpose, in whole or in part, of dealing with employers concerning an employee benefit plan, or other matters incidental to employment relationships; or any employees' beneficiary association organized for the purpose in whole or in part, of establishing such a plan.
5. The term "employer" means any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.
6. The term "employee" means any individual employed by an employer.
7. The term "participant" means any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.
8. The term "beneficiary" means a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder.
9. The term "person" means an individual, partnership, joint venture, corporation, mutual company, joint-stock company, trust, estate, unincorporated organization, association, or employee organization.
10. The term "State" includes any State of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, Wake Island, and the Canal Zone. The term "United States" when used in the geographic sense means the States and the Outer Continental Shelf lands defined in the Outer Continental Shelf Lands Act (43 USC 1331-1343).
11. The term "commerce" means trade, traffic, commerce, transportation, or communication between any State and any place outside thereof.
12. The term "industry or activity affecting commerce" means any activity, business, or industry in commerce or in which a labor dispute would hinder or obstruct commerce or the free flow of commerce, and includes any activity or industry "affecting commerce" within the meaning of the Labor Management Relations Act, 1947 [29 USCA 141 et seq.] or the Railway Labor Act [45 USCA 151 et seq.]
13. The term "Secretary" means the Secretary of Labor.
14. The term "party in interest" means, as to an employee benefit plan -

Editor's Note: Also see "Disqualified Person" definition, Internal Revenue Code § 4975(e)(2).

1. Any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such employee benefit plan;
2. A person providing services to such plan;
3. An employer any of whose employees are covered by such plan;
4. An employee organization any of whose members are covered by such plan;
5. An owner, direct or indirect, of 50 percent or more of -
1. The combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation.
2. The capital interest or the profits interest of a partnership, or
3. The beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D);
6. A relative (as defined in paragraph (15)) of any individual described in subparagraph (A), (B), (C), or (E);
7. A corporation, partnership, or trust or estate of which (or in which) 50 percent or more of -
1. The combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation,
2. The capital interest or profits interest of such partnership, or
3. The beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E);
8. An employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors), or a 10 percent or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D), (E), or (G), or of the employee benefit plan; or
9. A 10 percent or more (directly or indirectly in capital or profits) partner or joint venture of a person described in subparagraph (B), (C), (D), (E), or (G).

The Secretary, after consultation and coordination with the Secretary of the Treasury, may by regulation prescribe a percentage lower than 50 percent for subparagraph (E) and (G) and lower than 10 percent for subparagraph (H) or (I). The Secretary may prescribe regulations for determining the ownership (direct or indirect) of profits and beneficial interests, and the manner in which indirect stock holdings are taken into account. Any person who is a party in interest with respect to a plan to which a trust described in section 501(c)(22) of Title 26 is permitted to make payments under section 1403 of this title shall be treated as a party in interest with respect to such trust.

15. The term "relative" means a spouse, ancestor, lineal descendant, or spouse of a lineal descendant.

Editor's Note: Also see "Family Member" definition, Internal Revenue Code § 4975(e)(6).

16. The term "administrator" and  "plan sponsor"
1. The term "administrator" means -
1. The person specifically so designated by the terms of the instrument under which the plan is operated;
2. If an administrator is not so designated, the plan sponsor; or
3. In the case of a plan for which an administrator is not designated and a plan sponsor cannot be identified, such other person as the Secretary may by regulation prescribe.
2. The term "plan sponsor" means -
1. The employer in the case of an employee benefit plan established or maintained by a single employer,
2. The employee organization in the case of a plan established or maintained by an employee organization, or
3. In the case of a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan.
17. The term "separate account" means an account established or maintained by an insurance company under which income, gains, and losses, whether or not realized, from assets allocated to such account, are, in accordance with the applicable contract, credited to or charged against such account without regard to other income, gains, or losses of the insurance company.
18. The term "adequate consideration" when used in part 4 of subtitle B of this subchapter means -
1. In the case of a security for which there is a generally recognized market, either -
1. The price of the security prevailing on a national securities exchange which is registered under section 78f of Title 15, or
2. If the security is not traded on such a national securities exchange, a price not less favorable to the plan than the offering price for the security as established by the current bid and asked prices quoted by persons independent of the issuer and of any party in interest; and
2. In the case of an asset other than a security for which there is a generally recognized market, the fair market value of the asset as determined in good faith by the trustee or named fiduciary pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary.
19. The term "nonforfeitable" when used with respect to a pension benefit or right means a claim obtained by a participant or his beneficiary to that part of an immediate or deferred benefit under a pension plan which arises from the participant's service, which is unconditional, and which is legally enforceable against the plan. For purposes of this paragraph, a right to an accrued benefit derived from employer contributions shall not be treated as forfeitable merely because the plan contains a provision described in section 1053(a)(3) of this title.
20. The term "security" has the same meaning as such term has under section 77b(1) of Title 15.
21. (A) Except as otherwise provided in subparagraph (B), a person is a fiduciary with respect to a plan to the extent -

Editor's Note: Also see "Fiduciary" definition, Internal Revenue Code § 4975(e)(3).

1. He exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,
2. He renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or
3. He has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 1105(c)(1)(B) of this title.

(B) If any money or other property of an employee benefit plan is invested in securities issued by an investment company registered under the Investment Company Act of 1940 [15 USCA 80a-1 et seq.], such investment shall not by itself cause such investment company or such investment company's investment adviser or principal underwriter to be deemed to be a fiduciary or a party in interest as those terms are defined in this subchapter, except insofar as such investment company or its investment adviser or principal underwriter acts in connection with an employee benefit plan covering employees of the investment company, the investment adviser, or its principal underwriter. Nothing contained in this subparagraph shall limit the duties imposed on such investment company, investment adviser, or principal underwriter by any other law.

22. The term "normal retirement benefit" means the greater of the early retirement benefit under the plan, or the benefit under the plan commencing at normal retirement age. The normal retirement benefit shall be determined without regard to -
1. Medical benefits, and
2. Disability benefits not in excess of the qualified disability benefit.

For purposes of this paragraph, a qualified disability benefit is a disability benefit provided by a plan which does not exceed the benefit which would be provided for the participant if he separated from the service at normal retirement age. For purposes of this paragraph, the early retirement benefit under a plan shall be determined without regard to any benefit under the plan which the Secretary of the Treasury finds to be a benefit described in section 1054(b)(1)(G) of this title.

23. The term "accrued benefit" means -
1. In the case of a defined benefit plan, the individual's accrued benefit determined under the plan and, except as provided in section 1054(c)(3) of this title, expressed in the form of an annual benefit commencing at normal retirement age, or
2. In the case of a plan which is an individual account plan, the balance of the individual's account.

The accrued benefit of an employee shall not be less than the amount determined under section 1054(c)(2)(B) of this title with respect to the employee's accumulated contribution.

24. The term "normal retirement age" means the earlier of -
1. The time a plan participant attains normal retirement age under the plan, or
2. The later of -
1. The time a plan participant attains age 65, or
2. The 5th anniversary of the time a plan participant commenced participation in the plan.
25. The term "vested liabilities" means the present value of the immediate or deferred benefits available at normal retirement age for participants and their beneficiaries which are nonforfeitable.
26. The term "current value" means fair market value where available and otherwise the fair value as determined in good faith by a trustee or a named fiduciary (as defined in section 1102(a)(2) of this title) pursuant to the terms of the plan and in accordance with regulations of the Secretary, assuming an orderly liquidation at the time of such determination.
27. The term "present value", with respect to a liability, means the value adjusted to reflect anticipated events. Such adjustments shall conform to such regulations as the Secretary of the Treasury may prescribe.
28. The term "normal service cost" or "normal cost" means the annual cost of future pension benefits and administrative expenses assigned, under an actuarial cost method, to years subsequent to a particular valuation date of a pension plan. The Secretary of the Treasury may prescribe regulations to carry out this paragraph.
29. The term "accrued liability" means the excess of the present value, as of a particular valuation date of a pension plan, of the projected future benefit costs and administrative expenses for all plan participants and beneficiaries over the present value of future contributions for the normal cost of all applicable plan participants and beneficiaries. The Secretary of the Treasury may prescribe regulations to carry out this paragraph.
30. The term "unfunded accrued liability" means the excess of the accrued liability, under an actuarial cost method which so provides, over the present value of the assets of a pension plan. The Secretary of the Treasury may prescribe regulations to carry out this paragraph.
31. The term "advance funding actuarial cost method" or "actuarial cost method" means a recognized actuarial technique utilized for establishing the amount and incidence of the annual actuarial cost of pension plan benefits and expenses. Acceptable actuarial cost methods shall include the accrued benefit cost method (unit credit method), the entry age normal cost method, the individual level premium cost method, the aggregate cost method, the attained age normal cost method, and the frozen initial liability cost method. The terminal funding cost method and the current funding (pay-as-you-go) cost method are not acceptable actuarial cost methods. The Secretary of the Treasury shall issue regulations to further define acceptable actuarial cost methods.
32. The term "governmental plan" means a plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The term "governmental plan" also includes any plan to which the Railroad Retirement Act of 1935 or 1937 [45 USCA 231 et seq.] applies, and which is financed by contributions required under that Act and any plan of an international organization which is exempt from taxation under the provisions of the International Organizations Immunities Act [22 USCA 288 et seq.].
33. (A) The term "church plan" means a plan established and maintained (to the extent required in clause (ii) of subparagraph (B)) for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501 of Title 26.

(B) The term "church plan" does not include a plan -

1. Which is established and maintained primarily for the benefit of employees (or their beneficiaries) of such church or convention or association of churches who are employed in connection with one or more unrelated trades or businesses (within the meaning of section 513 of Title 26), or
2. If less than substantially all of the individuals included in the plan are individuals described in subparagraph (A) or in clause (ii) of subparagraph (C) (or their beneficiaries).

(C) For purposes of this paragraph -

1. A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or a convention or association of churches.
2. The term employee of a church or a convention or association of churches includes -
1. A duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry, regardless of the source of his compensation;
2. An employee of an organization, whether a civil law corporation or otherwise, which is exempt from tax under section 501 of Title 26 and which is controlled by or associated with a church or a convention or association of churches; and
3. An individual described in clause (v).
3. A church or a convention or association of churches which is exempt from tax under section 501 of Title 26 shall be deemed the employer of any individual included as an employee under clause (ii).
4. An organization, whether a civil law corporation or otherwise, is associated with a church or a convention or association of churches if it shares common religious bonds and convictions with that church or convention or association of churches.
5. If an employee who is included in a church plan separates from the service of a church or a convention or association of churches or an organization, whether a civil law corporation or otherwise, which is exempt from tax under section 501 of Title 26 and which is controlled by or associated with a church or a convention or association of churches, the church plan shall not fail to meet the requirements of this paragraph merely because the plan -

1. Retains the employee's accrued benefit or account for the payment of benefits to the employee or his beneficiaries pursuant to the terms of the plan; or
2. Receives contributions on the employee's behalf after the employee's separation from such service, but only for a period of 5 years after such separation, unless the employee is disabled (within the meaning of the disability provisions of the church plan or, if there are no such provisions in the church plan, within the meaning of section 72(m)(7) of Title 26) at the time of such separation from service.

(D) (i) If a plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501 of Title 26 fails to meet one or more of the requirements of this paragraph and corrects its failure to meet such requirements within the correction period, the plan shall be deemed to meet the requirements of this paragraph for the year in which the correction was made and for all prior years.

(ii) If a correction is not made within the correction period, the plan shall be deemed not to meet the requirements of this paragraph beginning with the date on which the earliest failure to meet one or more of such requirements occurred.

(iii) For purposes of this subparagraph, the term "correction period" means -

1. The period ending 270 days after the date of mailing by the Secretary of the Treasury of a notice of default with respect to the plan's failure to meet one or more of the requirements of this paragraph; or
2. Any period set by a court of competent jurisdiction after a final determination that the plan fails to meet such requirements, or, if the court does not specify such period, any reasonable period determined by the Secretary of the Treasury on the basis of all the facts and circumstances, but in any event not less than 270 days after the determination has become final; or
3. Any additional period which the Secretary of the Treasury determines is reasonable or necessary for the correction of the default, whichever has the latest ending date.

34. The term "individual account plan" or "defined contribution plan" means a pension plan which provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's account.
35. The term "defined benefit plan" means a pension plan other than an individual account plan; except that a pension plan which is not an individual account plan and which provides a benefit derived from employer contributions which is based partly on the balance of the separate account of a participant -
1. For the purposes of section 1052 of this title, shall be treated as an individual account plan, and
2. For the purposes of paragraph (23) of this section and section 1054 of this title, shall be treated as an individual account plan to the extent benefits are based upon the separate account of a participant and as a defined benefit plan with respect to the remaining portion of benefits under the plan.
36. The term "excess benefit plan" means a plan maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitations on contributions and benefits imposed by section 415 of Title 26 on plans to which that section applies, without regard to whether the plan is funded. To the extent that a separable part of a plan (as determined by the Secretary of Labor) maintained by an employer is maintained for such purpose, that part shall be treated as a separate plan which is an excess benefit plan.
37. Multiemployer Plan
1. The term "multiemployer plan" means a plan -
1. To which more than one employer is required to contribute,
2. Which is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer, and
3. Which satisfies such other requirements as the Secretary may prescribe by regulation.
2. For purposes of this paragraph, all trades or businesses (whether or not incorporated) which are under common control within the meaning of section 1301(b)(1) of this title are considered a single employer.
3. Notwithstanding subparagraph (A), a plan is a multiemployer plan on and after its termination date if the plan was a multiemployer plan under this paragraph for the plan year preceding its termination date.
4. For purposes of this subchapter, notwithstanding the preceding provisions of this paragraph, for any plan year which began before September 26, 1980, the term "multiemployer plan" means a plan described in this paragraph (37) as in effect immediately before such date.
5. Within one year after September 26, 1980, a multiemployer plan may irrevocably elect, pursuant to procedures established by the corporation and subject to the provisions of sections 1453(b) and (c) of this title, that the plan shall not be treated as a multiemployer plan for all purposes under this chapter or Title 26 if for each of the last 3 plan years ending prior to the effective date of the Multiemployer Pension Plan Amendments Act of 1980 -
1. The plan was not a multiemployer plan because the plan was not a plan described in subparagraph (A)(iii) of this paragraph and section 414(f)(1)(C) of Title 26 (as such provisions were in effect on the day before September 26, 1980); and
2. The plan had been identified as a plan that was not a multiemployer plan in substantially all its filings with the corporation, the Secretary of Labor and the Secretary of the Treasury.
6. Qualified Football Coaches Plan
1. For purposes of this title a qualified football coaches plan -
1. Shall be treated as a multiemployer plan to the extent not inconsistent with the purposes of this subparagraph; and
2. Notwithstanding section 401(k)(4)(B) of Title 26, may include a qualified cash and deferred arrangement.
2. For purposes of this subparagraph, the term "qualified football coaches plan" means any defined contribution plan which is established and maintained by an organization -
1. Which is described in section 501(c) of Title 26;
2. The membership of which consists entirely of individuals who primarily coach football as full-time employees of 4-year colleges or universities described in section 170(b)(1)(A)(ii) of Title 26; and
3. Which was in existence on September 18, 1986.
38. The term "investment manager" means any fiduciary (other than a trustee or named fiduciary, as defined in section 1102(a)(2) of this title) -
1. Who has the power to manage, acquire, or dispose of any asset of a plan;
2. Who is -
1. Registered as an investment adviser under the Investment Advisers Act of 1940 [15 USCA 80b-1 et seq.];
2. Is a bank, as defined in that Act; or
3. Is an insurance company qualified to perform services described in subparagraph (A) under the laws of more than one State; and
3. Has acknowledged in writing that he is a fiduciary with respect to the plan.
39. The terms "plan year" and "fiscal year of the plan" mean, with respect to a plan, the calendar, policy, or fiscal year on which the records of the plan are kept.
40. (A) The term "multiple employer welfare arrangement" means an employee welfare benefit plan, or any other arrangement (other than an employee welfare benefit plan), which is established or maintained for the purpose of offering or providing any benefit described in paragraph (1) to the employees of two or more employers (including one or more self-employed individuals), or to their beneficiaries, except that such term does not include any such plan or other arrangement which is established or maintained -

1. Under or pursuant to one or more agreements which the Secretary finds to be collective bargaining agreements,
2. By a rural electric cooperative, or
3. By a rural telephone cooperative association.

(B) For purposes of this paragraph -

1. Two or more trades or businesses, whether or not incorporated, shall be deemed a single employer if such trades or businesses are within the same control group,
2. The term "control group" means a group of trades or businesses under common control,
3. The determination of whether a trade or business is under "common control" with another trade or business shall be determined under regulations of the Secretary applying principles similar to the principles applied in determining whether employees of two or more trades or businesses are treated as employed by a single employer under section 1301(b) of this title, except that, for purposes of this paragraph, common control shall not be based on an interest of less than 25 percent,
4. The term "rural electric cooperative" means -
1. Any organization which is exempt from tax under section 501(a) of Title 26 and which is engaged primarily in providing electric service on a mutual or cooperative basis, and
2. Any organization described in paragraph (4) or (6) of section 501(c) of Title 26 which is exempt from tax under section 501(a) of such Title 26 and at least 80 percent of the members of which are organizations described in subclause (I), and
5. The term "rural telephone cooperative association" means an organization described in paragraph (4) or (6) of section 501(c) of Title 26 which is exempt from tax under section 501(a) of such Title and at least 80 percent of the members of which are organizations engaged primarily in providing telephone service to rural areas of the United States on a mutual, cooperative, or other basis.

41. Single-employer plan. The term "single-employer plan" means an employee benefit plan other than a multiemployer plan.

The term "single employer plan" means a plan which is not a multiemployer plan.

ERISA Section 206
(29 USC 1056)

In accordance with section 1056(d)(1)-(2) of this title:

(d) Assignment or alienation of plan benefits

1. Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.
2. For the purposes of paragraph (1) of this subsection, there shall not be taken into account any voluntary and revocable assignment of not to exceed 10 percent of any benefit payment, or of any irrevocable assignment or alienation of benefits executed before September 2, 1974. The preceding sentence shall not apply to any assignment or alienation made for the purposes of defraying plan administration costs. For purposes of this paragraph a loan made to a participant or beneficiary shall not be treated as an assignment or alienation if such loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax imposed by section 4975 of Title 26 (relating to tax on prohibited transactions) by reason of section 4975(d)(1) of Title 26.

ERISA Section 401
(29 USC 1101)

1. This part shall apply to any employee benefit plan described in section 4(a) (and not exempted under section 4(b)), other than:
1. A plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees; or
2. Any agreement described in section 736 of Title 26, which provides payments to a retired partner or deceased partner or a deceased partner's successor in interest.
2. For purposes of this part:
1. In the case of a plan which invests in any security issued by an investment company registered under the Investment Company Act of 1940 [15 USCA 80a-1 et seq.], the assets of such plan shall be deemed to include such security but shall not, solely by reason of such investment, be deemed to include any assets of such investment company.
2. In the case of a plan to which a guaranteed benefit policy is issued by an insurer, the assets of such plan shall be deemed to include such policy, but shall not, solely by reason of the issuance of such policy, be deemed to include any assets of such insurer. For purposes of this paragraph:
1. The term "insurer" means an insurance company, insurance service, or insurance organization, qualified to do business in a State.
2. The term "guaranteed benefit policy" means an insurance policy or contract to the extent that such policy or contact provides for benefits the amount of which is guaranteed by the insurer. Such term includes any surplus in a separate account, but excludes any other portion of a separate account.

ERISA Section 402
(29 USC 1102)

1. Named fiduciaries
1. Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.
2. For purposes of this subchapter, the term "named fiduciary" means a fiduciary who is named in the plan instrument, or who, pursuant to a procedure specified in the plan, is identified as a fiduciary-
1. By a person who is an employer or employee organization with respect to the plan or
2. By such an employer and such an employee organization acting jointly.
2. Requisite features of plan. Every employee benefit plan shall -
1. Provide a procedure for establishing and carrying out a funding policy and method consistent with the objectives of the plan and the requirements of this subchapter,
2. Describe any procedure under the plan for the allocation of responsibilities for the operation and administration of the plan (including any procedure described in section 1105(c)(1) of this title),
3. Provide a procedure for amending such plan, and for identifying the persons who have authority to amend the plan, and
4. Specify the basis on which payments are made to and from the plan.
3. Optional features of plan. Any employee benefit plan may provide -
1. That any person or group of persons may serve in more than one fiduciary capacity with respect to the plan (including service both as trustee and administrator);
2. That a named fiduciary, or a fiduciary designated by a named fiduciary pursuant to a plan procedure described in section 1105(c)(1) of this title, may employ one or more persons to render advice with regard to any responsibility such fiduciary has under the plan; or
3. That a person who is a named fiduciary with respect to control or management of the assets of the plan may appoint an investment manager or managers to manage (including the power to acquire and dispose of) any assets of a plan.

ERISA Section 403
(29 USC 1103)

1. Benefit plan assets to be held in trust; authority of trustees.

Except as provided in subsection (b) of this section, all assets of an employee benefit plan shall be held in trust by one or more trustees. Such trustee or trustees shall be either named in the trust instrument or in the plan instrument described in section 1102(a) of this title or appointed by a person who is a named fiduciary, and upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan, except to the extent that -

1. The plan expressly provides that the trustee or trustees are subject to the direction of a named fiduciary who is not a trustee, in which case the trustees shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to this chapter, or
2. Authority to manage, acquire, or dispose of assets of the plan is delegated to one or more investment managers pursuant to section 1102(c)(3) of this title.
2. Exceptions. The requirements of subsection (a) of this section shall not apply -
1. To any assets of a plan which consist of insurance contracts or policies issued by an insurance company qualified to do business in a State;
2. To any assets of such an insurance company or any assets of a plan which are held by such an insurance company;
3. To a plan -
1. Some or all of the participants of which are employees described in section 401(c)(1) of Title 26; or
2. Which consists of one or more individual retirement accounts described in section 408 of Title 26; to the extent that such plan's assets are held in one or more custodial accounts which qualify under section 401(f) or 408(h) of Title 26, whichever is applicable.
4. To a plan which the Secretary exempts from the requirement of subsection (a) of this section and which is not subject to any of the following provisions of this chapter
1. Part 2 of this subtitle,
2. Part 3 of this subtitle, or
3. Subchapter III of this chapter; or
5. To a contract established and maintained under section 403(b) of Title 26 to the extent that the assets of the contract are held in one or more custodial accounts pursuant to section 403(b)(7) of Title 26.
6. Any plan, fund or program under which an employer, all of whose stock is directly or indirectly owned by employees, former employees or their beneficiaries, proposes through an unfunded arrangement to compensate retired employees for benefits which were forfeited by such employees under a pension plan maintained by a former employer prior to the date such pension plan became subject to this chapter.
3. Assets of plan not to inure to benefit of employer; allowable purposes of holding plan assets
1. Except as provided in paragraph (2), (3), or (4) or subsection (d) of this section, or under sections 1342 and 1344 of this title (relating to termination of insured plans), or under section 420 of Title 26 as in effect on January 1, 1995) the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.
2. Contribution
1. In the case of a contribution, or a payment of withdrawal liability under part 1 of subtitle E of subchapter III of this chapter -
1. If such contribution or payment is made by an employer to a plan (other than a multiemployer plan) by a mistake of fact, paragraph (1) shall not prohibit the return of such contribution to the employer within one year after the payment of the contribution, and
2. If such contribution or payment is made by an employer to a multiemployer plan by a mistake of fact or law (other than a mistake relating to whether the plan is described in section 401(a) of Title 26 or the trust which is part of such plan is exempt from taxation under section 501(a) of Title 26), paragraph (1) shall not prohibit the return of such contribution or payment to the employer within 6 months after the plan administrator determines that the contribution was made by such a mistake.
2. If a contribution is conditioned on initial qualification of the plan under section 401 or 403(a) of Title 26, and if the plan receives an adverse determination with respect to its initial qualification, then paragraph (1) shall not prohibit the return of such contribution to the employer within one year after such determination, but only if the application for the determination is made by the time prescribed by law for filing the employer's return for the taxable year in which such plan was adopted, or such later date as the Secretary of the Treasury may prescribe.
3. If a contribution is conditioned upon the deductibility of the contribution under section 404 of Title 26, then, to the extent the deduction is disallowed, paragraph (1) shall not prohibit the return to the employer of such contribution (to the extent disallowed) within one year after the disallowance of the deduction.
3. In the case of a withdrawal liability payment which has been determined to be an overpayment, paragraph (1) shall not prohibit the return of such payment to the employer within 6 months after the date of such determination.
4. Redesignated (3).
4. Termination of plan.
1. Upon termination of a pension plan to which section 1321 of this title does not apply at the time of termination and to which this part applies (other than a plan to which no employer contributions have been made) the assets of the plan shall be allocated in accordance with the provisions of section 1344 of this title, except as otherwise provided in regulations of the Secretary.
2. The assets of a welfare plan which terminates shall be distributed in accordance with the terms of the plan, except as otherwise provided in regulations of the Secretary.

ERISA Section 404
(29 USC 1104)

1. Prudent man standard of care.
1. Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and -
1. For the exclusive purpose of:
1. Providing benefits to participants and their beneficiaries; and
2. Defraying reasonable expenses of administering the plan;
2. With the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
3. By diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
4. In accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III of this chapter.
2. In the case of an eligible individual account plan (as defined in section 1107(d)(3) of this title), the diversification requirement of paragraph (1)(C) and the prudence requirement (only to the extent that it requires diversification) of paragraph (1)(B) is not violated by acquisition or holding of qualifying employer real property or qualifying employer securities (as defined in section 1107(d)(4) and (5) of this title).
2. Indicia of ownership of assets outside jurisdiction of district courts.

Except as authorized by the Secretary by regulation, no fiduciary may maintain the indicia of ownership of any assets of a plan outside the jurisdiction of the district courts of the United States.

3. Control over assets by participant or beneficiary.

In the case of a pension plan which provides for individual accounts and permits a participant or beneficiary to exercise control over the assets in his account, if a participant or beneficiary exercises control over the assets in his account (as determined under regulations of the Secretary) -

1. Such participant or beneficiary shall not be deemed to be a fiduciary by reason of such exercise, and
2. No person who is otherwise a fiduciary shall be liable under this part for any loss, or by reason of any breach, which results from such participant's or beneficiary's exercise of control.
4. Plan terminations.
1. If, in connection with the termination of a pension plan which is a single-employer plan, there is an election to establish or maintain a qualified replacement plan, or to increase benefits, as provided under section 4980(d) of Title 26, a fiduciary shall discharge the fiduciary's duties under this subchapter and subchapter III of this chapter in accordance with the following requirements:
1. In the case of a fiduciary of the terminated plan, any requirement -
1. Under section 4980(d)(2)(B) of Title 26 with respect to the transfer of assets from the terminated plan to a qualified replacement plan, and
2. Under section 4980(d)(2)(B)(ii) or 4980(d)(3) of Title 26 with respect to any increase in benefits under the terminated plan.
2. In the case of a fiduciary of a qualified replacement plan, any requirement -
1. Under section 4980(d)(2)(A) of Title 26 with respect to participation in the qualified replacement plan of active participants in the terminated plan,
2. Under section 4980(d)(2)(B) of Title 26 with respect to the receipt of assets from the terminated plan, and
3. Under section 4980(d)(2)(C) of Title 26 with respect to the allocation of assets to participants of the qualified replacement plan.
2. For purposes of this subsection -
1. Any term used in this subsection which is also used in section 4980(d) of Title 26 shall have the same meaning as when used in such section, and
2. Any reference in this subsection to Title 26 shall be a reference to Title 26 as in effect immediately after the enactment of the Omnibus Budget Reconciliation Act of 1990.

ERISA Section 405
(29 USC 1105)

1. Circumstances giving rise to liability.

In addition to any liability which he may have under any other provision of this part, a fiduciary with respect to a plan shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan in the following circumstances:

1. If he participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach;
2. If, by his failure to comply with section 1104(a)(1) of this title in the administration of his specific responsibilities which give rise to his status as a fiduciary, he has enabled such other fiduciary to commit a breach; or
3. If he has knowledge of a breach by such other fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach.
2. Assets held by two or more trustees.
1. Except as otherwise provided in subsection (d) of this section and in section 1103(a)(1) and (2) of this title, if the assets of a plan are held by two or more trustees -
1. Each shall use reasonable care to prevent a co-trustee from committing a breach; and
2. They shall jointly manage and control the assets of the plan, except that nothing in this subparagraph (B) shall preclude any agreement, authorized by the trust instrument, allocating specific responsibilities, obligations, or duties among trustees, in which event a trustee to whom certain responsibilities, obligations, or duties have not been allocated shall not be liable by reason of this subparagraph (B) either individually or as a trustee for any loss resulting to the plan arising from the acts or omissions on the part of another trustee to whom such responsibilities, obligations, or duties have been allocated.
2. Nothing in this subsection shall limit any liability that a fiduciary may have under subsection (a) of this section or any other provision of this part.
3. (A) In the case of a plan the assets of which are held in more than one trust, a trustee shall not be liable under paragraph (1) except with respect to an act or omission of a trustee of a trust of which he is a trustee.

(B) No trustee shall be liable under this subsection for following instructions referred to in section 1103(a)(1) of this title.

3. Allocation of fiduciary responsibility; designated persons to carry out fiduciary responsibilities.
1. The instrument under which a plan is maintained may expressly provide for procedures (A) for allocating fiduciary responsibilities (other than trustee responsibilities) among named fiduciaries, and (B) for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities (other than trustee responsibilities) under the plan.
2. If a plan expressly provides for a procedure described in paragraph (1), and pursuant to such procedure any fiduciary responsibility of a named fiduciary is allocated to any person, or a person is designated to carry out any such responsibility, then such named fiduciary shall not be liable for an act or omission of such person in carrying out such responsibility except to the extent that -
1. The named fiduciary violated section 1104(a)(1) of this title -
1. With respect to such allocation or designation,
2. With respect to the establishment or implementation of the procedure under paragraph (1), or
3. In continuing the allocation or designation; or
2. The named fiduciary would otherwise be liable in accordance with subsection (a) of this section.
3. For purposes of this subsection, the term "trustee responsibility" means any responsibility provided in the plan's trust instrument (if any) to manage or control the assets of the plan, other than a power under the trust instrument of a named fiduciary to appoint an investment manager in accordance with section 1102(c)(3) of this title.
4. Investment managers.
1. If an investment manager or managers have been appointed under section 1102(c)(3) of this title, then, notwithstanding subsections (a)(2) and (3) and subsection (b) of this section, no trustee shall be liable for the acts or omissions of such investment manager or managers, or be under an obligation to invest or otherwise manage any asset of the plan which is subject to the management of such investment manager.
2. Nothing in this subsection shall relieve any trustee of any liability under this part for any act of such trustee.

ERISA Section 406
(29 USC 1106)

Editor's Note: Also see Prohibited Transaction provisions of Internal Revenue Code § 4975(c)(1).

1. Transactions between plan and party in interest. Except as provided in section 1108 of this title:
1. 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 -
1. Sale or exchange, or leasing, of any property between the plan and a party in interest;
2. Lending of money or other extension of credit between the plan and a party in interest;
3. Furnishing of goods, services, or facilities between the plan and a party in interest;
4. Transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan; or
5. Acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 1107(a) of this title.
2. No fiduciary who has authority or discretion to control or manage the assets of a plan shall permit the plan to hold any employer security or employer real property if he knows or should know that holding such security or real property violates section 1107(a) of this title.
2. Transactions between plan and fiduciary. A fiduciary with respect to a plan shall not -
1. Deal with the assets of the plan in his own interest or for his own account,
2. In his individual or in any other capacity act in any 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, or
3. Receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.
3. Transfer of real or personal property to plan by party in interest.

A transfer of real or personal property by a party in interest to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes or if it is subject to a mortgage or similar lien which a party-in-interest placed on the property within the 10-year period ending on the date of the transfer.

ERISA Section 407
(29 USC 1107)

1. Percentage limitation. Except as otherwise provided in this section and section 1114 of this title:
1. A plan may not acquire or hold -
1. Any employer security which is not a qualifying employer security, or
2. Any employer real property which is not qualifying employer real property.

Editor's Note: See DOL ERISA Regulation 2550.408e: Qualifying Employer Securities and Real Estate.

2. A plan may not acquire any qualifying employer security or qualifying employer real property, if immediately after such acquisition the aggregate fair market value of employer securities and employer real property held by the plan exceeds 10 percent of the fair market value of the assets of the plan.
3. (A) After December 31, 1984, a plan may not hold any qualifying employer securities or qualifying employer real property (or both) to the extent that the aggregate fair market value of such securities and property determined on December 31, 1984, exceeds 10 percent of the greater of -
1. The fair market value of the assets of the plan, determined on December 31, 1984, or
2. The fair market value of the assets of the plan determined on January 1, 1975.

(B) Subparagraph (A) of this paragraph shall not apply to any plan which on any date after December 31, 1974; and before January 1, 1985, did not hold employer securities or employer real property (or both) the aggregate fair market value of which determined on such date exceeded 10 percent of the greater of -

1. The fair market value of the assets of the plan, determined on such date, or
2. The fair market value of the assets of the plan determined on January 1, 1975.
4. (A) After December 31, 1979, a plan may not hold any employer securities or employer real property in excess of the amount specified in regulations under subparagraph (B). This subparagraph shall not apply to a plan after the earliest date after December 31, 1974, on which it complies with such regulations.

(B) Not later than December 31, 1976, the Secretary shall prescribe regulations which shall have the effect of requiring that a plan divest itself of 50 percent of the holdings of employer securities and employer real property which the plan would be required to divest before January 1, 1985, under paragraph (2) or subsection (c) of this section (whichever is applicable).

2. Exception
1. Subsection (a) of this section shall not apply to any acquisition or holding of qualifying employer securities or qualifying employer real property by an eligible individual account plan.
2. Cross References.
1. For exemption from diversification requirements for holding of qualifying employer securities and qualifying employer real property by eligible individual account plans, see section 1104(a)(2) of this title.
2. For exemption from prohibited transactions for certain acquisitions of qualifying employer securities and qualifying employer real property which are not in violation of 10 percent limitation, see section 1108(e) of this title.
3. For transitional rules respecting securities or real property subject to binding contracts in effect on June 30, 1974, see section 1114(c) of this title.
3. Election
1. A plan which makes the election, under paragraph (3) shall be treated as satisfying the requirement of subsection (a)(3) of this section if and only if employer securities held on any date after December 31, 1974 and before January 1, 1985 have a fair market value, determined as of December 31, 1974, not in excess of 10 percent of the lesser of -
1. The fair market value of the assets of the plan determined on such date (disregarding any portion of the fair market value of employer securities which is attributable to appreciation of such securities after December 31, 1974) but not less than the fair market value of plan assets on January 1, 1975, or
2. An amount equal to the sum of -

1. The total amount of the contributions to the plan received after December 31, 1974, and prior to such date, plus
2. The fair market value of the assets of the plan, determined on January 1, 1975.

2. For purposes of this subsection, in the case of an employer security held by a plan after January 1, 1975, the ownership of which is derived from ownership of employer securities held by the plan on January 1, 1975, or from the exercise of rights derived from such ownership, the value of such security held after January 1, 1975, shall be based on the value as of January 1, 1975, of the security from which ownership was derived. The Secretary shall prescribe regulations to carry out this paragraph.
3. An election under this paragraph may not be made after December 31, 1975. Such an election shall be made in accordance with regulations prescribed by the Secretary, and shall be irrevocable. A plan may make an election under this paragraph only if on January 1, 1975, the plan holds no employer real property. After such election and before January 1, 1985 the plan may not acquire any employer real property.
4. Definitions.

For purposes of this section -

1. The term "employer security" means a security issued by an employer of employees covered by the plan, or by an affiliate of such employer. A contract to which section 1108(b)(5) of this title applies shall not be treated as a security for purposes of this section.
2. The term "employer real property" means real property (and related personal property) which is leased to an employer of employees covered by the plan, or to an affiliate of such employer. For purposes of determining the time at which a plan acquires employer real property for purposes of this section, such property shall be deemed to be acquired by the plan on the date on which the plan acquires the property or on the date on which the lease to the employer (or affiliate) is entered into, whichever is later.
3. (A) The term "eligible individual account plan" means an individual account plan which is -
1. A profit-sharing, stock bonus, thrift, or savings plan;
2. An employee stock ownership plan; or
3. A money purchase plan which was in existence on September 2, 1974, and which on such date invested primarily in qualifying employer securities. Such term excludes an individual retirement account or annuity described in section 408 of Title 26.

(B) Notwithstanding subparagraph (A), a plan shall be treated as an eligible individual account plan with respect to the acquisition or holding of qualifying employer real property or qualifying employer securities only if such plan explicitly provides for acquisition and holding of qualifying employer securities or qualifying employer real property (as the case may be). In the case of a plan in existence on September 2, 1974, this subparagraph shall not take effect until January 1, 1976.

(C) The term "eligible individual account plan" does not include any individual account plan the benefits of which are taken into account in determining the benefits payable to a participant under any defined benefit plan.

4. The term "qualifying employer real property" means parcels of employer real property -
1. If a substantial number of the parcels are dispersed geographically;
2. If each parcel of real property and the improvements thereon are suitable (or adaptable without excessive cost) for more than one use;
3. Even if all of such real property is leased to one lessee (which may be an employer, or an affiliate of an employer); and
4. If the acquisition and retention of such property comply with the provisions of this part (other than section 1104(a)(1)(B) of this title to the extent it requires diversification, and sections 1104(a)(1)(C), 1106 of this title, and subsection (a) of this section).
5. The term "qualifying employer security" means an employer security which is -
1. Stock,
2. A marketable obligation (as defined in subsection (e)), or
3. An interest in a publicly traded partnership (as defined in section 7704(b) of Title 26, but only if such partnership is an existing partnership as defined in section 10211(c)(2)(A) of the Revenue Act of 1987 (Public Law 100-203).

After December 17, 1987, in the case of a plan other than an eligible individual account plan, an employer security described in subparagraph (A) or (C) shall be considered a qualifying employer security only if such employer security satisfies the requirements of subsection (f)(1) of this section.

6. The term "employee stock ownership plan" means an individual account plan -

Editor's Note: Also see "ESOP" definition, Internal Revenue Code § 4975(e)(7).

1. Which is a stock bonus plan which is qualified, or a stock bonus plan and money purchase plan both of which are qualified, under section 401 of Title 26, and which is designed to invest primarily in qualifying employer securities, and
2. Which meets such other requirements as the Secretary of the Treasury may prescribe by regulation.
7. A corporation is an affiliate of an employer if it is a member of any controlled group of corporations (as defined in section 1563(a) of Title 26, except that "applicable percentage" shall be substituted for "80 percent" wherever the latter percentage appears in such section) of which the employer who maintains the plan is a member. For purposes of the preceding sentence, the term "applicable percentage" means 50 percent, or such lower percentage as the Secretary may prescribe by regulation. A person other than a corporation shall be treated as an affiliate of an employer to the extent provided in regulations of the Secretary. An employer which is a person other than a corporation shall be treated as affiliated with another person to the extent provided by regulations of the Secretary. Regulations under this paragraph shall be prescribed only after consultation and coordination with the Secretary of the Treasury.
8. The Secretary may prescribe regulations specifying the extent to which conversions, splits, the exercise of rights, and similar transactions are not treated as acquisitions.
9. For purposes of this section, an arrangement which consists of a defined benefit plan and an individual account plan shall be treated as 1 plan if the benefits of such individual account plan are taken into account in determining the benefits payable under such defined benefit plan.
5. Marketable obligations. For purposes of subsection (d)(5) of this section, the term "marketable obligation" means a bond, debenture, note, or certificate, or other evidence of indebtedness (hereinafter in this subsection referred to as "obligation") if -
1. Such obligation is acquired -
1. On the market, either -
1. At the price of the obligation prevailing on a national securities exchange which is registered with the Securities and Exchange Commission, or
2. If the obligation is not traded on such a national securities exchange, at a price not less favorable to the plan than the offering price for the obligation as established by current bid and asked prices quoted by persons independent of the issuer;
2. From an underwriter, at a price -
1. Not in excess of the public offering price for the obligation as set forth in a prospectus or offering circular filed with the Securities and Exchange Commission, and
2. At which a substantial portion of the same issue is acquired by persons independent of the issuer; or
3. Directly from the issuer, at a price not less favorable to the plan than the price paid currently for a substantial portion of the same issue by persons independent of the issuer;
2. Immediately following acquisition of such obligation -
1. Not more than 25 percent of the aggregate amount of obligations issued in such issue and outstanding at the time of acquisition is held by the plan, and
2. At least 50 percent of the aggregate amount referred to in subparagraph (A) is held by persons independent of the issuer; and
3. Immediately following acquisition of the obligation, not more than 25 percent of the assets of the plan is invested in obligations of the employer or an affiliate of the employer.
6. Maximum percentage of stock held by plan; time of holding or acquisition; necessity of legally binding contract
1. Stock satisfies the requirements of this paragraph if, immediately following the acquisition of such stock -
1. No more than 25 percent of the aggregate amount of stock of the same class issued and outstanding at the time of acquisition is held by the plan, and
2. At least 50 percent of the aggregate amount referred to in subparagraph (A) is held by persons independent of the issuer.
2. Until January 1, 1993, a plan shall not be treated as violating subsection (a) of this section solely by holding stock which fails to satisfy the requirements of paragraph (1) if such stock -
1. Has been so held since December 17, 1987, or
2. Was acquired after December 17, 1987, pursuant to a legally binding contract in effect on December 17, 1987, and has been so held at all times after the acquisition.
3. After December 17, 1987, no plan may acquire stock which does not satisfy the requirements of paragraph (1) unless the acquisition is made pursuant to a legally binding contract in effect on such date.

ERISA Section 408
(29 USC 1108)

1. Grant of exemptions.

The Secretary shall establish an exemption procedure for purposes of this subsection. Pursuant to such procedure, he may grant a conditional or unconditional exemption of any fiduciary or transaction, or class of fiduciaries or transactions, from all or part of the restrictions imposed by sections 1106 and 1107(a) of this title. Action under this subsection may be taken only after consultation and coordination with the Secretary of the Treasury. An exemption granted under this section shall not relieve a fiduciary from any other applicable provision of this chapter. The Secretary may not grant an exemption under this subsection unless he finds that such exemption is -

1. Administratively feasible,
2. In the interest of the plan and of its participants and beneficiaries, and
3. Protective of the rights of participants and beneficiaries of such plan.

Editor's Note: See DOL Regulation 2570.30 through .52, which replaced DOL ERISA Procedure 75-1.

Before granting an exemption under this subsection from section 1106(a) or 1107(a) of this title, the Secretary shall publish notice in the Federal Register of the pendency of the exemption, shall require that adequate notice be given to interested persons, and shall afford interested persons opportunity to present views. The Secretary may not grant an exemption under this subsection from section 1106(b) of this title unless he affords an opportunity for a hearing and makes a determination on the record with respect to the findings required by paragraphs (1), (2), and (3) of this subsection.

2. Enumeration of transactions exempted from section 1106 prohibitions. The prohibitions provided in section 1106 of this title shall not apply to any of the following transactions:
1. Any loans made by the plan to parties in interest who are participants or beneficiaries of the plan if such loans -

Editor's Note: Also see participant loan provisions of Internal Revenue Code § 4975(d)(1) and DOL Regulation 2550.408b-1.

1. Are available to all such participants and beneficiaries on a reasonably equivalent basis,
2. Are not made available to highly compensated employees (within the meaning of section 414(q) of Title 26), in an amount greater than the amount made available to other employees,
3. Are made in accordance with specific provisions regarding such loans set forth in the plan,
4. Bear a reasonable rate of interest, and
5. Are adequately secured.
2. Contracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefore.

Editor's Note: Also see ancillary services provisions of Internal Revenue Code § 4975(d)(2).

3. A loan to an employee stock ownership plan (as defined in section 1107(d)(6) of this title), if -

Editor's Note: Also see ESOP loan provisions of Internal Revenue Code § 4975(d)(3).

1. Such loan is primarily for the benefit of participants and beneficiaries of the plan, and
2. Such loan is at an interest rate which is not in excess of a reasonable rate.

If the plan gives collateral to a party in interest for such loan, such collateral may consist only of qualifying employer securities (as defined in section 1107(d)(5) of this title).

4. The investment of all or part of a plan's assets in deposits which bear a reasonable interest rate in a bank or similar financial institution supervised by the United States or a State, if such bank or other institution is a fiduciary of such plan and if -

Editor's Note: Also see deposit provisions of Internal Revenue Code § 4975(d)(4).

1. The plan covers only employees of such bank or other institution and employees of affiliates of such bank or other institution, or
2. Such investment is expressly authorized by a provision of the plan or by a fiduciary (other than such bank or institution or affiliate thereof) who is expressly empowered by the plan to so instruct the trustee with respect to such investment.
5. Any contract for life insurance, health insurance, or annuities with one or more insurers which are qualified to do business in a State, if the plan pays no more than adequate consideration, and if each such insurer or insurers is -
1. The employer maintaining the plan, or
2. A party in interest which is wholly owned (directly or indirectly) by the employer maintaining the plan, or by any person which is a party in interest with respect to the plan, but only if the total premiums and annuity considerations written by such insurers for life insurance, health insurance, or annuities for all plans (and their employers) with respect to which such insurers are parties in interest (not including premiums or annuity considerations written by the employer maintaining the plan) do not exceed 5 percent of the total premiums and annuity considerations written for all lines of insurance in that year by such insurers (not including premiums or annuity considerations written by the employer maintaining the plan).
6. The providing of an ancillary service by a bank or similar financial institution supervised by the United States or a State, if such bank or other institution is a fiduciary of such plan, and if -

Editor's Note: Also see bank ancillary services provisions of Internal Revenue Code § 4975(d)(6).

1. Such bank or similar financial institution has adopted adequate internal safeguards which assure that the providing of such ancillary service is consistent with sound banking and financial practice, as determined by Federal or State supervisory authority, and
2. The extent to which such ancillary service is provided is subject to specific guidelines issued by such bank or similar financial institution (as determined by the Secretary after consultation with Federal and State supervisory authority), and adherence to such guidelines would reasonably preclude such bank or similar financial institution from providing such ancillary service -
1. In an excessive or unreasonable manner, and
2. In a manner that would be inconsistent with the best interests of participants and beneficiaries of employee benefit plans.

Such ancillary services shall not be provided at more than reasonable compensation.

7. The exercise of a privilege to convert securities, to the extent provided in regulations of the Secretary, but only if the plan receives no less than adequate consideration pursuant to such conversion.
8. Any transaction between a plan and -
1. A common or collective trust fund or pooled investment fund maintained by a party in interest which is a bank or trust company supervised by a State or Federal agency or
2. A pooled investment fund of an insurance company qualified to do business in a State, if -

Editor's Note: Also see collective investment fund provisions of Internal Revenue Code § 4975(d)(8).

1. The transaction is a sale or purchase of an interest in the fund,
2. The bank, trust company, or insurance company receives not more than reasonable compensation, and
3. Such transaction is expressly permitted by the instrument under which the plan is maintained, or by a fiduciary (other than the bank, trust company, or insurance company, or an affiliate thereof) who has authority to manage and control the assets of the plan.
9. The making by a fiduciary of a distribution of the assets of the plan in accordance with the terms of the plan if such assets are distributed in the same manner as provided under section 1344 of this title (relating to allocation of assets).
10. Any transaction required or permitted under part 1 of subtitle E of subchapter III of this chapter.
11. A merger of multiemployer plans, or the transfer of assets or liabilities between multiemployer plans, determined by the Pension Benefit Guaranty Corporation to meet the requirements of section 1411 of this title.
12. The sale by a plan to a party in interest on or after December 18, 1987, of any stock, if -
1. The requirements of paragraphs (1) and (2) of subsection (e) of this section are met with respect to such stock,
2. On the later of the date on which the stock was acquired by the plan, or January 1, 1975, such stock constituted a qualifying employer security (as defined in section 1107(d)(5) of this title as then in effect), and
3. Such stock does not constitute a qualifying employer security (as defined in section 1107(d)(5) of this title as in effect at the time of the sale).
13. Any transfer in a taxable year beginning before January 1, 2001, of excess pension assets from a defined benefit plan to a retiree health account in a qualified transfer permitted under section 420 of Title 26 (as in effect on January 1, 1996).
3. Fiduciary benefits and compensation not prohibited by section 1106. Nothing in section 1106 of this title shall be construed to prohibit any fiduciary from -
1. Receiving any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries;
2. Receiving any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of his duties with the plan; except that no person so serving who already receives full-time pay from an employer or an association of employers, whose employees are participants in the plan, or from an employee organization whose members are participants in such plan shall receive compensation from such plan, except for reimbursement of expenses properly and actually incurred; or
3. Serving as a fiduciary in addition to being an officer, employee, agent, or other representative of a party in interest.
4. Owner-employees; family members; shareholder employees. Section 1107(b) of this title and subsections (b), (c), and (e) of this section shall not apply to any transaction in which a plan, directly or indirectly -
1. Lends any part of the corpus or income of the plan to;
2. Pays any compensation for personal services rendered to the plan to; or
3. Acquires for the plan any property from or sells any property to; any person who is with respect to the plan an owner-employee (as defined in section 401(c)(3) of Title 26), a member of the family (as defined in section 267(c)(4) of Title 26) of any such owner-employee, or a corporation controlled by any such owner-employee through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. For purposes of this subsection a shareholder employee (as defined in section 1379 of Title 26 as in effect on the day before the date of the enactment of the Subchapter § Revision Act of 1982) and a participant or beneficiary of an individual retirement account or individual retirement annuity described in section 408 of Title 26 or a retirement bond described in section 409 of Title 26 (as effective for obligations issued before January 1, 1984) and an employer or association of employers which establishes such an account or annuity under section 408(c) of Title 26 shall be deemed to be an owner-employee.
5. Acquisition or sale by plan of qualifying employer securities; acquisition, sale, or lease by plan of qualifying employer real property.

Sections 1106 and 1107 of this title shall not apply to the acquisition or sale by a plan of qualifying employer securities (as defined in section 1107(d)(5) of this title) or acquisition, sale or lease by a plan of qualifying employer real property (as defined in section 1107(d)(4) of this title) -

1. If such acquisition, sale, or lease is for adequate consideration (or in the case of a marketable obligation, at a price not less favorable to the plan than the price determined under section 1107(e)(1) of this title),
2. If no commission is charged with respect thereto, and
3. If -

1. The plan is an eligible individual account plan (as defined in section 1107(d)(3) of this title), or
2. In the case of an acquisition or lease of qualifying employer real property by a plan which is not an eligible individual account plan, or of an acquisition of qualifying employer securities by such a plan, the lease or acquisition is not prohibited by section 1107(a) of this title.

6. Applicability of statutory prohibitions to mergers or transfers. Section 1106(b)(2) of this title shall not apply to any merger or transfer described in subsection (b)(11) of this section.

ERISA Section 409
(29 USC 1109)

1. Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made through use of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. A fiduciary may also be removed for a violation of section 1111 of this title.
2. No fiduciary shall be liable with respect to a breach of fiduciary duty under this subchapter if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary.

ERISA Section 410
(29 USC 1110)

1. Except as provided in sections 1105(b)(1) and 1105(d) of this title, any provision in an agreement or instrument which purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation, or duty under this part shall be void as against public policy.
2. Nothing in this subpart shall preclude -
1. A plan from purchasing insurance for its fiduciaries or for itself to cover liability or losses occurring by reason of the act or omission of a fiduciary, if such insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by such fiduciary;
2. A fiduciary from purchasing insurance to cover liability under this part from and for his own account; or
3. An employer or an employee organization from purchasing insurance to cover potential liability of one or more persons who serve in a fiduciary capacity with regard to an employee benefit plan.

ERISA Section 411
(29 USC 1111)

1. Conviction or imprisonment. No person who has been convicted of, or has been imprisoned as a result of his conviction of, robbery, bribery, extortion, embezzlement, fraud, grand larceny, burglary, arson, a felony violation of Federal or State law involving substances defined in section 802(6) of Title 21, murder, rape, kidnapping, perjury, assault with intent to kill, any crime described in section 80a-9(a)(1) of Title 15, a violation of any provision of this chapter, a violation of section 186 of this title, a violation of chapter 63 of Title 18, a violation of section 874, 1027, 1503, 1505, 1506, 1510, 1951, or 1954 of Title 18, a violation of the Labor-Management Reporting and Disclosure Act of 1959 (29 USC 401), any felony involving abuse or misuse of such person's position or employment in a labor organization or employee benefit plan to seek or obtain an illegal gain at the expense of the members of the labor organization or the beneficiaries of the employee benefit plan, or conspiracy to commit any such crimes or attempt to commit any such crimes, or a crime in which any of the foregoing crimes is an element, shall serve or be permitted to serve -
1. As an administrator, fiduciary, officer, trustee, custodian, counsel, agent, employee, or representative in any capacity of any employee benefit plan,
2. As a consultant or adviser to an employee benefit plan, including but not limited to any entity whose activities are in whole or substantial part devoted to providing goods or services to any employee benefit plan, or
3. In any capacity that involves decision making authority or custody or control of the moneys, funds, assets, or property of any employee benefit plan, during or for the period of thirteen years after such conviction or after the end of such imprisonment, whichever is later, unless the sentencing court on the motion of the person convicted sets a lesser period of at least three years after such conviction or after the end of such imprisonment, whichever is later, or unless prior to the end of such period, in the case of a person so convicted or imprisoned -
1. His citizenship rights, having been revoked as a result of such conviction, have been fully restored, or
2. If the offense is a Federal offense, the sentencing judge or, if the offense is a State or local offense, the United States district court for the district in which the offense was committed, pursuant to sentencing guidelines and policy statements under section 994(a) of Title 28, determines that such person's service in any capacity referred to in paragraphs (1) through (3) would not be contrary to the purposes of this subchapter. Prior to making any such determination the court shall hold a hearing and shall give notice to such proceeding by certified mail to the Secretary of Labor and to State, county, and Federal prosecuting officials in the jurisdiction or jurisdictions in which such person was convicted. The court's determination in any such proceeding shall be final. No person shall knowingly hire, retain, employ, or otherwise place any other person to serve in any capacity in violation of this subsection.

Notwithstanding the preceding provisions of this subsection, no corporation or partnership will be precluded from acting as an administrator, fiduciary, officer, trustee, custodian, counsel, agent, or employee of any employee benefit plan or as a consultant to any employee benefit plan without a notice, hearing, and determination by such court that such service would be inconsistent with the intention of this section.

2. Penalty. Any person who intentionally violates this section shall be fined not more than $10,000 or imprisoned for not more than five years, or both.
3. Definitions. For the purpose of this section -
1. A person shall be deemed to have been "convicted" and under the disability of "conviction" from the date of the judgment of the trial court, regardless of whether that judgment remains under appeal.
2. The term "consultant" means any person who, for compensation, advises, or represents an employee benefit plan or who provides other assistance to such plan, concerning the establishment or operation of such plan.
3. A period of parole or supervised release shall not be considered as part of a period of imprisonment.
4. Payment of salary into escrow. Whenever any person -
1. By operation of this section, has been barred from office or other position in an employee benefit plan as a result of a conviction, and
2. Has filed an appeal of that conviction, any salary which would be otherwise due such person by virtue of such office or position, shall be placed in escrow by the individual or organization responsible for payment of such salary. Payment of such salary into escrow shall continue for the duration of the appeal or for the period of time during which such salary would be otherwise due, whichever period is shorter. Upon the final reversal of such person's conviction on appeal, the amounts in escrow shall be paid to such person. Upon the final sustaining of that person's conviction on appeal, the amounts in escrow shall be returned to the individual or organization responsible for payments of those amounts. Upon final reversal of such person's conviction, such person shall no longer be barred by this statute from assuming any position from which such person was previously barred.

ERISA Section 412
(29 USC 1112)

1. Requisite bonding of plan officials. Every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan (hereafter in this section referred to as "plan official") shall be bonded as provided in this section; except that -
1. Where such plan is one under which the only assets from which benefits are paid are the general assets of a union or of an employer, the administrator, officers, and employees of such plan shall be exempt from the bonding requirements of this section, and
2. No bond shall be required of a fiduciary (or of any director, officer, or employee of such fiduciary) if such fiduciary -
1. Is a corporation organized and doing business under the laws of the United States or of any State;and
2. Is authorized under such laws to exercise trust powers or to conduct an insurance business;and
3. Is subject to supervision or examination by Federal or State authority; and
4. Has at all times a combined capital and surplus in excess of such a minimum amount as may be established by regulations issued by the Secretary, which amount shall be at least $1,000,000. Paragraph (2) shall apply to a bank or other financial institution which is authorized to exercise trust powers and the deposits of which are not insured by the Federal Deposit Insurance Corporation, only if such bank or institution meets bonding or similar requirements under State law which the Secretary determines are at least equivalent to those imposed on banks by Federal law; or
5. Is registered as a broker or dealer under Section 15(b) of the Securities Exchange Act of 1934 if the broker or dealer is subject to the fidelity bond requirements of a self-regulatory organization.

The amount of such bond shall be fixed at the beginning of each fiscal year of the plan. Such amount shall be not less than 10 per centum of the amount of funds handled. In no case shall such bond be less than $1,000 nor more than $500,000, except in the case of a plan that holds employer securities, in which case the maximum amount of such bond shall be $1,000,000. The Secretary, however, after due notice and opportunity for hearing to all interested parties, and after consideration of the record, may prescribe an amount in excess of $500,000, subject to the 10 per centum limitation of the preceding sentence. For purposes of fixing the amount of such bond, the amount of funds handled shall be determined by the funds handled by the person, group, or class to be covered by such bond and by their predecessor or predecessors, if any, during the preceding reporting year, or if the plan has no preceding reporting year, the amount of funds to be handled during the current reporting year by such person, group, or class, estimated as provided in regulations of the Secretary. Such bond shall provide protection to the plan against loss by reason of acts of fraud or dishonesty on the part of the plan official, directly or through connivance with others. Any bond shall have as surety thereon a corporate surety company which is an acceptable surety on Federal bonds under authority granted by the Secretary of the Treasury pursuant to sections 9304-9308 of Title 31. Any bond shall be in a form or of a type approved by the Secretary, including individual bonds or schedule of blanket forms of bonds which cover a group or class.

2. Unlawful acts. It shall be unlawful for any plan official to whom subsection (a) of this section applies, to receive, handle, disburse, or otherwise exercise custody or control of any of the funds or other property of any employee benefit plan, without being bonded as required by subsection (a) of this section and it shall be unlawful for any plan official of such plan, or any other person having authority to direct the performance of such functions, to permit such functions, or any of them, to be performed by any plan official, with respect to whom the requirements of subsection (a) of this section have not been met.
3. Conflict of interest prohibited in procuring bonds. It shall be unlawful for any person to procure any bond required by subsection (a) of this section from any surety or other company or through any agent or broker in whose business operations such plan or any party in interest in such plan has any control or significant financial interest, direct or indirect.
4. Exclusiveness of statutory basis for bonding requirement for persons handling funds or other property of employee benefit plans.

Nothing in any other provision of law shall require any person, required to be bonded as provided in subsection (a) of this section because he handles funds or other property of an employee benefit plan, to be bonded insofar as the handling by such person of the funds or other property of such plan is concerned.

5. Regulations. The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section including exempting a plan from the requirements of this section where he finds that -
1. Other bonding arrangements or
2. The overall financial condition of the plan would be adequate to protect the interests of the beneficiaries and participants.

When, in the opinion of the Secretary, the administrator of a plan offers adequate evidence of the financial responsibility of the plan, or that other bonding arrangements would provide adequate protection of the beneficiaries and participants, he may exempt such plan from the requirements of this section.

ERISA Section 413
(29 USC 1113)

No action may be commenced under this subchapter with respect to a fiduciary's breach of any responsibility, duty, or obligation under this part, or with respect to a violation of this part, after the earlier of -

1. Six years after (A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation, or
2. Three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation; except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation.

ERISA Section 502
(29 USC 1132)

(i) Administrative assessment of civil penalty. In the case of a transaction prohibited by section 406 (29 USC 1106) by a party in interest with respect to a plan to which this part applies, the Secretary may assess a civil penalty against such party in interest. The amount of such penalty may not exceed 10 percent of the amount involved in each such transaction (as defined in section 4975(f)(4) of the Internal Revenue Code, amended as of 1997) for each year or part thereof during which the prohibited transaction continues, except that, if the transaction is not corrected (in such manner as the Secretary shall prescribe in regulations which shall be consistent with section 4975(f)(5) of such Code within 90 days after notice from the Secretary (or such longer period as the Secretary may permit), such penalty may be in an amount not more than 100 percent of the amount involved. This subsection shall not apply to a transaction with respect to a plan described in section 4975(e)(1) of such Code.

1. Civil penalties on violations by fiduciaries. In the case of -
1. Any breach of fiduciary responsibility under (or any violation of) part 4 by a fiduciary, or
2. Any knowing participation in such breach or violation by any other person,

the Secretary shall assess a civil penalty against such fiduciary or other person in an amount equal to 20 percent of the applicable recovery amount.

2. For purposes of paragraph (l), the term "applicable recovery amount" means any amount which is recovered from a fiduciary or other person with respect to a breach or violation described in paragraph (1) -
1. Pursuant to any settlement agreement with the Secretary, or
2. Ordered by a court to be paid by such fiduciary or other person to a plan or its participants and beneficiaries in a judicial proceeding instituted by the Secretary under subsection (a)(2) or (a)(5).
3. The Secretary may, in the Secretary's sole discretion, waive or reduce the amount of the penalty under paragraph (l) if the Secretary determines in writing that -
1. The fiduciary or other person acted reasonably and in good faith, or
2. It is reasonable to expect that the fiduciary or other person will not be able to restore all losses to the plan without severe financial hardship unless such waiver or reduction is granted.
4. The penalty imposed on a fiduciary or other person under this subsection with respect to any transaction shall be reduced by the amount of any penalty or tax imposed on such fiduciary or other person with respect to such transaction under subsection (i) of this section and section 4975 of the Internal Revenue Code of 1986.

ERISA Section 3

Section-by-Section Interpretations

Regulations, Advisory Opinions, Court Cases, Opinion Letters,and Class Exemptions

10-27-94

1. Conference Report

See the discussion of the term "party in interest" at page 323 of the Congressional Conference Report.

2. Prohibited Transaction Class Exemptions (PTE)

[Plans] Two or more multi-employer plans or multiple employer plans are not parties in interest or disqualified persons with respect to each other merely because they are maintained by the same plan sponsors. However, a multi-employer plan or a multiple employer plan may be a party in interest or a disqualified person with respect to another multiemployer plan or multiple employer plan for other reasons (for example, one plan providing services to another). Final PTE 76-1; AO 77-47.

3. Advisory Opinions
1. [Affiliates] A corporation 50% or more of which is owned by a more than 50% shareholder of the employer maintaining the plan is a party in interest. Proposed PTE I-492.
2. [Banks] A savings and loan association is not a party in interest merely because plan assets are held on deposit. AO 77-11; AO 79-10.
3. [Broker-Dealers] Broker-dealers who execute securities transactions for plans are parties in interest. AO 76-76.
4. [Custodians] Custodians of plan assets are parties in interest. AO 76-76; PLR 7907091.
5. [Employer] Employers are parties in interest. WSB 77-14; PLR 7847034. Directors of an employer are parties in interest. WSB 77-14. An employer council is a party in interest because it acts on behalf of employers. AO 76-103.
6. [Employer] An employer of employees covered by the plan is a party in interest pursuant to ERISA Section 3(14)(C) even if it is merely an affiliate or subsidiary of the employer plan sponsor. Thus, absent a statutory or administrative exemption, the exchange of common stock for preferred stock and the cancellation of a note in connection therewith as a transaction between the affiliate corporation and the plan would constitute a prohibited transaction under Section 406(a)(1)(A). AO 81-34A.
7. [Insurance Companies] Insurance companies are not parties in interest merely because they issue group insurance policies to plans. AO 76-36.
8. [Mergers & Acquisitions] A corporation proposes to acquire all of an unrelated third party's assets. In connection therewith, the, acquiring corporation will not assume, adopt or maintain the existing plan of the corporation to be acquired. The acquiring corporation desires to purchase or lease a building owned by the plan. Certain employees of the acquired corporation will become employees of the acquiring corporation. The term party in interest includes in Subsection (c) an employer any of whose employees are covered by the plan. However, the definition of an employer under Section 3(14)(C) must be viewed in light of the overall statutory framework of ERISA, including Section 3(5). That section provides in relevant part that the term "employer" means any person acting directly as an employer or indirectly in the interest of an employer in relation to an employee benefit plan. Since the acquiring corporation had no relationship with the plan in the past and will not assume, maintain or adopt the plan or its accompanying trust after the acquisition, that entity is not a Section 3(14)(C) "party in interest" to the plan upon its acquisition of substantially all of the plan sponsor's assets. Advisory Opinion 81-78A.
9. [Ownership] A person is not a 50% owner of a corporation or partnership under Section 3(14)(G) if such 50% ownership interest will not be acquired until sometime in the future. AO 75-147; AO 77-83.
10. [Partners] Section 3(14)(I) applies only to 10% partners in a party in interest, not 10% partners with a party in interest in a partnership that is not itself a party in interest. AO 75-147; AO 77-83.
11. [Relatives] Relatives are parties in interest. AO 75-137.
12. [Service Providers] Service providers are parties in interest even if they receive no compensation from the plan. WSB 78-17. However, a person who only provides services to the employer before the plan is established is not a party in interest. AO 76-65.
13. [Trustees] Trustees of a plan and employees of a trustee are parties in interest. AO 77-84.
14. [Unions] Unions are parties in interest. AO 76-91; WSB 78-25. Employees of a union are parties in interest. AO 76-91. However, the mere fact that union officers are also directors and employees of a corporation does not make such corporation a party in interest. AO 76-120.
4. Court Decisions
1. Trustees of a pension or welfare plan are parties in interest to the plan under Section 3(14)(A). Marshall v. Snyder, 430 F. Supp. 1224 (E.D.N.Y. 1977), aff'd in part, 572 F.2d 894 (2d Cir. 1978).
2. Trustees and fiduciaries of employee benefit plans are parties in interest within the meaning of ERISA Section 3(14)(A). Donovan v. Bryans, 566 F. Supp. 1258, 4 EBC 1772 (E.D.Pa. 1983). A party in interest as defined by ERISA Section 3(14) includes any fiduciary and any employer of employees covered by an employee benefit plan. Brock v. Gilliken, 677 F. Supp. 398, 9 EBC 1803 (E.D.N.Y. 1987).
3. In an action by terminated employee claiming applicability of retroactive amendment in employee stock ownership plan, under ERISA Section 3(14) a party in interest includes the employer and its officers, directors and major stockholders. Allen v. The Katz Agency, Inc. Employee Stock Ownership Plan, 677 F.2d 193, 3 EBC 1352 (2d Cir. 1982).
4. A construction company is deemed a party in interest under Section 3(14)(G) when its sole stock owner and president is the trustee of an employee benefit plan and the company receives loans from such plan. Brock v. Gilliken, 677 F. Supp. 398, 9 EBC 1803 (E.D.N.Y. 1987).
5. A law firm that receives excessive amounts of money in relationship to services rendered by the firm and benefits received by the members of the represented employee welfare plan is treated as a party in interest in an action alleging the trustees breached their fiduciary duties by overpaying the law firm. Benvenuto v. Schneider 678 F. Supp. 51, 9 EBC 1528 (E.D.N.Y. 1988).

1. Conference Report

The Congressional Conference Report does not discuss the term "relative."

2. Advisory Opinions

The brother of a fiduciary is not a relative under Section 3(15) and, therefore, is not a party in interest under Section 3(14)(F). AO 77-05.

1. Conference Report

The Congressional Conference Report does not discuss the definition of the term "adequate consideration."

2. Regulations

DOL ERISA Regulation 2510.3-18(b) was proposed in 1988 but has not yet been adopted. It provided guidance on how thinly-traded securities should be valued.

3. Advisory Opinions
1. In the absence of regulations under Section 3(18), securities for which there is no generally recognized market should be valued by the trustees or other appropriate plan fiduciary by making a good faith determination of the fair market value of the securities, utilizing recognized methods of determining value. AO 75-141; AO 76-16.
2. If securities are publicly traded in the over-the-counter market and if there are current bid and asked prices quoted by persons independent of the issuer and of any party in interest, a plan may not purchase a controlling block of stock at a price greater than such current bid and asked prices. AO 76-52.
3. Reliance by a plan trustee on a ruling received from the IRS that a method of determining the fair market value of book value shares constitutes a reasonable method of determining fair market value for purposes of Treasury Regulation 1.421-7(e)(2) would be considered evidence that the trustee's determination of fair market value was made in good faith for purposes of Section 3(18)(B). AO 77-35.
4. Court Decisions
1. [ESOP - Stock Valuation] Where an ESOP purchases securities from a sponsoring company that does not have a generally recognized market, adequate consideration as defined in ERISA requires the trustee to exercise objective good faith by prudently using sound business principles of evaluation for the sole benefit of the employees' plan. Trustees who relied on appraisals that were 13 and 20 months old did not exercise good faith and sound business principles, and the amount paid for the securities purchased by the plan was more than adequate consideration. Donovan v. Cunningham, 716 F.2d 1455, 4 EBC 2329 (5th Cir. 1983).
2. Adequate consideration is the price for the stock quoted on the American Stock Exchange. The fact that a sale of the stock over a longer period of time might have resulted in a higher return or that a premium might have been obtained for the sale of a large block need not be taken into account. Leonard v. Drug Fair, Inc., No. 78-1335, Fed. Sec. L. Rep. (CCH) 97,144 (D.D.C. 1979).

1. Conference Report

See the discussion of the term "fiduciary" at page 323 of the Congressional Conference Report.

2. Regulations
1. Refer to DOL Regulation 2510.3-21 and IRS Regulation 54.4975-9.
2. The regulation clarifies the applicability of the definition fiduciary to persons who provide investment advice to plans and to securities brokers and dealers who execute securities transactions for plans. DOL Regulation 2510.3-21(c)-(e).
3. A person is a fiduciary only to the extent of his or her fiduciary responsibilities to a plan. DOL Regulation 2510.3-21(c)(2), (d)(2).
4. As a general matter, a person (e.g., a securities broker) is not a fiduciary to a plan if he or she does not know, and has no reason to know, that he or she is acting for a plan. Preamble to DOL Regulation 2510.3-21(c)-(e).
5. A fee or other compensation, direct or indirect, for the rendering of investment advice to a plan, within the meaning of Section 3(21)(A)(ii), should be deemed to include all fees or other compensation incident to the transaction in which the investment advice to the plan has been rendered or will be rendered. This may include, for example, brokerage commissions, mutual fund sales commissions and insurance sales commissions. Preamble to DOL ERISA Regulation 2510.3-21(c)-(e).
6. Depending on the facts and circumstances, a sales presentation and recommendations made to a plan fiduciary by an insurance agent or broker, pension consultant or mutual fund principal underwriter in connection with insurance or annuity contracts or mutual funds may constitute investment advice under Section 3(21). Preamble to DOL ERISA Regulation 2510.3-21(c)-(e).
7. A person who exercises discretion in the administration of a plan by making final decisions on appeals from claim denials is a fiduciary to the plan under Section 3(21)(A)(iii) even if the plan documents fail to state do the person is a named fiduciary or merely a fiduciary. Preamble to DOL ERISA Regulation 2560.503-1 (Claims Procedure).
3. Interpretive Bulletins
1. [Trustees] A plan trustee and a plan administrator are plan fiduciaries because of the nature of their functions for a plan. IB 75-8, Question D-3.
2. People who perform purely ministerial functions for a plan within a framework of policies, interpretations, rules, practices and procedures made by others are not fiduciaries under Section 3(21). IB 75-8, Question D-2. This question contains examples of purely ministerial functions.
3. An officer, director, or employee of an employer maintaining a plan will not be a fiduciary for the plan, unless he or she has or exercises any of the authority, responsibility or control described in Section 3(21)(A) or provides investment advice to the plan for a fee or other compensation. IB 75-8, Questions D-4 and D-5.
4. An attorney, accountant, actuary, or consultant for a plan who neither exercises nor has any of the responsibilities, authority or control described in Section 3(21)(A), and who does not provide investment advice to the plan for a fee or other compensation, is not a fiduciary to the plan under Section 3(21). IB 75-5, Question D-1.
5. A person who merely calculates the amount of benefits to which a participant is entitled in accordance with a formula contained in a plan document is not a fiduciary under Section 3(21). However, a person who has the final authority to authorize or disallow claims for benefits based on an interpretation of plan provisions relating to eligibility for benefits would be a fiduciary under Section 3(21). IB 75-8, Question D-3.
4. Prohibited Transaction Class Exemptions (PTE)
1. [Broker-Dealers] Where a broker-dealer acts as an investment adviser in recommending securities transactions and a second fiduciary decides whether each such transaction should be entered into, the broker-dealer may be a fiduciary by reason of providing investment advice within the meaning of ERISA Section 3(21)(A)(ii) and Code Section 4975(e)(3)(B). However, since he or she would not have the power to manage, acquire, or dispose of plan assets without the approval of the second fiduciary, he or she would not be an investment manager as that term is defined in ERISA Section 3(38). Final PTE C 78-10.
2. [Investment Advisor] A person may be a fiduciary by reason of being an investment adviser even if such person does not exercise investment discretion as that term is defined by the Securities and Exchange Commission under Section 3(a)(35) of the Securities Exchange Act of 1934. Final PTE C 78-10.
5. Advisory Opinions
1. The term "investment discretion" is defined in Section 3(a)(35) of the Securities Exchange Act of 1934. In general, a person who exercises investment discretion for a plan under that definition would also be a fiduciary with respect to the plan as defined in Section 3(21) of ERISA and Section 4975(e)(3) of the Code. A person also would also be a fiduciary as the result of rendering investment advice for compensation to a plan. Proposed Extension of Paragraph I(a) of PTE C 75-1.
2. [Banks] The mere fact that a plan invests in a savings account or certificate of deposit of a savings and loan association does not make the association a plan fiduciary. AO 77-11; AO 79-10.
3. [Custodians] A custodian of plan assets who has no discretionary authority or control over the management of the plan or the disposition of the assets, and who does not provide investment advice to the plan, is not a fiduciary under Section 3(21)(A). PLR 7907091.
4. [Insurance Companies] An insurance company maintaining a separate account in which a plan invests is a fiduciary to the plan. Proposed PTE C 78-19.
5. [Investments] A partnership in which a plan has invested does not become a plan fiduciary merely by reason of such investment. WSB 78-17.
6. [Plan Committee Members] The individuals serving on one investment committee of a plan with responsibility for managing plan assets and appointing investment managers for the plan are fiduciaries under Section 3(21)(A). AO 76-15.
7. [Trust Department Staff] A person who merely makes a report to plan fiduciaries on a plan's asset management staff and serves on a committee that advises Plan fiduciaries on plan investment policies and objectives will not be a plan fiduciary under Section 3(21)(A) or ERISA Regulations Section 2510.3-21. AO 77-68.
8. The advice and recommendations made to plans and plan fiduciaries by insurance agents and brokers, pension consultants and mutual fund principal underwriters (or their employees) regarding plan purchases of insurance contacts or annuities or mutual fund shares constitutes advice as to the value of securities or other property or recommendations as to the advisability of investing in, purchasing or selling securities or other property and could constitute investment advice so as to classify the persons who furnish such advice as fiduciaries if it is rendered under certain circumstances. Proposed PTE C 77-9; WSB 79-99.
6. Court Decisions
1. [General] The definition of fiduciary under ERISA Section 3(21) is to be broadly construed. Thus, fiduciary should be defined not only by reference to particular titles, such as trustee, but also by considering the authority that a particular person has or exercises over an employee benefit plan. Donovan v. Mercer, 747 F.2d 304, 5 EBC 2512 (5th Cir. 1984).
2. [General] ERISA fiduciary status is determined by focusing on the function performed by the individual rather than on the individual's title; an accounting firm was a fiduciary to the extent that it controlled whether or not contributions were returned to plan participants. Blan v. Marshall and Lasserman, 812 F.2d 810, 8 EBC 1495 (2d Cir. 1987).
3. [General] Because the terms of an employee benefit plan conferred authority on defendants to exercise discretion in the management of the plan and its assets, the defendants were fiduciaries as defined by ERISA Section 3(21). Donovan v. Bryans, 566 F. Supp. 1258, 4 EBC 1772 (E.D.Pa. 1983).
4. [General] ERISA permits the named plan fiduciary the option of delegating the responsibility of investing plan assets to a professional investment adviser who then might assume the ERISA fiduciary obligations to the plan, including the duties of care and loyalty. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 8 EBC 2457 (2d Cir. 987).
5. [General] A fiduciary continues in his status as such absent any clear resignation or removal under permissible circumstances. Marshall v. Dekeyser, 485 F.Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
6. [General] ERISA Section 3(21)(A) limits the scope of both fiduciary status and responsibility; a person is a fiduciary with only for those aspects of the plan over which he or she exercises control or authority, and his or her fiduciary duty extends solely to those functions. Jury instructions should delineate the requisite control necessary to consider a person a fiduciary and warn jurors against drawing inferences of control or authority merely from a person's status, including status as a former employer, an officer, a principal shareholder or a director. Sommers Drug Stores Co. Employee Profit Sharing Trust v. Corrigan Enterprises, Inc., 793 F.2d 1456, 7 EBC 1782 (5th Cir. 1986), cert. denied, 479 U.S. 1089 (1987).
7. [General] Under ERISA Section 3(21), a person is a fiduciary to a plan to the extent that he or she has any discretionary authority or discretionary responsibility in the administration of such plan. A duty to report "difficulties" concerning borrowers interest payments includes authority, responsibility and discretion to determine what constitutes difficulties. One who is conferred such authority is a fiduciary as defined by ERISA Section 3(21). Davidson v. Cook, 567 F.Supp. 225, 4 EBC 1816 (E.D.Va. 1983), aff'd, 734 F.2d 10 (4th Cir. 1984).
8. [Attorneys] Attorneys who counsel a plan sponsor, members of a plan investment committee, and stockbrokers or dealers who recommend certain securities and then participate in the purchase or sale of the securities and receive a commission for their services, may be plan fiduciaries by reason of providing investment advice for a fee or other compensation. Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978).
9. [Broker-Dealer] A stockbroker is a fiduciary as defined by ERISA when, without authorization, he invests the assets of an employee benefit plan in unsuitable, highly speculative securities and disregards the trustee's instructions to liquidate. Metzner v. D. H. Blair & Co., Inc., 663 F. Supp. 716, Fed. Sec. L. Rep. (CCH) 993,306, 8 EBC 2159 (S.D.N.Y. 1987).
10. [Custodians] A plan custodian can be a fiduciary, but only if the custodian possesses the requisite discretionary authority and discretionary control required by Section 3(21). The parenthetical language after "any fiduciary" in Section 3(14)(A) does not expand upon persons who are fiduciaries. A person is only a fiduciary under Section 3(14)(A) if such person is a fiduciary under Section 3(21). The Hibernia Bank v. International Brotherhood of Teamsters, Chauffeurs, Warehouseman and Helpers of America, 411 F.Supp. 478 (N.D.Cal. 1976).
11. [Insurance Agent] An insurance agent, who was solely responsible for formulating the specifications of an employee plan, represents himself as the administrator of the plan and subsequently gives investment advice regarding such plan, even though he was never formally appointed as plan administrator nor paid a fee for his services, is deemed a fiduciary as defined by Section 3(21)(A). Applying the agency theory of apparent authority, the insurance company, as the principal of the insurance agent, is designated a fiduciary as well. Miller v. Lay Trucking C&, Inc, 606 F. Supp 1326 (N.D.Ind. 1985).
12. [Insurance Companies] Congress did not want to make an insurance company that sells a standard annuity contract - one that provides "benefits the amount of which is guaranteed by the insurer" - a fiduciary toward the contract's purchaser. However, where pension trustees did not buy an insurance contract with a fixed payment but turned over the assets of the pension plan to an insurance company to manage with full investment discretion, subject only to a modest income guarantee, that company was a fiduciary as defined in Section 3(21) of ERISA. Amato v. Western Union International, Inc., 596 F. Supp. 963, 5 EBC 2718 (S.D.N.Y. 1984), aff'd in part and rev'd in part, 773 F.2d 1402 (2d Cir. 1985).
13. [Mergers & Acquisitions] An individual acted as a plan fiduciary when he recommended, designed, and implemented an amendment to a profit-sharing plan that changed the plan to an ESOP and required the plan to invest large sums of money in employer stock so as to enable the individual to acquire control of the employer. Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978).
14. [Plan Administrator] By the very nature of his position, a plan administrator is a fiduciary to the plan. Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
15. [Plan Sponsor] Officers and directors of a plan sponsor are plan fiduciaries if they exercise control through the selection of the investment committee, administrative committee or plan officers or directors. Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978); Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
16. [Plan Sponsor] An employer, whose only control over the management of the employee welfare plan is its authority to appoint, retain and remove the plan's administrator, is only a fiduciary for these acts and not for any others. Independent Association of Publishers' Employees, Inc. v. Dow Jones & Co., Inc., 671 F Supp. 1365 (S.D.N.Y. 1987).
17. [Plan Sponsor] An employer is a fiduciary to a plan only when and to the extent that it engages in activities governed by ERISA, including acing in the capacity of plan administrator. Amato v. Western Union International, Inc., 773 F.2d 1402, 6 EBC 2226 (2d Cir. 1985), cert. dismissed, 474 U.S. 1113 (1986). Contra Ashenbaugh v. Crucible, Inc., 854 F.2d 1516, 9 EBC 2560 (3d Cir. 1988).
18. [Plan Sponsor] An employer that is also a plan administrator of a plan has assumed two distinct statuses. ERISA's fiduciary duty attaches when the employer/administrator performs the function of a plan administrator but not when it acts in the capacity of an employer. When renegotiating a welfare benefit plan or benefits not vesting under ERISA the employer/administrator is acting in its employer capacity and, thus, can breach no ERISA fiduciary duty, because such fiduciary obligations do not attach to employer functions. United Independent Flight Officers, Inc. v. United Air Lines, Inc., 756 F.2d 1262, 6 EBC 1075, 6 EBC 1291, 118 L.R.R.M. (BNA) 2474,102 Lab. Cas. (CCH) 911,382 (7th Cir. 1985).
19. [Service Provider] Where a defendant provided claims processing services to a health and welfare fund using adjustment standards established jointly by the fund and the defendant and the fund made final determinations on any contested payments according to the adjustment standards, it was not established that the defendant exercised sufficient discretionary authority or control over the fund or its assets to make it a fiduciary within the meaning of Section 3(21)(A) of ERISA. Donovan v. Robbins, 558 F. Supp. 319 (N.D.Ill. 1983), aff'd, 703 F.2d 570 (7th Cir. 1983).
20. [Recordkeeping] A company was delegated by a bank trustee or custodian for self-directed IRA accounts the function of maintaining records and preparing appropriate reports required by Section 103 of ERISA. A company maintaining records necessary for the preparation of such reports is a plan fiduciary and must perform these functions with the degree of care set forth in Section 404(a)(1)(B). Redwood Bank v. QTA, Inc., No. C-79-1586, slip op. (N.D.Cal., Oct. 23, 1979).
21. [Trustees] The trustees of a pension or welfare plan are fiduciaries under Section 3(21)(A). Marshall v. Snyder, 430 F. Supp. 1224 (E.D.N.Y. 1977), aff'd in part, 572 F.2d 894 (2d Cir. 1978); Marshall v. Dekeyser 485 F. Suay (29, I EBC 1898 (W.D.Wis.1979).
22. [Trustees - Directed] Trustees who merely distribute plan assets upon direction from the plan's administrators in accordance with a court order and with no discretionary authority over the plan assets, do not exercise the required authority over a plan's assets that would impose fiduciary responsibilities. Richardson v. U.S. News & World Report, 623 F. Supp. 350 (D.D.C. 1985).
23. [Trustees - Directed] Even though a plan trustee has no authority for investment decisions, it cannot disavow itself a responsibility for such decisions, since it is still a fiduciary. However, under the allocation provisions of Section 405(c)(1), the trustee may, in fact, not be liable for such decisions. Leonard v. Drug Fair, Inc., No. 78-1335, Fed. Sec. L. Rep. (CCH) 997,144 (D.D.C. 1979).

1. Conference Report

See coverage of this provision on pages 296-297 of the Congressional Conference Report.

2. Interpretive Bulletinsa

The principles of Section 3(21)(B) are restated in IB 75-3, which also states that if an investment company, its investment adviser or its principal underwriter is a fiduciary or party in interest for a reason other than the investment in the securities of the investment company, such a person remains a fiduciary or party in interest regardless of Section 3(21)(B).

1. Conference Report

Page 302 of the Congressional Conference Report discusses the term investment manager.

2. Interpretive Bulletins
1. A person who is not registered under the Investment Advisers Act of 1940 because of an exemption from registration under that act (and who is not a bank or an insurance company) may not be an investment manager. IB 75-5, Question FR-6.
2. A person cannot be an investment manager if his or her application for registration under the Investment Advisers Act is still pending. IB 75-5, Question FR-7.
3. Advisory Opinions
1. An entity is an investment manager as defined in Section 3(38) of ERISA if it meets the three tests set forth in the statute.
2. A person can be both a named fiduciary and an investment manager provided that, as named fiduciary, such person does not have the power on behalf of the plan to appoint himself or herself or monitor his or her own performance as investment manager. AO 77-69/70.
3. A person who is registered only as a broker-dealer under the Securities Exchange Act of 1934 cannot serve as an investment manager. AO 76-20.
4. Court Decisions
1. Where an investment management firm had broad powers to manage plan assets, was registered as an investment adviser under the Investment Advisers Act of 1940, and had explicitly acknowledged itself as a fiduciary to the plan in its employment contract, it is considered an investment manager as defined in ERISA, regardless of any oral modifications of the agreement. Lowen v. Tower Asset Management, Inc, 829 F.2d 1209, 8 EBC 2457 (2d Cir. 1987).
2. Where an investment management company was not registered as an independent adviser under the Investment Advisers Act of 1940, was not a bank or insurance company, and had not acknowledged itself in writing as a fiduciary to the plan, it is not considered an investment manager as defined in ERISA. The trustee of an ESOP may not claim a defense under ERISA Section 405(d)(1). Whitfield v. Cohen, 682 F.Supp. 188, 9 EBC 1739 (S.D.N.Y 1988).

1. Conference Report

These provisions are discussed on pages 255-256 of the Congressional Conference Report.

1. Conference Report

All the fiduciary responsibilities imposed by Section 404(a)(1) are discussed at pages 302-305 of the Congressional Conference Report.

2. Regulations
1. Plan assets are defined in DOL ERISA Regulation 2510.3-101.
2. Prudence is covered in DOL ERISA Regulation 2550.404a-1 on "Investment Duties" and the specific coverage of § 404(a)(1)(B), below.
3. See DOL ERISA Regulation 404c-1, which exempts fiduciaries from certain ERISA liability if plans meet certain conditions and participants direct their own investments.
3. Interpretive Bulletins
1. Social Investments ("Economically Targeted Investments") (ETIs). Establishes DOL’s position on permissibility of making investments which achieve a social goal in addition to a financial return. The IB indicates that ETIs are not prohibited by ERISA, and that their choice as an investment must follow DOL ERISA regulation 2550.404a-1 regarding Investment Duties, be prudent, not be a prohibited transaction, and not provide less return to a plan than a normal investment. IB 94-1.
2. Proxy Voting. Among the fiduciary responsibilities of an investment manager are those to vote proxies for stock owned by ERISA plans. IB 94-2.
3. Investment Policies. An investment policy designed to further the purposes of a plan and its funding policy is consistent with, but not required by, ERISA 404(a)(1)(A) and (B). IB 94-2.
4. Advisory Opinions
1. Pursuant to ERISA Procedure 76-1 and particularly Section 5.02(o), the Department of Labor ordinarily will not issue advisory opinions on ERISA Section 404(a). AO 80-13A.
2. Service by a bank as trustee of a plan that has a significant portion of its assets invested in employer securities, while the bank is also a substantial secured creditor of the employer, may constitute a violation of Section 404(a)(1) by the bank. AO 76-32.
5. Court Decisions
1. [Effective Date] Actions by fiduciaries occurring after 1974 are not insulated from ERISA coverage merely because the roots of such action can be traced to an event prior to the effective date of ERISA. Marshall v. Craft, 463 F. Supp. 493 (N.D.Ga. 1978); Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
2. [Exemption Applicability] Exemptions from the prohibited transaction restrictions have no effect on the basic fiduciary responsibility rules of Section 404(a)(1). Marshall v. Dekeyser, 485 F.Supp. 629, 1 EBC 1898 (W.D.Vas. 1979).
3. [Precedent] Section 404(a)(1) codifies the common law rule that a trustee owes individual loyalty to the beneficiaries. Although trustees should carefully consider all recommendations submitted by the parties who appointed them, trustees are bound to exercise their independent judgment when making decisions in the administration of the trust. Sheet Metal Workers' International Association v. Central Florida Sheetmetal Contractors Association, 234 NLRB (CCH) No. 162 (1978).
4. [Precedent] ERISA Section 404 essentially codified the strict fiduciary standards that trustees under Section 302 of the Labor-Management Relations Act must meet. The legislative history of ERISA demonstrates that any employee benefit fund trustee is a fiduciary whose duty to the trust beneficiaries must overcome any loyalty to the interest of the plan that appointed him. N.L.R.B. v. Amax Coal Co., 453 U.S. 322,107 L.R.R.M. (BNA) 2769, 91 Lab. Cas. (CCH) Para 12,821, 2 EBC 1489 (1981).
5. [Bank Stock - Purchase/Retention/Sale of Fiduciary Bank/BHC Stock] The discretionary purchase, retention, or sale of the stock of the fiduciary bank is imprudent. DOL indicates that "it burdens our imagination to envision a situation in which a trustee with investment discretion could make an objective decision, solely on the basis of the prudence standard, regarding the purchase or sale of its own stock." [emphasis added] See 1980 letter from DOL to OCC. Also see AO 88-9 regarding self-directed IRA purchases and AO 88-28 covering self-directed IRA purchases on an initial public offering (IPO) from a mutual-to-stock thrift conversion, and AO 92-23 which permits non-discretionary purchase and retention of holding company stock.
6. [Exclusive Purpose] The statutory phrase, "solely in the interest" is, at least in part, a codification of the most fundamental duty traditionally owed by a trustee - the duty of loyalty. Accordingly, a fiduciary bears a heavy burden in justifying his conduct in situations where his interests or the interests of others come into conflict with those of plan beneficiaries. Marshall v. Snyder, 430 F. Supp. 1224 (S.D.N.Y. 1977), aff'd in part, rev'd in part, 572 F.2d 894 (2d Cir. 1978).
7. [Exclusive Purpose] A plan's administrator who is also an officer for the corporate employer, as a fiduciary has a duty to avoid putting himself in a position where he may be forced to compromise his duty of complete loyalty to the plan to act on the employer's behalf. Amato v. Western Union International, Inc., 773 F.2d 1402, 6 EBC 2226 (2d Cir. 1985), cert. dismissed, 474 U.S. 1113 (1986). Contra Ashenbaugh v. Crucible, Inc., 854 F.2d 1516, 9 EBC 2560 (3d Cir. 1988).
8. [Exclusive Purpose] ERISA Section 404(a)(1) and subsection (a) require a fiduciary to act solely in the interest of the participants and beneficiaries of a plan and for the exclusive purpose of paying plan benefits at a reasonable cost. One who, in his capacity as a trustee, attempts to prevent a trust from suing him for substantial damages cannot reasonably be said to do so solely for the interest or for the exclusive purpose of benefiting others. Iron Workers Local No. 272 v. Bowen, 624 F.2d 1255 (5th Cir. 1980).
9. [Exclusive Purpose] Preferential effect of trustees' decision alone does not constitute a violation of Section 404(a) of ERISA. Id.
10. [Exclusive Purpose] Where trustees resolve to extend plan coverage to themselves as trustees and participants in the plan and paid themselves benefits of the plan, such self-dealing conduct was improper and a violation of fiduciary duty under ERISA Section 404(a)(1)(A) and (D). Donovan v. Daugherty, 550 F.Supp. 390, 3 EBC 2079 (S.D.Ala. 1982).
11. [Exclusive Benefit] An employer that creates a retirement program that encourages early retirement, thereby reducing the workforce at overstaffed facilities, does not violate the exclusive purpose duty because of the consequential benefit of enhanced efficiency to the employer. Trenton v. Scott Paper Co., 832 F.2d 806, 45 Fair Empl. Prac. Case (BNA) 327, 45 Empl. Prac. Dec. (CCH) 137,744, 9 EBC 1075 (3d Cir. 1987), cert. denied, 108 S. Ct. 1576, 9 EBC 1968 (1988).
12. [Exclusive Benefit] A fiduciary who pays himself a sales commission from plan assets in the sale of plan property despite the lack of any obligation on the part of the plan to pay the commission violates Section 404(a)(1). Marshall v. Kelly, 465 F. Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
13. [Exclusive Benefit] Where the sale of ownership of the employer is likely to have an impact on the plan's ability to obtain payment on employer notes held by the plan, which, in turn, is likely to affect the plan's ability to pay benefits under the plan, the plan trustees' duties of loyalty and prudence require them to advise the participants of the full facts concerning the sale. Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wisc. 1979).
14. [Exclusive Purpose - Arbitrary & Capricious] Because the potential burden of per se personal liability for any violation of ERISA might deter capable persons from serving as trustees of benefit plans, Section 404 of ERISA does not establish a per se rule of fiduciary conduct and a trustee's decision to cancel past service credits will not be overturned unless it is arbitrary and capricious. Fentron Industries, Inc v. Shopmen Pension Fund, 674 F.2d 1300, 34 Fed. R. Serv.2d 281, 94 Lab. Cas. (CCH) Para 113,559, 3 EBC 1323 (9th Cir. 1982).
15. [Exclusive Purpose - Arbitrary & Capricious] In reviewing the propriety of trustees' action, the judicial standard is whether the trustees acted in an arbitrary and capricious manner or abused their discretion. Robinson v. Central States Pension Fund, 572 F.2d 1208 (8th Cir. 1978). To the same effect: see Robinson v. United Mine Workers, 449 F. Supp. 941 (D.D.C. 1978); Shaw v. Kruidenier, 620 F.2d 307 (8th Cir. 1980); Mosley v. The National Maritime Union Pension and Welfare Plan, 451 F. Supp. 226 (E.D.N.Y. 1978); Taylor v. Bakery and Confectionery Welfare Fund, 455 F. Supp. 816 (E.D.N.C. 1978); Peters v. Operating Engineers Pension Fund, No. CV 76-3747-FW, slip op. (D.C.Cal., April 14, 1979); Bayles v. Central States Pension Fund, 602 F.2d 97 (5th Cir. 1979); Vaughn v. Metal Lathers Local 46 Pension Fund, No. 78 Civ. 2170 (S.D.N.Y. June 14, 1979). To the contrary, see Winpisinger v. Aurora Corporation Illinois, 456 F. Supp. 559 (N.D. Ohio 1978) (standard for judicial review is whether trustees complied with their ERISA fiduciary responsibilities). See also Pierce v. NECA-IBEW Welfare Trust Fund, 488 F. Supp. 559 (E.D.Tenn. 1978), aff'd, 620 F.2d 589 (6th Cir.), cert. denied, 449 U.S. 1015 (1980).
16. [ESOP] While an ESOP fiduciary may be released from certain per se violations on investments in employer securities under the provisions of ERISA Sections 406 and 407, the structure of ERISA itself requires that in making an investment decision of whether or not a plan's assets should be invested in employer securities, an ESOP fiduciary, just as fiduciaries of other plans, is governed by the solely-in-the-interest and prudence tests of Sections 404(a)(1)(A) and (B). Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978).
17. [ESOP] Trustee's failure to conform stock ownership plan to Treasury requirements applicable to ESOPs in effect at the time of plaintiff's termination was not a breach of fiduciary duty under Section 404(a)(1) of ERISA for which a beneficiary may sue when defendant's stock ownership plan never functioned as an ESOP within the meaning of ERISA regulations. Allen v. The Katz Agency, Inc. Employee Stock Ownership Plan, 677 F.2d 193, 3 EBC 1352 (2d Cir. 1982).
18. [Plan Management] Corporate shareholders and directors, who are also pension plan investment managers and custodians violated their fiduciary duties when they refused to attend meetings of the shareholders, board of directors and trustees, thereby preventing any action in favor of the plan while also opposing the sale of shares of preferred hospital stock to the plan. Schoenholtz v. Doniger, 628 F. Supp. 1420, 7 EBC 1501 (S. D. N. Y. 1986).
19. [Plan Management] An insurance company that possesses the ultimate responsibility to grant or deny claims is a fiduciary under ERISA and must comply with the fiduciary duties enumerated in Section 404. Wickman v. Northwestern National Life Insurance, 9 EBC 1482 (D. Mass. 1987).
20. [Plan Management] An operator of a corporation's pension plan, who is also controlling the corporation in receivership, does not violate any fiduciary duties by amending the plan, freezing the accrual of benefits, returning excess funds to the corporation, and terminating the plan in accordance with the state court's appointment order and ERISA. Chait v. Bernstein, 645 F. Supp. 1092, 8 EBC 1126 (D.N.J. 1986), aff'd, 835 F.2d 1017, 9 EBC 1257 (3d Cir. 1987).
21. [Contributions] Corporate president violated his fiduciary duties when he failed to forward employer contributions and employee contributions, although they were deducted from employee paychecks; failed to notify employees that contributions had not been forwarded; allocated the monies to corporate expenses; and assumed conflicting roles of fiduciary and an officer of a struggling corporation. PBGC v. Solmsen, 671 F. Supp. 938, 9 EBC 1391 (E.D.N.Y 1987).
22. [Loans] Where trustees did not hold the local's proposal for a "loan at arm's length and compare it to other available investments, but instead did their best to accommodate" the local's needs, they violated ERISA Section 404(a)(1)(A)(i). Davidson v. Cook, 567 F. Supp. 225, 4 EBC 1816 (E. D. Va. 1983).
23. [Loans] A trustee breaches its fiduciary obligations by (1) making loans of plan assets under terms more favorable to the debtor than the plan and then not collecting the balance due; (2) allowing loans of plan assets to a debtor with an unproven business record and unstable financial condition; (3) lending an unreasonably large portion of loan assets to one entity and then concealing the existence of such loans; and (4) failing to adhere to guidelines in plan requiring that loans be at a reasonable rate of interest with adequate collateral. Brock v. Gilliken, 677 F. Supp. 398, 9 EBC 1803 (E.D.N.C. 1987).
24. [Loans] A fiduciary who makes or renews loans of plan assets based on inadequate security and at a lower interest rate than contemporaneous loans to others, and who fails to pursue timely repayment of principal and interest and to enforce the security agreement violates Section 404(a)(1). Marshall v. Kelly, 465 F. Supp. 341, 1 EBC 1850 (W.D.Okla. 1978); Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
25. [Loans/Leases] Pension fund trustees do not breach their fiduciary duties when they approve the construction of an office building after seeking advice from three legal firms, professional engineers, architects, appraisers, contractors and, in addition, eliminate certain aspects or demand cheaper designs when the project appears over budget. Furthermore, a lease agreement with a union that contains certain favorable terms for the union, while also benefiting the plan participants and beneficiaries, does not make the transaction imprudent when the trustees' decisions are calculated to benefit the fund members. Donovan v. Walton, 609 F.Supp. 1221, 6 EBC 1677 (S.D.Fla. 1985), aff'd, Brock v. Walton 794 F.2d 586, 7 EBC 1769, reh'g denied, 802 F.2d 1399 (11th Cir. 1986).
26. [Mergers & Acquisitions] A corporation which, through its pension board, acts as a fiduciary for the employee pension plan, does not breach its fiduciary duties when a purchase agreement selling a division of the company provides for the transfer of all assets, properly allocable under ERISA, to the trustees of the successor corporation's pension plan, provided the sale was not to avoid any unfunded pension obligations. United Steelworkers 2116 v. Cyclops Corp., 653 F. Supp. 574, 8 EBC 1194 (S.D.Ohio 1987), aff'd in part, vacated in part, 860 F.2d 189, 10 EBC 1345 (6th Cir. 1988).
27. [Mergers & Acquisitions] Pension plan fiduciary, who liquidated stock of one corporation to buy shares of another corporation to further his own corporate expansion goal without any effort to seek independent analysis to examine further investment opportunities, does not satisfy the prudent person test. Sandoval v. Simmons, 622 F.2d Supp. 1174, 6 EBC 2161 (C.D.Ill. 1985).
28. [Service in Dual Capacities: Lender and Plan Trustee] Prior to naming a bank as plan trustee, an ERISA plan had invested $796,000 in unsecured notes issued by Supreme Finance (Supreme), a used car finance company. During this time, the bank had extended a $3 million secured line of credit to Supreme. After being named trustee, the bank refused to renew its line of credit because of Supreme's financial difficulties. At the same time, the bank gave notice of resignation as trustee. Supreme subsequently filed for bankruptcy and the only assets remaining were applied to the bank's loan. The federal district court found, and was upheld on appeal, that:
1. The bank's acceptance of the trusteeship did not violate ERISA because -
1. nowhere does ERISA explicitly prohibit a trustee from holding positions of dual loyalties, and
2. the act did not cause the plan's losses.
2. The bank's decision not to renew Supreme's line of credit did not violate ERISA. The court noted that a fiduciary serving in both corporate and fiduciary capacities may make decisions in its own benefit without violating its fiduciary duty to the plan.

(Friend v. Sanwa Bank California, CA 9, No. 92-55641, 9-13-94).

29. [Summary Plan Disclosure] ERISA Section 404(a)(1) imposes a duty to provide employees with a comprehensive explanation of the plan. However, it does not impose an affirmative duty to alert an individual participant as to the vesting requirements of the plan once that individual notifies fiduciaries that he was "thinking of retirement." Schlomchik v. Retirement Plan of Amalgamated Insurance Fund, 502 F. Supp. 240 (E.D.Pa. 1980), aff'd, 671 F.2d 496 (3d Cir. 1981).

1. Interpretive Bulletins
1. A vacation plan may pay all or any portion of the benefits to which a plan participant or beneficiary is entitled to a third party without violating Section 404(a)(1)(A) if (a) the plan documents expressly provide for such payments to third parties at the direction of a participant or beneficiary, (b) the participant or beneficiary directs in writing that the plan trustees pay a named third party all or a specified portion of the sum of money that would otherwise be paid to the participant or beneficiary, and (c) payment is made to the third party only when or after the money would otherwise be payable to the participant or beneficiary. IB 78-1.
2. Social Investments ("Economically Targeted Investments") (ETIs) Establishes DOL position on permissibility of making investments which achieve a social goal in addition to a financial return. Indicates that ETIs are not prohibited by ERISA, and that their choice as an investment must follow DOL ERISA regulation 2550.404a-1 regarding Investment Duties, be prudent, not be a prohibited transaction, and not provide less return to a plan than a normal investment. IB 94-1.
3. Proxy Voting. Among the fiduciary responsibilities of an investment manager are those to vote proxies for stock owned by ERISA plans. IB 94-2.
4. Investment Policies. An investment policy designed to further the purposes of a plan and its funding policy is consistent with, but not required by, ERISA 404(a)(1)(A) and (B). IB 94-2.
2. Advisory Opinions
1. Payments by a plan for services rendered by a person prohibited from being employed in any capacity by the plan may violate Section 404(a)(1)(A). AO 75-90.
2. If a participant or beneficiary in Plan A refuses to repay an erroneous overpayment of benefits to Plan A, the fiduciaries of Plan B, a related plan, would fail to be acting solely in the interests of the plan's participants and beneficiaries if they attempted to penalize the participant or beneficiary by delaying or reducing benefits under Plan B. AO 77-07.
3. A plan provision authorizing reimbursement of legal fees in the event of any legal action that may arise from the performance of a trustee's fiduciary duties is too broad and would be prohibited under Section 404(a)(1)(A). Where a fiduciary is found in a legal proceeding to have violated his fiduciary duties, reimbursement of legal fees by the plan would not be permitted. AO 78-29.
3. Court Decisions
1. [Provide Benefits] Dividing pension benefits, once they are being paid out, between a participant and his divorced spouse does not violate Section 404(a)(1)(A). Campa v. Campa, 89 Cal. App.3d 113C (1st Dist. 1979), appeal dismissed, Carpenters Pension Trust Fund for Northern California v. Campa, 444 U. S. 1028 (1980).
2. [Provide Benefits] The payment of rent on behalf of the widow of a former plan trustee constitutes a violation of Section 404(a)(1)(A) even though the payment was morally commendable and not made for the personal gain of plan fiduciaries. Marshall v. Cuevas, I EBC 1580 (D.P.R. 1979).
3. [Provide Benefits] Where a plan participant has nonforfeitable vested pension rights under the plan, the plan administrative committee's denial of those rights; based on a retroactive plan amendment adopted by the plan sponsor violated the administrative committee's fiduciary duty to pay benefits when due. Fox v. Abrams, No. CV 77-881-ALS, slip op. (C.D.Cal. 1978).
4. [Exclusive Purpose] Plan monies, even if they constitute surplus assets, must be applied for the exclusive purpose of plan participants and beneficiaries. Marshall v. Snyder, 430 IF. Supp. 1224 (S.D.N.Y. 1977), aff'd in part, rev'd in part, 572 F.2d 894 (2d Cir. 197abbre8).
5. [Exclusive Purpose] Where a plan trustee fails to keep adequate records of the plan's financial obligations, questions of whether the plan owes money to the trustee should be resolved in favor of the plan. Marshall v. Kelly, 465 F. Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
6. [Exclusive Purpose] Lease by a plan of an aircraft unnecessary for plan operation violates Section 404(a)(1). Usery v. Wilson, 3-76-373 (E.D.Tenn. 1977) (consent order).
7. [Exclusive Purpose] Purchase by a multiemployer plan of individual automobile insurance policies for plan trustees and employees violates Section 404(a)(1)(A). Usery v. Wilson, 3-76-373 (E.D.Tenn. 1977) (consent order).
8. [Reasonable Expenses] Payments of in excess of $1 million over a two and one-half year period by a multiemployer plan to an individual for administrative services constitutes excessive compensation in violation of Section 404(a)(1)(A). Marshall v. Snyder, 430 F. Supp. 1224 (S.D.N.Y. 1977), aff'd in part, 572 F.2d 894 (2d Cir. 1978). To the same effect, see Marshall v. Knee, No. C-3-7793 (S.D.Ohio 1977) (complaint).
9. [Reasonable Expenses] A fiduciary who causes a plan to pay excessive amounts for the construction of a building on plan property violates Section 404(a)(1)(A). Marshall v. Kelly, 465 F. Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).

1. Statute

Investments in collectibles are generally prohibited by Section 408(m) of the Internal Revenue Code and PTE 91-55.

2. Regulations
1. Refer to DOL ERISA Regulation 2550.404a-1.
1. The regulation sets forth guidelines for plan fiduciaries for compliance with the prudence requirement in connection with their investment duties.
2. As a general rule, a fiduciary, in connection with his or her investment duties, is required to give appropriate consideration to those facts and circumstances that, given the scope of such fiduciary's investment duties, the fiduciary knows or should know are relevant to the particular investment or investment course of action involved. This includes consideration of the role an investment is intended to play in the plan's investment portfolio for which the fiduciary has investment duties.
3. The regulations also set forth a safe harbor rule. If a fiduciary complies with the safe harbor rule, the Labor Department will presume that the fiduciary has complied with the prudence requirement.

The safe harbor rule requires a fiduciary in connection with any particular investment or investment course of action -

1. To determine that the investment is reasonably designed as part of the portfolio (or the portion of the plan's portfolio) for which the fiduciary has investment duties) to further the purposes of the plan, taking into account the investment's risk of loss and opportunity for gain; and
2. To consider the portfolio's (or portion of the portfolio's) -

1. Diversification,
2. Liquidity and current return relative to plan cash flow, needs, and
3. Projected return relative to plan funding requirements.

2. For a definition of plan assets, see DOL ERISA Regulation 2510.3-101.
3. See DOL ERISA Regulation 404c-1, which exempts fiduciaries from certain ERISA liability, including the duty to monitor for prudence, if plans meet certain conditions and participants direct their own investments.
3. Interpretive Bulletins
1. A plan fiduciary responsible for appointing trustees or other plan fiduciaries should periodically review the performance of such trustees or other fiduciaries. The procedure for review may vary according to the circumstances. IB 75-8, Question FR-17.
2. Plan fiduciaries may rely on information and data supplied by non-fiduciaries in discharging their fiduciary duties. IB 75-8, Question FR-11.
3. Social Investments ("Economically Targeted Investments") (ETIs) Establishes DOL position on permissibility of making investments which achieve a social goal in addition to a financial return. Indicates that ETIs are not prohibited by ERISA, and that their choice as an investment must follow DOL ERISA regulation 2550.404a-1 regarding Investment Duties, be prudent, not be a prohibited transaction, and not provide less return to a plan than a normal investment. IB 94-1.
4. Proxy Voting. Among the fiduciary responsibilities of an investment manager are those to vote proxies for stock owned by ERISA plans. IB 94-2.
5. Investment Policies. An investment policy designed to further the purposes of a plan and its funding policy is consistent with, but not required by, ERISA 404(a)(1)(A) and (B). IB 94-2.
4. Advisory Opinions
1. [General] Section 404(a)(1)(B) does not absolutely prohibit any general type of investment. Whether an investment is prudent depends on the nature of the investment and the character and aims of the plan. AO 75-83.
2. [Bank Stock - Purchase/Retention/Sale of Fiduciary Bank/BHC Stock]: The discretionary purchase, retention, or sale of the stock of the fiduciary bank is imprudent. DOL indicates that "it burdens our imagination to envision a situation in which a trustee with investment discretion could make an objective decision, solely on the basis of the prudence standard, regarding the purchase or sale of its own stock." [emphasis added] See 1980 letter from DOL to OCC. Also see AO 88-9 regarding self-directed IRA purchases and AO 88-28 covering self-directed IRA purchases on an initial public offering (IPO) from a mutual-to-stock thrift conversion, and AO 92-23 which permits non-discretionary purchase and retention of holding company stock.
3. [Mortgage Valuations] Plan fiduciaries will be acting prudently under Section 404(a)(1)(B) if they value plan assets consisting of real estate mortgage loans that the plan has no current intention of selling and that are not financially troubled at the remaining principal balance of the loan. Financially troubled loans should be valued on the basis of any guarantees, security or other factors that a prudent person would deem relevant. AO 77-78; AO 77-81.
4. [DOL Investigations] Where the Labor Department is already conducting an investigation of plan investments, the new investment managers for the plan will be acting prudently under Section 404(a)(1)(B) if they report any breaches of fiduciary duties by others of which they become aware to the plan trustees and to the Labor Department and make available to the Labor Department all information requested about past transactions. AO 77-60/61; AO 77-79/80.
5. Court Decisions
1. [General] ERISA's prudence test is not that of a prudent lay person but, rather, that of a prudent fiduciary with experience dealing with a similar enterprise. Marshall v. Snyder 430 F. Supp. 1224 (S.D.N.Y. 1977), aff'd in part, rev'd in part, 572 F.2d 894 (2d Cir. 1978).
2. [General] Plan trustees violate their fiduciary obligations if they act arbitrarily or capriciously in light of all of the surrounding circumstances. Reviewing courts are hesitant to second guess the trustees' decisions and will do so only if there is no reasonable justification for the decision. Stewart v. National Shopmen Pension Fund, 795 F.2d 1079, 7 EBC 1917 (D.C.Cir. 1986).
3. [General] Fiduciaries are not relieved of their fiduciary responsibilities by their lack of involvement in a particular transaction. By failing to monitor the conduct of other trustees, a trustee may violate Section 404(a)(1)(B) and be held liable under Section 405(a)(2). Marshall v. Dekeyser 485 F, Supp. 629, 1 EBC 1898 (W.D.Wisc. 1979).
4. [General] The prudent person standard found in Section 404 is violated if a trustee who lacks the requisite education, experience and skill to make investment decisions fails to consult independent counsel prior to the making of such decisions. Donovan v. Walton, 609 F. Supp. EM, 6 EBC 1677 (S.D.Fla. 1985), aff'd, Brock c Walton 794 F.2d 586, 7 EBC 1769, reh'g denied, 802 F.2d 1399 (11th Cir. 1986).
5. [Plan Management] Failure by trustees of a multiemployer plan to maintain full and complete minutes of trustees meetings constitutes a violation of Section 404(a)(1)(B). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
6. [Plan Management] Implicit in ERISA's standard for fiduciary responsibility set forth under Section 404 is fiduciaries' duty to take an initiative to cause reasonably available evidence to be developed and considered in the decision making process. An employer and underwriter breached the duly to develop such evidence by relying upon erroneous, incomplete and sometimes irrelevant information in denying claims and thereby rendered their decisions in an arbitrary and capricious manner. Rosen v. Hotel and Restaurant Employees Union, 637 F.2d 592, 106 L.R.R.M. (BNA) 2745, 90 Lab. Cas. (CCH) Para 912,612, 2 EBC 1054 (3d Cir.), cert. denied, 454 U.S. 898 (1981).
7. [Arbitrary/Capricious Actions] Pension fiduciaries breach fiduciary duty when they act arbitrarily and capriciously or act with improper discriminatory or bad faith motives. Chambless v. Masters, Mates and Pilots Pension Plan, 571 F. Supp. 1430 (S.D.N.Y. 1983).
8. [Arbitrary/Capricious Actions] Trustees violated the prudent man standard when they failed to adequately investigate the basis and justification for the payment of over $10 million to a claims processing company as fees for services over a two year period, notwithstanding the court's subsequent finding that the fees were reasonable. Brock v. Robbins 830 F.2d 640, 8 EBC 2489 (7th Cir. 1987).
9. [ESOP] While an ESOP fiduciary may be released from certain per se violations on investments in employer securities under the provisions of Sections 406 and 407 of ERISA, the structure of ERISA itself requires that in making an investment decision of whether or not a plan's assets should be invested in employer securities, an ESOP fiduciary, just as fiduciaries of other plans, is governed by the solely-in-the-interest and prudence tests of Sections 404(a)(1)(A) and (B). Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978).
10. [ESOP] United Missouri Bank won a case where it continued to purchase a distressed company's stock for an ESOP, relying on an independent appraiser's valuation. The 10th Circuit Court of Appeals ruled that the bank (1) followed "proper" directions from the ESOP administrator, (2) paid no more than "appropriate consideration" by relying on the appraisals, (3) retained the stock appropriately because it was restricted by the ESOP agreement and to do so "would have run counter to the intended purpose of [the] ESOP," and (4) maintained an effective Chinese Wall within the bank to prevent transmittal of material inside information from the commercial lending to the trust investment areas. Ershick v. United Missouri Bank of Kansas City, N.A., 948 F.2d 660 (10th Cir. 1991).
11. [ESOP] A Washington bank was found liable for following a similar procedure in Fink v. National Savings & Trust Co., 772 F.2d 951 (D.C. Cir. 1985). The court found the ERISA fiduciary duty of prudence overrides the provisions of plan, such as in ESOPs, which are designed to invest in employer stock.
12. [ESOP] Banc One Arizona settled for $19 million (plus a $1.15 million DOL penalty) involving the Kroy, Inc., ESOP covering 400 employees. Kroy eventually declared bankruptcy. Banc One continued purchasing stock until Kroy declared bankruptcy. Banc One was criticized for apparently paying too much for the stock. The primary issue of the case dealt with ERISA Section 3(18)(B) regarding "adequate consideration."
13. [ESOP] The Statewide Bancorp ESOP directed the Plan Committee (who were also directors) to invest "primarily" in Statewide stock. The Committee continued to purchase Statewide stock even as its stock price fell to less than 25 cents a share. Eventually, all remaining assets were placed in money market accounts. Statewide declared bankruptcy. The 3rd Circuit Court of Appeals found that the purchase of Statewide stock was permissive, not mandatory. The court held that two standards apply:
• If the plan requires investment in employer securities, the trustee must comply unless "compliance would be impossible or illegal" or a court approves a deviation.
• If investment language is permissive, "the fiduciary must still exercise care, skill, and caution in making decisions to acquire or retain the investment." In such permissive situations, the fiduciary is presumed to have complied with ERISA in purchasing employer securities unless the facts and circumstances would defeat or substantially impair the purposes of the trust. If trustees are also directors or officers of the employer, they must show that they acted impartially in investigating available investment alternatives - particularly if the employer is experiencing financial difficulty.

The court evaluated the reasonableness of the trustees' actions under the standard set by the U.S. Supreme Court, in the Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101 (1989) case. Reasonableness is judged by whether:

• the interpretation is consistent with the goals of the plan;
• it renders any plan language meaningless or internally inconsistent;
• it conflicts with the substantive or procedural requirements of ERISA law;
• the provision has been interpreted consistently; and
• the interpretation is contrary to the clear language of the plan.

Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995).

14. [Investments] Purchase of stock in a financially unstable corporation constitutes a violation of Section 404(a)(1)(B). Usery v. Wilson, et al, No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
15. [Loans] Evidence that mortgage loans were made at interest rates below the prevailing market rate is insufficient to establish a violation of the prudent investor rule established in ERISA Section 404(a)(1)(A) and (B) where pension fund trustees, in developing a plan participant mortgage loan program, consulted with experts, including accountants and mortgage brokers; examined and considered rates charged on traditional and nontraditional mortgage loans; examined the prospective borrower's employment background; required that the loan be adequately secured; and thereafter set highest rates that not only generated a higher rate of return than any other portfolio asset but exceeded the fund's actuarial and funding requirements. Brock v. Walton, 794 F.2d 586, 7 EBC 1769 (11th Cir.), reh'g denied, 802 F.2d 1399 (11th Cir. 1986) (en banc).
16. [Loans] Trustees making loans violated the prudence test under ERISA Section 404(a)(1)(B) by failing to properly appraise the proposed building, investigate the borrower's financial resources, evaluate the likely rental income to be derived from the building, take an assignment of rents, require sureties on the loan and require a principal repayment schedule. Davidson v. Cook, 567 F. Supp. 225, 4 EBC 1816 (E.D.Va. 1983), aff'd, 734 F.2d 10 (4th Cir.), cert. denied, 469 U.S. 899 (1984).
17. [Loans] Where independent investigation based on financial statements would have disclosed imprudence of making loans and where trustees failed to seek outside counsel when "under the circumstances then prevailing ... a prudent man acting in a like capacity and familiar with such matters" would have sought outside counsel, ERISA, Section 404(a)(1)(B) is violated. A trustee's duty to make an independent investigation includes the obligation of not relying on representations, predictions, and hopes of a borrower. Katsaros v. Cody, 503 F. Supp. 360, 4 EBC 1910 (E.D.N.Y 1983).
18. [Loans] Even assuming the real estate attorney for the pension fund was a fiduciary, the opening bid of $5 million where the property was allegedly worth less, was not a breach of fiduciary duty of care under Section 404 of ERISA when the bid was made in the context of a foreclosure sale, the final judgment against the debtor was $9,615,422.26, and an unrealistically low bid might have precluded a deficiency judgment. Furthermore, although attorney was not instructed to establish $100,000 bid increments, such action was not imprudent where he was instructed to continue bidding the price upwards to $7 million. Donovan v. Nellis, 528 F. Supp. 538, 33 Fed. Rul. Serv. 2d (Cahaghan) 1742, 2 EBC 2209 (N.D.Fla. 1980.
19. [Loans - Employer] Where plan trustees make loans to employers that lack any security and are at interest rates below those that an arm's length lender would accept under the circumstances the trustees have violated Section 404(a)(1)(B). Marshall v. Dekeyser; 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
20. [Mergers & Acquisitions] In a contest for corporate control where potential conflicts of interest between plan administrators and beneficiaries existed, administrators who did not conduct independent, "intensive and scrupulous" investigation of plan's investment options violated ERISA Section 404. Leigh v. Engle, 727 F.2d 113, 4 EBC 2702 (7th Cir. 1984).
21. [Mergers & Acquisitions] Trustees breached ERISA's exclusive purpose and prudent man rules Section 404(a)(1)(A) and (B), by agreeing to the sale of employer securities to the employer's pension plan as part of alleged attempt to maintain corporate control without conducting any investigation as to the proposed transaction. Dimond v. Retirement Plan, 582 F. Supp. 892, 4 EBC 1457 (W.D.Pa. 1983).
22. [Mergers & Acquisitions] Where sale of ownership of the employer is likely to have an impact on the plan's ability to obtain payment on employer notes held by the plan, which, in turn, is likely to affect the plan's ability to pay benefits under the plan, the plan trustees' duties of loyalty and prudence require them to advise the participants of the full facts concerning the sale. Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
23. [Payments, Excessive] Payment of an excessive amount of rent by a plan for the lease of an aircraft violates Section 404(a)(1)(B). Usery v. Wilson, et al., No. 3-76-373 (E. D.Tenn., June 6, 1977) (consent order).
24. [Payments, Excessive] Trustees of an employee welfare plan breached fiduciary duties when they improperly overpaid a law firm $292,800 for legal services rendered to members of the plan. Law firm that knowingly receives excessive payments from trustees of a plan is held accountable for the breaches committed by the trustees and jointly liable for be overpayment. Benvenuto v. Schneider, 678 F. Supp. 51, 9 EBC 1528 (E.D.N.Y. 1988).
25. [Recordkeeping] A company was delegated by a bank trustee or custodian for self-directed IRA accounts the function of maintaining records and preparing appropriate reports required by Section 103 of ERISA. A company maintaining records necessary for the preparation of such reports is a plan fiduciary and must perform these functions with the degree of care set forth in Section 404(a)(1)(B). Redwood Bank v. QTA, Inc., No. C-79-1586, slip op. (N.D.Cal., Oct. 23, 1979).
26. [Self-Dealing] Purchase of automobile insurance covering plan trustees and employees, but which does not protect the plan, constitutes a violation of Section 404(a)(1)(B). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).

1. Advisory Opinions
1. [Deposits - Insured/Uninsured] The diversification requirement of Section 404(a)(1)(C) generally will not be violated if all plan assets in an individual account plan are invested in a federally insured savings account, so long as the account is fully insured. Where the account balance exceeds the amount covered by federal insurance, compliance with Section 404(a)(1)(C) is determined by whether the bank invests its assets in a diversified manner. AO 77-46.
2. [Collective Investment Funds] An investment by an ERISA plan in a single collective investment pool may be deemed to be a properly diversified investment if the pool is itself diversified. In this case, each of the investments of the collective trust is deemed to be an investment of the plan. AO 80-13A.
3. [Mutual funds/Annuities] A plan may invest all of its assets in insurance or annuity contracts (AO 75-79) or a mutual fund (AO 75-93) without violating Section 404(a)(1)(C) dealing with diversification.
4. [Real Estate] Where the assets of a plan consist largely of real estate mortgage loans, the new investment managers of the plan will not violate the diversification requirements of Section 404(a)(1)(C) if they follow a policy whereby decisions to retain or dispose of individual loans and properties will be made on the basis of economic and prudent management generally and not on a basis that requires diversification of plan assets in situations in which the principles of economic and prudent management would indicate that such loans and properties should be retained. AO 77-62/63.
5. [REIT] Proper diversification for plan assets invested in a real estate investment trust (REIT) is determined by considering the assets held by the REIT. AO 78-30.
2. Court Decisions
1. [General] Section 404 of ERISA requires that fiduciaries conduct their activities as would a prudent man under similar circumstances. While there is flexibility in the prudence standard, it is not a refuge for fiduciaries who are not equipped to evaluate a complex investment. Glass/Metal Association and Glaziers and Glass Workers Pension Plan, 507 F. Supp. 378, 2 EBC 1006 (D.Hawaii 1980).
2. [General] Where plan trustees, lacking prior lending experience, fail to follow the procedure that a prudent lender would utilize by failing to consider other real estate investment vehicles that offered greater opportunity for diversification, and by committing plan assets without adequate procedures for evaluation of a risk, the plan trustees violated their duty to act with care, skill, prudence and diligence as required under Section 404(a)(1)(B) of ERISA. Glass/Metal Association and Glaziers and Glass Workers Pension Plan, 507 F. Supp. 378, 2 EBC 1006 (D.Hawaii 1980).
3. [General] In contrast to traditional trust law, both Congress and the courts have recognized that the diversification requirement of ERISA Section 404(a)(1)(C) imposes a separate duty on plan fiduciaries to spread the risk of loss of the plan. Therefore, if consummated, a commitment of 23% of the pension plan's total assets to a single loan would subject a disproportionate amount of the pension trust's assets to the risk of a large loss and violate the diversification requirement. Glass/Metal Association and Glaziers and Glass Workers Pension Plan, 507 F. Supp. 378, 2 EBC 1006 (D.Hawaii 1980).
4. [Loans] A loan of 36% of plan assets to finance the expansion of a hotel and gambling casino violates Section 404(a)(1)(C). Marshall v. Teamsters Local 282 Pension Trust Fund, 458 F. Supp. 986 (E.D.N.Y. 1978).
5. [Loans - Employers] The investment of virtually all of a plan's assets in loans to employers, on its face, represents a complete failure to diversify the investments of the plan so as to minimize the risk of large losses required by Section 404(a)(1)(C). Once a plaintiff proves failure to diversify, the burden shifts to the defendant to demonstrate that nondiversification was prudent under the circumstances. Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
6. [Loans] Where trustees failed to collect what defendants owed the pension trust, renewed unfavorable loans and failed to diversity holdings, they violated Section 404(a)(1)(B) and (C). Donovan v. Schmoutey, 592 F. Supp. 1361 (D.Nev. 1984).
7. [Market Valuation] Pension plan service company that fails to revalue the market value of properties to determine a fair rental value to the lessee, the plan's sponsor, and also fails to advise trustees that the plan assets should be diversified and not concentrated in the buildings leased to the plan's sponsor, breaches its fiduciary duties under ERISA. Brock v. Self, 632 F. Supp. 1509, 7 EBC 1512 (W. D. La. 1986).

1. Interpretive Bulletins
1. A vacation plan may pay all or any portion of the benefits to which a plan participant or beneficiary is entitled to a different party without violating Section 404(a)(1)(D) if (a) the plan documents expressly provide for such payments to third parties at the direction of a participant or beneficiary, (b) the participant or beneficiary directs in writing that the plan trustees pay a named third party all or a specified portion of the sum of money that would otherwise be paid to the participant or beneficiary and (c) payment is made to the third party only when or after the money would otherwise be payable to the participant or beneficiary. IB 78-1.
2. Investment Policies. An investment policy designed to further the purposes of a plan and its funding policy is consistent with, but not required by, ERISA 404(a)(1)(A) and (B). If one exists, it is considered one of the "documents and instruments governing the plan", and must be followed. IB 94-2.
2. Advisory Opinions
1. Within the mandate of Section 404(a)(1)(D) is the rule that plan trustees and fiduciaries must administer the plan in accordance with clear and unambiguous provisions of the plan document and the law. The fact that policy reasons mandate a change in the plan provisions is relevant to a judicial review of the validity of the plan change, but such conditions are not relevant in the interpretation and implementation of such rule. Where, in this case, the plan's rules were clear and unambiguous and were upheld by the courts as valid, the trustees must enforce them as so written. AO 82-IA.
2. Whether the trustees can accept contributions from employers for certain specific individuals or classes thereof and/or make benefit payments to such individuals is a matter to be determined by the plan document. Section 404(a)(1)(D) requires that the plan be administered in accordance with the plan document to the extent that the plan document is in accordance with the law. AO 81-30A.
3. Court Decisions
1. A limitation in the plan instruments on the authority of the trustees to invest plan assets, which is not inconsistent with any provisions of ERISA, is binding on the trustees under Section 404(a)(1)(D). Marshall v. Teamsters Local 282 Pension Trust Fund, 458 F. Supp. 986 (E.D.N.Y. 1978).
2. Where plan document provided that administrative committee member having interest in transaction shall not participate in transaction and fiduciary acted contrary to plan terms, there was a violation of ERISA Section 404(a)(1)(D). Donovan v. Cunningham, 716 F.2d 1455, 4 EBC 2329 (5th Cir. 1983), cert. denied, 467 U.S. 1251 (1984).
3. Payment of compensation to plan trustees without express authorization in plan instruments violates Section 404(a)(1)(D). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
4. Payment of benefits to ineligible persons violates Section 404(a)(1)(D). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
5. A trustee's failure to declare his own forfeiture of benefits under a plan by reason of his violation of a 'bad boy' clause does not constitute a breach of fiduciary duty. Fremont v. McGraw-Edison Company, 460 F. Supp. 599 (N.D.Ill. 1978), aff'd in part, rev'd in part, 606 F.2d 752 (7th Cir. 1979), cert. denied, 445 U.S. 951 (1980).
6. Dividing pension benefits, once they are being paid out, between a participant and his divorced spouse does not violate Section 404(a)(1)(D). Campa v. Campa, 89 Cal. App.3d 113C (1st Dist. 1979), appeal dismissed, Carpenters Pension Trust Fund for Northern California v. Campa, 444 U. S. 1028 (1980).

1. Conference Report

This provision is discussed on page 317 of the Congressional Conference Report.

2. Advisory Opinions

   The purchase of employer securities by a profit-sharing plan is covered by Section 404(a)(2). AO 75-89; WSB 79-86 (thrift plan).

1. Conference Report

Page 306 of the Congressional Conference Report explains this provision.

2. Regulations

        Refer to DOL ERISA Regulation 2550.404b-1.

1. Plan assets may be held by persons located outside the United States if the assets are foreign securities and (a) the plan fiduciary, empowered to authorize such holding is a United States regulated bank, insurance company or investment adviser, has its principal place of business in the United States and meets certain minimum financial conditions; or (b) the securities are in the possession of a United States bank, a registered broker or dealer; or an SEC-designated "satisfactory control location" and certain other conditions are met. DOL ERISA Regulation 2550.404b-1.
2. An ADR (American depository receipt) that enables a person to demand delivery of a foreign security constitutes the "indicia of ownership" of the foreign security for purposes of Section 404(b). Preamble to DOL ERISA Regulation 2550.404b-1.
3. The indicia of ownership of any plan assets (e.g., foreign securities, United States securities, etc.) attributable to contributions made on behalf of plan participants who are Canadian citizens or residents may be maintained in Canada if required by Canadian tax or other laws. DOL ERISA Regulation 2550.404b-1.
3. Advisory Opinions
1. Section 404(b) does not prohibit the investment of plan assets in enterprises located outside the United States provided that the indicia of ownership (e.g., stock certificates) of such assets is maintained in the U.S. (or in accordance with DOL ERISA Regulation 2550.404b-1). AO 75-80.

1. Conference Report

This provision is explained on pages 305-306 of the Congressional Conference Report.

2. Regulations

See DOL ERISA Regulation 404c-1, which exempts fiduciaries from certain ERISA liability if plans meet certain conditions and participants direct their own investments.

3. Advisory Opinions
1. Section 404(c) does not exempt transactions covered by Section 404(c) from all provisions of ERISA; it only exempts fiduciaries from liability regarding such transactions and the participant or beneficiary from being a fiduciary by reason of exercising control under Section 404(c). AO 75-81.
2. The fact that transactions might be exempted from the provisions of Section 406 by reason of Section 404(c) does not affect the application of Section 4975 of the Code. PLR 7821122.
3. [Individual Account] A person who is a plan fiduciary and who also exercises control over assets in his or her own individual account will not be treated as a fiduciary with respect to such exercise of control. AO 75-24.
4. Court Decisions
1. [Fiduciary Liability for Self-Directed Plan Investments] A 401(k) plan offered GICs as one of several investment vehicles for plan participants, who directed their own investments. GICs were issued, in part, by Executive Life Insurance. The trustees relied on ratings of rating services. When Executive Life encountered financial difficulties and was eventually downgraded by the rating services, the plan notified participants that GIC investments were not guaranteed from loss. Unisys negotiated more liberal waiting periods for transfers from the GIC fund to other investment vehicles, but was restricted on what it could tell participants. As a result, it did not tell participants of Executive Life's problems. Unisys did; however, pay for the replacement of an annuity issued to its Chairman by Executive Life with an annuity from another insurer. Executive Life was declared insolvent by state insurance regulators in 1991. Plan participants sued the fiduciaries for breach of fiduciary responsibilities under ERISA Section 404(a). The Unisys trustees' defense was that they were protected from fiduciary responsibility by ERISA Section 404(c).

The courts ruled that (1) the duty of prudent inquiry may have been breached by total reliance on insurance rating services, (2) plan fiduciaries did not release material information to plan participants, (3) the participants' control over their investments may release the fiduciaries from investment liability, and (4) the case was remanded back to the District Court so plan participants may pursue their claims [3rd Circuit Court of Appeals, In Re Unisys Savings Plan Litigation (Meinhardt v. Unisys Corp.), 74 F.3d 420 (3d. Cir. 1996)].

1. Conference Report

Pages 299-300 of the Congressional Conference Report discuss co-fiduciary liability provisions.

2. Interpretive Bulletins
1. A plan fiduciary who knows of a breach committed by another fiduciary must take steps to remedy the breach, such as instituting a lawsuit, notifying the Department of Labor or publicizing the breach. Mere resignation by the fiduciary as a protest against the breach is not sufficient. IB 75-5, Question FR-10.
2. Even though a fiduciary has only limited functions to perform (e.g., because the fiduciaries have properly allocated functions among themselves or delegated them to others), the fiduciary can become liable for breaches in other areas by other plan fiduciaries under Section 405(a). IB 75-8, Questions FR-13, FR-14 and FR-16.
3. Where the Labor Department is already conducting an investigation of plan investments, the new investment managers for the plan will not be acting in violation of Section 405(a) if they report any breaches of fiduciary duties by others of which they become aware to the plan trustees and to the Labor Department and make available to the Labor Department all information requested about past transactions. AO 77-60/61; AO 77-79/80.
3. Court Decisions
1. [General] A fiduciary is liable under ERISA Section 405(a)(1) if he participates knowingly in, or knowingly undertakes to conceal, a co-fiduciary's breach of duty. Davidson v. Cook, 567 F. Supp. 225, 4 EBC 1816 (E.D.Va. 1983), aff'd, 734 F.2d 10 (4th Cir.), cert. denied, 469 U.S. 899 (1984).
2. [General] ERISA Section 405 does not impose vicarious liability; actual knowledge is required. The fiduciary must know the other person is a fiduciary to the plan, must know that he participated in the act that constituted a breach, and must know that it was a breach. Donovan v. Cunningham, 716 F.2d 1455, 4 EBC 2329 (5th Cir. 1983), cert. denied, 467 U.S. 1251 (1984).
3. [General] Under Section 405 of ERISA a fiduciary is liable for a co-fiduciary's breach of fiduciary duties if he knowingly participates and/or conceals such breach; furthermore, a fiduciary is required to make reasonable efforts to remedy a known breach by another fiduciary. Davidson v. Cook, 567 F. Supp. 225, 4 EBC 1816 (E.D. Va. 1983), aff'd, 734 F.2d 10 (4th Cir.), cert. denied, 469 U.S. 899 (1984).
4. [General] Co-fiduciaries each have responsibility for the actions of the others and will be found liable for the others' breach of fiduciary duty if such co-fiduciary participates knowingly in a breach or if, by his failure to comply with Section 404 of ERISA, he enables another fiduciary to commit a breach. LeFebre v. Westinghouse Electrical Corp., 549 F. Supp. 1021, 3 EBC 2353, as amended by 3 EBC 2359 (D.Md. 1982), rev'd, 747 F.2d 197 (4th Cir. 1984).
5. [General] Relying on the advice or information of a co-trustee alone may subject a trustee to liability. Katsaros v. Cody, 568 F. Supp. 360, 4 EBC 1910 (E.D.N.Y. 1983).
6. [Omission vs. Commission] Fiduciaries are not relieved of their fiduciary responsibilities by their lack of involvement in a particular transaction. By failing to monitor the conduct of other trustees, a trustee may violate Section 404(a)(1)(B) and be held liable under Section 405(a)(2). Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
7. [Successor Trustees] New trustees of a plan are not required to investigate how prudently prior trustees had negotiated a contract. If the contract terms are found reasonable and no other facts indicate the contrary, new trustees are not liable if prior trustees committed a breach of their fiduciary duties by acting imprudently. Brock v. Robbins, 830 F.2d 640, 8 EBC 2489 (7th Cir. 1987).
8. [Successor Trustees] A successor trustee has a duty to liquidate prior improper investment upon assuming his responsibilities. Marshall v. Craft 463 F. Supp. 493 (N.D.Ga. 1978). See also Morrissey v. Curran, 567 F.2d 546 (2d Cir. 1977).
9. [Resignation Not a Cure] Resignation by a fiduciary is not sufficient to discharge the fiduciary's duty under Section 405(a)(3) to make reasonable efforts to remedy the breach of another fiduciary. Marshall v. Dekeyser, 485 F. Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).

1. Conference Report

The allocation of trustee duties are discussed on pages 300-301 of the Congressional Conference Report.

2. Interpretive Bulletins

   A plan fiduciary who knows of a breach committed by another fiduciary must take reasonable steps to remedy the breach, such as instituting a lawsuit, notifying the Department of Labor, or publicizing the breach. Mere resignation by the fiduciary as a protest against the breach is not sufficient. IB 75-5, Question FR-10.

1. Conference Report

General fiduciary duty allocation provisions are covered on page 302 of the Congressional Conference Report.

2. Interpretive Bulletins
1. [Allocation] Fiduciary responsibilities not involving management or control of plan assets may be allocated among named fiduciaries and may be delegated by named fiduciaries to others if the plan instruments so provide. IB 75-8, Question FR-12.
2. [Allocation] If directors of an employer are the named fiduciaries of the plan, their liability can be limited by the procedures established in the plan instruments for allocating fiduciary responsibilities among named fiduciaries or for designating others to carry out fiduciary responsibilities. IB 75-8, Question D-4.
3. [Allocation] Even if named fiduciaries allocate responsibilities or designate others to perform these functions, they are still liable for breaches in the establishment and implementation of the allocation or designation procedure. IB 75-8, Questions FR-13 and FR-14.
4. [Delegation] Named fiduciaries cannot delegate authority or discretion to manage or control plan assets to anyone other than an investment manager as defined in Section 3(38). IB 75-8, Question FR-15.
3. Advisory Opinions
1. A named fiduciary with the duty to appoint, remove and monitor a plan's investment managers is not responsible for the day-to-day management of plan assets by the investment managers but must be prudent in appointing the investment managers and in continuing to retain them. AO 77-69/70.
4. Court Decisions
1. [Allocation] Fiduciaries are only liable for imprudent investment decisions made by an investment manager, who has been designated as such by the fiduciaries, if the fiduciaries fail to monitor adequately the performance of the investment manager. Brock v. Berman, 673 F. Supp. 634, 8 EBC 1689 (D.Mass. 1987).
2. [Allocation] Even though a plan trustee has no authority for investment decisions, it cannot disavow itself of responsibility for such decisions, since it is still a fiduciary. However, under the allocation provisions of Section 405(c)(1), the trustee may, in fact, not be liable for such decisions. Leonard v. Drug Fair, Inc., No. 78-1335, Fed. Sec. L. Rep. (CCH) Para 97,144 (D.D.C. 1979).
3. [Recordkeeping] A company was delegated by a bank trustee or custodian for self-directed IRA accounts the function of maintaining records and preparing appropriate reports required by Section 103 of ERISA. A company maintaining records necessary for the preparation of such reports is a plan fiduciary and must perform these functions with the degree of care set forth in Section 404(a)(1)(B). Redwood Bank v. QTA, Inc., No. C-79-1586, slip op. (N.D.Cal., Oct. 23, 1979).

1. Conference Report

Investment manager appointment provisions are covered on pages -301-302 of the Congressional Conference Report.

2. Regulations

1. Statute

Investments in collectibles are generally prohibited by Section 408(m) of the Internal Revenue Code and PTE 91-55.

2. Conference Report

These prohibited transaction provisions are discussed on pages 306-309 and 316-320 of the Congressional Conference Report.

3. Regulations

DOL ERISA Regulation 2510.3-101 defines plan assets.

4. Prohibited Transaction Class Exemptions (PTE)
1. [Broker] The provision of brokerage services to IRAs and to Keogh plans to which Title I of ERISA is inapplicable is not subject to the prohibited transaction provisions of Title I of ERISA. However, such IRAs and Keogh plans remain subject to the prohibited transaction provisions of Title I of ERISA. Final PTE C 79-1.
2. [Coins and Collectibles] PTE 91-55 permits IRA accounts to invest in American Eagle gold coins.
3. [Broker] Securities broker-dealers regularly provide research, information and advice concerning securities and also effect agency transactions for the purchase or sale of securities in the ordinary course of their business as broker-dealers, and the provision of a combination of such services by a fiduciary with regard to employee benefit plans would constitute prohibited transactions under ERISA and the Code. Proposed Extension of Paragraph 1(a) of PTE C 75-1; Final PTE C 78-10.
4. [Foreign Exchange] A bank fiduciary may use its own services (or those of an affiliate) to invest, on a non-discretionary basis, in foreign currencies and foreign currency options, subject to a number of conditions. See PTE 94-20.
5. [Loan by Union Plan to Provide Projects for Union Employers] A loan by a multiemployer plan or a multiple employer plan to an owner of real property who is not a party in interest or a disqualified person to such plan where the loan is for the purpose of enabling such property owner to make construction improvements on such property, and the property owner contracts with an employer participating in the plan to make such construction improvements, is not a prohibited transaction under Section 406(a) of ERISA and Section 4975(c)(1)(A) - (D) of the Code. However, such a loan may give rise to a prohibited transaction if, for example, the loan is made in the context of an arrangement where a specific participating employer is to furnish a portion of the construction, and such employer has a controlling influence over the plan's decision to make the loan. Final PTE C 76-1.
6. [Office Space] In some instances, a multiemployer plan or a multiple employer plan will secure office space and administrative services jointly with a participating employee organization, employer or employer association, or with another multiemployer plan or multiple employer plan that is a party in interest or disqualified person to the plan and will share the costs of securing such office space or administrative services on a pro-rata basis based on each party's use of such space or services. Such joint use of office space or administrative services does not constitute a prohibited transaction. However, if a multiemployer plan or a multiple employer plan independently secures for its own use office space or administrative services and furnishes part of such office space or administrative services to a party in interest or disqualified person, such transactions are prohibited transactions. Final PTE C 76-1.
7. [Securities Lending] A securities lending service, pursuant to which a bank-trustee will lend securities of plans for which it serves as trustee to broker-dealers for an additional fee from the plan, may contravene Section 406(b). AO 79-11. But also see PTE 82-63.
8. [Securities Lending] Payment to a party in interest of any commission, finder's fee or other compensation for services in connection with the effecting of a loan of securities by the plan to a broker-dealer, bank or other person would be a prohibited transaction. Proposed PTE I D-762. But also see PTE 82-63.
5. Interpretive Bulletins
1. [Plan Assets] In general, the investment by a plan in securities of a corporation will not be considered to be an investment in the underlying assets of the corporation. The assets of the corporation are not plan assets so subsequent transactions between a party in interest and the corporation will not be prohibited. This general proposition is consistent with Section 401(b)(1). However, this does not mean that such an investment may not sometimes constitute an indirect prohibited transaction. For example, if a plan invests in a corporation pursuant to an arrangement whereunder it is expected that the corporation will engage in a transaction with a party in interest, such arrangement will be a prohibited transaction. IB 75-2 (This IB contains several examples).
2. [Contributions, In-Kind] Contributions of non-cash ("in-kind") assets to a defined benefit plan is a prohibited transaction. In-kind contributions to a defined contributions or welfare benefit plan may be a prohibited transaction, depending on the facts and circumstances and provisions of the plan. The basic determinant is whether the in-kind contributions represents an attempt to lessen a present or future obligation to make cash contributions to a plan. IB 94-3.
3. [Bonding of Fiduciaries] The purchase of a bond required under Section 412 is not a prohibited transaction. IB 75-5, FR-9.
4. [Payment of Benefits] The mere payment of money to which a participant or beneficiary is entitled, at the direction of the participant or beneficiary, to a party in interest does not contravene Section 406(a)(1)(D). IB 78-1.
6. Advisory Opinions
1. [Alienation of Benefits] Because Section 406 prohibits both direct and indirect transactions, a trustee to whom the limitation on compensation in Section 408(c)(2) applies could not assign his rights to compensation for services rendered to a plan to a party in interest, such as an employer. Therefore, the trustee could not submit a request for compensation to the fund designating his employer as payee on checks issued. WSB 79-92.
2. [Alienation of Vested Benefits] Withholding of benefits from a plan participant and transfer of those benefits to a party in interest in satisfaction of a debt owed by the participant to that party in interest is a prohibited transaction. AO 76-99.
3. [Appointment] The appointment of a bank that is a creditor of the entity maintaining the plan as trustee of the plan assets is not a prohibited transaction. WSB 77-14.
4. [Appointment] The appointment of a party in interest as trustee, and the transfer of plan assets to the trustee pursuant to such appointment, does not constitute a prohibited transaction under Section 406(a)(1)(D) and does not contravene Sections 406(b)(1) or 406(b)(3). WSB 77-14.
5. [Bank Servicer] The owner of a trust company that acts as a fiduciary to employee benefit plans that renders certain services for the trust company, but not for the plans, is not subject to the prohibitions of Section 406(a), since the services would not be a transaction between the plan and a party in interest. AO 82-55A.
6. [Bank Stock - Purchase/Retention/Sale of Fiduciary Bank/BHC Stock]
• General Discretionary Rule - An ERISA plan may not invest in the stock of a fiduciary bank if the bank has discretion over the transaction. The discretionary retention of such stock would also be prohibited. Non-discretionary purchases, sales, retentions are permitted. See 1980 letter from DOL to OCC.
• General Non-Discretionary Rule - An ERISA plan may invest in the stock of a fiduciary bank or its bank holding company if the bank has no discretion over the investment. AO 92-23A.
• Self-Directed Purchases - Permits self-directed accounts to purchase stock (including treasury stock) of the fiduciary bank or its holding company. AO 88-9.
• Mutual Conversions - Initial Public Offerings - Permits self-directed accounts to purchase stock of the fiduciary bank (or its holding company) in an initial public offering (IPO) or on conversion of a mutual institution to a stock institution. AO 88-28.
7. [Bonds - Rights] The sale or assignment of rights to debentures by a trust to a party in interest is a prohibited transaction. AO 76-72.
8. [Collective Funds] The investment of plan assets in a commingled fund (for example, a qualified group trust) maintained by a bank trustee causes the assets of such commingled fund to be treated as assets of the plan. Consequently, a purchase or bolding of a master note (i.e, a nonnegotiable obligation issued by a finance company, the principal amount of which fluctuates on a daily basis depending on how much money the fund desires to loan the issuer) by the commingled fund in which the plan has an interest from a subsidiary of the corporation maintaining the plan constitutes a loan from the plan to the subsidiary in violation of Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code. PLR 7913114; PLR 7913116; Proposed PTE C 784.
9. [Collective Funds] The mere transfer of assets between a qualified group trust (CIF) and plans invested therein, and the corresponding increase or decrease in qualified group trust units credited to the plans, are intra plan transactions so long as the group trust is a qualified trust under Section 401(a) of the Code and the transfers are within the terms of the plan. Accordingly, such transactions do not fall within the restrictions of Section 406 of ERISA or Section 4975(c)(1) of the Code. PLR 7913116.
10. [Collective Funds - Conversion to Mutual Funds] The conversion of an ERISA collective investment fund would be a prohibited transaction in violation of Section 406. PTE 77-4 would not provide relief for such a conversion. See the 1994 letter from DOL to OCC.
11. [Compensation] The receipt of compensation by a fiduciary from a plan is a prohibited transaction if the fiduciary is already receiving full-time compensation from the employer maintaining the plan. AO 78-08.
12. [Contributions - In-Kind] The contribution to the plan by the employer of a condominium owned by the owner, in lieu of making its contribution to the defined benefit plan, in accordance with the requirements for properly funding the plan, constitutes a prohibited sale or exchange of property between the plan and a party in interest pursuant to Section 406(a)(1)(A).

Section 406 provides that a transfer of real or personal property by a party in interest to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or a lien that the plan assumes or it is subject to a mortgage or similar lien that a party in interest placed on the property within the ten year period ending on the date of the transfer. The transfer of an option to purchase a condominium by a party in interest to the plan followed by the exercise of the option by the plan may also constitute a violation of Section 406(a)(1)(A). AO 81-69A.

13. [Deposits] The investment of plan assets in credit union share accounts, at the direction of the plan participants and beneficiaries, is not a prohibited transaction. AO 76-38.
14. [Deposits] The investment of the assets of a noncollectively bargained multiple employer plan covering employees of banks, in savings accounts and certificates of deposit of banks that are contributing employers, constitutes a prohibited transaction under Section 406(a) and may also be prohibited under Section 406(b)(1) and (2), because members of the administrative board of the plan, which directs plan investments, are officers and employees of contributing employer/banks.

However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1), and 406(b)(2) for the investment of plan assets in the deposits of certificates of deposit of a bank that is a plan fiduciary or party in interest, if the requirements of DOL ERISA Regulations Section 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the banks in which deposits may be made. The specifications may be made in the plan by amendment retroactive to November 1, 1977. AO 79-25.

15. [Estates] The purchase of real property from the estate of the sole shareholder of a corporation contributing to a plan is not a prohibited transaction even though one of the executors of the estate formerly was a plan trustee. AO 76-420.
16. [Fees - Own-Bank Plan] A bank is not prohibited from serving as trustee for a plan maintained for the bank's employees where it receives no compensation from the plan for its trustee services [Emphasis added]. AO 79-49.
17. [Fees] The reimbursement of, or payment to, fiduciaries of expenses properly and actually incurred in settlement of pending or threatened litigation by a plan, pursuant to indemnification provisions that do not contravene ERISA, is not a prohibited transaction. AO 77-66/67.
18. [Investment Advisor] The provision of investment advisory, services by a corporation to a plan is not a prohibited transaction even though the corporation also provides such services to other clients who may be parties in interest to the plan. AO 77-44.
19. [Investment Advisor] To the extent that a party renders investment performance measurement services to a plan, providing no more than quantitative measurement and ranking of a plan's investment portfolio and/or management performance based upon objective, reasonable and relevant criteria that are uniformly applied, such service would not constitute the rendering of investment advice. However, where the service provider adopts, applies or modifies performance or portfolio indices in such a way that a plan is furnished with a format for decision making that is designed to influence the plan's continued participation in a particular investment program, the service would constitute investment advice. AO 94-03.
20. [Leases - Sponsor] The leasing by a plan of improved real property to the employer maintaining the plan is a prohibited transaction pursuant to Sections 406(a)(1)(A), (C), (D) and (E) of ERISA and Sections 4975(c)(a)(1),(C) and (D) of the Code.  In addition, since any property leased to an employer is "employer real property," as defined in Section 407(d)(2) of ERISA, if such property is not "qualifying employer real property" within the meaning of Section 407(d)(4) of ERISA, the holding of such property by the plan is a prohibited transaction pursuant to Sections 406(a)(2) and 407(a)(1) of ERISA. Also, to the extent that the employer may be a fiduciary to the plan, as defined in Section 3(21)(A) of ERISA and Section 4975(e)(3) of the Code, the lease arrangement may be a prohibited transaction pursuant to Section 406(b)(1) and (2) of ERISA and Section 4975(c)(1)(E) of the Code. Proposed PTE F 192.
21. [Loans - Common Borrower] If a loan is made by a plan to a person in order to encourage that person to do business with the employer, the transaction would be prohibited under Sections 406(a)(1)(D) and 406(b). WSB 79-63.
22. [Loan by Construction Union Plan to Provide Employment for Union Members] Because it will not opine on factual circumstances, the Department will not opine on construction industry trustees' direction to their investment manager to invest a specified amount of plan assets in construction mortgages within the jurisdiction of the union whose members are plan participants. The Department states, however, that it would not be inconsistent with the requirements of Sections 403(c) and 404 for plan fiduciaries to select an investment course of action that reflects non-economic factors so long as application of such factors follows the primary consideration of a broad range of investment opportunities that are economically equally advantageous. Arrangements whereby funds of plans are invested by the fiduciary in transactions that indirectly create employment opportunities and compensation for employee services necessarily require an examination to determine if an indirect use of plan assets for the benefit of a party in interest is involved. AO 85-36A.
23. [Loan by Union Plan to Provide Projects for Union Employers] If a multiemployer plan acquires unimproved real property and arranges for the construction of building structures on such property for the purpose of providing office space for the plan with building contractors and subcontractors some or all of whose employees are participants or beneficiaries of the plan, the arrangement between the plan and such building contractors and subcontractors would constitute prohibited transactions. Proposed PTE I 76-2.
24. [Loans - Sponsor] Where a plan has a loan outstanding to X Corp. and the employer with respect to the plan acquires a majority or controlling interest in X Corp., the loan would become a prohibited, indirect extension of credit to the employer, in addition to being a direct prohibited extension of credit to X Corp. However, if the loan transaction is contemplated before the acquisition, the loan would not be a prohibited transaction. AO 79-37.
25. [Loan Guarantee] A guarantee by a party in interest of a loan by a plan to a third party constitutes an extension of credit between the plan and the party in interest. If such loan was made pursuant to a binding contract in effect on July 1, 1974, it may be exempt under Section 414(c)(1), even if the loan constitutes a nonqualifying security under Section 407. See DOL ERISA Regulation Section 2550.407a-1(b).
26. [Mutual Fund Conversion from Collective Investment Fund] The conversion of an ERISA collective investment fund would be a prohibited transaction in violation of Section 406. PTE 77-4 would not provide relief for such a conversion. See 1994 letter from DOL to OCC.
27. [Pooled Fund - Seed Money] The transfer by an insurance company of seed money invested by it in separate investment accounts back to the general account of the insurance company would not be treated as assets of a plan that have invested in the separate accounts and, therefore, the insurance company's redemption of its participation units in the separate accounts does not constitute a violation of the provisions of Sections 404(a)(1)(A) and (D). AO 83-38A.
28. [Sale of Assets to Insider] The sale of certain parcels of real property by a profit-sharing plan to the majority shareholder of the employer maintaining the plan and to a corporation 50% or more of which is owned by such majority shareholder would constitute prohibited transactions pursuant to Section 406(a)(1)(A) and (D) of ERISA and Section 4975(c)(1)(A) and (D) of the Code. In addition, if the majority shareholder has the power to appoint and remove the plan trustee, such sales may be prohibited transactions under Section 406(b)(1) and (2) of ERISA and Section 4975(c)(1)(E) of the Code. Proposed PTE I 492.
29. [Stock - Sponsor] The purchase of common stock of the employer maintaining the plan by the employer from the plan is a prohibited transaction (AO 79-23), even if the purchase is made pursuant to a public tender offer (AO 77-48.)
30. [Sweep] Scan and sweep services by a bank for plans for which it provides fiduciary services and for which it is paid a separate fee would be exempt from any of the prohibitions of Section 406(a) if the conditions of Section 408(b)(2) are met. The question of what constitutes a reasonable service, a reasonable contract or arrangement, and reasonable compensation is inherently factual in nature, and not subject to opinion.

    A Section 408(b) violation would be involved if the bank, as fiduciary, exercised its authority, control or responsibility that makes it a fiduciary to cause the plan to enter into a transaction involving the provision of services when such fiduciary has an interest in the transaction that may affect the exercise of its judgment as a fiduciary. Therefore, to the extent the bank would direct the utilization of the scan and sweep services and receive any fee therefore, there would be a per se violation of Section 408(b). However, if the bank does not exercise such authority, but the decision is made by the plan sponsor, no violation would exist. AO 88-02A.

7. Court Decisions
1. [General] ERISA Section 406, which prohibits fiduciaries from causing a plan to engage in certain specified transactions, evinced the Congressional desire to prevent transactions that offer a high potential for loss of plan assets and for insider abuse; and to prevent a trustee from being put in a position where he has dual loyalties. McDougall v. Donovan 552 F.Supp. 1206, 3 EBC 2385 (N.D.Ill. 1982).
2. [General] The question of whether ERISA has been violated does not depend on whether any harm results from the transaction. Congress was concerned in ERISA to prevent transactions that offered a high potential for loss of plan assets or for insider abuse. The fact that a prohibited loan is or may be ultimately repaid does not render the loan lawful. Marshall v. Kelly, F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978); Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979); Marshall v. Dekeyser, 485 F.Supp. 629, 1, EBC 1898 (W.D.Wis. 1979).
3. [General] ERISA Section 406(a) prohibits a fiduciary from causing a plan to enter into transactions with parties whom "he knows or should have known" are parties in interest to the plan. A fiduciary must act with prudence in investigating whether a party-in-interest relationship exists. In the case of a significant transaction, generally for the fiduciary to be prudent he must make a thorough investigation of the other party's relationship to the plan to determine if he is a party in interest. In the case of a normal and insubstantial day-to-day transaction, it may be sufficient to check the identity of the other party against a roster of parties in interest that is periodically updated. Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
4. [General] Congress did not intend to exclude from prohibitions under Section 406 transactions that have independent business purposes, just as it did not exclude transactions that are fair under some independent measure. Congressional intent to eliminate all transactions, with even the potential to bias the independent judgment of plan fiduciaries, must be followed. McDougall v. Donovan 552 F.Supp. 1206, 3 EBC 2385 (N.D.Ill. 1982).
5. [General] Section 406 of ERISA does not create a per se prohibition against plan fiduciaries with dual loyalties acting on behalf of the plan. Donovan v. Bierwirth, 538 F.Supp. 463, 2 EBC 2145 (E.D.N.Y. 1981).
6. [Effective Date] Actions by fiduciaries occurring after 1974 are not insulated from ERISA coverage merely because their roots can be traced to an event prior to the effective date of ERISA. Marshall v. Craft, 463 F.Supp. 493 (N.D.Ga. 1978).
7. [Compensation] The critical analysis under Section 406, regarding a transaction with a party in interest that is exempted under Section 408, is whether the party in interest receives more than reasonable compensation. Brock v. Robbins 830 F.2d 640, 8 EBC 2489 (7th Cir. 1987).
8. [Compensation] The payment by a multiemployer plan of rent for an aircraft leased from a party in interest in an amount in excess of the value received by the multiemployer plan in utilizing the aircraft allegedly constitutes a prohibited transaction under Section 406(a)(1)(D). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
9. [ESOP] Under Section 406(a)(1)(B), one transaction normally prohibited is the lending of money or other extension of credit between the plan and a party in interest; however, loans to employee stock ownership plans are exempt from such prohibitions. Allen v. Katz Agency, Inc. Employee Stock Ownership Plan, 677 F.2d 193, 3 EBC 1352 (2d Cir. 1982).
10. [Ignorance] Where trustees did not inspect complete agreement as drafted by counsel, and thus were not aware that part of the plan would result in the use of plan assets to benefit a party in interest, they violated ERISA Section 406(a)(1). Dimond v. Retirement Plan, 582 F. Supp. 892, 4 EBC 1457 (W.D. Pa. 1983).
11. [Leases] The lease of an airplane by a multiemployer plan from a party in interest allegedly constitutes a prohibited transaction under Section 406(a)(1)(A). Usery v. Wilson, et al, No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
12. [Loans] Fiduciaries cannot act as both borrowers and lenders as these are parties whose interests are adverse; fiduciaries acting on both sides of a loan transaction cannot negotiate the best terms for either party. Davidson v. Cook, 567 F.Supp. 225, 4 EBC 1816 (E.D.Va. 1983), aff'd, 734 F.2d 10 (4th Cir.), cert. denied, 469 U.S. 899 (1984).
13. [Loans to Plan Sponsor] An employer's borrowing of money from the fund violates the prohibition under ERISA Section 406 regarding the lending of money between a plan and a party in interest. Dependahl v. Falstaff Brewing Corp., 491 F.Supp. 1188, 30 Fed. Rul. Serv.2d(Callahan) 564 (E.D.Miss. 1980), aff'd in part, rev'd in part, 653 F.2d 1208 (8th Cir.), cert.
14. [Loans] The phrase "reasonable rate of interest" within the meaning of ERISA Section 406(a)(1)(B) does not equate to the term "prevailing or market rate of interest." Thus, if the other requirements of Section 406(a)(1) are met, a pension fund may charge interest rates lower than the prevailing rate on mortgage loans made to plan participants. Evidence that a pension fund had charged a lower interest rate was insufficient to establish that the loans did not "bear a reasonable rate of interest" and were accordingly not exempted from the prohibition of ERISA Section 406(a) against making loans to plan participants. Brock v. Walton, 794 F.2d 586,7 EBC 1769 (11th Cir.), reh'g denied, 802 F.2d 1399 (11th Cir. 1986) (en banc).
15. [Loans] A loan of money by a multiemployer plan to a party in interest allegedly constitutes a prohibited transaction under Section 406(a)(1)(B). Usery v. Wilson, et al, No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
16. [Loans] Dissolving the improper party-in-interest relationship prior to the execution of a loan did not preclude the transaction from being violative of ERISA Section 406 when the loan agreement already existed at the time of divestiture. M&R Investment Co., Inc. v. Fitzsimmons, 685 F.2d 283, 3 EBC 1835 (9th Cir. 1982).
17. [Loans] A loan by a multiemployer plan to a party in interest for the purpose of enabling the party in interest to remove preexisting liens on an aircraft that the party in interest wished to acquire free of encumbrances allegedly constitutes a prohibited transaction under Section 406(a)(1)(D). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).
18. [Loans] Profit-sharing plan trustees violated ERISA's prohibited transactions provisions by maintaining pre-ERISA loans to employer-sponsor and to one of the trustees after law's effective date, where one loan was made without security with an oral promise to repay, since loans' terms were not at least as favorable to the plan as arm's length transaction would have been. Donovan v. Bryans, 566 F. Supp. 1258, 4 EBC 1816 (E.D.Pa. 1983).
19. [Mergers & Acquisitions] Fiduciaries of a trust, containing assets of corporate employee pension benefits plan, violated ERISA's prohibited transactions in Section 406 when they used the assets to finance another corporation's obligation under an acquisition agreement requiring the purchase of shares of stock held by the trust in another corporation. Sandoval v. Simmons 622 F.Supp. 1174, 6 EBC 2161 (D.C. Ill. 1985).
20. [Mergers & Acquisitions] ERISA Section 406(a)(1)(D) and (b)(1) should be read broadly as a gloss on the duty of loyalty required by Section 404 in light of the Congressional concern with protection of plan beneficiaries and should be read to cover action of trustee who buys shares in target corporation in order to assist either target's management or raider in its quest for corporate control or a control premium. Leigh v. Engle, 727 F.2d 113, 4 EBC 2702 (7th Cir. 1984).
21. [Provide Benefits] The payment of rent on behalf of the widow of a former plan trustee is a prohibited transaction under Section 406(a)(1)(D) even though the payment was morally commendable and was not made for the personal gain of plan fiduciaries. Marshall v. Cuevas, 1 EBC 1580 (D.P.R. 1979).
22. [Successor Trustee] ERISA limits a fiduciary's liability for breach of duty to those breaches committed during his tenure; however, under Section 406 of ERISA a successor trustee has a duty to dispose of prior investments violative of ERISA upon assuming his responsibilities. McDougall v. Donovan 552 F.Supp. 1206, 3 EBC 2385 (N.D.Ill. 1982).
23. [Unions] As Section 406 of ERISA seeks to protect against influences exerted by all parties in interest, Congress intended to prohibit dealings between a plan and any union whose members are among the beneficiaries of the plan. McDougall v. Donovan 552 F.Supp. 1206, 3 EBC 2385 (N.D.Ill. 1982).

1. Conference Report

The prohibited transaction provisions are discussed on pages 306-309 and 316-320 of the Congressional Conference Report.

1. Conference Report

This prohibition is covered on page 309 of the Congressional Conference Report.

2. Regulations

No regulations have been issued yet. However, the regulations under Section 408(b)(2) amplify this prohibition.

1. This prohibition is imposed to deter fiduciaries from exercising the authority, control or responsibility that makes such persons fiduciaries when they have interests that may conflict with the interests of the plans for which they act. ERISA Regulation 2550.408b-2(e)(1).
2. A fiduciary does not engage in an act described in Section 406(b)(1) if the fiduciary does not use any of the authority, control or responsibility that makes such person a fiduciary to cause the plan to pay additional fees for a service furnished by such fiduciary or by a person in which such fiduciary has an interest that may affect the exercise of such fiduciary's best judgment as a fiduciary. DOL ERISA Regulation 2550.408b-2(e)(2).
3. The regulation cited above contains several important examples. DOL ERISA Regulation 2550.408b-2(f). Some of the examples, however, only deal with Section 406(b)(1) and not with Sections 406(b)(2) and 406(b)(3). Therefore, even if an example indicates that there is no Section 406(b)(1) prohibition, there may be a Section 406(b)(2) or (3) prohibition.
4. For a definition of plan assets, see DOL ERISA Regulation 2510.3-101.
3. Advisory Opinions
1. [General] A fiduciary does not engage in a violation of Section 406(b)(1) unless he uses his fiduciary authority to benefit himself or a related party. WSB 79-20; PLR 7826047; PLR 7826048; PLR 7826049; Proposed PTE I 492; Proposed Extension of Paragraph 1(a) of PTE C 75-1.
2. [General - Discretion Required] A fiduciary to a plan, by reason of rendering investment advice for a fee or other compensation, shall not be deemed to be a fiduciary regarding any plan assets to which such person does not have discretionary authority, discretionary control or discretionary responsibility, does not exercise any authority or control and does not render investment advice for a fee or other compensation. Thus, a sale of assets by the corporate trustee and investment manager, but of assets not under the control of that fiduciary, does not involve a possible prohibited transaction under Section 406(b). Also, where a factual analysis confirms that at the time of a transaction, the plan, as seller, and the purchaser had no party-in-interest relationship to one another, the sale cannot constitute a violation of Section 406(a)(1)(A) through (D). AO 81-20A.
3. [General] If a fiduciary uses the authority, control and responsibility that makes him a fiduciary to cause the plan to enter a transaction involving the provision of services when such fiduciary has an interest in the transaction that may affect the exercise of his best judgment as a fiduciary, a transaction described in Section 406(b) would occur. That transaction would be deemed to be a separate transaction from the transaction involving the provision of services and would not be exempted under Section 408(b)(2). Also, questions of what constitutes a necessary service, a reasonable contract or arrangement, and reasonable compensation are inherently factual in nature and will not be the subject of advisory opinions.

Where a firm is an investment manager to individual employee benefit plans, the initial appointment of that firm as investment manager of a master trust and/or trustees of the master trust by independent plan fiduciaries would not cause the investment manager or trustees to violate Section 406(b)(1) or (2) as long as those persons exercise none of the authority, control or responsibility that makes them fiduciaries to cause the plan to make such appointments.

• [Collective Investment Funds] Also, Section 406(a)(1) does not apply to any transaction between a plan and a common or collective trust fund maintained by a bank or trust company supervised by a state or a federal agency if (a) the transaction is a sale or purchase of an interest in the fund, (b) the bank or trust company receives no more than reasonable compensation, and (c) the transaction is expressly permitted by the instrument under which the plan is maintained or by a fiduciary who has authority to manage and control the assets of the plan.
• [Deposits] Section 408(b)(4) provides that the prohibitions of Section 406 shall not apply to the investment of all or a part of plan assets and deposits that bear a reasonable rate of interest in a bank or similar financial institution supervised by the United States of America or by a state if such bank or other institution is a fiduciary of the plan and if (a) the plan covers only employees of such bank or other institution or affiliates of such bank or institution or (b) such investment is expressly authorized by a provision of the plan or by a fiduciary who is expressly empowered by the plan to so instruct the trustee regarding such an investment.
• [Loan to Provide Employment for Union Members] Finally, the Department of Labor, on its own, notes that one of the collective funds that was the subject of the request for opinion is designated as the union construction fund. The Department indicates that a decision to make an investment may not be influenced, for example, by a desire to stimulate the construction industry and generate employment unless the investment, when judged solely on the basis of the economic value to the plan, would be equal to or superior to alternate investments available to the fund. AO 82-51A.
4. [General] The inquiry concerning whether a fiduciary has violated ERISA Section 406(b)(1) is not limited to the initial decision by the plan regarding retention of the fiduciary to provide additional services. At all times, such fiduciary may make no decision on behalf of the plan (or in any way use his authority or control) to cause the plan to make a decision which would have the effect of personally benefiting himself or any other person in which such fiduciary has an interest.

However, the potential for a prohibited act of self-dealing in violation of ERISA Section 406(b)(1) may be prospectively avoided through the careful application, in effect as well as in form, of Example (7) of ERISA Regulations Section 2550.408(b)-2(f) (for example, the trustee must physically absent himself from all consideration of the matter and cannot any of his authority or control to influence the plan's decision.) WSB 79-20.

5. [Bank Board Membership] Where an individual is a fiduciary to a plan and where the individual serves as a member of the board of directors of a bank that also serves as a fiduciary to the plan, decisions made by the bank's board of directors regarding plan investments do not necessarily constitute Section 406(b) violations by the individual/director if he absents himself from any arrangements, agreements or understanding; removes himself from all board consideration of these decisions; and does not otherwise exercise any authority, control or responsibility with regard thereto. Provided, however, that if the board itself has an interest in the transaction that could alter or affect its judgment, this would constitute a per se violation under Section 406(b). AO 86-11A.
6. [Bank Custodian - Board Membership] The investment of plan assets in securities of the bank that is custodian, at the direction of a trustee who is also a director of the bank, may be a prohibited transaction under Section 406(b)(1). AO 76-76.
7. [Bank Holding Company Affiliate Use] The appointment of a second tier subsidiary and/or a division of a corporation to perform a fiduciary or nonfiduciary service for a plan, for which the second tier subsidiary or division acts as a fiduciary, would not constitute an act of self-dealing by the fiduciary provided that the appointment is made by a fiduciary who is independent of and unrelated to the parent-subsidiary group. PLR 7826047.
8. [Bank Holding Company Affiliate Use] A second tier subsidiary, acting in its capacity as plan trustee, retained a division of the parent of the first tier subsidiary to provide it with investment advice and related advisory services to the trust for which it was acting as trustee. The services performed by the division were clearly within the existing responsibilities of the second tier subsidiary. The second tier subsidiary did not delegate any of its responsibilities as trustee because it remained fully responsible for managing the plan's investments. The fees charged by the second tier subsidiary included payment for investment advice as well as for custodial services. The second tier subsidiary's fee was not affected by reason of its retaining the division. Rather, at its own expense, the second tier subsidiary compensated the division for the services rendered to it. The second tier subsidiary did not engage in an act of self-dealing under Code Section 4975(c)(1)(E) when it appointed the division to provide investment advice. PLR 7826048.
9. [Brokerage Services] If a plan fiduciary effects securities transactions on behalf of the plan and performs functions incidental to the effecting of such transactions, such transactions would be prohibited by ERISA and the Code unless, under the particular facts and circumstances surrounding the transactions, they do not constitute acts of self-dealing under ERISA Section 406(b)(1) and Code Section 4975(c)(1)(E). Proposed Extension of Paragraph 1(a) of PTE C 75-1.
10. [Collective Investment Funds] Also refer to General Advisory Opinions above for AO 82-51A.
11. [Collective Investment Funds] It is a violation of Section 406(b) when a company maintaining a pension advisory and consulting service, dealing in establishing investment objectives, evaluation, recommending managers, and monitoring performance, makes recommendations with regard to investments in collective trust funds to which said party has a fiduciary role, if the recommendations are a primary basis for plan investments. AO 84-04A.
12. [Commissions] This advisory opinion involved transactions by a licensed stock brokerage firm, which was the plan sponsor and involved mutual fund investments made by the plan. The documentation between the plan sponsor and the plan provided that the sponsor would agree to receive and hold all commissions as agent for the trustee on behalf of the plan and to pay the commissions to the plan within 30 days after receipt thereof.

The Department of Labor ruled that the receipt of brokerage commissions by a plan fiduciary from a transaction involving assets held by the fiduciary as agent for the plan would not constitute a violation of ERISA if the fiduciary had no right, title or interest in the proceeds passed to the fiduciary, the commissions were returned to the plan in the ordinary course of business, and the fiduciary does not benefit in any manner from the holding of the money. AO 81-90A.

13. [Compensation] The receipt of compensation by a fiduciary from a plan is a prohibited transaction if the fiduciary is already receiving full-time compensation from the employer maintaining the plan. AO 78-08.
14. [Compensation] The appointment by a plan trustee of his secretary as plan administrator may violate Section 406(b)(1). Plan fiduciaries are prohibited from dealing with plan assets in their own interest or for their own account. If the compensation paid by the plan for administrative services, in fact, serves to compensate the trustee's secretary for the time spent in the performance of her secretarial duties, a violation of Section 406(b)(1) might occur. AO 77-84.
15. [Deposits] Also refer to General Advisory Opinions above for AO 82-51A.
16. [Deposits] The investment of the assets of a plan covering employees of banks, in savings accounts and certificates of deposit of banks that are contributing employers, constitutes a prohibited transaction under Section 406(a) and may also be prohibited under Section 406(b)(1) and (2) because members of the administrative board of the plan, which directs plan investments, are officers and employees of contributing employer/banks.

However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1) and 406(b)(2) for the investment of plan assets in the deposits or certificates of deposit of a bank that is a plan fiduciary or party in interest, if the requirements of ERISA Regulations Section 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the banks in which deposits may be made. The specifications may be made to the plan by amendment retroactive to November 1, 1977. AO 79-25.

17. [Fees, Incentive] Payment of an incentive fee pursuant to appropriate contractual relationship between an investment manager (fiduciary) and the plan would not, in and of itself, violate Section 406(b)(1). The amount of compensation that the manager earns depends solely on the changes in value of the securities in the individual accounts and, therefore, the manager would not be exercising any of its fiduciary authority or control to cause the plan to pay an additional fee.

Moreover, it does not appear that the manager would be acting on behalf of or representing a person whose interests are adverse to the plan merely because it enters into an incentive fee arrangement. However, the Department notes that incentive fee arrangements could, under certain facts and circumstances, violate both Sections 406(a) and 406(b), as well as Section 404(a). Thus, the plan fiduciary must act prudently in deciding to enter into an incentive compensation arrangement with an investment manager, as well as the negotiation of the specific formula under which the compensation will be paid. The Department's position is that the fiduciary, prior to a decision to enter into an incentive compensation arrangement, must fully understand the compensation formula and the risks associated with this manner of compensation and have all relevant information pertaining thereto available to it. Further, the plan fiduciary must be capable of periodically monitoring the actions taken by the manager in the performance of its investment duties. AO 86-20A; accord AO 86-21A.

18. [Float] The ancillary services exemptions (§ 408(b)(2) and 408(b)(6)) do not include the float earned by the fiduciary bank from a demand deposit account to the extent that it is reasonably possible to earn a return on such funds. Retention of float would be permissible if it was a part of the bank's overall compensation from the plan and if the bank had made appropriate disclosures regarding the use of float. Failure to comply would result in a violation of ERISA Section 406(b)(1). AO 93-24A.
19. [Leases to Sponsor] The leasing by a plan of improved real property to the employer maintaining the plan is a prohibited transaction pursuant to ERISA Section 406(a)(1)(A), (C), (D) and (E) and Code Section 4975(c)(1)(A), (C) and (D). In addition, since any property leased to an employer is employer real property as defined in ERISA Section 407(d)(2), if such property is not qualifying employer real property within the meaning of ERISA Section 407(d)(4), the holding of such property by the plan is a prohibited transaction pursuant to ERISA Sections 406(a)(2) and 407(a)(1). Also, to the extent that the employer may be a fiduciary to the plan as defined in ERISA Section 3(21)(A) and Code Section 4975(e)(3), the lease arrangement may be a prohibited transaction pursuant to ERISA Section 406(b)(1) and (2) and Code Section 4975(c)(1)(E). Proposed PTE I 192.
20. [Loan by Construction Union Plan to Provide Employment for Union Members] Also refer to General Advisory Opinions above for AO 82-51A.
21. [Loans] If a loan is made by a plan to a person in order to encourage that person to do business with the employer, the transaction would be prohibited under Section 406(a)(1)(D) and 406(b). WSB 79-63.
22. [Sale to Insider] The sale of certain parcels of real property by a profit-sharing plan to the majority shareholder of the employer maintaining the plan and to a corporation 50% or more of which is owned by such majority shareholder would constitute prohibited transactions pursuant to Section 406(a)(1)(A) and (D) of ERISA and Section 4975(c)(1)(A) and (D) of the Code. In addition, if the majority shareholder has the power to appoint and remove the plan trustee, such sales may be prohibited transactions under Section 406(b)(1) and (2) of ERISA and Section 4975(c)(1)(E) of the Code. Proposed PTE I 492.
23. [Stock - Exchanges] An exchange of securities held by a stock bonus plan in connection with a reorganization is not a prohibited transaction. WSB 78-29.
4. Court Decisions
1. [General] ERISA Section 406(b) codifies the principle that ERISA fiduciaries owe the plan, its participants and its beneficiaries a duty of loyalty and cautions fiduciaries that they must either avoid certain types of transactions or not serve as fiduciaries. Section 406 is violated if fiduciaries invest plan assets in companies in which any fiduciary owns an equity interest or from which any fiduciary receives compensation for the investment. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 8 EBC 2457 (2d Cir. 1987).
2. [General] Based on Congressional concern about protection of plan beneficiaries, ERISA Sections 406(a)(1)(D) and (b)(1)should be read broadly as a gloss on the duty of loyalty required by Section 404 and should be read to cover action of trustee who buys shares in target corporation in order to assist either target's management or raider in its quest for corporate control or a control premium. Leigh v. Engle, 727 F.2d 113, 4 EBC 2702 (7th Cir. 1984).
3. [Compensation] The prohibition against fiduciaries acting in conflict of interest situations is violated where trustees authorize, for each other, monthly payment from plan's assets as compensation for their services as trustees while they are receiving full-time pay from participating employers or union and further authorize plans to make contributions on their behalf so as to make each other eligible for receipts of benefits from the plans. Donovan v. Daugherty, 550 F.Supp. 390, 3 EBC 2079 (S. D. Ala. 1982).
4. [Loans] Two trustees of a multiemployer plan who owned a large interest in a corporation and who caused the plan to make a loan commitment to the corporation so that the corporation could remove liens on an aircraft the corporation wished to acquire free of encumbrances allegedly violated Section 406(b)(1). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order). See also Marshall v. Dekeyser, 485 F.Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).

1. Conference Report

Page 309 of the Congressional Conference Report covers the above provision.

2. Regulations

No regulations have been issued yet. However, the regulations under Section 408(b)(2) and two prohibited transaction class exemptions amplify this prohibition.

1. This prohibition is imposed to deter fiduciaries from exercising the authority, control or responsibility that makes such persons fiduciaries when they have interests that may conflict with the interests of the plans for which they act. ERISA Regulation § 2550.408b-2(e)(1).
2. A fiduciary may not use the authority, control or responsibility that makes such a person a fiduciary to cause the plan to pay an additional fee to such fiduciary (or to a person in which such person has an interest that may affect the exercise of such fiduciary's best judgment as a fiduciary). DOL ERISA Regulation 2550.408b-2(e)(1).
3. The regulation cited above contains several important examples. DOL ERISA Regulation 2550.408b-2(f); however, not all of the examples deal with Section 406(b)(2).
4. The preambles to PTE C 76-1 and PTE 77-10 amplify the interrelationships between this prohibition and the other prohibitions.
3. Interpretive Bulletins
1. If a fiduciary, in addition to his duties for the plan, serves in a decision making capacity with another party, the mere fact that such fiduciary effects payments to such party of money to which a participant is entitled at the direction of the participant and in accordance with specific plan provisions does not contravene Section 406(b)(2). IB 78-1.
4. Advisory Opinions
1. [Bank Stock] The investment of plan assets in a bank of which a fiduciary is a director may be a prohibited transaction under Section 406(b)(2). AO 76-62.
2. [Bank Stock - Purchase/Retention/Sale of Fiduciary Bank/BHC Stock]

General Discretionary Rule - An ERISA plan may not invest in the stock of a fiduciary bank if the bank has discretion over the transaction. The discretionary retention of such stock would also be prohibited. Non-discretionary purchases, sales, and retentions are permitted.

DOL notes the duty of undivided loyalty owed under § 406(b), but the conflict of interest which may occur if a sale of bank stock would be in the best interests of a plan, but such a sale (or the news of such a sale) might lower the price of the bank's stock.

See 1980 letter from DOL to OCC.

3. [Custodians] The interests of the bank that performs the services of custodial agent for the plan and is a plan fiduciary are or could be deemed to be adverse to the interests of the plan. AO 76-76.
4. [Deposits] Investment of the assets of a noncollectively bargained multiple employer plan covering employees of banks, in savings accounts and certificates of deposit of banks that are contributing employers, constitutes a prohibited transaction under Section 406(a) and may also be prohibited under Section 406(b)(1) and (2) because members of the administrative board of the plan, which directs plan investments, are officers and employees of contributing employer banks.

However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1) and 406(b)(2) for the investment of plan assets in the deposits or certificates of deposit of a bank that is a plan fiduciary or party in interest if the requirements of ERISA Regulations Section 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the banks in which deposits may be made. The specifications may be made to the plan by amendment retroactive to November 1, 1977. AO 79-25.

5. [Investment Manager Appointment] The involvement of a plan fiduciary in the appointment of a corporation of which such fiduciary is a director as an investment manager of the plan's assets may be a prohibited transaction under Section 406(b)(2). AO 76-15.
6. [Investment Management] The provision of investment management services by the plan manager to a fund would be exempt from Section 406(a) if the conditions of Section 408(b)(2) are met. The question of what constitutes a necessary service, a reasonable contract or arrangement, or reasonable compensation is factual in nature and not subject to advisory opinions.

Further, the mere selection of the manager to provide investment management services to a plan where the payment of compensation for such services is to be made by the plan sponsor receiving such services would not constitute a per se violation of Section 406(b)(1), but such violation could occur in the course of the committee's deliberations to invest in the fund and the concomitant retention of the plan manager. Accordingly, a ruling that the arrangement is exempt from Section 406(b)(1) cannot be made.

Generally, a fiduciary's decision to retain an affiliate service provider whose fees will be paid by the plan sponsor will not involve an adversity of interest as contemplated by Section 406(b)(2) of the act. If, for example, a fiduciary of the plan, in negotiating a service contract on behalf of the plan, also acts on behalf of a person and causes that person to benefit from such a decision at the expense of any kind to the plan, the decision to retain the service provider would result in a violation of Section 406(b)(2). Accordingly, the decision to retain the manager to service the plan investments in the fund would not, in itself, constitute a violation of Section 406(b)(2); but because it is inherently factual in nature, no opinions can be rendered thereon. AO 83-44A.

7. [Leases to Sponsor] The leasing by a plan of improved real estate to the employer maintaining the plan is a prohibited transaction pursuant to ERISA Section 406(a)(1)(A), (C), (D) and (E) and Code Section 4975(c)(1)(A), (C) and (D). In addition, since any property leased to an employer is employer real property as defined in ERISA Section 407(d)(2), if such property is not qualifying employer real property within the meaning of ERISA Section 407(d)(4), the holding of such property by the plan is a prohibited transaction pursuant to ERISA Sections 406(a)(2) and 407(a)(1). Also, to the extent that the employer may be a fiduciary to the plan as defined in ERISA Section 3(21)(A) and Code Section 4975(e)(3), the lease arrangement may be a prohibited transaction pursuant to ERISA Section 406(b)(1) and (2) and Code Section 4975(c)(1)(E). Proposed PTE I 192.
8. [Sale to Insider of Sponsor] The sale of certain parcels of real property by a profit-sharing plan to the majority shareholder of the employer maintaining the plan and to a corporation 50% or more of which is owned by such majority shareholder would constitute prohibited transactions pursuant to ERISA Section 406(a)(1)(A) and (D) and Code Section 4975(c)(1)(A) and (D). In addition, if the majority shareholder has the power to appoint and remove the plan trustee, such sales may be prohibited transactions under ERISA Section 406(b)(1) and (2) and Code Section 4975(c)(1)(E). Proposed PTE I 492.
5. Court Decisions
1. [General] ERISA Section 406(b)(2) is to be read as requiring a transaction between the plan and a party having an adverse interest for the prohibition to apply. Donovan v. Bierwirth, 680 F.2d 263, 3 EBC 1417 (2d Cir.), cert. denied, 459 U.S. 1069 (1982).
2. [General] ERISA Section 406(b)(2) prohibits representation of parties who are adverse in the technical sense. A transaction does not have to exhibit fiduciary misconduct, reflecting harm to the beneficiaries, before ERISA Section 406(b)(2) is violated. When identical trustees of two plans whose participants and beneficiaries are not identical effect a loan between the plans without a statutory or administrative exemption, a per se violation of ERISA exists. ERISA Section 406(b) contains a blanket prohibition of certain transactions, no matter how fair. Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979).
3. [Loans] A party who is a borrower from a plan or who is claiming payment from a plan will, by definition, have interests adverse to the interests of the plan. Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978); Marshall v. Dekeyser, 485 F.Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).
4. [Loans] An employer trustee of a Taft-Hartley plan, who was also the director of the employer association, did not violate Section 406(b)(2) by either:
1. advising employers not to make contributions to the plan and to resist audits by the plan, or
2. bringing suit to block the plan's collection procedures that the trustee believed to be unauthorized.

The court noted that under Section 408(c)(3), a plan trustee can also serve as the director of an employer association and perform all of the duties required of a person holding each of these positions. The court also indicated that, where a trustee acts pursuant to Section 405(a)(3) to remedy a breach of fiduciary duty that such trustee believes to have been committed by another plan fiduciary, the trustee is not acting in violation of Section 406(b)(2) regardless of the trustee's motivation. Curren v. Freitag, 432 F.Supp. 668 (S.D.Ill. 1977). See also N.L.R.B. v. Construction and General Laborers Union Local 110, 577 F.2d 16 (8th Cir. 1978), cert. denied, 439 U.S. 1070 (1979) (union trustee and secretary-treasurer of union).

5. [Loans] The trustees of a multiemployer plan who agreed to cause the plan to: (a) pay rent to a corporation for the joint lease of an airplane (with a union) at a time when the plan held two notes from such corporation that were in default, or (b) make a loan commitment to the corporation so that the corporation could remove liens on an airplane it wished to acquire free of encumbrances, allegedly violated Section 406(b)(2). Usery v. Wilson, et al., No. 3-76-373 (E.D.Tenn., June 6, 1977) (consent order).

1. Conference Report

The above section is explained on page 309 of the Congressional Conference Report.

2. Regulations

No regulations have been issued yet. However, the regulations under Section 408(b)(2) amplify this prohibition.

1. This prohibition is imposed to deter fiduciaries from exercising the authority, control or responsibility that makes such persons fiduciaries when they have interests that may conflict with the interests of the plans for which they act. DOL ERISA Regulation 2550.408b-2(e)(1).
2. A fiduciary may not use the authority, control or responsibility that makes such a person a fiduciary to cause the plan to enter into a transaction involving plan assets whereby such fiduciary (or a person in which such fiduciary has an interest that may affect the exercise of such fiduciary best judgment as a fiduciary) will receive consideration from a third party in connection with such transaction. DOL ERISA Regulation 2550.408b-2(f).
3. The regulation cited above contains several important examples. DOL ERISA Regulation 2550.408b-2(f); however, not all of the examples deal with Section 406(b)(3).
4. For a definition of plan assets, see DOL ERISA Regulation 2510.3-101.
3. Advisory Opinions
1. [Compensation] The receipt of compensation by a fiduciary from a plan is a prohibited transaction if the fiduciary is already receiving full-time compensation from the employer maintaining the plan. AO 78-08.
2. [Estate Legacy] A violation of Section 406(b)(3) would not generally occur from the mere receipt of a distribution from an estate by a plan fiduciary as beneficiary of the estate in a transaction separate and apart from the plan's acquisition of qualifying employer securities from that estate. Under such circumstances, the distribution would not appear to be in connection with the transaction involving plan assets. AO 87-04A.
3. [Mutual Funds] No Section 406(b)(2) or (3) violations arise, per se, because fiduciaries to certain employee benefit plans are also sponsors of and advisers to certain mutual funds and the employee benefit plans purchase shares therein so long as these fiduciaries exercise none of the authority, control, or responsibility of the plans with regard to causing the plans to purchase units in the mutual funds. AO 82-31A.
4. Court Decisions
1. Fiduciary charged with violation of Section 406(b)(3) prohibiting receipt of consideration for fiduciary's own personal account from any party dealing with plan either must prove by a preponderance of evidence that the transaction in question fell within an exception, or must prove by clear and convincing evidence that compensation received was for services other than transactions involving plan assets. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 8 EBC 2457 (2d Cir. 1987).
2. If charged with a violation of Section 406(b)(3) the fiduciary bears the burden of proving that the questionable transaction fell within a Section 408 or regulatory exemption to Section 406(b)(3) or that compensation was for services other than the questionable transaction. For purposes of deciding a motion for summary judgment, if the transaction at issue is not exempted from the prohibitions of Section 406, the evidence before the court must be sufficient to permit a jury to conclude, by clear and convincing evidence, that the compensation received by a fiduciary was not "in connection with" the questionable investment of plan assets. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 8 EBC 2457 (2d Cir. 1987).

1. Conference Report

This provision is explained on page 308 of the Congressional Conference Report.

1. Conference Report

Pages 316-320 of the Congressional Conference Report explains the employer security and real property provisions.

2. Regulations
1. Refer to DOL ERISA Regulation 2550.407a-1. A plan may hold or acquire only employer securities that are qualifying employer securities and employer real property that is qualifying employer real property. A plan may not hold employer securities and employer real property that are not qualifying employer securities and qualifying employer real property except in certain circumstances.
2. See DOL ERISA Regulation 404c-1, covering participant-directed plans (such as 401(k) and 403(b)), which contains authorization for investments in employer securities (404c-1(b)(2)(B)(1)(vii)), and special conditions when offering them as an "investment alternative" (see 404c-1(d)(2)(ii)(E)(4)(vii), (viii) and (ix), as well as general 404c-1 requirements). In general, fiduciaries are exempted from certain ERISA fiduciary responsibility liability if plans meet certain conditions and participants direct their own investments.
3. Also refer to IRS Regulation 54.4975-12, which defines the term "Qualifying Employer Security".
3. Advisory Opinions
1. [Concentrations] The only language of ERISA that specifically limits the percentage amount of a particular asset that a plan may hold is found in Section 407, and this limitation refers to the holding or acquisition of qualifying employer securities or real property. Other than Section 407, the amount or percentage of plan assets that may be placed in a particular investment vehicle is governed by the general standards of fiduciary responsibility. AO 76-74.
2. [Limited Partnerships] Units in a limited partnership are not qualifying employer securities within the definition of ERISA Section 407(d)(5). The continued holding of such units may be a prohibited transaction under ERISA Sections 406(a)(2) and 407(a)(1). Proposed PTE I 038.
3. [Property - Leased] The leasing by a plan of improved real property to the employer maintaining the plan is a prohibited transaction pursuant to ERISA Section 406(a)(1)(A), (C), (D) and (E) and Code Section 4975(c)(1)(A), (C) and (D). In addition, since any property leased to an employer is "employer real property" as defined in ERISA Section 407(d)(2), if such property is not "qualifying employer real property" within the meaning of ERISA Section 407(d)(4), the holding of such property by the plan is a prohibited transaction pursuant to ERISA Sections 406(a)(2) and 407(a)(1). Also, to the extent that the employer may be a fiduciary to the plan as defined in ERISA Section 3(21)(A) and Code Section 4975(e)(3), the lease arrangement may be a prohibited transaction pursuant to ERISA Section 406(b)(1) and (2) and Code Section 4975(c)(1)(E). Proposed PTE I 192.
4. [Stock] Stock of the parent in a controlled group corporation held by an employee benefit plan sponsored and maintained by a wholly owned subsidiary constitutes employer qualified securities under Section 407. AO 84-36A.

1. Conference Report

Pages 316-320 of the Congressional Conference Report explains this employer security and real property provision.

2. Advisory Opinions
1. [Stock Exchanges] The exchange of stock between the employer maintaining the plan and the plan pursuant to a re-incorporation of the employer in another state is not an acquisition of employer stock by the plan. AO 75-100.
2. [Warrants] The acquisition of an employer's common stock by a plan through the exercise of warrants constitutes an acquisition by a plan of qualifying employer securities within the meaning of ERISA Section 407(a)(2). PLR 791005.

1. Conference Report

Pages 316-320 of the Congressional Conference Report explains the employer security and real property provisions.

2. Advisory Opinions

   A plan will meet the requirements of Section 407(a)(3)(B) if it falls below the 10% limitation on any day prior to December 31, 1984. AO 79-27.

3. Court Decisions

   Where a trustee invests less than 10% of a pension plan's assets complying with ERISA Section 407(a)(3), a trustee is not relieved of other fiduciary duties contained in ERISA. Donovan v. Bierwirth, 680 F.2d 263, 3 EBC 1417 (2d Cir.), cert. denied, 459 U.S. 1069 (1982).

1. Conference Report

Pages 316-320 of the Congressional Conference Report explain the employer security and real property provisions.

2. Advisory Opinions

[Bonds] A plan's holding of debentures issued by an employer may constitute a loan or extension of credit to the employer, which, if the conditions of Section 414(c)(1) are met, would be exempt until June 30, 1984 from the restrictions of Section 407(a). WSB 79-69.

1. Conference Report

Pages 316-320 of the Congressional Conference Report explains the above employer security and real property provision.

1. Conference Report

Pages 316-320 of the Congressional Conference Report explain the employer security and real property provisions.

1. Conference Report

Pages 316-320 of the Congressional Conference Report explain the definition of the term employer security.

2. Advisory Opinions
1. [Bonds] Rights to certain debentures may be employer securities. AO 76-72.
2. [Loan Guarantees] The guarantee by an employer of loans made by the plan to a third party constitutes an employer, under Section 407(d)(1) but not a qualifying employer security under Sections 407(d)(5) and 407(e). WSB 79-51.

1. Conference Report

Pages 316-320 of the Congressional Conference Report explain the definition of the term employer real property.

1. Conference Report

The term eligible individual account plan is covered at pages 316-320 of the Congressional Conference Report.

2. Advisory Opinions
1. [ESOPs] Section 407(b)(1) provides that the limitations on the acquisition and retention of qualifying employer securities and qualifying employer real property as contained in Section 407(a) do not apply to eligible individual account plans. Section 407(d)(3) defines the term eligible individual account plan to include an individual account plan that is an ESOP and that expressly provides for the acquisition and holding of employer securities. AO 81-67A.
2. An individual account plan is not an eligible individual account plan unless it explicitly provides for the acquisition and holding of qualifying employer securities or qualifying employer real property. AO 78-25; WSB 79-86.
3. [Profit Sharing Plans] Where a plan is a profit-sharing plan and, therefore, meets the requirements of Section 407(d)(3)(A), it would constitute an eligible individual account plan for purposes of Section 407(d)(3) in connection with the sale of employer stock held by the plan, even though the plan does not expressly provide for the acquisition and holding of employer securities as required by Section 407(d)(3)(B). WSB 79-88.
3. Court Decisions
1. [Governing Documents] For purposes of determining whether a plan provides for the purchase of employer securities, both the plan and the trust agreement can be looked to as plan documents. Leonard v. Drug Fair, Inc., Fed. Sec. L. Rep. (CCH) 997,144 (D.D.C. 1979).
2. [Defined Contribution Plan] Where the board of directors amended a pension plan to allow up to 50% of the plan's assets to be used to purchase the employer's securities, the plan will not violate ERISA Section 407 if the plan is within the definition of an eligible individual account plan. District 65, U.A. W. v. Harper & Row Publishers, Inc., 576 F.Supp. 1468, 4 EBC 2586, F&L S&L L. Rep. (CCH) 999,608 (S.D.N.Y. 1983).
3. [ESOPs] If a pension plan that allows up to 50% of the plan's assets to be used to purchase the employer's securities is an ESOP, the plan must conform to Code Section 401 in order to be an eligible individual account plan under ERISA Section 407(a). District 65, U.A. W. v. Harper & Row Publishers, Inc., 576 F.Supp. 1468, 4 EBC 2586, F&L S&L L. Rep. (CCH) 999,608 (S.D.N.Y. 1983).
4. [Bonds] In order for the purchase of debt securities by an eligible individual account plan to be exempt from the Section 407 limitations, the plan must specifically provide for the holding of marketable obligations of the type involved. Marshall v. Dekeyser, 485 F.Supp. 629, 1 EBC 1898 (W.D.Wis. 1979).

1. Conference Report

Pages 316-320 of the Congressional Conference Report explain the definition of the term qualifying employer real property.

2. Advisory Opinions
1. To meet the substantial number requirement of Section 407(d)(4)(A), there must be more than one parcel. AO 84-20A.
2. A single parcel of real property cannot be qualifying employer real property. Qualifying employer real property means parcels (plural) of employer real property. AO 76-14; AO 76-132; AO 77-16; Proposed PTE I 192, PLR 7847043.
3. Whether a substantial number of parcels of employer real property are geographically dispersed so as to provide protection for a plan in the event of adverse economic conditions in any one area, and whether such parcels are suitable or adaptable without excessive cost for more than one use are both questions that are inherently factual in nature and will not be the subject of advisory opinions. AO 84-20A.
4. Employer real property, is qualifying employer real property where there are six parcels of real property located in four different states; no two parcels are closer than 80 miles apart; five of the six parcels contain simple one-story structures and the machinery located therein could be removed at minimal costs without affecting the structure; and the sixth parcel contains a building with offices and open space for laboratories and machinery. AO 75-11.
5. The definition of the term qualifying employer real property requires a determination regarding whether a particular acquisition or retention of employer real property complies with ERISA Section 404. The Department of Labor will not issue an advisory opinion under Section 407(d)(4)(D) as to whether particular employer real property is qualifying employer real property. The Department will; however, issue advisory opinions regarding the other substantive conditions of Section 407(d)(4). AO 77-01.
6. The geographical dispersion requirement is satisfied where three parcels of property contain three restaurants that serve and draw from different fast food markets. AO 77-01.

1. Conference Report

Pages 316-320 of the Congressional Conference Report explain the definition of the term qualifying employer security.

2. Regulations

DOL ERISA Regulation 2550.407d-5 merely restates the statutory provisions.

3. Advisory Opinions
1. [Affiliate] A plan owns 100% of the stock of a corporation, but employees of that corporation do not participate in the plan. The stock of the corporation is not qualifying employer securities under Section 407(d)(5), since it has not been issued by an employer or an affiliate of an employer. AO 79-27.
2. [Affiliate] In general, where the employees of two or more employers [whether or not affiliated within the meaning of Section 407(d)(7)] are covered by a single plan, the securities issued by each employer or by an affiliate thereof, as defined in Section 407(d)(7), would ordinarily constitute qualifying employer securities within the meaning of Section 407(d)(5) if the applicable requirements under that section are satisfied. Accordingly, if the plan is, in fact, a single plan and continues to be maintained as one plan by both employers for their respective employees, the common stocks of each and both employers would constitute qualifying employer securities for purposes of applying the provisions of Sections 404(a)(2) and 407. AO 81-5A.
3. [Affiliate Stock] The common stock of a wholly owned subsidiary would be a qualifying employer security because it is a stock issued by an affiliate of an employer of employees covered by the plan. If the subsidiary has such employees, it would be stock issued by an employer of employees covered by the plan. If the subsidiary has employees covered by the plan, the subsidiary's stock will continue to be a qualifying employer security after the plan owns all of such stock. WSB 78-31. See also AO 77-30; WSB 78-26; WSB 79-86.
4. [Convertible Bonds] Debentures issued by an employer that are convertible into stock do not constitute stock for Purposes of Section 407(d)(5). AO 79-45.
5. [Loan Guarantees] The guarantee by an employer of loans made by the plan to a third party constitutes an employer security under Section 407(d)(1) but not a qualifying employer security under Sections 407(d)(5) and 407(e). WSB 79-51.
6. [Rights] Rights to certain debentures are not qualifying employer securities because they are neither stock nor marketable obligations. AO 76-72.
7. [Stock] Book value shares are qualifying employer securities. AO 77-35.
8. [Stock - Preferred] Preferred stock issued by an affiliate of an employer whose employees are covered by a plan is a qualifying employer security. AO 75-89.

1. Conference Report

The term ESOP is covered at pages 316-320 of the Congressional Conference Report.

2. Regulations

Refer to DOL ERISA Regulation 2550.407d-6. These regulations contain several requirements relating to ESOPs.

An ESOP must also meet such other requirements as the Secretary of the Treasury may prescribe by regulation under Section 4975(e)(7) of the Internal Revenue Code.

3. Advisory Opinions

   [ESOPs] Where a plan is organized and established as an employee stock ownership plan for the purpose of investing primarily in qualifying employer securities but where under the circumstances it would not be prudent or otherwise beneficial to plan participants for the ESOP to invest a large percentage of its assets in qualifying employer securities, even though plan documents generally provide for such investments. In that situation the potential liability for breach of fiduciary duty makes a fiduciary's decision to disregard a plan provision difficult. A plan provision that requires a plan to invest more than 50% of is assets in qualifying employer securities would normally be deemed to satisfy the requirement of Section 407(d)(6) that a plan must satisfy the primary requirement with regard to its primary investment objectives and vehicle. AO 83-6A.

4. Court Decisions

   [ESOPs] Where a pension plan purchased common stock without voting rights, the plan can still qualify as an ESOP under ERISA Section 407(d)(6), since Code Section 401 does not require stock to have voting rights for tax qualified plans. However, the ESOP must obtain voting power equal to or in excess of the amount of voting power held in said stock by the employer. Schoenholtz v. Doniger 657 F.Supp. 899, 8 EBC 2031 (S.D.N.Y. 1987).

1. Conference Report

"Affiliate" is discussed on pages 316-320 of the Congressional Conference Report.

2. Advisory Opinions
1. A corporation must be an affiliate prior to the sale of its securities for its securities to be either employer securities or qualifying employer securities. AO 77-18.
2. [Affiliate] Where an employer owns 62% of the outstanding stock of a corporation, such corporation is an "affiliate" of the employer under Section 407(d)(7). AO 79-23.
3. [Affiliate] A plan owns 100% of the stock of a corporation, but employees of that corporation do not participate in the plan. The stock of the corporation is not qualifying employer securities under Section 407(d)(5), since it has not been issued by an employer or an affiliate of an employer. AO 79-27.
4. For the exemption provided by Section 408(e) to apply to any sale, the property being sold must be either qualifying employer securities or qualifying employer real property at the time such securities or property, are sold by the plan. If a corporation is not a member of a controlled group prior to the consummation of a sale, the corporation's securities will not be securities of an affiliate prior to the sale. AO 77-18.

1. Conference Report

The above provision is covered at pages 316-320 of the Congressional Conference Report.

1. Conference Report

These employer security provisions are discussed at pages 316-320 the Congressional Conference Report.

2. Regulations

No regulations have been issued under Section 407(e), but regulations have been issued under Section 407(d)(5). ERISA Regulation 2550.407d-5.

3. Advisory Opinions
1. ["Independence"] A relative of an officer of the issuer is not "independent of the issuer." WSB 77-13; AO 78-25.
2. ["Independence"] A private foundation that was created by and may receive contributions from the issuer is not "independent of the issuer." AO 78-25.
3. [Loan Guarantees] The guarantee by an employer of loans made by the plan to a third party constitutes an employer security under Section 407(d)(1), but not a qualifying employer security under Sections 407(d)(5) and 407(e). WSB 79-51.
4. ["Marketable"] Debentures issued by a subsidiary of an employer constitute marketable obligations where they are purchased at the closing price on the New York Stock Exchange on the date of purchase, where they represent only 1.14% of the aggregate amount of debentures outstanding, where 50% of such aggregate amount is held by persons independent of the employer, and where the value of the debentures represents 22% of plan assets. AO 79-39.
5. [Mergers & Acquisitions] A trust will not be considered to have acquired certain debentures if, prior to the corporate merger pursuant to which the trust would have received the debentures, the trust sells or irrevocably assigns the rights to the debentures that it would have received in the merger. AO 76-72.
6. [Notes] A promissory note issued by an employer to a plan in lieu of a cash contribution to the plan will not constitute a marketable obligation if a substantial portion of the same issue of rates is not acquired by persons independent of the issuer for purposes of Section 407(e)(1) contemporaneously with the acquisition by the plan. PLR 7939009.

1. Conference Report.

The above exemption procedure is discussed on pages 309-311 of the Congressional Conference Report.

2. Regulations.

See DOL ERISA Regulation 2570.30 through .52. The regulation covers who may file for an exemption, where applications must be filed, the information to be included with an application, rights and procedures to a conference, publication and notification of interested persons, and the effect of an exemption. See also Revenue Procedure 75-26.

3. Prohibited Transaction Class Exemptions (PTE)
1. [Annuities] PTE C 77-8 covers the transfer of individual life insurance and annuity contracts from plans to a plan participant, the relative of a participant, the participant's employer or another plan. PTE C 77-7 covers transfers of the same assets to plans from plan participants or employers.
2. [Brokerage Services] PTE 79-1 granted an exemption for securities transactions for employee benefit plans by broker-dealers who serve as fiduciaries to the plans.
3. [Brokerage Services] In PTE 78-10, an exemption was granted for provision of securities by broker-dealers to plans for which they are fiduciaries.
4. [Brokerage Services] Exemption is granted for the execution of certain securities transactions in PTE 86-128.
5. [Collective Investment Funds] An exemption was granted for transactions between bank collective investment funds and parties in interest. PTE 80-51 (restated to PTE 91-38).
6. [Court-Authorized Transactions] PTE C 79-15 covers certain transactions authorized or required by judicial order or judicially approved settlement decree.
7. [Court-Directed Transactions] An exemption was granted for transactions authorized or permitted by a court. PTE 79-15.
8. [Customer Notes] A class exemption is granted for the purchase of customer notes of a party-in-interest employer by an employee benefit plan in PTE 85-68.
9. [Debt Retirement] PTE 80-83 provided an exemption for employee plans' purchase of securities used to retire indebtedness owed to parties in interest.
10. [Interest-Free Loans] PTE 80-26 granted an exemption for certain interest free loans, such as overdrafts, between employee benefit plans and parties in interest.
11. [Mortgages] An exemption was granted for employee benefit plans to provide mortgage financing to purchasers of certain residential construction in PTE 82-87.
12. [Mortgage Pools] PTE 81-7 exempted certain transactions between employee benefit plans and parties in interest involving mortgage pool investment trusts.
13. [Mutual Funds] PTE  77-4 covers the purchase and sale by a plan of mutual fund shares when a fiduciary to the plan is also the investment adviser for the mutual fund. Also see 1994 DOL letter to OCC.
14. [Mutual Funds - Closed-End] In PTE 79-13, an exemption was granted for acquisitions of shares in closed-end investment companies by employee benefit plans.
15. [Mutual Funds - Own] PTE  77-3 covers the purchase and sale of in-house mutual fund shares by an employee benefit plan covering employees of the mutual fund, its investment adviser or principal underwriter, or an affiliate thereof.
16. [Mutual Funds - Own Closed-End] PTE 79-13 covers the acquisition and sale of shares of certain registered closed end investment companies by plans that cover employees of the company, its investment adviser or an affiliate thereof.
17. [Office Space] PTE 77-10 grants an exemption for sharing and leasing of office space and administrative goods by multiple employer plans.
18. [Overdrafts] PTE 80-26 granted an exemption for certain interest free loans, such as overdrafts, between employee benefit plans and parties in interest.
19. [QPAM] PTE 84-14 covers certain prohibited transactions involving plans whose assets are managed by a qualified professional asset manager (QPAM).
20. [Repurchase Agreements] PTE 81-8 deals with the exemption granted for certain short-term investments (including repurchase agreements) by employee benefit plans.
21. [Securities Lending] PTE 81-6 granted an exemption for the lending of securities by employee benefit plans to broker-dealers and banks that are parties in interest to the plan.
22. [Securities Lending - Fees] An exemption was granted for the provision of securities lending services by a fiduciary to an employee benefit plan in PTE 82-63.
23. [Short-Term Investments] PTE 81-8 deals with the exemption granted for certain short-term investments (including repurchase agreements) by employee benefit plans.
24. PTE  77-9 covers six classes of transactions involving insurance agents and brokers, pension consultants, insurance companies, investment companies, investment company principal underwriters, and employee benefit plans:
• The fourth class covers the purchase with plan assets of an insurance or annuity contract from an insurance company.
• The fifth and sixth classes of transactions cover the purchase with plan assets of insurance or annuity contracts or securities issued by an investment company in situations where the insurance company, investment company, or investment company principal underwriter is a fiduciary or service provider to the plan solely by reason of sponsorship of a master or prototype plan.
25. Exemptions from prohibitions respecting certain transactions in which multiemployer and multiple employer plans are involved. PTE 76-1 and PTE 77-10. These exemptions cover three classes of transactions: (1) delinquent employer contributions; (2) construction loans; and (3) office space, administrative services and goods.
26. Exemptions from prohibitions respecting certain classes of transactions involving employee benefit plans and certain broker-dealers, reporting dealers and banks. PTE  75-1, PTE 78-10, and PTE 79-1. These exemptions cover five classes of transactions: (1) agency transactions and services, (2) principal transactions, (3) under writings, (4) market making, and (5) extensions of credit.
4. Advisory Opinions
1. [Bonding of Fiduciaries] The bonding provisions of ERISA are contained in Section 412. It is unlawful under Section 412(c) for any Person to procure a required bond through an agent in whose business operation a party in interest has any control or significant financial interest. ERISA's exemption provisions regarding bonding are contained in Section 412(e). Accordingly, it is concluded that Sections 408 and 414(c)(4) are not applicable to transactions that are unlawful under Section 412(c). AO 76-92.
2. [Relatives] An agent or broker who is a cousin of a plan fiduciary may receive commissions as agent or broker on the sale of insurance to the plan. WSB 79-104.
5. Court Decisions

Even though the terms of a transaction may be fair to the plan, if it constitutes a prohibited transaction under Section 406, the transaction constitutes a per se violation of ERISA without a Section 408 exemption. Approval of the transaction by a Taft-Hartley umpire is not sufficient. Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979).

1. Conference Report

Participant loans are discussed on pages 311-316 of the Congressional Conference Report.

2. Statutes

Also refer to Section 72(p) of the Internal Revenue Code, which imposes additional restrictions on loans to plan participants.

3. Regulations
1. Refer to DOL ERISA Regulation 2550.408b-1.
2. If plan makes more than 25 participant loans in a calendar year, it will be need to make the APR and Finance Charge (and other) disclosures required by the Truth in Lending Act and Federal Reserve Regulation Z. Refer to:
1. Footnote 3 of Regulation Z, concerning who meets the test of being a Creditor under Section 226.2(a)(17) of the Regulation; and
2. The Federal Reserve Board Official Staff Commentary on Regulation Z explanation of how Creditor applies to -
• Individual trust accounts instead of the Trust Department as a whole [Item 7], and
• "Employee savings plans" (401(k) and 403(b)-type plans) [Item 8].
4. Advisory Opinions
1. A transaction exempted by Section 408(b) from the prohibitions of Section 406(a) is not exempted for that portion of the transaction which may constitute a violation of Section 406(b). AO 83-45A.
2. The analysis of a program of investment by an employee benefit plan in residential mortgage loans that may be available to the plan's participants involves consideration of three distinct questions:
1. Whether the program is prudent within the meaning of Section 404(a)(1)(B),
2. Whether the loans within such a program are prudent within the meaning of that section, and
3. Where a loan is to be made to a plan participant, whether the rate of interest charged on the loan is available within the meaning of Section 408(b)(1).

[Note that the Department of Labor in December 1987 issued regulations under Section 408(b)(1) defining "reasonable rate of interest" consistent with prior decisions under Section 404(a)(2)(B), for example, endorsing the market or prevailing rate of interest.] AO 81-12A.

3. [ESOPs] Section 408(d) makes Section 408(b)(1) unavailable for transactions that involve a loan of any part of the income or corpus of a plan to a shareholder-employee as defined in Code Section 1379(d) of the employer maintaining the plan. The applicability of Section 408(b)(1) depends, among other things, on whether the proposed recipient is such a shareholder-employee. The trustees of the plan are responsible for determining whether the provisions of Section 408(b)(1), or any other section of ERISA, are applicable to the plan. AO 75-105.
4. A transaction that constituted a prohibited transaction but that was subject to a statutory exemption under Section 408(b) when the transaction was entered into may, in the future, become prohibited while the transaction continues because of changes in the relationship, causing the loss of the statutory exemption protection for the transaction. Thus, a loan between a plan and a party in interest may be entitled to relief under Section 408(b)(1) when the loan was made. However, if the party in interest later becomes an owner-employee for purposes of Section 408(d), then the loan is a prohibited transaction for which no relief is available under Section 408(b)(1). AO 84-44A.
5. Court Decisions
1. If other participants are required to provide greater security for their loans from a plan than the participant was required to provide, the loans to the participant are not made on a reasonably equivalent basis to loans to other participants as required by ERISA Section 408(b)(1)(A). Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
2. If a loan from a plan to a participant exceeds the total of all loans to all other participants, the loan does not meet the criteria of ERISA Section 408(b)(1)(B). Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
3. A loan in an amount that exceeds the limits set forth in the plan document does not satisfy ERISA Section 408(b)(1)(C). Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
4. A participant's vested interest in a plan may not constitute adequate security for a loan from the plan under Section 408(b)(1)(E). Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).

1. Conference Report

General ancillary services are covered on pages 311-316 of the Congressional Conference Report.

2. Regulations

Refer to DOL ERISA Regulation 2550.408b-2.

1. Section 408(b)(2) does not contain an exemption from acts described in Section 406(b)(1) through (3). Such acts are separate transactions not described in Section 408(b)(2). DOL ERISA Regulation 2550.408b-2(a).
2. A service is necessary for the establishment or operation of a plan if the service is appropriate and helpful to the plan obtaining the service in carrying out the purposes for which the plan is established and maintained. DOL ERISA Regulation 2550.408b-2(b).
3. No contract or arrangement is reasonable if it does not permit termination by the plan without penalty to the plan on reasonably short notice under the circumstances to prevent the plan from becoming locked into an arrangement that has become disadvantageous. DOL ERISA Regulation 2550.408b-2(c).
4. The prohibitions of Section 406(b) supplement the other provisions of Section 406(a) by imposing on parties in interest who are fiduciaries a duty of undivided loyalty to the plans for which they act. The prohibitions are imposed upon fiduciaries to deter them from exercising the authority, control or responsibility that makes such persons fiduciaries when they have interests that may conflict with the interest of the plans for which they act. A fiduciary may not use the authority, control or responsibility that makes such person a fiduciary to cause a plan to pay an additional fee to a person in which such fiduciary has an interest that may affect the exercise of such fiduciary's best judgment as a fiduciary to provide a service. DOL ERISA Regulation 2550.408b-2(e).
5. The regulations cited above contain several important examples. DOL ERISA Regulation 2550.408b-2(f). Some of the examples, however, only deal with Section 406(b)(1) and not with Sections 406(b)(2) and 406(b)(3).
6. The provision of services by a multiemployer plan to a party in interest is the subject of PTE C 76-1 and PTE C 77-10.
3. Prohibited Transaction Class Exemptions (PTE)
1. [Bank - Securities Lending] A securities lending service offered by a bank fiduciary to plans would not be exempt under Section 408(b)(2) because the compensation arrangement, which was based on a percentage of the value of the securities loan, might involve self-dealing. AO 79-11. However, see PTE 81-6 and PTE 82-63.
2. [Brokerage Services] A broker-dealer who provides investment advice to a plan and is therefore a fiduciary may, under certain circumstances, be able to effect brokerage transactions to a plan provided that he obtains prior authorization from another plan fiduciary before effecting any such transaction. Final PTE C 78-10.
3. [Brokerage Services at Cost or Free] Broker-dealers may perform brokerage services for plans that they sponsor when such services are undertaken to recapture commissions, when such services are provided in accordance with the provisions of Section 408(b)(2), or when such services are performed at no charge to a plan. Final PTE C 79-1.
4. [Indirect Expenses] Under ERISA Section 408(b)(2) and Code Section 4975(d)(2), a fiduciary may perform services for a plan and be reimbursed for certain direct expenses incurred in connection with those services. However, the allocation of overhead costs to the plan may not be covered by this exemption. Final PTE C 79-1.
5. [Office Space] The furnishing of office space or administrative services to a plan by a participating employee organization, employer or employee association, or by another multiemployer plan or multiple employer plan that is a party in interest or disqualified person to the plan, will generally be exempt from the prohibited transaction provisions if the conditions of ERISA Section 408(b)(2) and Code Section 4975(d)(2) are met. Final PTE C 76-1.
4. Advisory Opinions
1. [General] The Department will not rule on what constitutes a "necessary" service, a "reasonable" contract or arrangement, or what constitutes "reasonable" compensation since each issue is inherently factual in nature. Further, although Section 408(b)(2) generally permits the performance of multiple services for the same plan, it does not exempt an act of self-dealing by a fiduciary under the provisions of Section 406(b)(1). AO 82-26A.
2. [Administrative Services] A law firm may provide both legal and administrative services to a plan if the arrangement for all such services meets all of the requirements of Section 408(b)(2) and (c)(2) and Regulations Sections 2550.408b-2 and 2550.408c-2 and does not contravene the requirements of Section 406(b). WSB 78-18.
3. [Administrative Services] A welfare plan may retain a participating union to provide administrative services to the plan for a fee if those plan trustees who are officers of the union physically absent themselves from all consideration of the matter and do not use any of their authority or control to influence the plan's decision to hire the union). See Example 7 of DOL ERISA Regulation 2550.408b-2(f). WSB 79-41.
4. [Bank - Own-Bank Trustee] A bank is not prohibited from serving as trustee for a plan maintained for the bank's employees where it receives no compensation from the plan for its trustee services (Emphasis added). AO 79-49.
5. [Bank - Brokerage Service] The provision of brokerage services by a bank to employee benefit plans maintained by it for which the bank also serves as custodian and/or investment manager would be exempt from the prohibitions of Section 406(a) if the conditions of Section 408(b)(2) are met. Whether the conditions are met in each case involves questions that are inherently factual in nature and on which the Department of Labor will issue no rulings. AO 85-15; accord AO 85-16.
6. [Bank - CIF Investment Manager] The provision of investment management services by a wholly owned bank subsidiary would be exempt from the prohibitions of Section 406(a)(1) of ERISA in connection with the maintenance of a common or collective trust fund if the conditions of Section 408(b)(2) are specifically met. AO 82-22A.
7. [Bank - CIF Investment Manager] The supplying of investment management and advisory services by a registered advisor/investment manager to a common trust fund of a bank, both of which are part of a single controlled group, would be exempt from the prohibitions of Section 406(a) if the conditions of Section 408(b)(2) are met. The exemption granted by Section 408(b)(2) is limited to Section 406(a) prohibited transactions and does not cover the situations described in Section 406(b). Thus, a decision with regard to the manager's retention by the common trust fiduciaries could constitute a violation of Section 406(b). Further, compensation paid by a service provider to its employees may be a properly reimbursable expense under Regulations Section 2550.408c-2(b)(3) if the expense would not, in fact, have been sustained had the services not been provided and if it can be properly allocated to the particular services provided. What constitutes a direct expense in a particular case; however, is a factual matter to be resolved, taking into account the relevant facts and circumstances, and will not be the subject of an advisory opinion. AO 83-20A.
8. [Bank - CIF/STIF] The provision of trustee services by a bank to employee benefit plans and the investment of plan funds in the bank's commingled short term investment fund would be exempt from the prohibitions of Section 406(a) if the conditions of Sections 408(b)(2) and 408(b)(8) are met. Also, the mere selection of the bank to provide trustee services to the plans would not in itself constitute a violation of Section 406(b)(1). However, self-dealing in violation of Section 406(b)(1) could occur in the case of a committee's deliberations regarding the retention of the bank as trustee, and no opinion can be rendered on that potential circumstance. AO 82-62A.
9. [Bank - Loan Participations] Under Section 408(b)(2), a bank trustee for a plan may also provide services to a plan under a loan participation agreement, even if the plan can terminate such services only by selling its participation. WSB 79-48.
10. [Brokerage/Investment Management at No Cost] A brokerage firm which proposes to provide investment management and brokerage services to employee benefit plans, to be paid for directly by the plan sponsor, would be exempt from the prohibitions of Section 406(a)(1) if the conditions contained in Section 408(b)(2) are met (Emphasis added). AO 82-26A.
11. [Custodian] Under the facts of the request, where a brokerage firm acts as custodian of custodial accounts established under a prototype plan for self-employed persons (a Keogh plan) or a simplified employee pension plan (SEP) but possesses no discretionary authority over the investments over the accounts nor any other aspect of the business administration of the custodial accounts, the firm would not be treated as a trustee for purposes of PTE 79-4. AO 82-12A.
12. [Direct Expenses] Where the employer plan sponsor provides administrative services to the plan for charges based upon its actual cost for labor and material in connection therewith, the provision of administrative services would be exempt from the prohibitions of Section 406(a), assuming that, in fact and in operation, the plan service provider has met the conditions of Section 408(b)(2). In addition, it is the Department's view that compensation paid to a service provider to its employees may be a properly reimbursable expense under DOL ERISA Regulation 2550.408c-2(b)(3) if the expense would not have been sustained had the services not been provided, if it can be properly allocated to the particular services provided and the expense does not represent an allocable portion of overhead cost. AO 82-01A.
13. [Float] The ancillary services exemptions (including 408(b)(6)) do not include the float earned by the fiduciary bank from a demand deposit account to the extent that it is reasonably possible to earn a return on such funds. Retention of float would be permissible if it was a part of the bank's overall compensation from the plan and if the bank had made appropriate disclosures regarding the use of float. Failure to comply would result in a violation of ERISA Section 406(b)(1). AO 93-24A.
14. [Related Expenses] A plan may reimburse its attorney for expenses incurred in attending an educational seminar if, under the facts and circumstances, attendance at such seminar was deemed to be relevant to the needs of the plan. WSB 79-85.
15. The provision of services, including construction or repair services, to an apprenticeship plan by a contributing employer or the leasing of office space by an apprenticeship plan from a contributing employer are covered by the statutory exemption under ERISA Section 408(b)(2). Proposed PTE C 78-5. AO 79-72.
5. Court Decisions
1. [Written Contract Required] The Section 408(b)(2) exemption is only available where there is a contract or arrangement for services. Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
2. [Partial Exemption Only] ERISA Section 408(b)(2) provides no exemption from the provisions of ERISA Section 406(b). Although the language of ERISA Section 408(b)(2) appears to provide an exemption from all of the prohibitions of Section 406, the court concluded, based on the legislative history of Section 408(b)(2), that it should not be construed to provide an exemption from the prohibitions of ERISA Section 406(b). The decision explicitly supports ERISA Regulations Section 2550.408b-2(a) and (e). Marshall v. Kelly, 465 F.Supp. 341, 1 EBC 1850 (W.D.Okla. 1978).
3. [Reasonable Compensation] Transactions between trustees of a pension, health and welfare fund and a claims processing company for the rendering of services necessary for the operation of the plan are exempted under Section 408 unless the company receives more than reasonable compensation. Brock v. Robbins 830 F.2d 64, 8 EBC 2489 (7th Cir. 1987).

1. Conference Report

ESOP loans are covered in pages 311-316 of the Congressional Conference Report.

2. Regulations

Regulations have been issued under Section 408(b)(3). See DOL ERISA Regulation 2550.408b-3.

1. Section 408(b)(3) provides an exemption from the prohibited transaction provisions of Sections 406(a), 406(b)(1), and 406(b)(2). Section 408(b)(3) does not provide an exemption from the prohibitions of Section 406(b)(3). DOL ERISA Regulation 2550.408b-3(b)(1).
2. The exemption under Section 408(b)(3) includes within its scope certain transactions in which the potential for self-dealing by fiduciaries exists and in which the interests of fiduciaries may conflict with the interests of beneficiaries. To guard against these potential abuses, the Department of Labor will subject these transactions to special scrutiny to ensure that they are primarily for the benefit of participants and beneficiaries. DOL ERISA Regulation 2550.408b-3(b)(2).
3. These regulations contain several requirements relating to these loans. See also Treasury Department Regulation 54.4975-7(b).

1. Conference Report

Deposits with fiduciaries are discussed on pages 311-316 of the Congressional Conference Report.

2. Regulations

Refer to DOL ERISA Regulation 2550.408b-4.

1. Section 408(b)(4) provides an exemption from Section 406(b)(1) and 406(b)(2), as well as Section 406(a)(1) because Section 408(b)(4) contemplates a bank or similar financial institution causing a plan for which it acts as a fiduciary to invest plan assets in its own deposits or certificates of deposit, if the requirements of Section 408(b)(4) are met. However, it does not provide an exemption from Section 406(b)(3). The receipt of such consideration is a separate transaction not described in the statutory exemption. DOL ERISA Regulation 2550.408b-4(a).
2. Such investment may be made if the investment is expressly authorized by a provision of the plan or trust agreement or if the investment is expressly authorized (or made) by a fiduciary of the plan who has authority to make such investments and who has no interest in the transaction that may affect the exercise of such authorizing fiduciary's best judgment as a fiduciary so as to cause such authorization to constitute an act described in Section 406(b). DOL ERISA Regulation 2550.408b-4.
3. If the requirements of Section 408(b)(4) are met, a defined benefit plan maintained by a bank employer may invest in certificates of deposit issued by the bank in excess of the 10% limitation of Section 407(a) of ERISA. AO 79-76.
3. Advisory Opinions
1. [Banks] The investment of plan assets of a noncollectively bargained multiple employer plan covering employees of banks, in savings accounts and certificates of deposit of banks that are contributing employers, constitutes a prohibited transaction under Section 406(a) and may also be prohibited under Section 406(b)(1) and (2) because members of the administrative board of the plan, which directs plan investments, are officers and employees of contributing employer/banks.

However, Section 408(b)(4) provides an exemption from Sections 406(a), 406(b)(1) and 406(b)(2) for the investment of plan assets in the deposits or certificates of deposit of a bank that is a plan fiduciary or party in interest, if the requirements of DOL ERISA Regulation 2550.408b-4 are met. One requirement of the regulation is that, for investments made after November 1, 1977, the plan specify the name(s) of the bank(s) in which deposits may be made. The specifications may be made in the plan by amendment retroactive to November 1, 1977. AO 79-25.

2. [Naming of Depository] A prototype plan used by a bank contained authorization "to invest in any type of deposit of the Trustee." The prototype plan defined the Trustee as the person who executed an adoption agreement. The bank adopted the prototype by executing an adoption agreement. A question arose as to whether such an indirect designation of the fiduciary bank was satisfactory.

In response to an FDIC telephone inquiry, the DOL Office of (ERISA) Regulations and Interpretations staff indicated informally that the arrangement was deemed to comply with Section 408(b)(4) of the Act, DOL ERISA Regulation 2550.408b-4, and AO 79-25. The DOL staff indicated DOL would take a rather liberal view of the various documentation that would constitute the plan document(s). [10-27-94.]

3. [Substantial Penalty] The payment by an employee benefit plan to an issuer bank of a penalty upon the early redemption of certificates of deposit is subject to the exemption set forth in Section 408(b)(4) to the extent the exemption was available to the certificates of deposit. AO 81-42A.
4. [Non-bank Bank] A company engaged in the business of issuing face amount certificates for sale to employee benefit plans, among others, is a bank or similar financial institution within the meaning of Section 408(b)(4) based upon the facts set forth in the ruling request. AO 83-18A.
5. [Non-bank Bank] An industrial loan company may qualify as a bank or similar financial institution for purposes of meeting the conditions of Section 408(b)(4), exempting transactions from the prohibitions of Section 406. Thus, investment of assets of employee benefit plans in the industrial loan entity's saving instruments would be permitted under Section 408(b)(4). AO 82-64A.
6. [Deposits - Insured/Uninsured] The diversification requirement of Section 404(a)(1)(C) generally will not be violated if all plan assets in an individual account plan are invested in a federally insured savings account, so long as the account is fully insured. Where the account balance exceeds the amount covered by federal insurance, compliance with Section 404(a)(1)(C) is determined by whether the bank invests its assets in a diversified manner. AO 77-46.

1. Conference Report

The Congressional Conference Report explains this statutory exemption at pages 311-316.

2. Advisory Opinions
1. [Pooled Fund Use] Where the assets of an insurance company's own plan are maintained in a single customer separate account pursuant to a group annuity contract, the transfer of such assets in kind to a pooled separate account maintained by the company in return for the acquisition of units in such pooled account by the plan, together with a change in the contract to permit plan investment in the pooled account, is exempt under Section 408(b)(5). AO 79-79.
2. Stop-loss policies of insurance are deemed to be included in the term "life insurance, health insurance and annuity contracts" as that term is used in PTE C 79-41 in connection with sale of stop-loss insurance by an affiliate of a bank holding company to plan sponsor by the holding company for its employees or employees of its affiliates. AO 83-19A.

1. Conference Report

Bank ancillary services are discussed on pages 311-316 of the Congressional Conference Report.

2. Regulations

Regulations have been issued under Section 408(b)(6). DOL ERISA Regulation 2550.408b-6.

1. The Section 408(b)(6) exemption exempts ancillary services that do not meet the requirements of Section 408(b)(2) because the provision of such services involves self-dealing described in Section 406(b)(1) by the fiduciary bank or similar financial institution or a conflict of interest described in Section 406(b)(2). Section 408(b)(6) provides an exemption from Sections 406(b)(1) and (2) because Section 408(b)(6) contemplates the provision of such ancillary services without the approval of a second fiduciary. DOL ERISA Regulation 2550.408b-6(a).
2. Plan assets held by a fiduciary bank that are reasonably expected to be needed to satisfy current plan expenses may be placed by the bank in a non-interest bearing checking account in the bank if the conditions of this regulation are met notwithstanding the provisions of Section 408(b)(4), which required the payment of a reasonable rate of interest on bank deposits. DOL ERISA Regulation 2550-408b-4(a).
3. Section 408(b)(6) does not provide an exemption for the receipt of compensation described in Section 406(b)(3). The receipt of such consideration is a separate transaction not described in Section 408(b)(6). DOL ERISA Regulation 2550.408b-4(a).
3. Prohibited Transaction Class Exemptions (PTE)

   [Securities Lending] Securities lending is an authorized ancillary service which may be offered by a bank to an ERISA plan. PTE 81-6 permits securities lending and PTE 82-63 permits the bank to receive a fee for providing such services.

4. Advisory Opinions

   [Bank Loan to Plan] Section 408(b)(6) does not provide an exemption for a loan to a plan by a bank trustee, even if authorized by the plan instruments, in order to aid the plan in paying the purchase price for an asset being purchased by the plan at the direction of the plan's administrative committee. AO 79-73.

1. Conference Report

The Congressional Conference Report explains this statutory exemption at pages 311-316.

1. Conference Report

The use of a fiduciary's collective investment funds is covered in pages 311-316 of the Congressional Conference Report.

2. Advisory Opinions
1. [Annual Reports to Plan Administrators] CIFs are required to provide an annual report, covering certain material, to plan administrators of participating ERISA plans. See DOL ERISA Regulation 2520.103-5.
2. [CIF Investments in Another CIF] Fund-to-fund investments by affiliates of a multibank holding company, by bank pooled funds in corresponding pooled funds of other affiliates of the holding company, and fund-to-fund investments by a pooled fund of the controlled group in another pooled fund of the controlled group are transactions involving the sale or purchase of all interest in a fund by an employee benefit plan and would be exempt from the prohibitions of Section 406(a)(1) if the conditions of Section 408(b)(8) are met. AO 82-41A.
3. [Trust Company CIFs] A wholly owned subsidiary corporation of an investment manager established as a trust company and subject to the supervision and examination by the superintendent of banks in the state of its domicile shall be deemed to constitute a bank for purposes of PTE C 80-51, and its common or collective trust fund may be utilized for investment by employee benefit plans managed by the parent-investment manager so long as the conditions of Section 408(b)(8) are satisfied. AO 83-12.

1. Conference Report

The Congressional Conference Report explains this statutory exemption at pages 311-316.

1. Conference Report

The Congressional Conference Report does not explain Section 408(c)(1).

2. Court Decisions
1. Profit-sharing plan trustees improperly refused to pay benefits to a former executive on the ground that it would breach his fiduciary duties to receive plan benefits, as he was still a plan trustee when the request was made, since Section 408(c) permits a fiduciary to receive benefits to which he may be entitled as a plan participant so long as benefits are computed and paid in the same manner as they are for other participants. Kann v. Keystone Resources, Inc. Profit Sharing Plan, 575 F.Supp. 1084, 5 EBC 1233 (W.D. Pa. 1983).
2. Where, as a result of termination of employment, an employee is vested in only a portion of his account balance under a profit-sharing plan, the remaining portion being reallocated under the terms of the plan to other accounts of other participants, the fact that participants who are also plan fiduciaries benefited from such reallocation does not constitute self-dealing by virtue of ERISA Section 408(c)(1). Shaw v. Kruidenier, 470 F.Supp. 1375 (S.D.Iowa 1979), aff'd, 620 F.2d 207 (8th Cir. 1980).

1. Conference Report

The Congressional Conference Report does not explain this interpretation.

2. Regulations

Regulations have been issued under Section 408(c)(2). DOL ERISA Regulation 2550.408c-2.

1. Section 408(b)(2) refers to the payment of reasonable compensation by a plan to a party in interest for services rendered to the plan. Section 408(c)(2) clarifies what constitutes reasonable compensation for such services. DOL ERISA Regulation 2550.408c-2(a).
2. Generally, whether compensation is reasonable under Sections 408(b)(2) and 408(c)(2) depends on the particular facts and circumstances of each case. DOL ERISA Regulation 2550.408c-2(b)(1).
3. The term "reasonable compensation" does not include any compensation to a fiduciary who is already receiving full-time pay from an employer or association of employers or from an employer organization, except for the reimbursement of direct expenses properly and actually incurred and not otherwise reimbursed. These restrictions do not apply to a party in interest who is not a fiduciary. DOL ERISA Regulation 2550.408c-2(b)(2).
4. An expense is not a direct expense to the extent it would have been sustained had the service not been provided or if it represents an applicable portion of overhead costs. DOL ERISA Regulation 2550.408c-2(b)(3).
5. The term "reasonable compensation", as applied to a fiduciary or an employee of a plan, includes an advance to such a fiduciary or employee by the plan to cover direct expenses to be properly and actually incurred by such person in the performance of such person's duties with the plan if certain conditions are satisfied. DOL ERISA Regulation 2550.408c-2(b)(4).
3. Interpretive Bulletins

IB 75-6, relating to Section 408(c)(2), has been superseded by the regulation cited above.

4. Advisory Opinions
1. [General] Section 408(c)(2) was inserted in ERISA as an exemption from the Section 406 prohibited transaction rules to enable certain services to be provided to a plan. The clause in Section 408(c)(2) relating to full-time employee receiving solely reimbursement for expenses is a limitation within an exemption from Section 406. AO 75-21.
2. [General] A fiduciary who receives full-time pay from an employer association acting on behalf of a group of employers as a sponsor of an employee benefit plan where employees of the contributing employers are participants in this plan would be precluded under Section 408(b)(2) from receiving compensation from the plan for his services as a trustee. This is consistent with the legislative history of Section 408(c)(2) wherein Congress expressed an intent to prevent double payment when the sponsoring association, which is supported solely by the contributing employers, already pays the trustee full-time pay. AO 85-19A.
3. [Form of Compensation] Section 408(c)(2) and the regulations thereunder do not proscribe the payment of compensation to fiduciaries in a form other than cash (e.g, purchase of life insurance), provided the amount of total compensation paid in all forms is reasonable. WSB 78-34.
4. [Compensation] The manner in which a union, an employer, and an employer association characterize the payments that they make to trustees is not dispositive of the issue of whether those payments constitute full-time pay. WSB 78-36.
5. [Compensation] When two union trustees are full-time paid union officers, no compensation is permissible under Section 408(c)(2). AO 76-57.
6. [Compensation] The receipt of compensation by a fiduciary from a plan is a prohibited transaction if the fiduciary is already receiving full-time compensation from the employer maintaining the plan. AO 78-08.
7. [Compensation] A trustee or fiduciary who is paid by his employer on an hourly basis and who loses wages for time spent in connection with his plan duties will not be deemed to be receiving full-time pay from his employer during those periods of time that he is performing his duties as plan trustee or fiduciary; and he may, therefore, receive compensation from the plan for services rendered in the performance of his duties with the plan. AO 76-03; WSB 79-92; WSB 79-97
8. [Compensation - Owner] A management representative/trustee who is the owner of a business that is an employer whose employees are participants in the plan may not receive compensation from the plan for services rendered in the performance of his duties with the plan. The trustee's regular full-time pay or compensation will not be diminished for his time spent on plan duties. AO 76-03; WSB 79-92; WSB 79-97.
9. [Indemnification of Trustee] Reimbursement or payment by the fund, pursuant to certain indemnification provisions, of expenses properly and actually incurred (including reimbursement or payment of expenses properly and actually incurred in settlement of pending or threatened litigation) is not a prohibited transaction under Section 406(a)(1)(B) or (D) to the extent the reimbursement or payment does not exceed amounts allowed under Section 408(c)(2). AO 77-66/67.
10. [Expenses] Section 408(c)(2) expressly does not preclude reimbursement for expenses properly and actually incurred by any plan fiduciary. AO 75-145.
11. [Legal Expenses] Reimbursement of a legal defense expenses of Taft-Hartley plan trustees is permitted under certain circumstances. However, a plan provision authorizing reimbursement of legal fees in the event of any legal action that may arise from the performance of a trustee's fiduciary duties is too broad and would be prohibited under Section 408(c)(2). Where a fiduciary is found in legal proceedings to have violated his fiduciary duties, reimbursement of legal fees by the plan would not be permitted (Emphasis added). AO 78-29.
5. Court Decisions
1. [Legal Expenses] Absent any finding of breach of fiduciary duty, the reimbursement of litigation expenses incurred by a fiduciary defending against allegations of breach of fiduciary duty is not prohibited by Section 410(a) and, by virtue of Section 408(c)(2), is not a prohibited transaction. Central States Pension Fund v. American National Bank & Trust Co. of Chicago, No. 77 C 4335, slip op. (N.D.Ill., Oct. 26, 1979).
2. [Commissions] The investment of plan assets in companies in exchange for commissions, equity, or other compensation does not qualify as a Section 408 exempted transaction and, as such, is prohibited by Section 406. Lowen v. Tower Asset Management, Inc., 829 F.2d 1209, 8 EBC 2457 (2d Cir. 1987).
3. [Commissions] The payment of a sales commission to a fiduciary on the sale of plan real property is not exempt under Section 408(c)(2) as the fiduciary received full-time pay from the employer. If the commission is characterized as compensation for "extraordinary services", it is not exempt under Section 408(c)(2), since that section exempts only compensation for the performance of fiduciary duties. Marshall v. Kelly, 465 F.Supp. 341, 1EBC 1850 (W.D.Okla. 1978).

1. Conference Report

The Congressional Conference Report does not explain this interpretation.

2. Advisory Opinions
1. [General] Section 408(c)(3) has no bearing on the applicability of the fiduciary duties set forth in Section 404(a)(1). The Section also does not deal with possible prohibited transactions that might occur under Section 406(b), depending on the factual situation, when a fiduciary is a director of an investment manager of the plan's assets. AO 76-15.
2. [Own-Bank Plans] A bank is not prohibited from serving as trustee for a plan maintained for the bank's employees where it receives no compensation from the plan for its trustee services [Emphasis added]. AO 79-49.
3. [Bank Director] An individual who is a fiduciary of an employee benefit plan because he has authority to appointment the investment manager is not subject to liability under Section 406 merely because he continues to serve as the director of a trust company that has been appointed as an investment manager to manage assets of such plan. AO 76-15.
4. [Director] A person serving as a director of a fiduciary or a service provider is a representative of a party in interest. As such, he will not be subject to liability under Section 406 merely because he serves as a trustee of a plan while at the same time serving as a director of a bank service provider. AO 77-45.
3. Court Decisions

   The appointment of an officer or employee of the plan sponsor as plan trustee is not improper merely because of the trustee's relationship to the sponsor. Blackmar v. Lichtenstein, 468 F.Supp. 370 (E.D.Mo.), aff'd, 603 F.2d 1306, 1 EBC 1679 (8th Cir. 1979).

1. Conference Report

The Congressional Conference Report does not explain this exception to the scope of the exemptions.

2. Advisory Opinions

   Section 408(d) makes Section 408(b) unavailable for transactions between a plan and a shareholder-employee (as defined in Section 1379(d) of the Internal Revenue Code of 1954) of the plan. The trustees of the plan are, of course, responsible for determining whether the provisions of Section 408(b), or any other section of ERISA, are applicable to the plan. AO 75-105.

1. Conference Report

The Congressional Conference Report explains this employer security and real property exemption at pages 316-320.

2. Regulations

See DOL ERISA Regulation 2550.408e.

3. Advisory Opinions
1. [General] For the exemption provided by Section 408(e) to apply to any sale, the property being sold must be either qualifying employer securities or qualifying employer real property at the time such securities or property are sold by the plan. If a corporation is not a member of a controlled group prior to the consummation of a sale, the corporation's securities will not be securities of an affiliate prior to the sale (Emphasis added). AO 77-18.
2. [Employer Real Estate] Section 408(e) is not applicable where the property is not "qualifying employer real property" (Emphasis added). AO 76-14.
3. [Individual Account Plan] An exchange of employer common stock by an eligible individual account plan for stock of a new parent company is covered by Section 408(e). AO 78-22.
4. [Individual Account Plan] The exemption provided in Section 408(e) is available to an eligible individual account plan only if the conditions set forth in that section are met. AO 79-13 and AO 79-23. The exemption is not affected by the exercise of control by a participant or beneficiary over the assets in his individual account. AO 75-89.
5. [Employer Securities] The prohibited transaction restrictions of Section 406 of ERISA do not apply to a company's repurchase of its stock from its employee benefit plan, provided that the three conditions of Section 408(e) are met. However, the Department will not opine as to whether a particular transaction is for adequate compensation. AO 81-46A.
6. [Employer Securities] The acquisition by the plan of preferred stock of the plan sponsor in payment of a debt owned by the plan sponsor corporation to the plan, and the further acquisition by the plan of the plan sponsor's preferred stock in exchange for the plan sponsor's common stock held by the plan, constitute acquisitions within the meaning of Section 408(e). AO 81-33A.
7. [Valuation - Employer Securities] ERISA Section 3(18) defines the term "adequate consideration", in the case of a security for which there is no generally recognized market, as the fair value of the security determined in good faith by the trustee or named fiduciary to a plan pursuant to the terms of the plan and in accordance with regulations promulgated by the Department of Labor. The Department of Labor has not yet issued such regulations and does not, at the present time, contemplate making advance determinations as to adequate consideration in the case of individual purchases and sales of stock. Guidelines to be issued will be general guidelines in the form of regulations under Section 3(18). In view of the fact that no regulations have been issued under Section 3(18), the plan advisory committee should make a good faith determination of the fair market value of the common stock of the employer maintaining the plan, utilizing recognized methods of determining the value of stock of closely held corporations. AO 75-141.
8. [Valuation - Employer Securities] In view of the fact that no regulations have been issued under Section 3(18), the trustee should make a good faith determination of the fair market value of the book value shares, utilizing recognized methods of determining the value of such shares. The ruling received by the trustee from the Internal Revenue Service as to where the method of determining fair market value of the book value shares was a reasonable one for purposes of Section 1.421-7(e)(2) of the Income Tax Regulations would be considered as evidence that the trustee determining of fair market value was made in good faith. AO 77-35.

1. Conference Report

The Congressional Conference Report discusses the exculpatory provision proIf an investment manager or managers hibition.

2. Interpretive Bulletins

Indemnification agreements are not prohibited if the fiduciary who may be indemnified under the agreement remains responsible and liable for his acts or omissions with the indemnifying party merely satisfying the fiduciary liability. For example, an employer or union may agree to indemnity a plan fiduciary under Section 410(a). Also, a fiduciary can agree to indemnity his employees who perform fiduciary functions for a plan. However, a plan cannot agree to indemnify a fiduciary for a breach of fiduciary duty. IB 75-4.

3. Advisory Opinions
1. [Exculpatory Clauses] An exculpatory clause that appears in a plan instrument is void even if the plan is not amended to remove the clause. AO 75-122.
2. [Exculpatory Clauses] Any provision in a plan instrument purporting to relieve the trustees of the duty to collect contributions is void under Section 410(a). AO 78-28.
3. [Indemnification] Indemnification by a multiemployer plan of an investment manager's defense costs and settlement payment is permitted in a lawsuit alleging a breach of fiduciary duty by the investment manager, provided that (1) no court decision was rendered that the investment manager had breached his fiduciary duties; (2) the defense costs indemnified did not exceed a reasonable amount and (3) an opinion is obtained from independent legal counsel that the acts in question did not involve a breach of fiduciary duty by the investment manager. AO 77-66/67.
4. [Indemnification] An advance or reimbursement by a plan of expenses incurred by a plan fiduciary in defending a lawsuit alleging a breach of fiduciary duty is not a prohibited transaction, provided (1) no reimbursement is made or any advances repaid if a court rules that a breach has occurred; and (2) the advance or reimbursement is for expenses properly and actually incurred (see DOL ERISA Regulation 2550.408c-2). AO 77-66/67.
5. [Indemnification] Reimbursement of the legal defense expenses of Taft-Hartley plan trustees is permitted under certain circumstances. However, a plan provision authorizing reimbursement of legal fees in the event of any legal action that may arise from the performance of a trustee's fiduciary duties is too broad and would be prohibited under Section 410(a). Where a fiduciary is found in a legal proceeding to have violated his fiduciary duties, reimbursement of legal fees by the plan would not be permitted. AO 78-29.
4. Court Decisions
1. Absent any finding of breach of fiduciary duty, the reimbursement of litigation expenses incurred by a fiduciary in defending against allegations of breach of fiduciary duty is not prohibited by Section 410(a) and, by virtue of Section 408(c)(2), is not a prohibited transaction. Central States Pension Fund v. American National Bank & Trust Co. of Chicago, No. 77 C 4335, slip op. (N.D.Ill., Oct. 26, 1979).
2. Where a pension plan contains a provision to indemnify members of the board of directors, plan administrative committee, trustee and any other person to whom fiduciary responsibility was allocated from liability for a breach of fiduciary duty, except for liabilities and claims arising from willful misconduct, the indemnity agreement is void under ERISA Section 410(a). Donovan v. Cunningham, 541 F.Supp. 276, 3 EBC 1641 (S.D.Tex. 1982), aff'd in part, rev'd in part, 716 F.2d 1455, 4 EBC 2329 (5th Cir. 1983), cert. denied, 467 U.S. 1251 (1984).
3. A successor trustee cannot be exonerated by the provisions of a trust agreement from his duty to liquidate prior improper investments upon assuming his responsibilities. Marshall v. Craft, 463 F.Supp. 493 (N.D.Ga. 1978).
4. Even though a plan trustee has no authority for investment decisions, it cannot disavow itself of a responsibility for such decision since it is still a fiduciary. However, under the allocation provisions of Section 405(c)(1) the trustee may not, in fact, be liable for such decisions. Leonard v. Drug Fair, Inc., Fed. Sec. L. Rep. (CCH) Para 97,144 (D.D.C. 1979).
5. Where a pension plan was challenged under ERISA Section 410(a) because the summary plan descriptions contained disclaimers, the widow of a deceased employee could not maintain a private action since she was not a beneficiary as defined in ERISA. Trembly v. Marshall, 502 F.Supp. 29, 2 EBC 2500 (D.D.C. 1980).

1. Conference Report

The Congressional Conference Report discusses the fiduciary insurance provisions of Section 410(b) at pages 320-321.

2. Regulations

No regulations have been issued interpreting Section 410(b). However, in a news release issued on March 4, 1975, the Department of Labor stated that fiduciary insurance purchased by a plan that provides for recourse by the insurer against the fiduciary but that also permits the fiduciary to pay an additional premium to obtain coverage against the insurer's recourse is not prohibited under Section 410(b).

3. Advisory Opinions

Section 410(b) does not require plans to maintain fiduciary insurance. AO 76-03.

1. Conference Report

The Congressional Conference Report discusses the bonding requirements of ERISA.

2. Regulations
1. The temporary regulations generally incorporated by reference the bonding regulations issued under Section 13 of the Welfare and Pension Plans Disclosure Act (WPPDA). ERISA Regs. 2550.412-1. WPPDA Regulation Section 464 (29 C.F.R. 464).
2. Section 464.5 of the WPPDA regulations provides that the term "funds or other property" [see ERISA 412(a)] includes all property that is to be used by a plan as a source for paying benefits; however, it does not include, among other things, fixed assets used in the operation of a plan (e.g., a building used as office space by a plan).
3. Section 464.6 of the WPPDA regulations provides that in the case of multiemployer plans, employer contributions become plan funds when they are actually received by the plan.
4. Section 464.7 of the WPPDA regulations indicates the following regarding persons who handle funds or other property:
1. Generally, a person handles plan funds or other property, when he has a relationship to funds or property that can rise to risk of loss through fraud or dishonesty. DOL WPPDA Regulation 464.7(a)(1).
2. However, a person is not deemed to be handling where the risk of loss is negligible (e.g., where the person is handling checks, securities or title papers that he cannot negotiate). DOL WPPDA Regulation 464.7(a)(2).
3. The power to withdraw funds from a bank account generally constitutes handling, regardless of whether the power is authorized. DOL WPPDA Regulation 464.7(b)(2).
4. Having the authority to transfer ownership of plan assets to others constitutes handling. DOL WPPDA Regulation 464.7(b)(3).
5. Persons who disburse plan funds or sign plan checks are handling plan funds. DOL WPPDA Regulation 464.7(b)(4).
6. In the case of fully insured plans, there is generally no handling of plan funds or other assets, unless benefit payments, dividends, etc., are paid to the plan by the insurance company. DOL WPPDA Regulation 464.7(b)(7).
3. Interpretive Bulletins
1. A person who provides investment advice to a plan but does not handle plan funds or other property is not required to be bonded under Section 412. IB 75-5, Question FR-8.
2. A plan can purchase a bond covering plan officials, but the bond must be solely for the protection of the plan. IB 75-5, Question FR-9.
3. Even though a person is not a plan fiduciary, he may be subject to the bonding requirements of Section 412 if he handles plan funds or other property. IB 75-8, Question D-2.
4. Advisory Opinions
1. The Labor Department cannot postpone the applicability of the bonding requirements to any plan. AO 75-120.
2. There is no provision in Section 412 exempting plans with a minimum number of participants from the bonding requirements. AO 75-117.
3. Section 412(a) requires coverage only against fraud or dishonesty; it does not require errors and omissions coverage. AO 75-124.
4. A plan official is not required to be bonded unless he handles funds or other property. Handling occurs whenever the duties or activities of a plan official are such that there is a risk that such funds or other property could be lost in the event of fraud or dishonesty on the part of such person, acting either alone or in collusion with others. The authorization of disbursements may constitute handling, depending on the facts in a particular case. The factors that are considered include the closeness and continuity of supervision; who is, in fact, charged with or actually exercises final responsibility for determining whether specific disbursements or benefit claims are bona fide, regular and made in accordance with the applicable trust instrument or other documents; and who has the final responsibility for determining the propriety of any specific expenditure. AO 77-84.
5. An impartial chairman of a joint board of trustees who is only given full trustee voting authority to resolve disputes between trustees is handling plan funds or other property. AO 75-119.
6. Plan assets deposited in a savings account are not required to be bonded under Section 412. AO 77-11 and AO 79-10.
7. A person who (a) receives insurance policies from the plan trustees or participants for transmissions to the insurance company and (b) handles premium checks made out to the insurance carrier or receives checks made out to the plan trustees from the insurance company (but has no authority to negotiate these checks) is not handling plan funds or other property. AO 76-47.
8. The sale of a group insurance policy to an employer to fund a plan does not alone make the insurance company a party in interest to the plan. Therefore, the insurance company is not prohibited under Section 12(c) from selling a bond to the plan. AO 76-36.
9. The administrator of a plan cannot sell a bond to the plan under Section 412(c). The exemptions provided in Sections 408 and 414(c) apply only to prohibited transactions, not to the bonding restrictions. AO 76-92.
5. Court Decisions
1. A fiduciary who is not bonded is legally disqualified from serving as a fiduciary. Lane v. Marshall, Civ. A. No. 79-0868 (N.D.Cal., April 28,1979).
2. Posting of government obligations in lieu of corporate surety bond does not fulfill ERISA Section 412 bonding requirement. Musso v. Baker, 834 F.2d 78, 9 EBC 1145 (3d Cir. 1987), cert. denied, 101 L.Ed.2d 884, 1988 U.S. LEXIS 2840, 108 S.Ct. 2846, 56 U.S.L.W. 3864, 9 EBC 2304 (U.S. 1988) (where fund trustees deposited fund-owned federal government obligations).

Section 72(p)
26 USC 72(p)

As Amended through 1988 (P.L. 100-647)

1. Treatment as Distributions. - For purposes of this section -
1. Loans. - If during any taxable year a participant or beneficiary receives (directly or indirectly) any amount as a loan from a qualified employer plan, such amount shall be treated as having been received by such individual as a distribution under such plan.
2. Assignments or pledges. - If during any taxable year a participant or beneficiary assigns (or agrees to assign) or pledges (or agrees to pledge) any portion of his interest in a qualified employer plan, such portion shall be treated as having been received by such individual as a loan from such plan.
2. Exception of certain loans. -
1. General rule. - Paragraph (1) shall not apply to any loan to the extent that such loan (when added to the outstanding balance of all other loans from such plan whether made on, before, or after August 13, 1982), does not exceed the lesser of -
1. $50,000, reduced by the excess (if any) of
1. The highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which such loan was made, over
2. The outstanding balance of loans from the plan on the date which such loan was more, or
2. The greater of -
1. One-half of the present value of the nonforfeitable accrued benefit of the employee under the plan, or
2. $10,000.

For purposes of clause (ii) the present value of the nonforfeitable accrued benefit shall be determined without regard to any accumulated deductible employee contributions (as defined in subsection (O)(5)(b)).

2. Requirement that loan be repayable within 5 years-
1. In general. - Subparagraph (A) shall not apply to any loan unless such loan, by its terms, is required to be repaid within 5 years.
2. Exception for home loans. - Clause (i) shall not apply to any loan used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as a principal residence of the participant.
3. Requirement of level amortization. -- Except as provided in regulations, this paragraph shall not apply to any loan unless substantially level amortization of such loan (with payments not less frequently than quarterly) is required over the term of the loan.
4. Related employers and related plans. -- For purposes of this paragraph
1. The rules of subsections (b), (c), and (m) of section 414 shall apply, and
2. All plans of an employer (determined after the application of such subsections) shall be treated as 1 plan.
3. Denial of interest deductions in certain cases. -
1. In general. No deduction otherwise allowable under this chapter shall be allowed under this chapter for any interest paid or accrued on any loan to which paragraph (1) does not apply by reason of paragraph (2) during the period described in subparagraph (B).
2. Period to which subparagraph (A) applies. --For purposes of subparagraph (A), the period described in this subparagraph is the period--
1. On or after the 1st day on which the individual to whom the loan is made is a key employee (as defined in section 416(i)), or
2. Such loan is secured by amounts attributable to elective deferrals described in subparagraph (A) or (C) of section 402(g)(3). made to a key employee (as defined in section 416(i), or
4. Qualified employer plan, etc. For purposes of this subsection
1. Qualified employer plan -
1. In general. - The term "qualified employer plan" means -
1. A plan described in section 401(a) which includes a trust exempt from tax under section 501(a).
2. A annuity plan described in section 403(a), and
3. A plan under which amounts are contributed by an individual's employer for an annuity contract described in section 403(b).
2. Special rules. - The term "qualified employer plan" -
1. Shall include any plan which was (or was determined to be) a qualified employer plan or a government plan, but
2. Shall not include a plan described in subsection (e)(7).
2. Government plan. The term "government plan" means any plan, whether or not qualified, established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing.
5. Special rules for loans, etc., from certain contracts. For purposes of this subsection, any amount received as a loan under a contract purchased under a qualified employer plan (and any assignment or pledge with respect to such a contract) shall be treated as a loan under such employer plan.

Section 72(p)-1
26 USC 72(p)-1

Section 72(p) was added by section 236 of the Tax Equity and Fiscal Responsibility Act of 1982 (96 Stat. 324), and amended by the Technical Corrections Act of 1982 (96 Stat. 2365), the Deficit Reduction Act of 1984 (98 Stat. 494), the Tax Reform Act of 1986 (100 Stat. 2085), and the Technical and Miscellaneous Revenue Act of 1988 (102 Stat. 3342).

Section 72(p)-1 was added on July 31, 2000 [Federal Register Volume 65, Number 147].

Statutory effective date: Section 72(p) applies to assignments, pledges, and loans made after August 13, 1982.

Regulatory effective date: Section 72(p)-1 applies to assignments, pledges, and loans made on or after January 1, 2002.

Refer to response to question # 22 (a) through (c)(2) below for applicability dates.

Sec. 1.72(p)-1 Loans treated as distributions.

The questions and answers in this section provide guidance under section 72(p) pertaining to loans from qualified employer plans (including government plans and tax-sheltered annuities and employer plans that were formerly qualified). The examples included in the questions and answers in this section are based on the assumption that a bona fide loan is made to a participant from a qualified defined contribution plan pursuant to an enforceable agreement (in accordance with paragraph (b) of Q&A-3 of this section), with adequate security and with an interest rate and repayment terms that are commercially reasonable. (The particular interest rate used, which is solely for illustration, is 8.75 percent compounded annually.) In addition, unless the contrary is specified, it is assumed in the examples that the amount of the loan does not exceed 50 percent of the participant's nonforfeitable account balance, the participant has no other outstanding loan (and had no prior loan) from the plan or any other plan maintained by the participant's employer or any other person required to be aggregated with the employer under section 414(b), (c) or (m), and the loan is not excluded from section 72(p) as a loan made in the ordinary course of an investment program as described in Q&A-18 of this section. The regulations and examples in this section do not provide guidance on whether a loan from a plan would result in a prohibited transaction under section 4975 of the Internal Revenue Code or on whether a loan from a plan covered by Title I of the Employee Retirement Income Security Act of 1974 (88 Stat. 829) (ERISA) would be consistent with the fiduciary standards of ERISA or would result in a prohibited transaction under section 406 of ERISA. The questions and answers are as follows:

Q-1: In general, what does section 72(p) provide with respect to loans from a qualified employer plan?

A-1: (a) Loans. Under section 72(p), an amount received by a participant or beneficiary as a loan from a qualified employer plan is treated as having been received as a distribution from the plan (a deemed distribution), unless the loan satisfies the requirements of Q&A-3 of this section. For purposes of section 72(p) and this section, a loan made from a contract that has been purchased under a qualified employer plan (including a contract that has been distributed to the participant or beneficiary) is considered a loan made under a qualified employer plan.

(b) Pledges and assignments. Under section 72(p), if a participant or beneficiary assigns or pledges (or agrees to assign or pledge) any portion of his or her interest in a qualified employer plan as security for a loan, the portion of the individual's interest assigned or pledged (or subject to an agreement to assign or pledge) is treated as a loan from the plan to the individual, with the result that such portion is subject to the deemed distribution rule described in paragraph (a) of this Q&A-1. For purposes of section 72(p) and this section, any assignment or pledge of (or agreement to assign or to pledge) any portion of a participant's or beneficiary's interest in a contract that has been purchased under a qualified employer plan (including a contract that has been distributed to the participant or beneficiary) is considered an assignment or pledge of (or agreement to assign or pledge) an interest in a qualified employer plan. However, if all or a portion of a participant's or beneficiary's interest in a qualified employer plan is pledged or assigned as security for a loan from the plan to the participant or the beneficiary, only the amount of the loan received by the participant or the beneficiary, not the amount pledged or assigned, is treated as a loan.

Q-2: What is a qualified employer plan for purposes of section 72(p)?

A-2: For purposes of section 72(p) and this section, a qualified employer plan means-

(a) A plan described in section 401(a) which includes a trust exempt from tax under section 501(a);

(b) An annuity plan described in section 403(a);

(c) A plan under which amounts are contributed by an individual's employer for an annuity contract described in section 403(b);

(d) Any plan, whether or not qualified, established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of the United States, a State or a political subdivision of a State; or

(e) Any plan which was (or was determined to be) described in paragraph (a), (b), (c), or (d) of this Q&A-2.

Q-3: What requirements must be satisfied in order for a loan to a participant or beneficiary from a qualified employer plan not to be a deemed distribution?

A-3: (a) In general. A loan to a participant or beneficiary from a qualified employer plan will not be a deemed distribution to the participant or beneficiary if the loan satisfies the repayment term requirement of section 72(p)(2)(B), the level amortization requirement of section 72(p)(2)(C), and the enforceable agreement requirement of paragraph (b) of this Q&A-3, but only to the extent the loan satisfies the amount limitations of section 72(p)(2)(A).

(b) Enforceable agreement requirement. A loan does not satisfy the requirements of this paragraph unless the loan is evidenced by a legally enforceable agreement (which may include more than one document) and the terms of the agreement demonstrate compliance with the requirements of section 72(p)(2) and this section. Thus, the agreement must specify the amount and date of the loan and the repayment schedule. The agreement does not have to be signed if the agreement is enforceable under applicable law without being signed. The agreement must be set forth either--

(1) In a written paper document;

(2) In an electronic medium that is reasonably accessible to the participant or the beneficiary and that is provided under a system that satisfies the following requirements:

(i) The system must be reasonably designed to preclude any individual other than the participant or the beneficiary from requesting a loan.

(ii) The system must provide the participant or the beneficiary with a reasonable opportunity to review and to confirm, modify, or rescind the terms of the loan before the loan is made.

(iii) The system must provide the participant or the beneficiary, within a reasonable time after the loan is made, a confirmation of the loan terms either through a written paper document or through an electronic medium that is reasonably accessible to the participant or the beneficiary and that is provided under a system that is reasonably designed to provide the confirmation in a manner no less understandable to the participant or beneficiary than a written document and, under which, at the time the confirmation is provided, the participant or the beneficiary is advised that he or she may request and receive a written paper document at no charge, and, upon request, that document is provided to the participant or beneficiary at no charge; or

Q-4: If a loan from a qualified employer plan to a participant or beneficiary fails to satisfy the requirements of Q&A-3 of this section, when does a deemed distribution occur?

A-4: (a) Deemed distribution. For purposes of section 72, a deemed distribution occurs at the first time that the requirements of Q&A-3 of this section are not satisfied, in form or in operation. This may occur at the time the loan is made or at a later date. If the terms of the loan do not require repayments that satisfy the repayment term requirement of section 72(p)(2)(B) or the level amortization requirement of section 72(p)(2)(C), or the loan is not evidenced by an enforceable agreement satisfying the requirements of paragraph (b) of Q&A-3 of this section, the entire amount of the loan is a deemed distribution under section 72(p) at the time the loan is made. If the loan satisfies the requirements of Q&A-3 of this section except that the amount loaned exceeds the limitations of section 72(p)(2)(A), the amount of the loan in excess of the applicable limitation is a deemed distribution under section 72(p) at the time the loan is made. If the loan initially satisfies the requirements of section 72(p)(2)(A), (B) and (C) and the enforceable agreement requirement of paragraph (b) of Q&A-3 of this section, but payments are not made in accordance with the terms applicable to the loan, a deemed distribution occurs as a result of the failure to make such payments. See Q&A-10 of this section regarding when such a deemed distribution occurs and the amount thereof and Q&A-11 of this section regarding the tax treatment of a deemed distribution.

(b) Examples. The following examples illustrate the rules in paragraph (a) of this Q&A-4 and are based upon the assumptions described in the introductory text of this section:

Example 1.
(i) A participant has a nonforfeitable account balance of $200,000 and receives $70,000 as a loan repayable in level quarterly installments over five years.

(ii) Under section 72(p), the participant has a deemed distribution of $20,000 (the excess of $70,000 over $50,000) at the time of the loan, because the loan exceeds the $50,000 limit in section 72(p)(2)(A)(i). The remaining $50,000 is not a deemed distribution.

Example 2.
(i) A participant with a nonforfeitable account balance of $30,000 borrows $20,000 as a loan repayable in level monthly installments over five years.

(ii) Because the amount of the loan is $5,000 more than 50% of the participant's nonforfeitable account balance, the participant has a deemed distribution of $5,000 at the time of the loan. The remaining $15,000 is not a deemed distribution. (Note also that, if the loan is secured solely by the participant's account balance, the loan may be a prohibited transaction under section 4975 because the loan may not satisfy 29 CFR 2550.408b-1(f)(2).)

Example 3.
(i) The nonforfeitable account balance of a participant is $100,000 and a $50,000 loan is made to the participant repayable in level quarterly installments over seven years. The loan is not eligible for the section 72(p)(2)(B)(ii) exception for loans used to acquire certain dwelling units.

(ii) Because the repayment period exceeds the maximum five-year period in section 72(p)(2)(B)(i), the participant has a deemed distribution of $50,000 at the time the loan is made.

Example 4.
(i) On August 1, 2002, a participant has a nonforfeitable account balance of $45,000 and borrows $20,000 from a plan to be repaid over five years in level monthly installments due at the end of each month. After making monthly payments through July 2003, the participant fails to make any of the payments due thereafter.

(ii) As a result of the failure to satisfy the requirement that the loan be repaid in level monthly installments, the participant has a deemed distribution. See paragraph (c) of Q&A-10 of this section regarding when such a deemed distribution occurs and the amount thereof.

Q-5: What is a principal residence for purposes of the exception in section 72(p)(2)(B)(ii) from the requirement that a loan be repaid in five years?

A-5: Section 72(p)(2)(B)(ii) provides that the requirement in section 72(p)(2)(B)(i) that a plan loan be repaid within five years does not apply to a loan used to acquire a dwelling unit which will within a reasonable time be used as the principal residence of the participant (a principal residence plan loan). For this purpose, a principal residence has the same meaning as a principal residence under section 121.

Q-6: In order to satisfy the requirements for a principal residence plan loan, is a loan required to be secured by the dwelling unit that will within a reasonable time be used as the principal residence of the participant?

A-6: A loan is not required to be secured by the dwelling unit that will within a reasonable time be used as the participant's principal residence in order to satisfy the requirements for a principal residence plan loan.

Q-7: What tracing rules apply in determining whether a loan qualifies as a principal residence plan loan?

A-7: The tracing rules established under section 163(h)(3)(B) apply in determining whether a loan is treated as for the acquisition of a principal residence in order to qualify as a principal residence plan loan.

Q-8: Can a refinancing qualify as a principal residence plan loan?

A-8: (a) Refinancings. In general, no, a refinancing cannot qualify as a principal residence plan loan. However, a loan from a qualified employer plan used to repay a loan from a third party will qualify as a principal residence plan loan if the plan loan qualifies as a principal residence plan loan without regard to the loan from the third party.

(b) Example. The following example illustrates the rules in paragraph (a) of this Q&A-8 and is based upon the assumptions described in the introductory text of this section:

Example.
(i) On July 1, 2003, a participant requests a $50,000 plan loan to be repaid in level monthly installments over 15 years. On August 1, 2003, the participant acquires a principal residence and pays a portion of the purchase price with a $50,000 bank loan. On September 1, 2003, the plan loans $50,000 to the participant, which the participant uses to pay the bank loan.

(ii) Because the plan loan satisfies the requirements to qualify as a principal residence plan loan (taking into account the tracing rules of section 163(h)(3)(B)), the plan loan qualifies for the exception in section 72(p)(2)(B)(ii).

Q-9: Does the level amortization requirement of section 72(p)(2)(C) apply when a participant is on a leave of absence without pay?

A-9: (a) Leave of absence. The level amortization requirement of section 72(p)(2)(C)does not apply for a period, not longer than one year (or such longer period as may apply under section 414(u)), that a participant is on a bona fide leave of absence, either without pay from the employer or at a rate of pay (after income and employment tax withholding) that is less than the amount of the installment payments required under the terms of the loan. However, the loan (including interest that accrues during the leave of absence) must be repaid by the latest date permitted under section 72(p)(2)(B) (e.g., the suspension of payments cannot extend the term of the loan beyond 5 years, in the case of a loan that is not a principal residence plan loan) and the amount of the installments due after the leave ends (or, if earlier, after the first year of the leave or such longer period as may apply under section 414(u)) must not be less than the amount required under the terms of the original loan.

(b) Military service. See section 414(u)(4) for special rules relating to military service.

(c) Example. The following example illustrates the rules of paragraph (a) of this Q&A-9 and is based upon the assumptions described in the introductory text of this section:

Example.
(i) On July 1, 2002, a participant with a nonforfeitable account balance of $80,000 borrows $40,000 to be repaid in level monthly installments of $825 each over 5 years. The loan is not a principal residence plan loan. The participant makes 9 monthly payments and commences an unpaid leave of absence that lasts for 12 months. Thereafter, the participant resumes active employment and resumes making repayments on the loan until the loan is repaid in full (including interest that accrued during the leave of absence). The amount of each monthly installment is increased to $1,130 in order to repay the loan by June 30, 2007.

(ii) Because the loan satisfies the requirements of section 72(p)(2), the participant does not have a deemed distribution. Alternatively, section 72(p)(2) would be satisfied if the participant continued the monthly installments of $825 after resuming active employment and on June 30, 2007 repaid the full balance remaining due.

Q-10: If a participant fails to make the installment payments required under the terms of a loan that satisfied the requirements of Q&A-3 of this section when made, when does a deemed distribution occur and what is the amount of the deemed distribution?

A-10: (a) Timing of deemed distribution. Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)(C) and, accordingly, results in a deemed distribution at the time of such failure. However, the plan administrator may allow a cure period and section 72(p)(2)(C) will not be considered to have been violated if the installment payment is made not later than the end of the cure period, which period cannot continue beyond the last day of the calendar quarter following the calendar quarter in which the required installment payment was due.

(b) Amount of deemed distribution. If a loan satisfies Q&A-3 of this section when made, but there is a failure to pay the installment payments required under the terms of the loan (taking into account any cure period allowed under paragraph (a) of this Q&A-10), then the amount of the deemed distribution equals the entire outstanding balance of the loan (including accrued interest) at the time of such failure.

(c) Example. The following example illustrates the rules in paragraphs (a) and (b) of this Q&A-10 and is based upon the assumptions described in the introductory text of this section:

Example. (i) On August 1, 2002, a participant has a nonforfeitable account balance of $45,000 and borrows $20,000 from a plan to be repaid over 5 years in level monthly installments due at the end of each month. After making all monthly payments due through July 31, 2003, the participant fails to make the payment due on August 31, 2003 or any other monthly payments due thereafter. The plan administrator allows a three-month cure period.

(ii) As a result of the failure to satisfy the requirement that the loan be repaid in level installments pursuant to section 72(p)(2)(C), the participant has a deemed distribution on November 30, 2003, which is the last day of the three-month cure period for the August 31, 2003 installment. The amount of the deemed distribution is $17,157, which is the outstanding balance on the loan at November 30, 2003. Alternatively, if the plan administrator had allowed a cure period through the end of the next calendar quarter, there would be a deemed distribution on December 31, 2003 equal to $17,282, which is the outstanding balance of the loan at December 31, 2003.

Q-11: Does section 72 apply to a deemed distribution as if it were an actual distribution?

A-11: (a) Tax basis. If the employee's account includes after-tax contributions or other investment in the contract under section 72(e), section 72 applies to a deemed distribution as if it were an actual distribution, with the result that all or a portion of the deemed distribution may not be taxable.

(b) Section 72(t) and (m). Section 72(t) (which imposes a 10 percent tax on certain early distributions) and section 72(m)(5) (which imposes a separate 10 percent tax on certain amounts received by a 5-percent owner) apply to a deemed distribution under section 72(p) in the same manner as if the deemed distribution were an actual distribution.

Q-12: Is a deemed distribution under section 72(p) treated as an actual distribution for purposes of the qualification requirements of section 401, the distribution provisions of section 402, the distribution restrictions of section 401(k)(2)(B) or 403(b)(11), or the vesting requirements of Sec. 1.411(a)-7(d)(5) (which affects the application of a graded vesting schedule in cases involving a prior distribution)?

A-12: No; thus, for example, if a participant in a money purchase plan who is an active employee has a deemed distribution under section 72(p), the plan will not be considered to have made an in-service distribution to the participant in violation of the qualification requirements applicable to money purchase plans. Similarly, the deemed distribution is not eligible to be rolled over to an eligible retirement plan and is not considered an impermissible distribution of an amount attributable to elective contributions in a section 401(k) plan. See also Sec. 1.402(c)-2, Q&A-4(d) and Sec. 1.401(k)-1(d)(6)(ii).

Q-13: How does a reduction (offset) of an account balance in order to repay a plan loan differ from a deemed distribution?

A-13: (a) Difference between deemed distribution and plan loan offset amount.

(1) Loans to a participant from a qualified employer plan can give rise to two types of taxable distributions-

(i) A deemed distribution pursuant to section 72(p); and

(ii) A distribution of an offset amount.

(2) As described in Q&A-4 of this section, a deemed distribution occurs when the requirements of Q&A-3 of this section are not satisfied, either when the loan is made or at a later time. A deemed distribution is treated as a distribution to the participant or beneficiary only for certain tax purposes and is not a distribution of the accrued benefit. A distribution of a plan loan offset amount (as defined in Sec. 1.402(c)-2, Q&A-9(b)) occurs when, under the terms governing a plan loan, the accrued benefit of the participant or beneficiary is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in the accrued benefit). A distribution of a plan loan offset amount could occur in a variety of circumstances, such as where the terms governing the plan loan require that, in the event of the participant's request for a distribution, a loan be repaid immediately or treated as in default.

(b) Plan loan offset. In the event of a plan loan offset, the amount of the account balance that is offset against the loan is an actual distribution for purposes of the Internal Revenue Code, not a deemed distribution under section 72(p). Accordingly, a plan may be prohibited from making such an offset under the provisions of section 401(a), 401(k)(2)(B) or 403(b)(11) prohibiting or limiting distributions to an active employee. See Sec. 1.402(c)-2, Q&A-9(c), Example 6. See also Q&A-19 of this section for rules regarding the treatment of a loan after a deemed distribution.

Q-14: How is the amount includible in income as a result of a deemed distribution under section 72(p) required to be reported?

A-14: The amount includible in income as a result of a deemed distribution under section 72(p) is required to be reported on Form 1099-R (or any other form prescribed by the Commissioner).

Q-15: What withholding rules apply to plan loans?

A-15: To the extent that a loan, when made, is a deemed distribution or an account balance is reduced (offset) to repay a loan, the amount includible in income is subject to withholding. If a deemed distribution of a loan or a loan repayment by benefit offset results in income at a date after the date the loan is made, withholding is required only if a transfer of cash or property (excluding employer securities) is made to the participant or beneficiary from the plan at the same time. See Secs. 35.3405-1, f-4, and 31.3405(c)-1, Q&A-9 and Q&A-11, of this chapter for further guidance on withholding rules.

Q-16: If a loan fails to satisfy the requirements of Q&A-3 of this section and is a prohibited transaction under section 4975, is the deemed distribution of the loan under section 72(p) a correction of the prohibited transaction?

A-16: No, a deemed distribution is not a correction of a prohibited transaction under section 4975. See Secs. 141.4975-13 and 53.4941(e)-1(c)(1) of this chapter for guidance concerning correction of a prohibited transaction.

Q-17: What are the income tax consequences if an amount is transferred from a qualified employer plan to a participant or beneficiary as a loan, but there is an express or tacit understanding that the loan will not be repaid?

A-17: If there is an express or tacit understanding that the loan will not be repaid or, for any reason, the transaction does not create a debtor-creditor relationship or is otherwise not a bona fide loan, then the amount transferred is treated as an actual distribution from the plan for purposes of the Internal Revenue Code, and is not treated as a loan or as a deemed distribution under section 72(p).

Q-18: If a qualified employer plan maintains a program to invest in residential mortgages, are loans made pursuant to the investment program subject to section 72(p)?

A-18: (a) Residential mortgage loans made by a plan in the ordinary course of an investment program are not subject to section 72(p) if the property acquired with the loans is the primary security for such loans and the amount loaned does not exceed the fair market value of the property. An investment program exists only if the plan has established, in advance of a specific investment under the program, that a certain percentage or amount of plan assets will be invested in residential mortgages available to persons purchasing the property who satisfy commercially customary financial criteria. A loan will not be considered as made under an investment program if-

(1) Any of the loans made under the program matures upon a participant's termination from employment;

(2) Any of the loans made under the program is an earmarked asset of a participant's or beneficiary's individual account in the plan; or

(3) The loans made under the program are made available only to participants or beneficiaries in the plan.

(b) Paragraph (a)(3) of this Q&A-18 shall not apply to a plan which, on December 20, 1995, and at all times thereafter, has had in effect a loan program under which, but for paragraph (a)(3) of this Q&A-18, the loans comply with the conditions of paragraph (a) of this Q&A-18 to constitute residential mortgage loans in the ordinary course of an investment program.

(c) No loan that benefits an officer, director, or owner of the employer maintaining the plan, or their beneficiaries, will be treated as made under an investment program.

(d) This section does not provide guidance on whether a residential mortgage loan made under a plan's investment program would result in a prohibited transaction under section 4975, or on whether such a loan made by a plan covered by Title I of ERISA would be consistent with the fiduciary standards of ERISA or would result in a prohibited transaction under section 406 of ERISA. See 29 CFR 2550.408b-1.

Q-19: If there is a deemed distribution under section 72(p), is the interest that accrues thereafter on the amount of the deemed distribution an indirect loan for income tax purposes?

A-19: (a) General rule. Except as provided in paragraph (b) of this Q&A-19, a deemed distribution of a loan is treated as a distribution for purposes of section 72. Therefore, a loan that is deemed to be distributed under section 72(p)ceases to be an outstanding loan for purposes of section 72, and the interest that accrues thereafter under the plan on the amount deemed distributed is disregarded in applying section 72 to the participant or beneficiary. Even though interest continues to accrue on the outstanding loan (and is taken into account for purposes of determining the tax treatment of any subsequent loan in accordance with paragraph (b) of this Q&A-19), this additional interest is not treated as an additional loan (and, thus, does not result in an additional deemed distribution) for purposes of section 72(p). However, a loan that is deemed distributed under section 72(p) is not considered distributed for all purposes of the Internal Revenue Code. See Q&A-11 through Q&A-16 of this section.

(b) Exception for purposes of applying section 72(p)(2)(A) to a subsequent loan. In the case of a loan that is deemed distributed under section 72(p) and that has not been repaid (such as by a plan loan offset), the unpaid amount of such loan, including accrued interest, is considered outstanding for purposes of applying section 72(p)(2)(A) to determine the maximum amount of any subsequent loan to the participant or beneficiary.

Q-20: May a participant refinance an outstanding loan or have more than one loan outstanding from a plan?

A-20: [Reserved]

Q-21: Is a participant's tax basis under the plan increased if the participant repays the loan after a deemed distribution?

A-21: (a) Repayments after deemed distribution. Yes, if the participant or beneficiary repays the loan after a deemed distribution of the loan under section 72(p), then, for purposes of section 72(e), the participant's or beneficiary's investment in the contract (tax basis) under the plan increases by the amount of the cash repayments that the participant or beneficiary makes on the loan after the deemed distribution. However, loan repayments are not treated as after-tax contributions for other purposes, including sections 401(m) and 415(c)(2)(B).

(b) Example. The following example illustrates the rules in paragraph (a) of this Q&A-21 and is based on the assumptions described in the introductory text of this section:

Example.
(i) A participant receives a $20,000 loan on January 1, 2003, to be repaid in 20 quarterly installments of $1,245 each. On December 31, 2003, the outstanding loan balance ($19,179) is deemed distributed as a result of a failure to make quarterly installment payments that were due on September 30, 2003 and December 31, 2003. On June 30, 2004, the participant repays $5,147 (which is the sum of the three installment payments that were due on September 30, 2003, December 31, 2003, and March 31, 2004, with interest thereon to June 30, 2004, plus the installment payment due on June 30, 2004). Thereafter, the participant resumes making the installment payments of $1,245 from September 30, 2004 through December 31, 2007. The loan repayments made after December 31, 2003 through December 31, 2007 total $22,577.

(ii) Because the participant repaid $22,577 after the deemed distribution that occurred on December 31, 2003, the participant has investment in the contract (tax basis) equal to $22,577 (14 payments of $1,245 each plus a single payment of $5,147) as of December 31, 2007.

Q-22: When is the effective date of section 72(p) and the regulations in this section?

A-22: (a) Statutory effective date. Section 72(p) generally applies to assignments, pledges, and loans made after August 13, 1982.

(b) Regulatory effective date. This section applies to assignments, pledges, and loans made on or after January 1, 2002.

(c) Loans made before the regulatory effective date-

(1) General rule. A plan is permitted to apply Q&A-19 and Q&A-21 of this section to a loan made before the regulatory effective date in paragraph (b) of this Q&A-22 (and after the statutory effective date in paragraph (a) of this Q&A-22) if there has not been any deemed distribution of the loan before the transition date or if the conditions of paragraph (c)(2) of this Q&A-22 are satisfied with respect to the loan.

(2) Consistency transition rule for certain loans deemed distributed before the regulatory effective date.

(i) The rules in this paragraph (c)(2) of this Q&A-22 apply to a loan made before the regulatory effective date in paragraph (b) of this Q&A-22 (and after the statutory effective date in paragraph (a) of this Q&A-22) if there has been any deemed distribution of the loan before the transition date.

(ii) The plan is permitted to apply Q&A-19 and Q&A-21 of this section to the loan beginning on any January 1, but only if the plan reported, in Box 1 of Form 1099-R, for a taxable year no later than the latest taxable year that would be permitted under this section (if this section had been in effect for all loans made after the statutory effective date in paragraph (a) of this Q&A-22), a gross distribution of an amount at least equal to the initial default amount. For purposes of this section, the initial default amount is the amount that would be reported as a gross distribution under Q&A-4 and Q&A-10 of this section and the transition date is the January 1 on which a plan begins applying Q&A-19 and Q&A-21 of this section to a loan.

(iii) If a plan applies Q&A-19 and Q&A-21 of this section to such a loan, then the plan, in its reporting and withholding on or after the transition date, must not attribute investment in the contract (tax basis) to the participant or beneficiary based upon the initial default amount.

(iv) This paragraph (c)(2)(iv) of this Q&A-22 applies if-

(A) The plan attributed investment in the contract (tax basis) to the participant or beneficiary based on the deemed distribution of the loan;

(B) The plan subsequently made an actual distribution to the participant or beneficiary before the transition date; and

(C) Immediately before the transition date, the initial default amount (or, if less, the amount of the investment in the contract so attributed) exceeds the participant's or beneficiary's investment in the contract (tax basis). If this paragraph (c)(2)(iv) of this Q&A-22 applies, the plan must treat the excess (the loan transition amount) as a loan amount that remains outstanding and must include the excess in the participant's or beneficiary's income at the time of the first actual distribution made on or after the transition date.

(3) Examples. The rules in paragraph (c)(2) of this Q&A-22 are illustrated by the following examples, which are based on the assumptions described in the introductory text of this section (and, except as specifically provided in the examples, also assume that no distributions are made to the participant and that the participant has no investment in the contract with respect to the plan). Example 1, Example 2, and Example 4 of this paragraph (c)(3) of this Q&A-22 illustrate the application of the rules in paragraph (c)(2) of this Q&A-22 to a plan that, before the transition date, did not treat interest accruing after the initial deemed distribution as resulting in additional deemed distributions under section 72(p). Example 3 of this paragraph (c)(3) of this Q&A-22 illustrates the application of the rules in paragraph (c)(2) of this Q&A-22 to a plan that, before the transition date, treated interest accruing after the initial deemed distribution as resulting in additional deemed distributions under section 72(p). The examples are as follows:

Example 1.
(i) In 1998, when a participant's account balance under a plan is $50,000, the participant receives a loan from the plan. The participant makes the required repayments until 1999 when there is a deemed distribution of $20,000 as a result of a failure to repay the loan. For 1999, as a result of the deemed distribution, the plan reports, in Box 1 of Form 1099-R, a gross distribution of $20,000 (which is the initial default amount in accordance with paragraph (c)(2)(ii) of this Q&A-22) and, in Box 2 of Form 1099-R, a taxable amount of $20,000. The plan then records an increase in the participant's tax basis for the same amount ($20,000). Thereafter, the plan disregards, for purposes of section 72, the interest that accrues on the loan after the 1999 deemed distribution. Thus, as of December 31, 2001, the total taxable amount reported by the plan as a result of the deemed distribution is $20,000 and the plan's records show that the participant's tax basis is the same amount ($20,000). As of January 1, 2002, the plan decides to apply Q&A-19 of this section to the loan. Accordingly, it reduces the participant's tax basis by the initial default amount of $20,000, so that the participant's remaining tax basis in the plan is zero. Thereafter, the amount of the outstanding loan is not treated as part of the account balance for purposes of section 72. The participant attains age 59 ½ in the year 2003 and receives a distribution of the full account balance under the plan consisting of $60,000 in cash and the loan receivable. At that time, the plan's records reflect an offset of the loan amount against the loan receivable in the participant's account and a distribution of $60,000 in cash.

(ii) For the year 2003, the plan must report a gross distribution of $60,000 in Box 1 of Form 1099-R and a taxable amount of $60,000 in Box 2 of Form 1099-R.

Example 2.
(i) The facts are the same as in Example 1, except that in 1999, immediately prior to the deemed distribution, the participant's account balance under the plan totals $50,000 and the participant's tax basis is $10,000. For 1999, the plan reports, in Box 1 of Form 1099-R, a gross distribution of $20,000 (which is the initial default amount in accordance with paragraph (c)(2)(ii) of this Q&A-22) and reports, in Box 2 of Form 1099-R, a taxable amount of $16,000 (the $20,000 deemed distribution minus $4,000 of tax basis ($10,000 times ($20,000/$50,000)) allocated to the deemed distribution). The plan then records an increase in tax basis equal to the $20,000 deemed distribution, so that the participant's remaining tax basis as of December 31, 1999, totals $26,000 ($10,000 minus $4,000 plus $20,000). Thereafter, the plan disregards, for purposes of section 72, the interest that accrues on the loan after the 1999 deemed distribution. Thus, as of December 31, 2001, the total taxable amount reported by the plan as a result of the deemed distribution is $16,000 and the plan's records show that the participant's tax basis is $26,000. As of January 1, 2002, the plan decides to apply Q&A-19 of this section to the loan. Accordingly, it reduces the participant's tax basis by the initial default amount of $20,000, so that the participant's remaining tax basis in the plan is $6,000. Thereafter, the amount of the outstanding loan is not treated as part of the account balance for purposes of section 72. The participant attains age 59 ½ in the year 2003 and receives a distribution of the full account balance under the plan consisting of $60,000 in cash and the loan receivable. At that time, the plan's records reflect an offset of the loan amount against the loan receivable in the participant's account and a distribution of $60,000 in cash.

(ii) For the year 2003, the plan must report a gross distribution of $60,000 in Box 1 of Form 1099-R and a taxable amount of $54,000 in Box 2 of Form 1099-R.

Example 3.
(i) In 1993, when a participant's account balance in a plan is $100,000, the participant receives a loan of $50,000 from the plan. The participant makes the required loan repayments until 1995 when there is a deemed distribution of $28,919 as a result of a failure to repay the loan. For 1995, as a result of the deemed distribution, the plan reports, in Box 1 of Form 1099-R, a gross distribution of $28,919 (which is the initial default amount in accordance with paragraph (c)(2)(ii) of this Q&A-22) and, in Box 2 of Form 1099-R, a taxable amount of $28,919. For 1995, the plan also records an increase in the participant's tax basis for the same amount ($28,919). Each year thereafter through 2001, the plan reports a gross distribution equal to the interest accruing that year on the loan balance, reports a taxable amount equal to the interest accruing that year on the loan balance reduced by the participant's tax basis allocated to the gross distribution, and records a net increase in the participant's tax basis equal to that taxable amount. As of December 31, 2001, the taxable amount reported by the plan as a result of the loan totals $44,329 and the plan's records for purposes of section 72 show that the participant's tax basis totals the same amount ($44,329). As of January 1, 2002, the plan decides to apply Q&A-19 of this section. Accordingly, it reduces the participant's tax basis by the initial default amount of $28,919, so that the participant's remaining tax basis in the plan is $15,410 ($44,329 minus $28,919). Thereafter, the amount of the outstanding loan is not treated as part of the account balance for purposes of section 72. The participant attains age 59 ½ in the year 2003 and receives a distribution of the full account balance under the plan consisting of $180,000 in cash and the loan receivable equal to the $28,919 outstanding loan amount in 1995 plus interest accrued thereafter to the payment date in 2003. At that time, the plan's records reflect an offset of the loan amount against the loan receivable in the participant's account and a distribution of $180,000 in cash.

(ii) For the year 2003, the plan must report a gross distribution of $180,000 in Box 1 of Form 1099-R and a taxable amount of $164,590 in Box 2 of Form 1099-R ($180,000 minus the remaining tax basis of $15,410).

Example 4.
(i) The facts are the same as in Example 1, except that in 2000, after the deemed distribution, the participant receives a $10,000 hardship distribution. At the time of the hardship distribution, the participant's account balance under the plan totals $50,000. For 2000, the plan reports, in Box 1 of Form 1099-R, a gross distribution of $10,000 and, in Box 2 of Form 1099-R, a taxable amount of $6,000 (the $10,000 actual distribution minus $4,000 of tax basis ($10,000 times ($20,000/$50,000)) allocated to this actual distribution). The plan then records a decrease in tax basis equal to $4,000, so that the participant's remaining tax basis as of December 31, 2000, totals $16,000 ($20,000 minus $4,000). After 1999, the plan disregards, for purposes of section 72, the interest that accrues on the loan after the 1999 deemed distribution. Thus, as of December 31, 2001, the total taxable amount reported by the plan as a result of the deemed distribution plus the 2000 actual distribution is $26,000 and the plan's records show that the participant's tax basis is $16,000. As of January 1, 2002, the plan decides to apply Q&A-19 of this section to the loan. Accordingly, it reduces the participant's tax basis by the initial default amount of $20,000, so that the participant's remaining tax basis in the plan is reduced from $16,000 to zero. However, because the $20,000 initial default amount exceeds $16,000, the plan records a loan transition amount of $4,000 ($20,000 minus $16,000). Thereafter, the amount of the outstanding loan, other than the $4,000 loan transition amount, is not treated as part of the account balance for purposes of section 72. The participant attains age 59 ½ in the year 2003 and receives a distribution of the full account balance under the plan consisting of $60,000 in cash and the loan receivable. At that time, the plan's records reflect an offset of the loan amount against the loan receivable in the participant's account and a distribution of $60,000 in cash.

(ii) In accordance with paragraph (c)(2)(iv) of this Q&A-22, the plan must report in Box 1 of Form 1099-R a gross distribution of $64,000 and in Box 2 of Form 1099-R a taxable amount for the participant for the year 2003 equal to $64,000 (the sum of the $60,000 paid in the year 2003 plus $4,000 as the loan transition amount).

Section 408(h)
26 USC 408(h)

For purposes of this section, a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in subsection (n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.

Section 408(m)
26 USC 408(m)

As Amended through 1988 (P.L. 100-647)

Editor's Note: Also see PTE 91-55, which permits IRA accounts to hold US American Eagle gold coins.

• In general. The acquisition by an individual retirement account or by an individually-directed account under a plan described in section 401(a) of any collectible shall be treated (for purposes of this section and section 402) as a distribution from such account in an amount equal to the cost to such account of such collectible.
• Collectible defined. For purposes of this subsection, the term "collectible" means -
1. Any work of art,
2. Any rug or antique,
3. Any metal or gem,
4. Any stamp or coin,
5. Any alcoholic beverage, or
6. Any other tangible personal property specified by the Secretary for purposes of this subsection.
• Exception for Certain Coins. In the case of an individual retirement account, paragraph (2) shall not apply to any gold coin described in paragraph (7), (8), (9), or (10) of Section 5112(A) of Title 31 or any silver coin described in Section 5112(e) of Title 31.

Section 408(q)
26 USC 408(q)

"(q) Deemed IRAs under qualified employer plans"

(1) General Rule

If -

(A) a qualified employer plan elects to allow employees to make voluntary employee contributions to a separate account or annuity established under the plan, and

(B) under the terms of the qualified employer plan, such account or annuity meets the applicable requirements of this section or section 408A for an individual retirement account or annuity, then such account or annuity shall be treated for purposes of this title in the same manner as an individual retirement plan and not as a qualified employer plan (and contributions to such account or annuity as contributions to an individual retirement plan and not to the qualified employer plan). For purposes of subparagraph (B), the requirements of subsection (a)(5) shall not apply.

(2) Special rules for qualified employer plans

For purposes of this title, a qualified employer plan shall not fail to meet any requirement of this title solely by reason of establishing and maintaining a program described in paragraph (1).

(3) Definitions

For purposes of this subsection -

(A) Qualified employer plan

The term "qualified employer plan" has the meaning given such term by section 72(p)(4); except such term shall not include a government plan which is not a qualified plan unless the plan is an eligible deferred compensation plan (as defined in section 457(b)).

(B) Voluntary employee contribution

The term "voluntary employee contribution" means any contribution (other than a mandatory contribution within the meaning of section 411(c)(2)(C)) -

(i) which is made by an individual as an employee under a qualified employer plan which allows employees to elect to make contributions described in paragraph (1), and

(ii) with respect to which the individual has designated the contribution as a contribution to which this subsection applies.

Section 409(e)
26 USC 409(e)

As Amended through 1997 (P.L. 105-34)

"(e) Voting Rights"

1. In general

A plan meets the requirements of this subsection if it meets the requirements of paragraph (2) or (3), whichever is applicable.

2. Requirements where employer has a registration-type class of securities

If the employer has a registration-type class of securities, the plan meets the requirements of this paragraph only if each participant or beneficiary in the plan is entitled to direct the plan as to the manner in which securities of the employer which are entitled to vote and are allocated to the account of such participant or beneficiary are to be voted.

3. Requirement for other employers

If the employer does not have a registration-type class of securities, the plan meets the requirements of this paragraph only if each participant or beneficiary in the plan is entitled to direct the plan as to the manner in which voting rights under securities of the employer which are allocated to the account of such participant or beneficiary are to be exercised with respect to any corporate matter which involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction as the Secretary may prescribe in regulations.

4. Registration-type class of securities defined

For purposes of this subsection, the term, "registration-type class of securities" means -

1. a class of securities required to be registered under section 12 of the Securities Exchange Act of 1934, and
2. a class of securities which would be required to be so registered except for the exemption from registration provided in subsection (g)(2)(H) of such section 12.  

5. 1 Vote per Participant

A plan meets the requirements of paragraph (3) with respect to an issue if -

1. the plan permits each participant 1 vote with respect to such issue, and
2. the trustee votes the shares held by the plan in the proportion determined after application of subparagraph (A).

Section 417
26 USC 417

Section. 417. Definitions and special rules for purposes of minimum survivor annuity requirements

(a) Election to waive qualified joint and survivor annuity or qualified preretirement survivor annuity

(1) In general

A plan meets the requirements of section 401(a)(11) only if –

(A) under the plan, each participant -

(i) may elect at any time during the applicable election period to waive the qualified joint and survivor annuity form of benefit or the qualified preretirement survivor annuity form of benefit (or both), and

(ii) may revoke any such election at any time during the applicable election period, and

(B) the plan meets the requirements of paragraphs (2), (3), and (4) of this subsection.

(2) Spouse must consent to election

Each plan shall provide that an election under paragraph (1)(A)(i) shall not take effect unless -

(A) (i) the spouse of the participant consents in writing to such election, (ii) such election designates a beneficiary (or a form of benefits) which may not be changed without spousal consent (or the consent of the spouse expressly permits designations by the participant without any requirement of further consent by the spouse), and (iii) the spouse's consent acknowledges the effect of such election and is witnessed by a plan representative or a notary public, or

(B) it is established to the satisfaction of a plan representative that the consent required under subparagraph (A) may not be obtained because there is no spouse, because the spouse cannot be located, or because of such other circumstances as the Secretary may by regulations prescribe.

Any consent by a spouse (or establishment that the consent of a spouse may not be obtained) under the preceding sentence shall be effective only with respect to such spouse.

(3) Plan to provide written explanations

(A) Explanation of joint and survivor annuity
Each plan shall provide to each participant, within a reasonable period of time before the annuity starting date (and consistent with such regulations as the Secretary may prescribe), a written explanation of -

(i) the terms and conditions of the qualified joint and survivor annuity,

(ii) the participant's right to make, and the effect of, an election under paragraph (1) to waive the joint and survivor annuity form of benefit,

(iii) the rights of the participant's spouse under paragraph (2), and

(iv) the right to make, and the effect of, a revocation of an election under paragraph (1).

(B) Explanation of qualified preretirement survivor annuity

(i) In general
Each plan shall provide to each participant, within the applicable period with respect to such participant (and consistent with such regulations as the Secretary may prescribe), a written explanation with respect to the qualified preretirement survivor annuity comparable to that required under subparagraph (A).

(ii) Applicable period
For purposes of clause (i), the term "applicable period" means, with respect to a participant, whichever of the following periods ends last:

(I) The period beginning with the first day of the plan year in which the participant attains age 32 and ending with the close of the plan year preceding the plan year in which the participant attains age 35.

(II) A reasonable period after the individual becomes a participant.

(III) A reasonable period ending after paragraph (5) ceases to apply to the participant.

(IV) A reasonable period ending after section 401(a)(11) applies to the participant.

In the case of a participant who separates from service before attaining age 35, the applicable period shall be a reasonable period after separation.

(4) Requirement of spousal consent for using plan assets as security for loans

Each plan shall provide that, if section 401(a)(11) applies to a participant when part or all of the participant's accrued benefit is to be used as security for a loan, no portion of the participant's accrued benefit may be used as security for such loan unless -

(A) the spouse of the participant (if any) consents in writing to such use during the 90-day period ending on the date on which the loan is to be so secured, and

(B) requirements comparable to the requirements of paragraph (2) are met with respect to such consent.

(5) Special rules where plan fully subsidizes costs

(A) In general
The requirements of this subsection shall not apply with respect to the qualified joint and survivor annuity form of benefit or the qualified preretirement survivor annuity form of benefit, as the case may be, if such benefit may not be waived (or another beneficiary selected) and if the plan fully subsidizes the costs of such benefit.

(B) Definition
For purposes of subparagraph (A), a plan fully subsidizes the costs of a benefit if under the plan the failure to waive such benefit by a participant would not result in a decrease in any plan benefits with respect to such participant and would not result in increased contributions from such participant.

(6) Applicable election period defined

For purposes of this subsection, the term "applicable election period" means -

(A) in the case of an election to waive the qualified joint and survivor annuity form of benefit, the 90-day period ending on the annuity starting date, or

(B) in the case of an election to waive the qualified preretirement survivor annuity, the period which begins on the first day of the plan year in which the participant attains age 35 and ends on the date of the participant's death.

In the case of a participant who is separated from service, the applicable election period under subparagraph (B) with respect to benefits accrued before the date of such separation from service shall not begin later than such date.

(7) Special rules relating to time for written explanation

Notwithstanding any other provision of this subsection -

(A) Explanation may be provided after annuity starting date

(i) In general
A plan may provide the written explanation described in paragraph (3)(A) after the annuity starting date.  In any case to which this subparagraph applies, the applicable election period under paragraph (6) shall not end before the 30th day after the date on which such explanation is provided.

(ii) Regulatory authority
The Secretary may by regulations limit the application of clause (i), except that such regulations may not limit the period of time by which the annuity starting date precedes the provision of the written explanation other than by providing that the annuity starting date may not be earlier than termination of employment.

(B) Waiver of 30-day period
A plan may permit a participant to elect (with any applicable spousal consent) to waive any requirement that the written explanation be provided at least 30 days before the annuity starting date (or to waive the 30-day requirement under subparagraph (A)) if the distribution commences more than 7 days after such explanation is provided.

(b) Definition of qualified joint and survivor annuity

For purposes of this section and section 401(a)(11), the term "qualified joint and survivor annuity" means an annuity -

(1) for the life of the participant with a survivor annuity for the life of the spouse which is not less than 50 percent of (and is not greater than 100 percent of) the amount of the annuity which is payable during the joint lives of the participant and the spouse, and

(2) which is the actuarial equivalent of a single annuity for the life of the participant.

Such term also includes any annuity in a form having the effect of an annuity described in the preceding sentence.

(c) Definition of qualified preretirement survivor annuity

For purposes of this section and section 401(a)(11) -

(1) In general
Except as provided in paragraph (2), the term "qualified preretirement survivor annuity" means a survivor annuity for the life of the surviving spouse of the participant if -

(A) the payments to the surviving spouse under such annuity are not less than the amounts which would be payable as a survivor annuity under the qualified joint and survivor annuity under the plan (or the actuarial equivalent thereof) if -

(i) in the case of a participant who dies after the date on which the participant attained the earliest retirement age, such participant had retired with an immediate qualified joint and survivor annuity on the day before the participant's date of death, or

(ii) in the case of a participant who dies on or before the date on which the participant would have attained the earliest retirement age, such participant had -

(I) separated from service on the date of death,

(II) survived to the earliest retirement age,

(III) retired with an immediate qualified joint and survivor annuity at the earliest retirement age, and

(IV) died on the day after the day on which such participant would have attained the earliest retirement age, and

(B) under the plan, the earliest period for which the surviving spouse may receive a payment under such annuity is not later than the month in which the participant would have attained the earliest retirement age under the plan.

In the case of an individual who separated from service before the date of such individual's death, subparagraph (A)(ii)(I) shall not apply.

(2) Special rule for defined contribution plans
In the case of any defined contribution plan or participant described in clause (ii) or (iii) of section 401(a)(11)(B), the term "qualified preretirement survivor annuity" means an annuity for the life of the surviving spouse the actuarial equivalent of which is not less than 50 percent of the portion of the account balance of the participant (as of the date of death) to which the participant had a nonforfeitable right (within the meaning of section 411(a)).

(3) Security interests taken into account
For purposes of paragraphs (1) and (2), any security interest held by the plan by reason of a loan outstanding to the participant shall be taken into account in determining the amount of the qualified preretirement survivor annuity.

(d) Survivor annuities need not be provided if participant and spouse married less than 1 year

(1) In general
Except as provided in paragraph (2), a plan shall not be treated as failing to meet the requirements of section 401(a)(11) merely because the plan provides that a qualified joint and survivor annuity (or a qualified preretirement survivor annuity) will not be provided unless the participant and spouse had been married throughout the 1-year period ending on the earlier of -

(A) the participant's annuity starting date, or

(B) the date of the participant's death.

(2) Treatment of certain marriages within 1 year of annuity starting date for purposes of qualified joint and survivor annuities
For purposes of paragraph (1), if -

(A) a participant marries within 1 year before the annuity starting date, and

(B) the participant and the participant's spouse in such marriage have been married for at least a 1-year period ending on or before the date of the participant's death, such participant and such spouse shall be treated as having been married throughout the 1-year period ending on the participant's annuity starting date.

(e) Restrictions on cash-outs

(1) Plan may require distribution if present value not in excess of dollar limit
A plan may provide that the present value of a qualified joint and survivor annuity or a qualified preretirement survivor annuity will be immediately distributed if such value does not exceed the dollar limit under section 411(a)(11)(A). No distribution may be made under the preceding sentence after the annuity starting date unless the participant and the spouse of the participant (or where the participant has died, the surviving spouse) consents in writing to such distribution.

(2) Plan may distribute benefit in excess of dollar limit only with consent If -

(A) the present value of the qualified joint and survivor annuity or the qualified preretirement survivor annuity exceeds the dollar limit under section 411(a)(11)(A), and

(B) the participant and the spouse of the participant (or where the participant has died, the surviving spouse) consent in writing to the distribution, the plan may immediately distribute the present value of such annuity.

(3) Determination of present value

(A) In general

(i) Present value
Except as provided in subparagraph (B), for purposes of paragraphs (1) and (2), the present value shall not be less than the present value calculated by using the applicable mortality table and the applicable interest rate.

(ii) Definitions
For purposes of clause (i) -

(I) Applicable mortality table
The term "applicable mortality table" means the table prescribed by the Secretary. Such table shall be based on the prevailing commissioners' standard table (described in section 807(d)(5)(A)) used to determine reserves for group annuity contracts issued on the date as of which present value is being determined (without regard to any other subparagraph of section 807(d)(5)).

(II) Applicable interest rate
The term "applicable interest rate" means the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe.

(B) Exception
In the case of a distribution from a plan that was adopted and in effect before the date of the enactment of the Retirement Protection Act of 1994, the present value of any distribution made before the earlier of -

(i) the later of the date a plan amendment applying subparagraph (A) is adopted or made effective, or

(ii) the first day of the first plan year beginning after December 31, 1999, shall be calculated, for purposes of paragraphs (1) and (2), using the interest rate determined under the regulations of the Pension Benefit Guaranty Corporation for determining the present value of a lump sum distribution on plan termination that were in effect on September 1, 1993, and using the provisions of the plan as in effect on the day before such date of enactment; but only if such provisions of the plan met the  requirements of section 417(e)(3) as in effect on the day before such date of enactment.

(f) Other definitions and special rules

For purposes of this section and section 401(a)(11) -

(1) Vested participant
The term "vested participant" means any participant who has a nonforfeitable right (within the meaning of section 411(a)) to any portion of such participant's accrued benefit.

(2) Annuity starting date

(A) In general
The term "annuity starting date" means -

(i) the first day of the first period for which an amount is payable as an annuity, or

(ii) in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the participant to such benefit.

(B) Special rule for disability benefits
For purposes of subparagraph (A), the first day of the first period for which a benefit is to be received by reason of disability shall be treated as the annuity starting date only if such benefit is not an auxiliary benefit.

(3) Earliest retirement age
The term "earliest retirement age" means the earliest date on which, under the plan, the participant could elect to receive retirement benefits.

(4) Plan may take into account increased costs
A plan may take into account in any equitable manner (as determined by the Secretary) any increased costs resulting from providing a qualified joint or survivor annuity or a qualified preretirement survivor annuity.

(5) Distributions by reason of security interests
If the use of any participant's accrued benefit (or any portion thereof) as security for a loan meets the requirements of subsection (a)(4), nothing in this section or section 411(a)(11) shall prevent any distribution required by reason of a failure to comply with the terms of such loan.

(6) Requirements for certain spousal consents
No consent of a spouse shall be effective for purposes of subsection (e)(1) or (e)(2) (as the case may be) unless requirements comparable to the requirements for spousal consent to an election under subsection (a)(1)(A) are met.

(7) Consultation with the Secretary of Labor
In prescribing regulations under this section and section 401(a)(11), the Secretary shall consult with the Secretary of Labor.

Source - (Added Pub. L. 98-397, title II, Sec. 203(b), Aug. 23, 1984, 98 Stat. 1441; amended Pub. L. 99-514, title XI, Sec. 1139(b), title XVIII, Sec. 1898(b)(1)(A), (4)(A), (5)(A), (6)(A), (8)(A), (9)(A), (10)(A), (11)(A), (12)(A), (15)(A), (B), Oct. 22, 1986, 100 Stat. 2487, 2944, 2945, 2947-2951; Pub. L. 100-647, title I, Sec. 1018(u)(9), Nov. 10, 1988, 102 Stat. 3590; Pub. L. 101-239, title VII, Sec. 7862(d)(1)(A), Dec. 19, 1989, 103 Stat. 2433; Pub. L. 103-465, title VII, Sec. 767(a)(2), Dec. 8, 1994, 108 Stat. 5038; Pub. L. 104-188, title I, Sec. 1451(a), Aug. 20, 1996, 110 Stat. 1815; Pub. L. 105-34, title X, Sec. 1071(a)(2), Aug. 5, 1997, 111 Stat. 948.)

Section 4975
26 USC 4975

As Amended through July 22, 1998 (P.L. 105-206)

(a) Initial taxes on disqualified person

There is hereby imposed a tax on each prohibited transaction.
The rate of tax shall be equal to 15 percent of the amount involved with respect to the prohibited transaction for each year (or part thereof) in the taxable period.  The tax imposed by this subsection shall be paid by any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such).

(b) Additional taxes on disqualified person

In any case in which an initial tax is imposed by subsection (a) on a prohibited transaction and the transaction is not corrected within the taxable period, there is hereby imposed a tax equal to 100 percent of the amount involved.  The tax imposed by this subsection shall be paid by any disqualified person who participated in the prohibited transaction (other than a fiduciary acting only as such).

(c) Prohibited Transaction

(1) General rule

For purposes of this section, the term "prohibited transaction" means any direct or indirect -

(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;

(B) lending of money or other extension of credit between a plan and a disqualified person;

(C) furnishing of goods, services, or facilities between a plan and a disqualified person;

(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or

(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

(2) Special exemption

The Secretary shall establish an exemption procedure for purposes of this subsection. Pursuant to such procedure, he may grant a conditional or unconditional exemption of any disqualified person or transaction, orders of disqualified persons or transactions, from all or part of the restrictions imposed by paragraph (1) of this subsection. Action under this subparagraph may be taken only after consultation and coordination with the Secretary of Labor. The Secretary may not grant an exemption under this paragraph unless he finds that such exemption is –

(A) administratively feasible,

(B) in the interests of the plan and of its participants and beneficiaries, and

(C) protective of the rights of participants and beneficiaries of the plan.
Before granting an exemption under this paragraph, the Secretary shall require adequate notice to be given to interested persons and shall publish notice in the Federal Register of the pendency of such exemption and shall afford interested persons an opportunity to present views.  No exemption may be granted under this paragraph with respect to a transaction described in subparagraph (E) or (F) of paragraph (1) unless the Secretary affords an opportunity for a hearing and makes a determination on the record with respect to the findings required under subparagraphs (A), (B), and (C) of this paragraph, except that in lieu of such hearing the Secretary may accept any record made by the Secretary of Labor with respect to an application for exemption under section 408(a) of title I of the Employee Retirement Income Security Act of 1974.

(3) Special rule for individual retirement accounts

An individual for whose benefit an individual retirement account is established and his beneficiaries shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be an individual retirement account by reason of the application of section 408(e)(2)(A) or if section 408(e)(4) applies to such account.

(4) Special rule for medical savings accounts

An individual for whose benefit a medical savings account (within the meaning of section 220(d)) is established shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if section 220(e)(2) applies to such transaction.

(5) Special rule for education individual retirement accounts

An individual for whose benefit an education individual retirement account is established and any contributor to such account shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if section 530(d) applies with respect to such transaction.

(d) Exemptions

Except as provided in subsection (f)(6), the prohibitions provided in subsection (c) shall not apply to -

(1) any loan made by the plan to a disqualified person who is a participant or beneficiary of the plan if such loan -

(A) is available to all such participants or beneficiaries on a reasonably equivalent basis,

(B) is not made available to highly compensated employees (within the meaning of section 414(q)) in an amount greater than the amount made available to other employees,

(C) is made in accordance with specific provisions regarding such loans set forth in the plan,

(D) bears a reasonable rate of interest, and

(E) is adequately secured;

(2) any contract, or reasonable arrangement, made with a disqualified person for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefore;

(3) any loan to an leveraged employee stock ownership plan (as defined in subsection (e)(7)), if-

(A) such loan is primarily for the benefit of participants and beneficiaries of the plan, and

(B) such loan is at a reasonable rate of interest, and any collateral which is given to a disqualified person by the plan consists only of qualifying employer securities (as defined in subsection (e)(8));

(4) the investment of all or part of a plan's assets in deposits which bear a reasonable interest rate in a bank or similar financial institution supervised by the United States or a State, if such bank or other institution is a fiduciary of such plan and if -

(A) the plan covers only employees of such bank or other institution and employees of affiliates of such bank or other institution, or

(B) such investment is expressly authorized by a provision of the plan or by a fiduciary (other than such bank or institution or affiliates thereof) who is expressly empowered by the plan to so instruct the trustee with respect to such investment;

(5) any contract for life insurance, health insurance, or annuities with one or more insurers which are qualified to do business in a State if the plan pays no more than adequate consideration, and if each such insurer or insurers is -

(A) he employer maintaining the plan, or

(B) a disqualified person which is wholly owned (directly or indirectly) by the employer establishing the plan, or by any person which is a disqualified person with respect to the plan, but only if the total premiums and annuity considerations written by such insurers for life insurance, health insurance, or annuities for all plans (and their employers) with respect to which such insurers are disqualified persons (not including premiums or annuity considerations written by the employer maintaining the plan) do not exceed 5 percent of the total premiums and annuity considerations written for all lines of insurance in that year by such insurers (not including premiums or annuity considerations written by the employer maintaining the plan);

(6) the provision of any ancillary service by a bank or similar financial institution supervised by the United States or a State, if such service is provided at not more than reasonable compensation, if such bank or other institution is a fiduciary of such plan, and if -

(A) such bank or similar financial institution has adopted adequate internal safeguards which assure that the provision of such ancillary service is consistent with sound banking and financial practice, as determined by Federal or State supervisory authority, and

(B) the extent to which such ancillary service is provided is subject to specific guidelines issued by such bank or similar financial institution (as determined by the Secretary after consultation with Federal and State supervisory authority), and under such guidelines the bank or similar financial institution does not provide such ancillary service -

(i) in an excessive or unreasonable manner, and

(ii) in a manner that would be inconsistent with the best interests of participants and beneficiaries of employee benefit plans;

(7) the exercise of a privilege to convert securities, to the extent provided in regulations of the Secretary but only if the plan receives no less than adequate consideration pursuant to such conversion;

(8) any transaction between a plan and a common or collective trust fund or pooled investment fund maintained by a disqualified person which is a bank or trust company supervised by a State or Federal agency or between a plan and a pooled investment fund of an insurance company qualified to do business in a State if –

(A) the transaction is a sale or purchase of an interest in the fund,

(B) the bank, trust company, or insurance company receives not more than a reasonable compensation, and

(C) such transaction is expressly permitted by the instrument under which the plan is maintained, or by a fiduciary (other than the bank, trust company, or insurance company, or an affiliate thereof) who has authority to manage and control the assets of the plan;

(9) receipt by a disqualified person of any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries; (10) receipt by a disqualified person of any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of his duties with the plan, but no person so serving who already receives full-time pay from an employer or an association of employers, whose employees are participants in the plan or from an employee organization whose members are participants in such plan shall receive compensation from such fund, except for reimbursement of expenses properly and actually incurred;

(10) service by a disqualified person as a fiduciary in addition to being an officer, employee, agent, or other representative of a disqualified person;

(11) the making by a fiduciary of a distribution of the assets of the trust in accordance with the terms of the plan if such assets are distributed in the same manner as provided under section 4044 of title IV of the Employee Retirement Income Security Act of 1974 (relating to allocation of assets);

(12) any transaction which is exempt from section 406 of such Act by reason of section 408(e) of such Act (or which would be so exempt if such section 406 applied to such transaction) or which is exempt from section 406 of such Act by reason of section 408(b)(12) of such Act;

(13) any transaction required or permitted under part 1 of subtitle E of title IV or section 4223 of the Employee Retirement Income Security Act of 1974, but this paragraph shall not apply with respect to the application of subsection (c)(1) (E) or (F); or

(14) a merger of multiemployer plans, or the transfer of assets or liabilities between multiemployer plans, determined by the Pension Benefit Guaranty Corporation to meet the requirements of section 4231 of such Act, but this paragraph shall not apply with respect to the application of subsection (c)(1) (E) or (F).

(e) Definitions

(1) Plan

For purposes of this section, the term "plan" means -

(A) a trust described in section 401(a) which forms a part of a plan, or a plan described in section 403(a), which trust or plan is exempt from tax under section 501(a),

(B) an individual retirement account described in section 408(a),

(C) an individual retirement annuity described in section 408(b),

(D) a medical savings account described in section 220(d),

(E) an education individual retirement account described in section 530, or

(F) a trust, plan, account, or annuity which, at any time, has been determined by the Secretary to be described in any preceding subparagraph of this paragraph.

(2) Disqualified person

For purposes of this section, the term "disqualified person" means a person who is -

(A) a fiduciary;

(B) a person providing services to the plan;

(C) an employer any of whose employees are covered by the plan;

(D) an employee organization any of whose members are covered by the plan;

(E) an owner, direct or indirect, of 50 percent or more of -

(i) he combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation,

(ii) the capital interest or the profits interest of a partnership, or

(iii) the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described in subparagraph (C) or (D);

(F) a member of the family (as defined in paragraph (6)) of any individual described in subparagraph (A), (B), (C), or (E);

(G) a corporation, partnership, or trust or estate of which (or in which) 50 percent or more of -

(i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation,

(ii) the capital interest or profits interest of such partnership, or

(iii) the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described in subparagraph (A), (B), (C), (D), or (E);

(H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G); or

(I) a 10 percent or more (in capital or profits) partner or joint venture of a person described in subparagraph (C), (D), (E), or (G).

The Secretary, after consultation and coordination with the Secretary of Labor or his delegate, may by regulation prescribe a percentage lower than 50 percent for subparagraphs (E) and (G) and lower than 10 percent for subparagraphs (H) and (I).

(3) Fiduciary

For purposes of this section, the term "fiduciary" means any person who -

(A) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets,

(B) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or

(C) has any discretionary authority or discretionary responsibility in the administration of such plan. Such term includes any person designated under section 405(c)(1)(B) of the Employee Retirement Income Security Act of 1974.

(4) Stockholdings

For purposes of paragraphs (2)(E)(i) and (G)(i) there shall be taken into account indirect stockholdings which would be taken into account under section 267(c), except that, for purposes of this paragraph, section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of paragraph (6).

(5) Partnerships; Trusts

For purposes of paragraphs (2)(E)(ii) and (iii), (G)(ii) and (iii), and (I) the ownership of profits or beneficial interests shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) (other than paragraph (3) thereof), except that section 267(c)(4) shall be treated as providing that the members of the family of an individual are the members within the meaning of paragraph (6).

(6) Member of family

For purposes of paragraph (2)(F), the family of any individual shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant.

(7) Employee stock ownership plan
The term "employee stock ownership plan" means a defined contribution plan -

(A) which is a stock bonus plan which is qualified, or a stock bonus and a money purchase plan both of which are qualified under section 401(a), and which are designed to invest primarily in qualifying employer securities; and

(B) which is otherwise defined in regulations prescribed by the Secretary.

A plan shall not be treated as an employee stock ownership plan unless it meets the requirements of section 409(h), section 409(o), and, if applicable, section 409(n) and section 664(g) and, if the employer has a registration-type class of securities (as defined in section 409(e)(4)), it meets the requirements of section 409(e).

(8) Qualifying employer security
The term "qualifying employer security" means any employer security within the meaning of section 409(l). If any moneys or other property of a plan are invested in shares of an investment company registered under the Investment Company Act of 1940, the investment shall not cause that investment company or that investment company's investment adviser or principal underwriter to be treated as a fiduciary or a disqualified person for purposes of this section, except when an investment company or its investment adviser or principal underwriter acts in connection with a plan covering employees of the investment company, its investment adviser, or its principal underwriter.

(9) Section made applicable to withdrawal liability payment funds

For purposes of this section -

(A) In general

The term "plan" includes a trust described in section 501(c)(22).

(B) Disqualified person In the case of any trust to which this section applies by reason of subparagraph (A), the term "disqualified person" includes any person who is a disqualified person with respect to any plan to which such trust is permitted to make payments under section 4223 of the Employee Retirement Income Security Act of 1974.

(f) Other definitions and special rules

For purposes of this section -

(1) Joint and several liability

If more than one person is liable under subsection (a) or (b) with respect to any one prohibited transaction, all such persons shall be jointly and severally liable under such subsection with respect to such transaction.

(2) Taxable period

The term "taxable period" means, with respect to any prohibited transaction, the period beginning with the date on which the prohibited transaction occurs and ending on the earliest of -

(A) the date of mailing a notice of deficiency with respect to the tax imposed by subsection (a) under section 6212,

(B) the date on which the tax imposed by subsection (a) is assessed, or

(C) the date on which correction of the prohibited transaction is completed.

(3) Sale or exchange; encumbered property

A transfer or real or personal property by a disqualified person to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer.

(4) Amount involved

The term "amount involved" means, with respect to a prohibited transaction, the greater of the amount of money and the fair market value of the other property given or the amount of money and the fair market value of the other property received; except that, in the case of services described in paragraphs (2) and (10) of subsection (d) the amount involved shall be only the excess compensation. For purposes of the preceding sentence, the fair market value -

(A) in the case of the tax imposed by subsection (a), shall be determined as of the date on which the prohibited transaction occurs; and

(B) in the case of the tax imposed by subsection (b), shall be the highest fair market value during the taxable period.

(5) Correction

The terms "correction" and "correct" mean, with respect to a prohibited transaction, undoing the transaction to the extent possible, but in any case placing the plan in a financial position not worse than that in which it would be if the disqualified person were acting under the highest fiduciary standards.

(6) Exemptions not to apply to certain transactions

(A) In general

In the case of a trust described in section 401(a) which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (as defined in section 401(c)(3)), the exemptions provided by subsection (d) (other than paragraphs (9) and (12)) shall not apply to a transaction in which the plan directly or indirectly -

(i) lends any part of the corpus or income of the plan to,

(ii) pays any compensation for personal services rendered to the plan to, or

(iii) acquires for the plan any property from, or sells any property to, any such owner-employee, a member of the family (as defined in section 267(c)(4)) of any such owner-employee, or any corporation in which any such owner-employee owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.

(B) Special rules for shareholder-employees, etc.

(i) In general

For purposes of subparagraph (A), the following shall be treated as owner-employees:

(I) A shareholder-employee.

(II) A participant or beneficiary of an individual retirement plan (as defined in section 7701(a)(37)).

(III) An employer or association of employees which establishes such an individual retirement plan under section 408(c).

(ii) Exception for certain transactions involving shareholder-employees

Subparagraph (A)(iii) shall not apply to a transaction which consists of a sale of employer securities to an employee stock ownership plan (as defined in subsection (e)(7)) by a shareholder-employee, a member of the family (as defined in section 267(c)(4)) of such shareholder-employee, or a corporation in which such a shareholder-employee owns stock representing a 50 percent or greater interest described in subparagraph (A).

(C) Shareholder-employee

For purposes of subparagraph (B), the term "shareholder-employee" means an employee or officer of an S corporation who owns (or is considered as owning within the meaning of section 318(a)(1)) more than 5 percent of the outstanding stock of the corporation on any day during the taxable year of such corporation.

(g) Application of section

This section shall not apply -

(1) in the case of a plan to which a guaranteed benefit policy (as defined in section 401(b)(2)(B) of the Employee Retirement Income Security Act of 1974) is issued, to any assets of the insurance company, insurance service, or insurance organization merely because of its issuance of such policy;

(2) to a governmental plan (within the meaning of section 414(d)); or

(3) to a church plan (within the meaning of section 414(e)) with respect to which the election provided by section 410(d) has not been made.

In the case of a plan which invests in any security issued by an investment company registered under the Investment Company Act of 1940, the assets of such plan shall be deemed to include such security but shall not, by reason of such investment, be deemed to include any assets of such company.

(h) Notification of Secretary of Labor

Before sending a notice of deficiency with respect to the tax imposed by subsection (a) or (b), the Secretary shall notify the Secretary of Labor and provide him a reasonable opportunity to obtain a correction of the prohibited transaction or to comment on the imposition of such tax.

(i) Cross reference

For provisions concerning coordination procedures between Secretary of Labor and Secretary of the Treasury with respect to application of tax imposed by this section and for authority to waive imposition of the tax imposed by subsection (b), see section 3003 of the Employee Retirement Income Security Act of 1974.

Source - (Added Pub. L. 93-406, title II, Sec. 2003(a), Sept. 2, 1974, 88 Stat. 971; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 95-600, title I, Sec. 141(f)(5), (6), Nov. 6, 1978, 92 Stat. 2795; Pub. L. 96-222, title I, Sec. 101(a)(7)(C), (K), (L)(iv)(III), (v)(XI), Apr. 1, 1980, 94 Stat. 198-201; Pub. L. 96-364, title II, Sec. 208(b), 209(b), Sept. 26, 1980, 94 Stat. 1289, 1290; Pub. L. 96-596, Sec. 2(a)(1)(K),(L), (2)(I), (3)(F), Dec. 24, 1980, 94 Stat. 3469, 3471; Pub. L. 97-448, title III, Sec. 305(d)(5), Jan. 12, 1983, 96 Stat. 2400; Pub. L. 98-369, div. A, title IV, Sec. 491(d)(45), (46), (e)(7), (8), July 18, 1984, 98 Stat. 851-853; Pub. L. 99-514, title XI, Sec. 1114(b)(15)(A), title XVIII, Sec. 1854(f)(3)(A), 1899A(51), Oct. 22, 1986, 100 Stat. 2452, 2882, 2961; Pub. L. 101-508, title XI, Sec. 11701(m), Nov. 5, 1990, 104 Stat. 1388-513; Pub. L. 104-188, title I, Sec. 1453(a), 1702(g)(3), Aug. 20, 1996, 110 Stat. 1817, 1873; Pub. L. 104-191, title III, Sec. 301(f), Aug. 21, 1996, 110 Stat. 2051; Pub. L. 105-34, title II, Sec. 213(b), title X, Sec. 1074(a), title XV, Sec. 1506(b)(1), 1530(c)(10), title XVI, Sec. 1602(a)(5), Aug. 5, 1997, 111 Stat. 816, 949, 1065, 1079, 1094; Pub. L. 105-206, title VI, Sec. 6023(19), July 22, 1998, 112 Stat. 825.)

Internal Revenue Service
Regulation 54.4975-11
26 C.F.R. 54.4975-11

Originally issued September 2, 1977 (42 FR 44393)

As revised through January 9, 1979 (44 FR 1978)

1. In general -
1. Type of plan. To be an "ESOP" (employee stock ownership plan), a plan described in section 4975(e)(7)(A) must meet the requirements of this section. See section 4975(e)(7)(B).
2. Designation as ESOP. To be an ESOP, a plan must be formally designated as such in the plan document.
3. Continuing loan provisions under plan -
1. Creation of protections and rights. The terms of an ESOP must formally provide participants with certain protections and rights with respect to plan assets acquired with the proceeds of an exempt loan. These protections and rights are those referred to in the third sentence of  54.4975-7(b)(4), relating to put, call, or other options and to buy-sell or similar arrangements, and in  54.4975-7(b)(10), (11), and (12), relating to put options.
2. "Nonterminable" protections and rights. The terms of an ESOP must also formally provide that these protections and rights are nonterminable. Thus, if a plan holds or has distributed securities acquired with the proceeds of an exempt loan and either the loan is repaid or the plan ceases to be an ESOP, these protections and rights must continue to exist under the terms of the plan. However, the protections and rights will not fail to be nonterminable merely because they are not exercisable under 54.4975-7(b)(11) and (12)(ii). For example, if, after a plan ceases to be an ESOP, securities acquired with the proceeds of an exempt loan cease to be publicly traded, the 15-month period prescribed by  54.4975-7(b)(11) includes the time when the securities are publicly traded.
3. No incorporation by reference of protections and rights. The formal requirements of paragraph (a)(3)(i) and (ii) of this section must be set forth in the plan. Mere reference to the third sentence of  54.4975-7(b)(4) and to the provisions of  54.4975-7(b)(10), (11), and (12) is not sufficient.
4. Certain remedial amendments. Notwithstanding the limits under paragraph (a)(4) and (10) of this section on the retroactive effect of plan amendments, a remedial plan amendment adopted before December 31, 1979, to meet the requirements of paragraph (a)(3)(i) and (ii) of this section is retroactively effective as of the later of the date on which the plan was designated as an ESOP or November 1, 1977.
4. Retroactive amendment. A plan meets the requirements of this section as of the date that it is designated as an ESOP if it is amended retroactively to meet, and in fact does meet, such requirements at any of the following times:
1. 12 months after the date on which the plan is designated as an ESOP;
2. 90 days after a determination letter is issued with respect to the qualification of the plan as an ESOP under this section, but only if the determination is requested by the time in paragraph (a)(4)(i) of this section; or
3. A later date approved by the district director.
5. Addition to other plan. An ESOP may form a portion of a plan the balance of which includes a qualified pension, profit-sharing, or stock bonus plan which is not an ESOP. A reference to an ESOP includes an ESOP that forms a portion of another plan.
6. Conversion of existing plan to an ESOP. If an existing pension, profit-sharing, or stock bonus plan is converted into an ESOP, the requirements of section 404 of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 877), relating to fiduciary duties, and section 401(a) of the Code, relating to requirements for plans established for the exclusive benefit of employees, apply to such conversion. A conversion may constitute a termination of an existing plan. For definition of a termination, see the regulations under section 411(d)(3) of the Code and section 4041(f) of ERISA.
7. Certain arrangements barred -
1. Buy-sell agreements. An arrangement involving an ESOP that creates a put option must not provide for the issuance of put options other than as provided under  54.4975-7 (b)(10), (11), and (12). Also, an ESOP must not otherwise obligate itself to acquire securities from a particular security holder at an indefinite time determined upon the happening of an event such as the death of the holder.
2. Integrated plans. A plan designated as an ESOP after November 1, 1977, must not be integrated directly or indirectly with contributions or benefits under Title II of the Social Security Act or any other State or Federal law. ESOPs established and integrated before such date may remain integrated. However, such plans must not be amended to increase the integration level or the integration percentage. Such plans may in operation continue to increase the level of integration if under the plan such increase is limited by reference to a criterion existing apart from the plan.
8. Effect of certain ESOP Provisions on section 401(a) status -
1. Exempt loan requirements. An ESOP will not fail to meet the requirements of section 401(a)(2) merely because it gives plan assets as collateral for an exempt loan under  54.4975-7(b)(5) or uses plan assets under  54.4975-7(b)(6) to repay an exempt loan in the event of default.
2. Individual annual contribution limitation. An ESOP will not fail to meet the requirements of section 401(a)(16) merely because annual additions under section 415(c) are calculated with respect to employer contributions used to repay an exempt loan rather than with respect to securities allocated to participants.
3. Income pass-through. An ESOP will not fail to meet the requirements of section 401(a) merely because it provides for the current payment of income under paragraph (f)(3) of this section.
9. Transitional rules for ESOPs established before November 1, 1977. A plan established before November 1, 1977, that otherwise satisfies the provisions of this section constitutes an ESOP if it is amended by December 31, 1977, to comply from November 1, 1977, with this section even though before November 1, 1977, the plan did not satisfy paragraphs (c) and (d)(2), (4), and (5) of this section.
10. Additional transitional rules. Notwithstanding paragraph (a)(9) of this section, a plan established before November 1, 1977, that otherwise satisfies the provisions of this section constitutes an ESOP if by December 31, 1977, it is amended to comply from November 1, 1977, with this section even though before such date the plan did not satisfy the following provisions of this section:
1. Paragraph (a)(3) and (8)(iii);
2. The last sentence of paragraph (d)(3), and
3. Paragraph (f)(3). [Amended by T. D. 7571 on November 16, 1978, 43 FR 53718.]
2. Plan designed to invest primarily in qualifying employer securities. A plan constitutes an ESOP only if the plan specifically states that it is designed to invest primarily in qualifying employer securities. Thus, a stock bonus plan or a money purchase pension plan constituting an ESOP may invest part of its assets in other than qualifying employer securities. Such plan will be treated the same as other stock bonus plans or money purchase pension plans qualified under section 401(a) with respect to those investments.
3. Suspense Account. All assets acquired by an ESOP with the proceeds of an exempt loan under section 4975(d)(3) must be added to and maintained in a suspense account. They are to be withdrawn from the suspense account by applying  54.4975-7(b)(8) and (15) as if all securities in the suspense account were encumbered. Such assets acquired before November 1, 1977, must be withdrawn by applying  54.4975-7(b)(8) or the provision of the loan that controls release from encumbrance. Assets in such suspense accounts are assets of the ESOP. Thus, for example, such assets are subject to section 401(a)(2).
4. Allocations to accounts of participants -
1. In general. Except as provided in this section, amounts contributed to an ESOP must be allocated as provided under  1.401-1(b)(ii) and (iii) of this chapter, and securities acquired by an ESOP must be accounted for as provided under  1.402(a)-1(b)(2)(ii) of this chapter.
2. Assets withdrawn from suspense account. As of the end of each plan year, the ESOP must consistently allocate to the participants' accounts non-monetary units representing participants' interests in assets withdrawn from the suspense account.
3. Income. Income with respect to securities acquired with the proceeds of an exempt loan must be allocated as income of the plan except to the extent that the ESOP provides for the use of income from such securities to repay the loan. Certain income may be distributed currently under paragraph (f)(3) of this section.
4. Forfeitures. If a portion of a participant's account is forfeited, qualifying employer securities allocated under paragraph (d)(2) of this section must be forfeited only after other assets. If interests in more than one class of qualifying employer securities have been allocated to the participant's account, the participant must be treated as forfeiting the same proportion of each such class.
5. Valuation. For purposes of  54.4975-7(b)(9) and (12) and this section, valuations must be made in good faith and based on all relevant factors for determining the fair market value of securities. In the case of a transaction between a plan and a disqualified person, value must be determined as of the date of the transaction. For all other purposes under this subparagraph (5), value must be determined as of the most recent valuation date under the plan. An independent appraisal will not in itself be a good faith determination of value in the case of a transaction between a plan and a disqualified person. However, in other cases, a determination of fair market value based on at least an annual appraisal independently arrived at by a person who customarily makes such appraisals and who is independent of any party to a transaction under  54.4975-7(b)(9) and (12) will be deemed to be a good faith determination of value. [Amended by T.D. 7571 on November 16, 1978, 43 FR 53718.]
5. Multiple plans -
1. General rule. An ESOP may not be considered together with another plan for purposes of applying section 401(a)(4) and (5) or section 410(b) unless-
1. The ESOP and such other plan exist on November 1, 1977; or
2. Paragraph (e)(2) of this section is satisfied.
2. Special rule for combined ESOPs. Two or more ESOPs, one or more of which does not exist on November 1, 1977, may be considered together for purposes of applying section 401(a)(4) and (5) or section 410(b) only if the proportion of qualifying employer securities to total plan assets is substantially the same for each ESOP and-
1. The qualifying employer securities held by all ESOPs are all of the same class; or
2. The ratios of each class held to all such securities held is substantially the same for each plan.
3. Amended coverage, contribution, or benefit structure. For purposes of paragraph (e)(1)(i) of this section, if the coverage, contribution, or benefit structure of a plan that exists on November 1, 1977, is amended after that date, as of the effective date of the amendment, the plan is no longer considered to be a plan that exists on November 1, 1977. [Amended by T.D. 7571 on November 16, 1978, 43 FR 53718.]
6. Distribution -
1. In general. Except as provided in paragraph (f)(2) and (3) of this section, with respect to distributions, a portion of an ESOP consisting of a stock bonus plan or a money purchase pension plan is not to be distinguished from other such plans under section 401(a). Thus, for example, benefits distributable from the portion of an ESOP consisting of a stock bonus plan are distributable only in stock of the employer. Also, benefits distributable from the money-purchase portion of the ESOP may be, but are not required to be, distributable in qualifying employer securities.
2. Exempt loan proceeds. If securities acquired with the proceeds of an exempt loan available for distribution consist of more than one class, a distributee must receive substantially the same proportion of each such class. However, as indicated in paragraph (f)(1) of this section, benefits distributable from the portion of an ESOP consisting of a stock bonus plan are distributable only in stock of the employer.
3. Income. Income paid with respect to qualifying employer securities acquired by an ESOP in taxable years beginning after December 31, 1974, may be distributed at any time after receipt by the plan to participants on whose behalf such securities have been allocated. However, under an ESOP that is a stock bonus plan, income held by the plan for a 2-year period or longer must be distributed under the general rules described in paragraph (f)(1) of this section. (See the last sentence of section 803(h), Tax Reform Act of 1976.) [Reg 54.4975-11 added by T. D. 7506 on August 30, 1977; amended by T. D. 7571 on November 16, 1978, 43 FR 53718.]

Internal Revenue Service
Regulation 54.4975-12
26 C.F.R. 54.4975-12

Originally Issued September 2, 1977 (42 FR 44394)

1. In general. For purposes of section 4975(e)(8) and this section, the term "qualifying employer security" means an employer security which is -
1. Stock or otherwise an equity security, or
2. A bond, debenture, note, or certificate or other evidence of indebtedness which is described in paragraphs (1), (2), and (3) of section 503(e).
2. Special rule. In determining whether a bond, debenture, note, or certificate or other evidence of indebtedness is described in paragraphs (1), (2), and (3) of section 503(e), any organization described in section 401(a) shall be treated as an organization subject to the provisions of section 503. [Reg.  54.4975-12 added August 30, 1977, by T. D. 7506.]

Department of Labor
Pension and Welfare Benefits Administration Regulation
Regulation 2510.3-101
29 C.F.R. 2510.3-101

Originally issued November 13, 1986 (51 FR 41280)

Subsection (e) amended for a technical correction December 31, 1986 (51 FR 47226)

1. In General.
1. This section describes what constitute assets of a plan with respect to a plan's investment in another entity for purposes of Subtitle A, and Parts 1 and 4 of Subtitle 3, of Title I of the Act and section 4975 of the Internal Revenue Code. Paragraph (a)(2) contains a general rule relating to plan investments. Paragraphs (b) through (f) define certain terms that are used in the application of the general rule. Paragraph (g) describes how the rules in this section are to be applied when a plan owns property jointly with others or where it acquires an equity interest whose value relates solely to identified assets of an issuer. Paragraph (h) contains special rules relating to particular kinds of plan investments. Paragraph (i) describes the assets that a plan acquires when it purchases certain guaranteed mortgage certificates. Paragraph (j) contains examples illustrating the operation of this section. The effective date of this section is set forth in paragraph (k).
2. Generally, when a plan invests in another entity, the plan's assets include its investment, but do not, solely by reason of such investment, include any of the underlying assets of the entity. However, in the case of a plan's investment in an equity interest of an entity that is neither a publicly-offered security nor a security issued by an investment company registered under the Investment Company Act of 1940 its assets include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established that -
1. the entity is an operating company, or
2. equity participation in the entity by benefit plan investors is not significant.

Therefore, any person who exercises authority or control respecting the management or disposition of such underlying assets, and any person who provides investment advice with respect to such assets for a fee (direct or indirect), is a fiduciary of the investing plan.

2. "Equity Interests" and "Publicly-Offered Securities".
1. The term "equity interest" means any interest in an entity other than an instrument that is treated as indebtedness under applicable local law and which has no substantial equity features. A profits interest in a partnership, an undivided ownership interest in property and a beneficial interest in a trust are equity interests.
2. A "publicly-offered security" is a security that is freely transferable, part of a class of securities that is widely held and either
1. Part of a class of securities registered under section 12(b) or 12(g) of the Securities Exchange Act of 1934, or
2. Sold to the plan as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act of 1933 and the class of securities of which such security is a part is registered under the Securities Exchange Act of 1934 within 120 days (or such later time as may be allowed by the Securities and Exchange Commission) after the end of the fiscal year of the issuer during which the offering of such securities to the public occurred.
3. For purposes of paragraph (b)(2), a class of securities is "widely-held" only if it is a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A class of securities will not fail to be widely-held solely because subsequent to the initial offering the number of independent investors falls below 100 as a result of events beyond the control of the issuer.
4. For purposes of paragraph (b)(2), whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. If a security is part of an offering in which the minimum investment is $10,000 or less, however, the following factors ordinarily will not, alone or in combination, affect a finding that such securities are freely transferable -
1. Any requirement that not less than a minimum number of shares or units of such security be transferred or assigned by any investor, provided that such requirement does not prevent transfer of all of the then remaining shares or units held by an investor;
2. Any prohibition against transfer or assignment of such security or rights in respect thereof to an ineligible or unsuitable investor;
3. Any restriction on, or prohibition against, any transfer or assignment which would either result in a termination or reclassification of the entity for federal or state tax purposes or which would violate any state or federal statute, regulation, court order, judicial degree, or rule of law;
4. Any requirement that reasonable transfer or administrative fees be paid in connection with a transfer or assignment;
5. Any requirement that advance notice of a transfer or assignment be given to the entity and any requirement regarding execution of documentation evidencing such transfer or assignment (including documentation setting forth representations from either or both of the transferor or transferee as to compliance with any restriction or requirement described in this paragraph (b)(4) or requiring compliance with the entity's governing instruments);
6. Any restriction on substitution of an assignee as a limited partner of a partnership, including a general partner consent requirement, provided that the economic benefits of ownership of the assignor may be transferred or assigned without regard to such restriction or consent (other than compliance with any other restriction described in this paragraph (b)(4));
7. Any administrative procedure which establishes an effective date, or an event, such as the completion of the offering, prior to which a transfer or assignment will not be effective; and
8. Any limitation or restriction on transfer or assignment which is not created or imposed by the issuer or any person acting for or on behalf of such issuer.
3. "Operating Company".
1. An "operating company" is not an entity that is primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the production or sale of a product or service other than the investment of capital. The term "operating company" includes an entity which is not described in the preceding sentence, but which is a "venture capital operating company" described in paragraph (d) or a "real estate operating company" described in paragraph (e).
2. [Editorial Note: There is no subsection (c)(2).]
4. "Venture Capital Operating Company".
1. An entity is a "venture capital operating company" for the period beginning on an initial valuation date described in paragraph (d)(5)(i) and ending on the last day of the first "annual valuation period" described in paragraph (d)(5)(ii) (in the case of an entity that is not a venture capital operating company immediately before the determination) or for the 12-month period following the expiration of an "annual valuation period" described in paragraph (d)(5)(ii) (in the case of an entity that is a venture capital operating company immediately before the determination) if -
1. On such initial valuation date, or at any time within such annual valuation period, at least 50 percent of its assets (other than short-term investments pending long-term commitment or distribution to investors), valued at cost, are invested in venture capital investments described in paragraph (d)(3)(i) or derivative investments described in paragraph (d)(4); and
2. During such 12-month period (or during the period beginning on the initial valuation date and ending on the last day of the first annual valuation period), the entity, in the ordinary course of its business, actually exercises management rights of the kind described in paragraph (d)(3)(ii) with respect to one or more of the operating companies in which it invests.
2. Distribution Period
1. A venture capital operating company described in paragraph (d)(1) shall continue to be treated as a venture capital operating company during the "distribution period" described in paragraph (d)(2)(ii). An entity shall not be treated as a venture capital operating company at any time after the end of the distribution period.The "distribution period" referred to in paragraph (d)(2)(i) begins on a date established by a venture capital operating company that occurs after the first date on which the venture capital operating company has distributed to investors the proceeds of at least 50 percent of the highest amount of its investments (other than short-term investments made pending long-term commitment or distribution to investors) outstanding at any time from the date it commenced business (determined on the basis of the cost of such investments) and ends on the earlier of -
1. The date on which the company makes a "new portfolio investment", or
2. The expiration of 10 years from the beginning of the distribution period.
2. For purposes of paragraph (d)(2)(ii)(A), a "new portfolio investment" is an investment other than -
1. An investment in an entity in which the venture capital operating company had an outstanding venture capital investment at the beginning of the distribution period which has continued to be outstanding at all times during the distribution period, or
2. A short-term investment pending long-term commitment or distribution to investors.
3. Venture Capital Investment
1. For purposes of this paragraph (d) a "venture capital investment" is an investment in a operating company (other than a venture capital operating company) as to which the investor has or obtains management rights.
2. The term "management rights" means contractual rights directly between the investor and an operating company to substantially participate in, or substantially influence the conduct of, the management of the operating company.
4. Derivative Investment
1. An investment is a "derivative investment" for purposes of this paragraph (d) if it is -
1. A venture capital investment as to which the investor's management rights have ceased in connection with a public offering of securities of the operating company to which the investment relates, or
2. An investment that is acquired by a venture capital operating company in the ordinary course of its business in exchange for an existing venture capital investment in connection with:
1. A public offering of securities of the operating company to which the existing venture capital investment relates, or
2. A merger or reorganization of the operating company to which the existing venture capital investment relates, provided that such merger or reorganization is made for independent business reasons unrelated to extinguishing management rights.
2. An investment ceases to be a derivative investment on the later of:
1. 10 years from the date of the acquisition of the original venture capital investment to which the derivative investment relates, or
2. 30 months from the date on which the investment becomes a derivative investment.
5. For purposes of this paragraph (d) and paragraph (e) -
1. An "initial valuation date" is the later of -
1. Any date designated by the company within the 12-month period ending with the effective date of this section, or
2. The first date on which an entity makes an investment that is not a short-term investment of funds pending long-term commitment.
2. An "annual valuation period" is a pre-established annual period, not exceeding 90 days in duration, which begins no later than the anniversary of an entity's initial valuation date. An annual valuation period, once established may not be changed except for good cause unrelated to a determination under this paragraph (d) or paragraph (e).
5. "Real Estate Operating Company".

An entity is a "real estate operating company" for the period beginning on an initial valuation date described in paragraph (d)(5)(i) and ending on the last day of the first "annual valuation period" described in paragraph (d)(5)(ii) (in the case of an entity that is not a real estate operating company immediately before the determination) or for the 12-month period following the expiration of an annual valuation period described in paragraph (d)(5)(ii) (in the case of an entity that is a real estate operating company immediately before the determination) if:

1. On such initial valuation date, or on any date within such annual valuation period, at least 50 percent of its assets, valued at cost (other than short-term investments pending long-term commitment or distribution to investors), are invested in real estate which is managed or developed and with respect to which such entity has the right to substantially participate directly in the management or development activities; and
2. During such 12-month period (or during the period beginning on the initial valuation date and ending on the last day of the first annual valuation period) such entity in the ordinary course of its business is engaged directly in real estate management or development activities.
6. Participation by Benefit Plan Investors.
1. Equity participation in an entity by benefit plan investors is "significant" on any date if, immediately after the most recent acquisition of any equity interest in the entity, 25 percent or more of the value of any class of equity interests in the entity is held by benefit plan investors (as defined in paragraph (f)(2)). For purposes of determinations pursuant to this paragraph (f), the value of any equity interests held by a person (other than a benefit plan investor) who has discretionary authority or control with respect to the assets of the entity or any person who provides investment advice for a fee (direct or indirect) with respect to such assets, or any affiliate of such a person, shall be disregarded.
2. A "benefit plan investor" is any of the following -
1. Any employee benefit plan (as defined in section 3(3) of the Act), whether or not it is subject to the provisions of Title I of the Act,
2. Any plan described in section 4975(e)(1) of the Internal Rev. Code,
3. Any entity whose underlying assets include plan assets by reason of a plan's investment in the entity.
3. An "affiliate" of a person includes any person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the person. For purposes of this paragraph (f)(3), "control", with respect to a person other than an individual, means the power to exercise a controlling influence over the management or policies of such person.
7. Joint Ownership. For purposes of this section, where a plan jointly owns property with others, or where the value of a plan's equity interest in an entity relates solely to identified property of the entity, such property shall be treated as the sole property of a separate entity.
8. Specific Rules Relating to Plan Investment. Notwithstanding any other provision of this section-
1. Except where the entity is an investment company registered under the Investment Company Act of 1940, when a plan acquires or holds an interest in any of the following entities its assets include its investment and an undivided interest in each of the underlying assets of the entity:
1. A group trust which is exempt from taxation under section 501(a) of the Internal Revenue Code pursuant to the principles of Rev. Rul. 81-100, 1981-1 C.B. 326,
2. A common or collective trust fund of a bank,
3. A separate account of an insurance company, other than a separate account that is maintained solely in connection with fixed contractual obligations of the insurance company under which the amounts payable, or credited, to the plan and to any participant or beneficiary of the plan (including an annuitant) are not affected in any manner by the investment performance of the separate account.
2. When a plan acquires or holds an interest in any entity (other than an insurance company licensed to do business in a State) which is established or maintained for the purpose of offering or providing any benefit described in section 3(1) or section 3(2) of the Act to participants or beneficiaries of the investing plan, its assets will include its investment and an undivided interest in the underlying assets of that entity.
3. When a plan or a related group of plans owns all of the outstanding equity interests (other than director's qualifying shares) in an entity, its assets include those equity interests and all of the underlying assets of the entity. This paragraph (h)(3) does not apply, however, where all of the outstanding equity interests in an entity are qualifying employer securities described in section 407(d)(5) of the Act, owned by one or more eligible individual account plan(s) (as defined in section 407(d)(3) of the Act) maintained by the same employer, provided that substantially all of the participants in the plan(s) are, or have been, employed by the issuer of such securities or by members of a group of affiliated corporations (as determined under section 407(d)(7) of the Act) of which the issuer is a member.
4. For purposes of paragraph (h)(3), a "related group" of employee benefit plans consists of every group of two or more employee benefit plans-
1. Each of which receives 10 percent or more of its aggregate contributions from the same employer or from members of the same controlled group of corporations (as determined under section 1563(a) of the Internal Revenue Code, without regard to section 1563(a)(4) thereof); or
2. Each of which is either maintained by, or maintained pursuant to a collective bargaining agreement negotiated by, the same employee organization or affiliated employee organizations. For purposes of this paragraph, an "affiliate" of an employee organization means any person controlling, controlled by, or under common control with such organization, and includes any organization chartered by the same parent body, or governed by the same constitution and bylaws, or having the relation of parent and subordinate.
9. Governmental Mortgage Pools.
1. Where a plan acquires a guaranteed governmental mortgage pool certificate, as defined in paragraph (i)(2), the plan's assets include the certificate and all of its rights with respect to such certificate under applicable law, but do not, solely by reason of the plan's holding of such certificate, include any of the mortgages underlying such certificate.
2. A "guaranteed governmental mortgage pool certificate" is a certificate backed by, or evidencing an interest in, specified mortgages or participation interests therein and with respect to which interest and principal payable pursuant to the certificate is guaranteed by the United States or an agency or instrumentality thereof. The term "guaranteed governmental mortgage pool certificate" includes a mortgage pool certificate with respect to which interest and principal payable pursuant to the certificate is guaranteed by:
1. The Government National Mortgage Association;
2. The Federal Home Loan Mortgage Corporation; or
3. The Federal National Mortgage Association.
10. Examples. [NOTE: Subsection (j) of the regulation is omitted.]
11. Effective Date and Transitional Rules.
1. In general, this section is effective for purposes of identifying the assets of a plan or after March 13, 1987. Except as a defense, this section shall not apply to investments in an entity in existence on March 13, 1987, if no plan subject to Title I of the Act or plan described in section 4975(e)(1) of the Code (other than a plan described in section 4975(g)(2) or 4975(g)(3)) acquires an interest in the entity from an issuer or underwriter at any time on or after March 13, 1987 except pursuant to a contract binding on the plan in effect on March 13, 1987 with an issuer or underwriter to acquire an interest in the entity.
2. Notwithstanding paragraph (k)(1), this section shall not, except as a defense, apply to a real estate entity described in section 11018(a) of Pub. L. 99-272.

Department of Labor
Regulation 2520.103-5
29 C.F.R. 2520.103-5

Transmittal and certification of information to plan administrator for annual reporting purposes.

(Collective Investment Fund Reporting to Plan Administrators)

Originally issued September 10, 1978 (43 FR 10140)

1. General. In accordance with section 103(a)(2) of the Act, an insurance carrier or other organization which provides benefits under the plan or holds plan assets, a bank or similar institution which holds plan assets, or a plan sponsor, shall transmit and certify such information as needed by the administrator to file the annual report under section 104(a)(1)(A) of the Act and  2520.104a-5 or  2520.104a-6:
1. Within 9 months after the close of the plan year which begins in 1975 or September 30, 1976, whichever is later, and
2. Within 120 days after the close of any plan year which begins after December 31, 1975.
2. Application. This requirement applies with respect to -
1. An insurance carrier or other organization which:
1. Provides from its general asset accounting funds for the payment of benefits under a plan, or
2. Holds assets of a plan in a separate account;
2. A bank, trust company, or similar institution which holds assets of a plan in a common or collective trust, separate trust, or custodial account; and
3. A plan sponsor as defined in section 3(16)(B) of the Act.
3. Contents. The information required to be provided to the administrator shall include -
1. In the case of an insurance carrier or other organization which -
1. Provides funds from its general asset account for the payment of benefits under a plan, upon request of the plan administrator, such information as is contained within the ordinary business records of the insurance carrier or other organization and is needed by the plan administrator to comply with the requirements of section 104(a)(1)(A) of the Act and 2520.104a-5 or 2520.104a-6;
2. Holds assets of a plan in a pooled separate account which is exempted from certain reporting requirements under 2520.103-4, a copy of the annual statement of assets and liabilities of the separate account for the fiscal year of such account that ends with or within the plan year for which the annual report is made, and a statement of the value of the plan's units of participation in the separate account;
3. Holds assets of a plan in a separate account which is not exempted from certain reporting requirements under 2520.103-4, a listing of all transactions of the separate account and, upon request of the plan administrator, such information as is contained within the ordinary business records of the insurance carrier and is needed by the plan administrator to comply with the requirements of section 104(a)(1)(A) of the Act and 2520.104a-5 or 2520.104a-6.
2. In the case of a bank, trust company, or similar institution holding assets of a plan -
1. In a common or collective trust which is exempted from certain reporting requirements under 2520.103-3, a copy of the annual statement of assets and liabilities of the common or collective trust for the fiscal year of such trust that ends with or within the plan year for which the annual report is made, and a statement of the value of the plan's units of participation in the common or collective trust.
2. In a trust which is not exempted from certain reporting requirements under 2520.103-3, a listing of all transactions of the separate trust and, upon request of the plan administrator, such information as is contained within the ordinary business records of the bank, trust company, or similar institution and is needed by the plan administrator to comply with the requirements of section 104(a)(1)(A) of the Act and 2520.104a-5.
3. In a custodial account, upon request of the plan administrator, such information as is contained within the ordinary business records of the bank, trust company, or similar institution and is needed by the plan administrator to comply with the requirements of section 104(a)(1)(A) of the Act and 2520.104a-5 or 2520.104a-6.
3. In the case of a plan sponsor, a listing of all transactions directly or indirectly involving plan assets engaged in by the plan sponsor and such information as is needed by the plan administrator to comply with the requirements of section 104(a)(1)(A) of the Act and 2520.104a-5 or 2520.104a-6.
4. Certification.
1. An insurance carrier or other organization a bank, trust company, or similar institution, or plan sponsor, as described in paragraph (b) of this section, shall certify to the accuracy and completeness of the information described in paragraph (c) of this section by a written declaration which is signed by a person authorized to represent the insurance carrier, bank, or plan sponsor. Such certification will serve as a written assurance of the truth of the facts stated therein.
2. Example of Certification. The XYZ Bank (Insurance Carrier) hereby certifies that the foregoing statement furnished pursuant to 20 C.F.R. 2520.103-5(c) is complete and accurate.

Department of Labor
Regulation 2550.404a-1
C.F.R. 2550.404a-1

Originally issued June 26, 1979 (44 FR 37225)

The technical corrections of 4-4-78 and the amendment of 3-1-89 contained no changes to this regulation.

Editor's Note: Also refer to Interpretive Bulletin 94-1, dealing with the prudence of social ("economically targeted" or ETI) investments. Also see DOL ERISA Regulation 404c-1, which exempts fiduciaries from certain ERISA liability if plans meet certain conditions and participants direct their own investments.

Agency: Department of Labor.

Action: Final regulation.

Summary: This document contains a final regulation relating to the investment duties of a fiduciary of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (the Act). The regulation is relevant to the investment of assets of employee benefit plans for which fiduciaries have investment duties, and, therefore, it affects participants, beneficiaries and fiduciaries of all such plans.

Effective Date: July 23, 1979.

Final Regulation

1. In General. Section 404(a)(1)(B) of the Employee Retirement Income Security Act of 1974 (the Act) provides, in part, that a fiduciary shall discharge his duties with respect to a plan with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.
2. Investment Duties.
1. With regard to an investment or investment course of action taken by a fiduciary of an employee benefit plan pursuant to his investment duties, the requirements of Section 404(a)(1)(B) of the Act set forth in subsection (a) of this section are satisfied if the fiduciary (A) has given appropriate consideration to those facts and circumstances that, given the scope of such fiduciary's investment duties, the fiduciary knows or should know are relevant to the particular investment or investment course of action involved, including the role the investment or investment course of action plays in that portion of the plan's investment portfolio with respect to which the fiduciary has investment duties; and (B) has acted accordingly.
2. For purpose of paragraph (1) of this subsection, "appropriate consideration" shall include, but is not necessarily limited to:
1. A determination by the fiduciary that the particular investment course of action is reasonably designed, as part of the portfolio (or, where applicable, that portion of the plan portfolio with respect to which the fiduciary has investment duties), to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action, and
2. Consideration of the following factors as they relate to such portion of the portfolio:
1. The composition of the portfolio with regard to diversification;
2. The liquidity and current rates of return of the portfolio relative to the anticipated cash flow requirements of the plan, and
3. The projected return of the portfolio relative to the funding objectives of the plan.
3. An investment manager appointed, pursuant to the provisions of Section 402(c)(3) of the Act, to manage all or part of the assets of a plan, may, for purposes of compliance with the provisions of paragraphs (1) and (2) of this subsection, rely on, and act upon the basis of, information pertaining to the plan provided by or at the direction of the appointing fiduciary, if -
1. Such information is provided for the stated purpose of assisting the manager in the performance of his investment duties, and
2. The manager does not know and has no reason to know that the information is incorrect.
3. Definitions.

For purposes of this section:

1. The term "investment duties" means any duties imposed upon, or assumed or undertaken by, a person in connection with the investment of plan assets which make or will make such person a fiduciary of an employee benefit plan or which are performed by such person as a fiduciary of an employee benefit plan as defined in Section 3(21)(A)(i) or (ii) of the Act.
2. The term "investment course of action" means any series or program of investments or actions related to a fiduciary's performance of his investment duties.
3. The term "plan" means an employee benefit plan to which Title I of the Act applies.

Explanatory Preamble

For further information contact: Paul R. Antsen, Office of Fiduciary Standards, Pension and Welfare Benefit Programs, U.S. Department of Labor, Washington, D.C. 20216, (202) 522-8971, or Gregor B. McCurdy, Plan Benefits Security Division, Office of the Solicitor, U.S. Department of Labor, Washington, D.C. 20216. (202) 523-9141.

Supplemantary information: On April 25, 1978, notice was published in the Federal Register (43 FR 17480)¹ that the Department had under consideration a proposal to adopt a regulation, 29 C.F.R. 2550.404a-1, under section 404(a)(1)(B) of the Act, relating to the investment duties of a fiduciary of an employee benefit plan. Section 404(a)(1)(B) of the Act provides, in part, that a fiduciary shall discharge his duties with respect to an employee benefit plan with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims (the "Prudence" rule).²

Public comments were received, in response to the proposal, that generally supported the tentative views of the Department reflected therein, although many suggestions for specific revisions were offered. A few comments opposed the adoption of the proposed or of any, regulation concerning these matters. Among the reasons given in opposition to the adoption of the proposed regulation were: (1) that the courts, rather than the Department, should determine how the "prudence" rule is to be interpreted, (2) that the Department's views regarding the requirements of the "Prudence" rule, as reflected in the proposed regulation, are incorrect, (3) that it is impractical to attempt to define "prudence" by regulation; and (4) that the proposal did not accomplish its stated objectives. The Department has considered the comments opposing adoption of the regulation, but has not been persuaded that the interpretation of the requirements of the "prudence" rule set forth below is incorrect. It believes, moreover, that adoption of a regulation concerning the investment duties of fiduciaries under the "prudence" rule is appropriate because such a regulation would provide guidance for many plan fiduciaries in an important area of their responsibilities under the Act.

Counsel for one group of interested persons, while supporting the proposed regulation in principle, asked that they be given an opportunity to express their views at a public hearing on the proposed regulation. They also suggested that the regulation should, in any event, be republished to give interested persons additional opportunity for comment. The Department has considered these requests, but has determined that neither a public hearing nor republication of a proposed regulation is necessary or appropriate.

Accordingly, after consideration of all the written comments received, the Department has determined to adopt the proposed regulation as modified and set forth below.

Discussion of the Regulation

The legislative history of the Act indicates that the common law of trusts, which forms the basis for and is federalized and codified in part 4 of Title I of the Act, should, nevertheless, not be mechanically applied to employee benefit plans.³ The "prudence" rule in the Act sets forth a standard built upon, but that should and does depart from, traditional trust law in certain respects.

The Department is of the opinion that (1) generally, the relative riskiness of a specific investment or investment course of action does not render such investment or investment course of action either per se prudent or per se imprudent, and (2) the prudence of an investment decision should not be judged without regard to the role that the proposed investment or investment course of action plays with the overall plan portfolio. Thus, although securities Issued by a small or new company may be a riskier investment than securities issued by a "blue chip" company, the investment in the former company may be entirely proper under the Act's prudence" rule.

Accordingly, paragraph (b)(1) of the regulation, as adopted, provides generally that, with respect to an investment or investment course of action taken pursuant to a fiduciary's investment duties, the requirements of the "prudence" rule have been satisfied if the fiduciary has acted in a manner consistent with appropriate consideration of the facts and circumstances that the fiduciary knows or should know are relevant, including the role that the investment or investment course of action plays in that portion of the plan's investment portfolio with respect to which the fiduciary has investment duties. Paragraph (b), as adopted, has been modified in response to certain comments received on the regulation as originally proposed.

As a general observation, the comments received by the Department indicated that many commentators were uncertain of the scope of the proposed regulation. In particular, some commentators appear to have viewed the various factors and conditions set forth in the proposal as a statement of requirements that must necessarily be met in order to satisfy the requirements of the "Prudence" rule. In this regard, it should be noted that the regulation reflects the views of the Department as to a manner of satisfying the requirements of the "prudence" rule, and does not purport to impose any additional requirements or constraints upon plan fiduciaries. It should also be noted that the Department does not view compliance with the provisions of the regulation as necessarily constituting the exclusive method for satisfying the requirements of the "prudence" rule. Rather, the regulation is in the nature of a "safe harbor" provision; it is the opinion of the Department that fiduciaries who comply with the provisions of the regulation will have satisfied the requirements of the "prudence" rule, but no opinion is expressed in the regulation as to the status of activities undertaken or performed that do not so comply.

With regard to more particular matters, a number of comments suggested that one condition of the proposal - that a fiduciary give appropriate consideration to "all" relevant facts and circumstance - could be read as establishing an impossible standard, especially for fiduciaries of small plans, because (1) no fiduciary has unlimited resources to develop all the information that one might deem to be relevant to a particular investment decision, and (2) no fiduciary can be expected to consider all the relevant facts and circumstances, whether or not of material significance.

Because section 404(a)(1)(B) of the Act provides that it is the fiduciary's duties with respect to the plan which must be discharged in accordance with the "prudence" rule, it appears to the Department that the scope of those duties will determine, in part, the factors which should be considered by a plan fiduciary in a given case. The nature of those duties will, of course, depend on the facts and circumstances of the case, including the nature of the arrangement between the fiduciary and the plan. For that reason, the regulation, as adopted, does not distinguish among classes of fiduciaries with respect to what particular duties may be involved. The Department recognizes, however, that a fiduciary should be required neither to expend unreasonable effort in discharging his duties. nor to consider matters outside the scope of those duties. Accordingly, the regulation has been modified to provide that consideration be given to those facts and circumstances which take into account the scope of his investment duties, the fiduciary knows or should know are relevant to the particular investment decision involved. The scope of the fiduciary's inquiry in this respect, therefore, is limited to those facts and circumstances that a prudent person having similar duties and familiar with such matters would consider relevant.

Several commentators asserted that the regulation, in recognition of the Act's provisions permitting delegation of investment duties to, and allocation among, several fiduciaries, should permit a fiduciary who is responsible for the management of plan assets to rely on information supplied by appropriate other plan fiduciaries, and to act in accordance with policies and instructions supplied by those persons in making decisions on the investment of plan assets. Those comments, generally, addressed the situation where several investment managers are involved in managing the assets of a plan, each being responsible for a portion of the plan's investment portfolio.⁴ Under those circumstances, it would not, in the view of the commentators, be appropriate to require a fiduciary who is responsible for only a portion of the plan's portfolio to take into consideration facts and circumstances relating to the balance of the portfolio in making an investment decision. The Department agrees, in part, with those comments. Accordingly, paragraph (b)(1) of the regulation as adopted also provides that such a fiduciary need give appropriate consideration to the role the proposed investment or investment course of action plays in that portion only, of the plan's investment portfolio, with respect to which the fiduciary has investment duties.

However, the Department cannot state that, under the foregoing circumstances, a fiduciary is entitled blindly to rely upon instructions or policies established by other plan fiduciaries. Similarly, the regulation does not provide, as requested by one commentator, that the assets of a pooled investment fund may be invested in accordance with its published investment objectives and policies without requiring that consideration be given to the particular needs of any individual plan that has an interest in the fund. It would appear that where authority to manage part (or all) of the assets of a plan has been delegated to one or more investment managers pursuant to section 402(c)(3) of the Act, the primary responsibility for determining that the delegation is appropriate rests with the named fiduciary or fiduciaries effecting the delegation. Nevertheless, the Department considers that each such manager's investment duties, under section 404(a)(1)(B) of the Act, includes (among other things) a duty not to act in accordance with a delegation of plan investment duties to the extent that the manager either knows or should know that the delegation involves a breach of fiduciary responsibility.⁵ Once the manager has considered factors otherwise necessary to assure himself that the delegation of investment authority and related specific instructions are appropriate, he may, in exercising such authority and carrying out such instructions, rely upon information provided to him in accordance with the provisions of new paragraph (b)(3) of the regulation. That paragraph provides that an investment manager responsible for the management of all or part of a plan's assets pursuant to an appointment described in section 402(c)(3) of the Act may, for purposes o f complying with the provisions of the regulation, rely upon certain information supplied to him by or at the direction of the appointing fiduciary, provided that the manager neither knows or should know that the information is incorrect.

Paragraph (b)(1) of the proposed regulation also been revised in order to make clear that the fiduciary's acts do not satisfy the "prudence" rule solely because the fiduciary had previously given consideration to relevant facts and circumstances. Some comments questioned whether, under the regulation as originally proposed, a fiduciary might be deemed to be "immunized" once he had given such consideration, not withstanding the nature of his subsequent acts. The regulation, as adopted, provides that it is the "investment" or "investment course of action" in question that will satisfy the requirements of the prudence rule if the criteria set forth in the regulation are met.

Paragraph (b)(2) of the regulation sets forth factors that are to be included, to the extent applicable, in an evaluation of an investment or investment course of action if a fiduciary wishes to rely on the provisions of the regulation. They are: (1) the composition of the portfolio with regard to diversification; (2) the liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan; and (3) the projected return of the portfolio relative to the objectives of the plan. These factors are adopted substantially as proposed, except that the first factor has been revised, in response to questions raised by some of the comments, to make clear that the word "diversification" is to be given its customary meaning as a mechanism for reducing the risk of large losses; that factor, as originally proposed, referred to "diversification of risk." The second factor has also been modified in order to make clear that its principal subject matter is all anticipated cash requirements of the plan, and not solely those arising by reason of payment of benefits. A fourth factor set forth in the proposal which related to the "volatility" of the portfolio, has been eliminated as a factor specifically to be considered because, although paragraph (b)(2) as adopted sets forth factors which must be considered in all cases in order to comply with the provisions of the regulation⁶, the reference to volatility may be read, according to some comments, as suggesting that only certain portfolio management techniques are appropriate. Moreover, as discussed more fully below, the subject of risk and opportunity for gain - which subsumes consideration of "volatility" in some respects - is now addressed in subparagraph (A) of paragraph (b)(2). A former fifth factor, which read "the prevailing and projected economic conditions of the entities in which the plan has invested and proposes to invest," is also deal t with in that subparagraph.

Several commentators suggested that inclusion of that fifth factor in the regulation would be contrary to the intent of the proposal because it focuses attention on the individual investment, rather than on the aggregate plan portfolio. Others objected to its inclusion on the ground that it is antithetical to the theory of operation of certain "passive" investment media (such as "index" funds) that acquire portfolios designed to match the performance of various investment indices and that, accordingly, have little or no discretion in altering the composition of their portfolios.⁷

The regulation, however, is not intended to suggest either that any relevant or material attributes of a contemplated investment may properly be ignored or disregarded, or that a particular plan investment should be deemed to be prudent solely by reason of the propriety of the aggregate risk/return characteristics of the plan's portfolio. Rather, it is the Department's view that an investment reasonably designed - as a part of the portfolio - to further the purposes of the plan, and that is made upon appropriate consideration of the surrounding facts and circumstances, should not be deemed to be imprudent merely because the investment, standing alone, would have, for example, a relatively high degree of risk. The Department also believes that appropriate consideration of an investment to further the purposes of the plan must include consideration of the characteristics of the investment itself. Accordingly, paragraph (b)(2) of the regulation provides that, for purposes of paragraph (b)(1), "appropriate consideration" shall include a determination by the fiduciary that the particular investment or investment course of action is reasonably designed, as part of the portfolio for which the fiduciary is responsible, to further the purposes of the plan, taking into account the risk of loss and the opportunity for gain (or other return) associated with the investment or investment course of action.⁸

In the case of "passive" investment funds, referred to above, it would seem that, to the extent the fund manager is managing plan assets,⁹ the investments made by the fund, as well as the plan's investment in the fund, must meet the requirements of the "prudence" rule. However, to the extent that an index fund, including the screen or filter process described above at note 7, is reasonably designed to fulfill the fund manager's fiduciary obligations with respect to a plan whose assets are managed therein, such manager, acting in accordance with the fund's objective and its filter or screen process, generally would be in compliance with the provisions of the "prudence" rule, as described in the regulation, with respect to that plan.

The terms "investment duties" and "investment course of action" are defined in paragraphs (c)(1) and (2) of the regulation. No comments were received regarding these definitions, and they have been adopted substantially in the form proposed. New paragraph (c)(3) has been added, defining the term "plan" to mean an employee benefit plan to which Title I of the Act applies.

Discussion of Certain other Comments

Counsel for one group of commentators characterized the factors set forth in paragraph (b)(2) as relating solely to the "investment merit" of a particular investment or investment course of action. Because, in the view of those commentators, the prudence of the acquisition or retention of a contract Issued by an insurance company may involve factors besides "investment merit", they suggested that the regulation should contain a separate provision that would set forth two factors to be considered by a fiduciary, in evaluating the prudence of the acquisition or retention of such a contract: the risks assumed, and the services provided, by the insurance company. The Department is unable to concur with the commentators' view that the regulation as proposed dealt only with matters of "investment merit" as narrowly perceived in the comment. The Department agrees that such factors as the risk to be assumed and the services to be provided under a contract are pertinent to any investment decision involving such contract. The regulation as adopted specifically provides that, in order to come within the scope of the regulation, a fiduciary shall consider the facts and circumstances the fiduciary knows or should know are relevant to the investment decision, and that the factors set forth in paragraph (b)(2) are not intended to be exclusive. Accordingly, the Department believes that it is unnecessary to set forth additional factors with respect to insurance contracts or other specific types of investment.

Two commentators suggested that the Department clarify that the adoption of the regulation would not result in fiduciaries being required to invest in expensive systems or analyses to make investment decisions. Under the "prudence" rule, the standard to which a fiduciary is held in the proper discharge of his investment duties is defined, in part, by what a prudent person acting in a like capacity and familiar with such matters would do. Thus, for example, it would not seem necessary for a fiduciary of a plan with assets of $50,000 to employ, in all respects, the same investment management techniques as would a fiduciary of a plan with assets of $50,000,000.

Numerous comments were received with respect to the factors set forth in paragraph (b)(2). Several persons requested that the Department clarify or define terms such as "diversification of risk". "risk," "volatility" and "liquidity." For example, some persons asked what specific measurements of volatility, risk and liquidity should be utilized by fiduciaries in making investment decisions for a plan. The Department believes that, in view of the modifications (discussed above) made in the regulation as adopted, it is neither necessary nor appropriate for the regulation to contain such definitions. Several commentators asserted that certain specific types of investments such as, for example, investment in small or recently formed companies, or nonincome producing investments that are not securities (such as, for example, certain precious metals and objects of art) have not been viewed with favor, traditionally, as trust investments. Those comments urged that the regulation specify the extent to which such investments are permissible under the "prudence" rule. Other commentators made reference to the traditional principle that trust investments should be income producing, and suggested that the appropriate measure of investment "return" should be defined to mean 'total return" - that is, an aggregate return computed without regard to whether a contributing factor thereto consists of income or capital items. Although the Department considers that defining "return" would be beyond the appropriate scope of this regulation, it believes that the "prudence" rule does not require that every plan investment produce current income under all circumstances. As indicated above and in the preamble to the proposed regulation, the Department believes that the universe of investments permissible under the "prudence" rule is not necessarily limited to those permitted at common law.

However, the Department does not consider it appropriate to include in the regulation any list of investments, classes of investment, or investment techniques that might be permissible under the "prudence" rule. No such list could be complete; moreover, the Department does not intend to create or suggest a "legal list" of investments for plan fiduciaries.

The preamble to the proposed regulation stated (as does this preamble) that the risk level of an investment does not alone make the investment per se prudent or per se imprudent. Comments were received which asserted that such proposition is inappropriate and would promote irresponsibility on the part of plan fiduciaries. Other commentators not only agreed with the proposition, but also suggested that it should be incorporated in the regulation. The Department believes that both of these concerns are addressed by the modifications, discussed above, made to paragraph (b)(2) of the regulation as adopted.

The Department has determined that this regulation is not a "significant regulation" as defined in the Department's guidelines (44 FR 5570, January 26, 1979) implementing Executive Order 12044.

Statutory Authority

The regulation set forth below is adopted pursuant to the authority contained in section 505 of the Act (Pub. L. 93-406, 88 Stat. 894 (29 USC  1135)). Although the regulation is an "interpretative rule" within the meaning of 5 USC  553(d), the effective date of the regulation is July 23, 1979, consistent with the statement of the Department, in connection with the regulation as proposed. that such regulation would be effective 30 days after its adoption.

Final Regulation

Accordingly, Part 2550 of Chapter XXV of Title 29 of the Code of Federal) Regulations is amended by inserting in the appropriate place to read  2550.404a-1.

Signed at Washington, D.C, this 20th day of June 1979.

Ian D. Lanoff, Administrator

Pension and Welfare Benefit Programs

Labor-Management Services Administration

United States Department of Labor

Footnotes

1. See also 43 FR 27208 (June 23, 1978), in which notice was given of an extension of the original comment period.
2. The regulation pertains only to the investment duties of a fiduciary of an employee benefit plan. Section 404(a)(1)(B) of the Act, however, requires that a fiduciary discharge all of his duties in accordance with the "prudence" rule.
3. It should also be noted that although the proposed regulation made reference to an additional requirement of section 404(a)(1) - that the fiduciary discharge his duties solely in the interest of plan participants and beneficiaries - that reference has been deleted from the regulation as adopted. This was done to avoid suggesting that satisfaction of the "prudence" rule with respect to an investment or investment course of action necessarily implies satisfaction of that additional requirement.
4. See, e.g., H.R. Rep. No. 1280, 93d Cong., 2d Sess. 302 (1974).
5. See sections 403(a)(2) and 403(c)(3) of the Act.
6. Further, section 405(a) of the Act provides, in part, that a plan fiduciary shall be liable for a breach of fiduciary liability of another fiduciary with respect to the same plan if, among other things, he has knowledge of such a breach and does not make reasonable efforts to remedy it, or he has enabled such other fiduciary to commit a breach by his failure to comply with the requirements of section 404(a)(1) of the Act in the administration of his specific responsibilities which give rise to his status as a fiduciary.
7. Paragraph (b)(2) of the regulation, as proposed, stated that the factors which should be considered may include those listed. In order to reduce uncertainty, reflected in the comments, regarding the application of the regulation, and in view of the fact that the regulation is in the nature of a "safe harbor" provision, paragraph (b)(2) has been restructured so as to indicate the factors which should under all circumstances be considered by any fiduciary who wishes to rely on the provisions of the rule.
8. It should be noted that index funds typically include a screen or filter process by which portfolio investments for any such fund may be changed to reflect significant adverse financial developments affecting any potential or existing portfolio company, notwithstanding the continued inclusion of the company in the index against which the fund is measured.
9. The term "risk" is used here in its ordinary sense, and refers to any and all types of risk applicable to a particular investment or investment course of action.
10. See, e.g., section 401(b) of the Act.

Department of Labor
Employee Benefits Security Administration
29 CFR Part 2550

Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974 Automatic Rollover Safe Harbor

SUMMARY: Section 657 of the EGTRRA of 2001 amended IRC Section 401(a)(31)(B) to require qualfied imployer plans to automatically rollover involuntary cash outs of more than $1,000 (but less than $5,000) if the participant failed to affirmatively elect any other plan options. This final regulation will affect employee pension benefit plans, plan sponsors, administrators and fiduciaries, service providers, and plan participants and beneficiaries.

DATES: Effective Date: This final regulation is effective March 28, 2005. Applicability Date: This final regulation shall apply to the rollover of mandatory distributions made on or after March 28, 2005.

Subchapter F—Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974
PART 2550—RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

The following new section is added to part 2550 to read as follows:

§ 2550.404a–2 Safe Harbor for Automatic Rollovers to Individual Retirement Plans.

1. In general.
1. Pursuant to section 657(c) of the Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107–16, June 7, 2001, 115 Stat. 38, this section provides a safe harbor under which a fiduciary of an employee pension benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (the Act), 29 U.S.C. 1001 et seq., will be deemed to have satisfied his or her fiduciary duties under section 404(a) of the Act in connection with an automatic rollover of a mandatory distribution described in section 401(a)(31)(B) of the Internal Revenue Code of 1986, as amended (the Code). This section also provides a safe harbor for certain other mandatory distributions not described in section 401(a)(31)(B) of the Code.
2. The standards set forth in this section apply solely for purposes of determining whether a fiduciary meets the requirements of this safe harbor. Such standards are not intended to be the exclusive means by which a fiduciary might satisfy his or her responsibilities under the Act with respect to rollovers of mandatory distributions described in paragraphs (c) and (d) of this section.
2. Safe harbor.

A fiduciary that meets the conditions of paragraph (c) or paragraph (d) of this section is deemed to have satisfied his or her duties under section 404(a) of the Act with respect toboth the selection of an individual retirement plan provider and the investment of funds in connection with the rollover of mandatory distributions described in those paragraphs to an individual retirement plan, within the meaning of section 7701(a)(37) of the Code.

3. Conditions.

With respect to an automatic rollover of a mandatory distribution described in section 401(a)(31)(B) of the Code, a fiduciary shall qualify for the safe harbor described in paragraph (b) of this section if:

1. The present value of the nonforfeitable accrued benefit, as determined under section 411(a)(11) of the Code, does not exceed the maximum amount under section 401(a)(31)(B) of the Code;
2. The mandatory distribution is to an individual retirement plan within the meaning of section 7701(a)(37) of the Code;
3. In connection with the distribution of rolled-over funds to an individual retirement plan, the fiduciary enters into a written agreement with an individual retirement plan provider that provides: (i) The rolled-over funds shall be invested in an investment product designed to preserve principal and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with liquidity; (ii) For purposes of paragraph (c)(3)(i) of this section, the investment product selected for the rolled-over funds shall seek to maintain, over the term of the investment, the dollar value that is equal to the amount invested in the product by the individual retirement plan; (iii) The investment product selected for the rolled-over funds shall be offered by a state or federally regulated financial institution, which shall be: A bank or savings association, the deposits of which are insured by the Federal Deposit Insurance Corporation; a credit union, the member accounts of which are insured within the meaning of section 101(7) of the Federal Credit Union Act; an insurance company, the products of which are protected by State guaranty associations; or an investment company registered under the Investment Company Act of 1940; (iv) All fees and expenses attendant to an individual retirement plan, including investments of such plan, (e.g., establishment charges, maintenance fees, investment expenses, termination costs and surrender charges) shall not exceed the fees and expenses charged by the individual retirement plan provider for comparable individual retirement plans established for reasons other than the receipt of a rollover distribution subject to the provisions of section 401(a)(31)(B) of the Code; and The participant on whose behalf the fiduciary makes an automatic rollover shall have the right to enforce the terms of the contractual agreement establishing the individual retirement plan, with regard to his or her rolledover funds, against the individual retirement plan provider.
4. Participants have been furnished a summary plan description, or a summary of material modifications, that describes the plan’s automatic rollover provisions effectuating the requirements of section 401(a)(31)(B) of the Code, including an explanation that the mandatory distribution will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity, a statement indicating how fees and expenses attendant to the individual retirement plan will be allocated (i.e., the extent to which expenses will be borne by the account holder alone or shared with the distributing plan or plan sponsor), and the name, address and phone number of a plan contact (to the extent not otherwise provided in the summary plan description or summary of material modifications) for further information concerning the plan’s automatic rollover provisions, the individual retirement plan provider and the fees and expenses attendant to the individual retirement plan; and
5. Both the fiduciary’s selection of an individual retirement plan and the investment of funds would not result in a prohibited transaction under section 406 of the Act, unless such actions are exempted from the prohibited transaction provisions by a prohibited transaction exemption issued pursuant to section 408(a) of the Act.
4. Mandatory distributions of $1,000 or less.

A fiduciary shall qualify for the protection afforded by the safe harbor described in paragraph (b) of this section with respect to a mandatory distribution of one thousand dollars ($1,000) or less described in section 411(a)(11) of the Code, provided there is no affirmative distribution election by the participant and the fiduciary makes a rollover distribution of such amount into an individual retirement plan on behalf of such participant in accordance with the conditions described in paragraph (c) of this section, without regard to the fact that such rollover is not described in section 401(a)(31)(B) of the Code.

5. Effective date.

This section shall be effective and shall apply to any rollover of a mandatory distribution made on or after March 28, 2005.

Signed at Washington, DC, this 20th day of September, 2004.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration.
[FR Doc. 04–21591 Filed 9–27–04; 8:45 am]
BILLING CODE 4150–29–P

Department of Labor
Regulation 2550.404b-1
29 C.F.R. 2550.404b-1

Originally issued October 4, 1977 (42 FR 54124)

Amended January 6, 1981 (46 FR 1267)

1. No fiduciary may maintain the indicia of ownership of any assets of a plan outside the jurisdiction of the district courts of the United States, unless:
1. Such assets are:
1. Securities issued by a person, as defined in section 3(9) of the Employee Retirement Income Security Act of 1974 (Act) (other than an individual), which is not organized under the laws of the United States or a State and does not have its principal place of business within the United States,
2. Securities issued by a government other than the government of the United States or of a State, or any political subdivision, agency or instrumentality of such a government,
3. Securities issued by a person, as defined in section 3(9) of the Act (other than an individual), the principal trading market for which securities is outside the jurisdiction of the district courts of the United States, or
4. Currency issued by a government other than the government of the United States if such currency is maintained outside the jurisdiction of the district courts of the United States solely as an incident to the purchase, sale or maintenance of securities described in paragraph (a)(1) of this section; and
2. Such assets are:
1. Such assets are under the management and control of a fiduciary which is a corporation or partnership organized under the laws of the United States or a State, which fiduciary has its principal place of business within the United States and which is -
1. A bank as defined in section 202(a)(2) of the Investment Advisors Act of 1940 that has, as of the last day of its most recent fiscal year, equity capital in excess of $1,000,000;
2. An insurance company which is qualified under the laws of more than one State to manage, acquire, or dispose of any asset of a plan, which company has, as of the last day of its most recent fiscal year, net worth in excess of $1,000,000 and which is subject to supervision and examination by the State authority having supervision over insurance companies; or
3. An investment adviser registered under the Investment Advisers Act of 1940 that has, as of the last day of its most recent fiscal year, total client assets under its management and control in excess $50,000,000 and either
1. Shareholders' or partners' equity in excess of $750,000 or
2. All of its obligations and liabilities assumed or guaranteed by a person described in paragraph (a)(2)(i)(A), (B), or (C)(1) or (a)(2)(ii)(A)(2) of this section; or
2. Such indicia or ownership are either:
1. In the physical possession of, or, as a result of normal business operations, are in transit to the physical possession of, a person which is organized under the laws of the United States or a State, which person has its principal place of business in the United States and which is -
1. A bank as defined in section 202(a)(2) of the Investment Advisers Act of 1940 that has, as of the last day of its most recent fiscal year, equity capital in excess of $1,000,000;
2. A broker of dealer registered under the Securities Exchange Act of 1934 that has, as of the last day of its most recent fiscal year, net worth in excess of $750,000; or
3. A broker or dealer registered under the Securities Exchange Act of 1934 that has all of its obligations and liabilities assumed or guaranteed by a person described in paragraph (a)(2)(i)(A), (B), or (C)(1) or (a)(2)(ii)(A)(2) of this section; or
2. Maintained by a broker or dealer, described in paragraph (a)(2)(ii)(A)(2) or (3) of this section, in the custody of an entity designated by the Securities and Exchange Commission as a "satisfactory control location" with respect to such broker or dealer pursuant to Rule 15c3-3 under the Securities Exchange Act of 1934 provided that:
1. Such entity holds the indicia of ownership as agent for the broker or dealer, and
2. Such broker or dealer is liable to the plan to the same extent it would be if it retained the physical possession of the indicia of ownership pursuant to paragraph (a)(2)(ii)(A) of this section.
3. Maintained by a bank described in paragraph (a)(2)(ii)(A)(1), in the custody of an entity that is a foreign securities depository, foreign clearing agency which acts as a securities depository, or foreign bank which entity is supervised or regulated by a government agency or regulatory authority in the foreign jurisdiction having authority over such depositories, clearing agencies or banks, provided that:
1. The foreign entity holds the indicia of ownership as agent for the bank;
2. The bank is liable to the plan to the same extent it would be if it retained the physical possession of the indicia of ownership within the U.S.
3. The indicia of ownership are not subject to any right, charge, security interest, lien or claim of any kind in favor of the foreign entity except for their safe custody or administration;
4. Beneficial ownership of the assets represented by the indicia of ownership is freely transferable without the payment of money or value other than for safe custody or administration; and
5. Upon request by the plan fiduciary who is responsible for the selection and retention of the bank, the bank identifies to such fiduciary the name, address and principal place of business of the foreign entity which acts as custodian for the plan pursuant to this paragraph (a)(2)(ii)(C), and the name and address of the governmental agency or other regulatory authority that supervises or regulates that foreign entity.
2. Notwithstanding any requirement of paragraph (a) of this section, a fiduciary, with respect to a plan may maintain in Canada the indicia of ownership of plan assets which are attributable to a contribution made on behalf of a plan participant who is a citizen or resident of Canada, if such indicia of ownership must remain in Canada in order for the plan to qualify for and maintain tax exempt status under the laws of Canada or to comply with other applicable laws of Canada or any Province of Canada.
3. For purposes of this regulation:
1. The term "management and control" means the power to direct the acquisition or disposition through purchase, sale, pledging, or other means; and
2. The term "depository" means any company, or agency or instrumentality of government, that acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series or any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry without physical delivery of securities certificates.

Department of Labor
Regulation 2550.404c-1
29 C.F.R. 2550.404c-1

Originally issued October 4, 1977 (42 FR 54124)

Amended January 26, 1981 (46 FR 1267)

1. In General.
1. Section 404(c) of the Employee Retirement Income Security Act of 1974 (ERISA or the Act) provides that if a pension plan that provides for individual accounts permits a participant or beneficiary to exercise control over assets in his account and that participant or beneficiary in fact exercises control over assets in his account, then the participant or beneficiary shall not be deemed to be a fiduciary by reason of his exercise of control and no person who is otherwise a fiduciary shall be liable for any loss, or by reason of any breach, which results from such exercise of control. This section describes the kinds of plans that are "ERISA section 404(c) plans," the circumstances in which a participant or beneficiary is considered to have exercised independent control over the assets in his account as contemplated by section 404(c), and the consequences of a participant's or beneficiary's exercise of control.
2. The standards set forth in this section are applicable solely for the purpose of determining whether a plan is an ERISA section 404(c) plan and whether a particular transaction engaged in by a participant or beneficiary of such plan is afforded relief by section 404(c). Such standards, therefore, are not intended to be applied in determining whether, or to what extent, a plan which does not meet the requirements for an ERISA section 404(c) plan or a fiduciary with respect to such a plan satisfies the fiduciary responsibility or other provisions of title I of the Act.
2. ERISA section 404(c) plans -
1. In general. An "ERISA section 404(c) plan" is an individual account plan described in section 3(34) of the Act that:
1. Provides an opportunity for a participant or beneficiary to exercise control over assets in his individual account (see paragraph (b)(2) of this section); and
2. Provides a participant or beneficiary an opportunity to choose, from a broad range of investment alternatives, the manner in which some or all of the assets in his account are invested (see paragraph (b)(3) of this section).
2. Opportunity to exercise control.
1. A plan provides a participant or beneficiary an opportunity to exercise control over assets in his account only if -
1. Under the terms of the plan, the participant or beneficiary has a reasonable opportunity to give investment instructions (in writing or otherwise, with opportunity to obtain written confirmation of such instructions) to an identified plan fiduciary who is obligated to comply with such instructions except as otherwise provided in paragraph (b)(2)(ii)(B) and (d)(2)(ii) of this section; and
2. The participant or beneficiary is provided or has the opportunity to obtain sufficient information to make informed decisions with regard to investment alternatives available under the plan, and incidents of ownership appurtenant to such investments. For purposes of this subparagraph, a participant or beneficiary will not be considered to have sufficient investment information unless -
1. The participant or beneficiary is provided by an identified plan fiduciary (or a person or persons designated by the plan fiduciary to act on his behalf):
1. An explanation that the plan is intended to constitute a plan described in section 404(c) of the Employee Retirement Income Security Act, and title 29 of the Code of Federal Regulations Section 2550.440c-1, and that the fiduciaries of the plan may be relieved of liability for any losses which are the direct and necessary result of investment instructions given by such participant or beneficiary;
2. A description of the investment alternatives available under the plan and, with respect to each designated investment alternative, a general description of the investment objectives and risk and return characteristics of each such alternative, including information relating to the type and diversification of assets comprising the portfolio of the designated investment alternative;
3. Identification of any designated investment managers;
4. An explanation of the circumstances under which participants and beneficiaries may give investment instructions and explanation of any specified limitations on such instructions under the terms of the plan, including any restrictions on transfer to or from a designated investment alternative and any restrictions on the exercise of voting, tender and similar rights appurtenant to a participant's or beneficiary's investment in an investment alternative;
5. A description of any transaction fees and expenses which affect the participant's or beneficiary's account balance in connection with purchases or sales of interests in investment alternatives (e.g., commissions, sales load, deferred sales charges, redemption or exchange fees);
6. The name, address, and phone number of the plan fiduciary (and, if applicable, the person or persons designated by the plan fiduciary to act on his behalf) responsible for providing the information described in paragraph (b)(2)(i)(B)(2) upon request of a participant or beneficiary and a description of the information described in paragraph (b)(2)(i)(B)(2) which may be obtained on request;
7. In the case of plans which offer an investment alternative which is designed to permit a participant or beneficiary to directly or indirectly acquire or sell any employer security (employer security alternative), a description of the procedures established to provide for the confidentiality of information relating to the purchase, holding and sale of employer securities, and the exercise of voting, tender and similar rights, by participants and beneficiaries, and the name, address and phone number of the plan fiduciary, responsible for monitoring compliance with the procedures (see paragraphs (d)(2)(ii)(E)(4)(vii), (viii) and (ix) of this section); and
8. In the case of an investment alternative which is subject to the Securities Act of 1933, and in which the participant or beneficiary has no assets invested, immediately following the participant's or beneficiary's initial investment, a copy of the most recent prospectus provided to the plan. This condition will be deemed satisfied if the participant or beneficiary has been provided with a copy of such most recent prospectus immediately prior to the participant's or beneficiary's initial investment in such alternative;
9. Subsequent to an investment in a investment alternative, any materials provided to the plan relating to the exercise of voting, tender or similar rights which are incidental to the holding in the account of the participant or beneficiary of an ownership interest in such alternative to the extent that such rights are passed through to participants and beneficiaries under the terms of the plan, as well as a description of or reference to plan provisions relating to the exercise of voting, tender or similar rights.
2. The participants or beneficiary is provided by the identified plan fiduciary (or a person or persons designated by the plan fiduciary to act on his behalf), either directly or upon request, the following information, which shall be based on the latest information available to the plan:
1. A description of the annual operating expenses of each designated investment alternative (e.g., investment management fees, administrative fees, transaction costs) which reduce the rate of return to participants and beneficiaries, and the aggregate amount of such expenses expressed as a percentage of average net assets of the designated investment alternative;
2. Copies of any prospectuses, financial statements and reports, and of any other materials relating to the investment alternatives available under the plan, to the extent such information is provided to the plan;
3. A list of the assets comprising the portfolio of each designated investment alternative which constitute plan assets within the meaning of 29 C.F.R. 2510.3-101, the value of each such asset (or the proportion of the investment alternative which it comprises), and, with respect to each such asset which is a fixed rate investment contract issued by a bank, savings and loan association or insurance company, the name of the issuer of the contract, the term of the contract and the rate of return on the contract;
4. Information concerning the value of shares or units in designated investment alternatives available to participants and beneficiaries under the plan, as well as the past and current investment performance of such alternatives, determined net of expenses, on a reasonable and consistent basis; and
5. Information concerning the value of shares or units in designated investment alternatives held in the accounts of the participant or beneficiary.
2. A plan does not fail to provide an opportunity for a participant or beneficiary to exercise control over his individual account merely because it -
1. Imposes charges for reasonable expenses. A plan may charge participants' and beneficiaries' accounts for the reasonable expenses of carrying out investment instructions, provided that procedures are established under the plan to periodically inform such participants and beneficiaries of actual expenses incurred with respect to their respective individual accounts;
2. Permits a fiduciary to decline to implement investment instructions by participants and beneficiaries. A fiduciary may decline to implement participant and beneficiary instructions which are described at paragraph (d)(2)(ii) of this section, as well as instructions specified in the plan, including instructions -
1. Which would result in a prohibited transaction described in ERISA section  406 or section  4975 of the Internal Revenue Code, and
2. Which would generate income that would be taxable to the plan;
3. Imposes reasonable restrictions on frequency of investment instructions. A plan may impose reasonable restrictions on the frequency with which participants and beneficiaries may give investment instructions. In no event however, is such a restriction reasonable unless, with respect to each investment alternative made available by the plan, it permits participants and beneficiaries to give investment instructions with a frequency which is appropriate in light of the market volatility to which the investment alternative may reasonably be expected to be subject, provided that -
1. At least three of the investment alternatives made available pursuant to the requirements of paragraph (b)(3)(i)(B) of this section, which constitute a broad range of investment alternatives, permit participants and beneficiaries to give investment instructions no less frequently than once within any three month period; and
2. (i) At least one of the investment alternatives meeting the requirements of paragraph (b)(2)(ii)(C)(1) of this section permits participants and beneficiaries to give investment instructions with regard to transfers into the investment alternative as frequently as participants and beneficiaries are permitted to give investment instructions with respect to any investment alternative made available by the plan which permits participants and beneficiaries to give investment instructions more frequently than once within any three month period; or
   
   (ii) With respect to each investment alternative which permits participants and beneficiaries to give investment instructions more frequently than once within any three month period, participants and beneficiaries are permitted to direct their investments from such alternative into an income producing, low risk, liquid fund, subfund, or account as frequently as their are permitted to give investment instructions with respect to each such alternative and, with respect to such fund, subfund or account, participants and beneficiaries are permitted to direct investments from the fund, subfund or account to an investment alternative meeting the requirements of paragraph (b)(2)(ii)(C)(1) as frequently as they are permitted to give investment instructions with respect to that investment alternative; and
4. With respect to transfers from an investment alternative which is designed to permit a participant or beneficiary to directly or indirectly acquire or sell any employer security (employer security alternative) either:
1. All of the investment alternatives meeting the requirements of paragraph (b)(2)(ii)(C)(1) of this section must permit participants and beneficiaries to give investment instructions with regard to transfers into each of the investment alternatives as frequently as participants and beneficiaries are permitted to give investment instructions with respect to the employer security alternative; or
2. Participants and beneficiaries are permitted to direct their investments from each employer security alternative into an income producing, low risk, liquid, fund, subfund, or account as frequently as they are permitted to give investment instructions with respect to such employer security alternative and, with respect to such fund, subfund, or account, participants and beneficiaries are permitted to direct investments from the fund, subfund or account to each investment alternative meeting the requirements of paragraph (b)(2)(ii)(C)(1) as frequently as they are permitted to give investment instructions with respect to each such investment alternative.
3. Paragraph (c) of this section describes the circumstances under which a participant or beneficiary will be considered to have exercised independent control with respect to a particular transaction.
3. Broad range of investment alternatives.
1. A plan offers a broad range of investment alternatives only if the available investment alternatives are sufficient to provide the participant or beneficiary with a reasonable opportunity to:
1. Materially affect the potential return on amounts in his individual account with respect to which he is permitted to exercise control and the degree of risk to which such amounts are subject;
2. Choose from at least three investment alternatives:
1. Each of which is diversified;
2. Each of which has materially different risk and return characteristics;
3. Which in the aggregate enable the participant or beneficiary by choosing among them to achieve a portfolio with aggregate risk and return characteristics at any point within the range normally appropriate for the participant or beneficiary; and
4. Each of which when combined with investments in the other alternatives tends to minimize through diversification the overall risk of a participant's or beneficiary's portfolio;
3. Diversify the investment of that portion of his individual account with respect to which he in permitted to exercise control so as to minimize the risk of large losses, taking into account the nature of the plan and the size of participants' or beneficiaries' accounts. In determining whether a plan provides the participant or beneficiary with a reasonable opportunity to diversify his investments, the nature of the investment alternatives offered by the plan and the size of the portion of the individual's account over which he is permitted to exercise control must be considered. Where such portion of the account of any participant or beneficiary is so limited in size that the opportunity to invest in look-through investment vehicles is the only prudent means to assure an opportunity to achieve appropriate diversification, a plan may satisfy the requirements of this paragraph only by offering look-through investment vehicles.
2. Diversification and look-through investment vehicles. Where look-through investment vehicles are available as investment alternatives to participants and beneficiaries, the underlying investments of the look-through investment shall be considered in determining whether the plan satisfies the requirements of subparagraphs (b)(3)(i)(B) and (b)(3()i)(C).
3. Exercise of control.
1. In general. -
1. Sections 404(c)(1) and 404(c)(2) of the Act and paragraphs (a) and (d) of this section apply only with respect to a transaction where a participant or beneficiary has exercised independent control in fact with respect to the investment of assets in his individual account under an ERISA section 404(c) plan.
2. For purposes of sections 404(c)(1) and 4040(c)(2) [sic] of the Act and paragraphs (a) and (d) of this section, a participant or beneficiary will be deemed to have exercised control with respect to the exercise of voting, tender and similar rights appurtenant to the participant's or beneficiary's ownership interest in an investment alternative, provided that the participant's or beneficiary's investment in the investment alternative was itself the result of an exercise of control, the participant or beneficiary was provided a reasonable opportunity to give instruction with respect to such incidents of ownership, including the provision of the information described in paragraph (b)(2)(i)(B)(1)(ix) of this section, and the participant or beneficiary has not failed to exercise control by reason of the circumstances described in Paragraph (c)(2) with respect to such incidents of ownership.
2. Independent control. Whether a participant or beneficiary has exercised independent control in fact with respect to a transaction depends on the facts and circumstances of the particular case. However, a participant's or beneficiary's exercise of control is not independent in fact if:
1. The participant or beneficiary is subjected to improper influence by a plan fiduciary or the plan sponsor with respect to the transaction;
2. A plan fiduciary has concealed material non-public facts regarding the investment from the participant or beneficiary, unless the disclosure of such information by the plan fiduciary to the participant or beneficiary would violate any provision of federal law or any provision of state law which in not preempted by the Act; or
3. The participant or beneficiary is legally incompetent and the responsible plan fiduciary accepts the instructions of the participant or beneficiary knowing him to be legally incompetent.
3. Transactions involving a fiduciary. In the case of a sale, exchange or leasing of property (other than a transaction described in paragraph (d)(2)(ii)(E) of this section) between an ERISA section 404(c) plan and a plan fiduciary or an affiliate of such a fiduciary, or a loan to a plan fiduciary or an affiliate of such a fiduciary, the participant or beneficiary will not be deemed to have exercised independent control unless the transaction is fair and reasonable to him. For purposes of this paragraph (c)(3), a transaction will be deemed to be fair and reasonable to a participant or beneficiary if he pays no more than, or receives no less than, adequate consideration (as defined in section 3(18) of the Act) in connection with the transaction.
4. No obligation to advise. A fiduciary has no obligation under part 4 of Title I of this Act to provide investment advice to a participant or beneficiary under an ERISA section 404(c) plan.
4. Effect of independent exercise of control.
1. Participant or beneficiary not a fiduciary. If a participant or beneficiary of an ERISA section 404(c) plan exercises independent control over assets in his individual account in the manner described in paragraph (c), then such participant or beneficiary is not a fiduciary of the plan by reason of such exercise of control.
2. Limitation on liability of plan fiduciaries -
1. If a participant or beneficiary of an ERISA section 404(c) plan exercises independent control over assets in his individual account in the manner described in paragraph (c), then no other person who is a fiduciary with respect to such plan shall be liable for any loss, or with respect to any breach of part 4 of Title I of the Act that is the direct and necessary result of that participant's or beneficiary's exercise of control.
2. Paragraph (d)(2)(i) does not apply with respect to any instruction, which if implemented -
1. Would not be in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of Title I of ERISA;
2. Would cause a fiduciary to maintain the indicia of ownership of any assets of the plan outside the jurisdiction of the district courts of the United States other than as permitted by section 404(b) of the Act and 29 C.F.R. 2550.404b-1;
3. Would jeopardize the plan's tax qualified status under the Internal Revenue Code;
4. Could result in a loss in excess of a participant's or beneficiary's account balance; or
5. Would result in a direct or indirect:
1. Sale, exchange or lease of property between a plan sponsor or any affiliate of the sponsor and the plan except for the acquisition or disposition of any interest in a fund, subfund or portfolio managed by a plan sponsor or an affiliate of the sponsor, or the purchase or sale of any qualifying employer security (as defined in Section 407(d)(5) of the Act) which meets the conditions of section 408(e) of ERISA and section (d)(2))(ii)(E)(4) below;
2. Loan to a plan sponsor or any affiliate of the sponsor;
3. Acquisition or sale of any employer real property (as defined in section 407(d)(2) of the Act); or
4. Acquisition or sale of any employer security except to the extent that:
1. Such securities are qualifying employer securities (as defined in section 407(d)(5) of the Act);
2. Such securities are stock or an equity interest in a publicly traded partnership (as defined in section 7704(b) of the Internal Revenue Code of 1986), but only if such partnership is an existing partnership as defined in section 10211(c)(2)(A) of the Revenue Act of 1987 (Public Law 100-203);
3. Such securities are publicly traded on a national exchange or other generally recognized market;
4. Such securities are traded with sufficient frequency and in sufficient volume to assure that participant and beneficiary directions to buy or sell the security may be acted upon promptly and efficiently;
5. Information provided to shareholders of such securities is provided to participants and beneficiaries with accounts holding such securities;
6. Voting, tender and similar rights with respect to such securities are passed through to participants and beneficiaries with accounts holding such securities;
7. Information relating to the purchase, holding, and sale of securities, and the, exercise of voting, tender, and similar rights with respect to such securities by participants and beneficiaries, is maintained in accordance with procedures which are designed to safeguard the confidentiality of such information, except to the extent necessary to comply with Federal laws or state laws not preempted by the Act;
8. The plan designates a fiduciary who is responsible for ensuring that: The procedures required under subparagraph (d)(2)(ii)(E)(4)(vii) are sufficient to safeguard the confidentiality of the information described in that subparagraph, such procedures are being followed, and the independent fiduciary required by subparagraph (d)(2)(ii)(E)(4)(ix) is appointed; and
9. An independent fiduciary is appointed to carry out activities relating to any situations which the fiduciary designated by the plan for purposes of subparagraph (d)(2)(ii)(E)(4)(viii) determines involve a potential for undue employer influence upon participants and beneficiaries, with regard to the direct or indirect exercise of shareholder rights. For purposes of this subparagraph, a fiduciary is not independent if the fiduciary is affiliated with any sponsor of the plan.
3. The individual investment decisions of an investment manager who is designated directly by a participant or beneficiary or who manages a look-through investment vehicle in which a participant or beneficiary has invested are not direct and necessary results of the designation of the investment manager or of investment in the look-through investment vehicle. However, this paragraph (d)(2)(iii) shall not be construed to result in liability under section 405 of ERISA with respect to a fiduciary (other than the investment manager) who would otherwise be relieved of liability by reason of section 404(c)(2) of the Act and paragraph (d) of this section.
3. Prohibited Transactions. The relief provided by section 404(c) of the Act and this section applies only to the provisions of part 4 of title I of the Act. Therefore, nothing in this section relieves a disqualified person from the taxes imposed by sections 4975(a) and (b) of the Internal Revenue Code with respect to the transactions prohibited by section 4975(c)(1) of the Code.
5. Definitions. For purposes of this section:
1. Look-through investment vehicle means:
1. An investment company described in section 3(a) of the Investment Company Act of 1940, or a series investment company described in section 18(f) of the 1940 Act or any of the segregated portfolios of such company;
2. A common or collective trust fund or a pooled investment fund maintained by a bank or similar institution, a deposit in a bank or similar institution, or a fixed rate investment contract of a bank or similar institution;
3. A pooled separate account or a fixed rate investment contract of an insurance company qualified to do business in a State; or
4. Any entity whose assets include plan assets by reason of a plan's investment in the entity;
2. Adequate consideration has the meaning given it in section 3(18) of the Act and in any regulations under this title;
3. An affiliate of a person includes the following:
1. Any person directly or indirectly controlling, controlled by, or under common control with the person;
2. Any officer, director, partner, or employee, an employee of an affiliated employer, relative (as defined in section 3(15) of ERISA), brother, sister, or spouse of a brother or sister, of the person; and
3. Any corporation or partnership of which the person is an officer director or partner.

For purposes of this paragraph (e)(3), the term "control" means, with respect to a person other than an individual, the power to exercise a controlling influence over the management or policies of such person.

4. A designated investment alternative is a specific investment identified by a plan fiduciary as an available investment alternative under the plan.
6. Examples. The provisions of this section are illustrated by the following examples. Examples (5) through (11) assume that the participant has exercised independent control with respect to his individual account under an ERISA section 404(c) plan described in paragraph (b) and has not directed a transaction described in paragraph (d)(2)(ii).
1. Plan A is an individual account plan described in section 3(34) of the Act. The plan states that a plan participant or beneficiary may direct the plan administrator to invest any portion of his individual account in a particular diversified equity fund managed by an entity which is not affiliated with the plan sponsor, or any other asset administratively feasible for the plan to hold. However, the plan provides that the plan administrator will not implement certain listed instructions for which plan fiduciaries would not be relieved of liability under section 404(c) (see paragraph (d)(2)(ii)).

Plan participants and beneficiaries are permitted to give investment instructions during the first week of each month with respect to the equity fund and at any time with respect to other investments. The plan provides for the pass-through of voting, tender and similar rights incidental to the holding in the account of a participant or beneficiary of an ownership interest in the equity fund or any other investment alternative available under the plan.

• The plan administrator of plan A provides each participant and beneficiary with the information described in subparagraphs (i), (ii), (iii), (iv), (v), (vi) and (vii) of paragraph (b)(2)(i)(B)(1) upon their entry into the plan, and provides updated information in the event of any material change in the information provided.
• Immediately following an investment by a participant or beneficiary in the equity fund, the plan administrator provides a copy of the most recent prospectus received from the fund to the investing participant or beneficiary.
• Immediately following any investment by a participant or beneficiary in any other investment alternative which is subject to the Securities Act of 1933, the plan administrator provides the participant or beneficiary with the most recent prospectus received from that investment alternative (see paragraph (b)(2)(1)(B)(i)(viii)).
• Finally, subsequent to any investment by a participant or beneficiary, the plan administrator forwards to the investing participant or beneficiary any materials provided to the plan relating to the exercise of voting, tender or similar rights attendant to ownership of an interest in such investment (see paragraph (b)(2)(1)(B)(i)(ix)).
• Upon request, the plan administrator provides each participant or beneficiary with copies of any prospectuses, financial statements and reports, and any other materials relating to the investment alternatives available under the plan which are received by the plan (see paragraph (b)(2)(i)(B)(2 )(ii)).
• Also upon request, the plan administrator provides each participant and beneficiary with the other information required by paragraph (b)(2)(i)(B)(2) with respect to the equity fund, which is a designated investment alternative, including information concerning the latest available value of the participant's or beneficiary's interest in the equity fund (see paragraph (b)(2)(i)(B)(2)(v)).

Plan A meets the requirements of paragraphs (b)(2)(i)(B)(1) and (2) of this section regarding the provision of investment information.

Note: The regulation imposes no additional obligation on the administrator to furnish or make available materials relating to the companies in which the equity fund invests (e.g., prospectuses, proxies, etc.).

2. Plan C is an individual account plan described in section 3(34) of the Act under which participants and beneficiaries may choose among three investment alternatives which otherwise meet the requirements of paragraph (b) of this section. The plan permits investment instruction with respect to each investment alternative only on the first 10 days of each calendar quarter, i.e., January 1-10, April 1-10, July 1-10 and October 1-10. Plan C satisfies the condition of paragraph (b)(2)(ii)(C)(1) that instruction be permitted not less frequently than once within any three month period, since there is not any three month period during which control could not be exercised.
3. Assume the same facts as in paragraph (f)(2), except that investment instruction may only be given on January 1, April 1, July 1 and October 1. Plan C is not an ERISA section 404(c) plan because it does not satisfy the condition of paragraph (b)(2)(ii)(C)(1) that instruction be permitted not less frequently than once within any three month period. Under these facts, there is a three month period, e.g., January 2 through April 1, during which control could not be exercised by participants and beneficiaries.
4. Plan D is an individual account plan described in section 3(34) of the Act under which participants and beneficiaries may choose among three diversified investment alternatives which constitute a broad range of investment alternatives. The plan also permits investment instruction with respect to an employer securities alternative but provides that a participant or beneficiary can invest no more than 25% of his account balance in this alternative. This restriction does not affect the availability of relief under section 404(c) inasmuch as it does not relate to the three diversified investment alternatives and, therefore, does not cause the plan to fail to provide an opportunity to choose from a broad range of investment alternatives.
5. A participant, P, independently exercises control over assets in his individual account plan by directing a plan fiduciary, F, to invest 100% of his account balance in a single stock. P is not a fiduciary with respect to the plan by reason of his exercise of control and F will not be liable for any losses that necessarily result from P's investment instruction.
6. Assume the same facts as in paragraph (f)(5), except that P directs F to purchase the stock from B, who is a party in interest with respect to the plan. Neither P nor F has engaged in a transaction prohibited under section 406 of the Act: P because he is not a fiduciary with respect to the plan by reason of his exercise of control and F because he is not liable for any breach of part 4 of Title I that is the direct and necessary consequence of P's exercise of control. However, a prohibited transaction under section 4975(c) of the Internal Revenue Code may have occurred, and, in the absence of an exemption, tax liability may be imposed pursuant to sections 495(a) and (b) of the Code.
7. Assume the same facts as in paragraph (f)(5), except that P does not specify that the stock be purchased from B, and F chooses to purchase the stock from B. In the absence of an exemption, F has engaged in a prohibited transaction described in 406(a) of ERISA because the decision to purchase the stock from B is not a direct or necessary result of P's exercise or control.
8. Pursuant to the terms of the plan, plan fiduciary F designates three reputable investment managers whom participants may appoint to manage assets in their individual accounts. Participant P selects M, one of the designated managers, to manage the assets in his account. M prudently manages P's account for 6 months after which he incurs losses in managing the account through his imprudence. M has engaged in a breach of fiduciary duty because M's imprudent management of P's account is not a direct or necessary result of P's exercise of control (the choice of M as manager). F has no fiduciary liability for M's imprudence because he has no affirmative duty to advise P (see paragraph (c)(4)) and because F is relieved of co-fiduciary liability by reason of section 404(c)(2) (see paragraph (d)(2)(iii)). F does have a duty to monitor M's performance to determine the suitability of continuing M as an investment manager, however, and M's imprudence would be a factor which F must consider in periodically reevaluating its decision to designate M.
9. Participant P instructs plan fiduciary F to appoint G as his investment manager pursuant to the terms of the plan which provide P total discretion in choosing an investment manager. Through G's imprudence, G incurs losses in managing P's account. G has engaged in a breach of fiduciary duty because G's imprudent management of P's account is not a direct or necessary result of P's exercise of control (the choice of G as manager). Plan fiduciary F has no fiduciary liability for G's imprudence because F has no obligation to advise P (see paragraph (c)(4)) and because F is relieved of co-fiduciary liability for G's actions by reason of section 402(c)(2) (see paragraph (d)(2)(iii)). In addition, F also has no duty to determine the suitability of G as an investment manager because the plan does not designate G as an investment manager.
10. Participant P directs a plan fiduciary, F, a bank, to invest all of the assets in his individual account in a collective trust fund managed by F that is designed to be invested solely in a diversified portfolio of common stocks. Due to economic conditions, the value of the common stocks in the bank collective trust fund declines while the value of publicly-offered fixed income obligations remains relatively stable. F is not liable for any losses incurred by P solely because his individual account was not diversified to include fixed income obligations. Such losses are the direct result of P's exercise of control; moreover, under paragraph (c)(4) of this section F has no obligation to advise P regarding his investment decisions.
11. Assume the same facts as in paragraph (f)(10) except that F, in managing the collective trust fund, invests the assets of the fund solely in a few highly speculative stocks. F is liable for losses resulting from its imprudent investment in the speculative stocks and for its failure to diversify the assets of the account. This conduct involves a separate breach of F's fiduciary duty that is not a direct or necessary result of P's exercise of control (see paragraph (d)(2)(iii)).
7. Effective date.
1. In general. Except as provided in paragraph (g)(2), this section is effective with respect to transactions occurring on or after the first day of the second plan year beginning on or after October 13, 1992.
2. This section is effective with respect to transactions occurring under a plan maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers ratified before October 13, 1992 after the later of the date determined under paragraph (g)(1) or the date on which the last collective bargaining agreement terminates. For purposes of this paragraph (g)(2), any extension or renegotiation of a collective bargaining agreement which is ratified on or after October 13, 1992 is to be disregarded in determining the date on which the agreement terminates.
3. Transactions occurring before the date determined under subparagraph (g)(1) or (2) of this section, as applicable, are governed by section 404(c) of, the Act without regard to the regulation.

Department of Labor
Regulation 2550.404c-5
29 C.F.R. 2550.404c-5

(a) In general.

(1) This section implements the fiduciary relief provided under section 404(c)(5) of the Employee Retirement Income Security Act of 1974, as amended (ERISA or the Act), 29 U.S.C. 1001 et seq., under which a participant or beneficiary in an individual account plan will be treated as exercising control over the assets in his or her account for purposes of ERISA section 404(c)(1) with respect to the amount of contributions and earnings that, in the absence of an investment election by the participant, are invested by the plan in accordance with this regulation. If a participant or beneficiary is treated as exercising control over the assets in his or her account in accordance with ERISA section 404(c)(1) no person who is otherwise a fiduciary shall be liable under part 4 of title I of ERISA for any loss or by reason of any breach which results from such participant's or beneficiary's exercise of control. Except as specifically provided in paragraph (c)(6) of this section, a plan need not meet the requirements for an ERISA section 404(c) plan under 29 CFR 2550.404c–1 in order for a plan fiduciary to obtain the relief under this section.

(2) The standards set forth in this section apply solely for purposes of determining whether a fiduciary meets the requirements of this regulation. Such standards are not intended to be the exclusive means by which a fiduciary might satisfy his or her responsibilities under the Act with respect to the investment of assets in the individual account of a participant or beneficiary.

(b) Fiduciary relief.

(1) Except as provided in paragraphs (b)(2), (3), and (4) of this section, a fiduciary of an individual account plan that permits participants or beneficiaries to direct the investment of assets in their accounts and that meets the conditions of paragraph (c) of this section shall not be liable for any loss, or by reason of any breach under part 4 of title I of ERISA, that is the direct and necessary result of (i) investing all or part of a participant's or beneficiary's account in any qualified default investment alternative within the meaning of paragraph (e) of this section, or (ii) investment decisions made by the entity described in paragraph (e)(3) of this section in connection with the management of a qualified default investment alternative.

(2) Nothing in this section shall relieve a fiduciary from his or her duties under part 4 of title I of ERISA to prudently select and monitor any qualified default investment alternative under the plan or from any liability that results from a failure to satisfy these duties, including liability for any resulting losses.

(3) Nothing in this section shall relieve any fiduciary described in paragraph (e)(3)(i) of this section from its fiduciary duties under part 4 of title I of ERISA or from any liability that results from a failure to satisfy these duties, including liability for any resulting losses.

(4) Nothing in this section shall provide relief from the prohibited transaction provisions of section 406 of ERISA, or from any liability that results from a violation of those provisions, including liability for any resulting losses.

(c) Conditions. With respect to the investment of assets in the individual account of a participant or beneficiary, a fiduciary shall qualify for the relief described in paragraph (b)(1) of this section if:

(1) Assets are invested in a qualified default investment alternative within the meaning of paragraph (e) of this section;

(2) The participant or beneficiary on whose behalf the investment is made had the opportunity to direct the investment of the assets in his or her account but did not direct the investment of the assets;

(3) The participant or beneficiary on whose behalf an investment in a qualified default investment alternative may be made is furnished a notice that meets the requirements of paragraph (d) of this section:

(i) (A) At least 30 days in advance of the date of plan eligibility, or at least 30 days in advance of the date of any first investment in a qualified default investment alternative on behalf of a participant or beneficiary described in paragraph (c)(2) of this section; or (B) On or before the date of plan eligibility provided the participant has the opportunity to make a permissible withdrawal (as determined under section 414(w) of the Internal Revenue Code of 1986, as amended (Code)); and

(ii) Within a reasonable period of time of at least 30 days in advance of each subsequent plan year;

(4) A fiduciary provides to a participant or beneficiary the material set forth in 29 CFR 2550.404c-1(b)(2)(i)(B)(1)(viii) and (ix) and 29 CFR 404c-1(b)(2)(i)(B)(2) relating to a participant's or beneficiary's investment in a qualified default investment alternative;

(5)

(i) Any participant or beneficiary on whose behalf assets are invested in a qualified default investment alternative may transfer, in whole or in part, such assets to any other investment alternative available under the plan with a frequency consistent with that afforded to a participant or beneficiary who elected to invest in the qualified default investment alternative, but not less frequently than once within any three month period;

(ii) (A) Except as provided in paragraph (c)(5)(ii)(B) of this section, any transfer described in paragraph (c)(5)(i), or any permissible withdrawal as determined under section 414(w)(2) of the Code, by a participant or beneficiary of assets invested in a qualified default investment alternative, in whole or in part, resulting from the participant's or beneficiary's election to make such a transfer or withdrawal during the 90-day period beginning on the date of the participant's first elective contribution as determined under section 414(w)(2)(B) of the Code, or other first investment in a qualified default investment alternative on behalf of a participant or beneficiary described in paragraph (c)(2) of this section, shall not be subject to any restrictions, fees or expenses (including surrender charges, liquidation or exchange fees, redemption fees and similar expenses charged in connection with the liquidation of, or transfer from, the investment); (B) Paragraph (c)(5)(ii)(A) of this section shall not apply to fees and expenses that are charged on an ongoing basis for the operation of the investment itself (such as investment management fees, distribution and/or service fees, “12b–1” fees, or legal, accounting, transfer agent and similar administrative expenses), and are not imposed, or do not vary, based on a participant's or beneficiary's decision to withdraw, sell or transfer assets out of the qualified default investment alternative; and

(iii) Following the end of the 90-day period described in paragraph (c)(5)(ii)(A) of this section, any transfer or permissible withdrawal described in this paragraph (c)(5) of this section shall not be subject to any restrictions, fees or expenses not otherwise applicable to a participant or beneficiary who elected to invest in that qualified default investment alternative; and

(6) The plan offers a “broad range of investment alternatives” within the meaning of 29 CFR 2550.404c–1(b)(3).

(d) Notice. The notice required by paragraph (c)(3) of this section shall be written in a manner calculated to be understood by the average plan participant and shall contain the following:

(1) A description of the circumstances under which assets in the individual account of a participant or beneficiary may be invested on behalf of the participant or beneficiary in a qualified default investment alternative; and, if applicable, an explanation of the circumstances under which elective contributions will be made on behalf of a participant, the percentage of such contributions, and the right of the participant to elect not to have such contributions made on the participant's behalf (or to elect to have such contributions made at a different percentage);

(2) An explanation of the right of participants and beneficiaries to direct the investment of assets in their individual accounts;

(3) A description of the qualified default investment alternative, including a description of the investment objectives, risk and return characteristics (if applicable), and fees and expenses attendant to the investment alternative;

(4) A description of the right of the participants and beneficiaries on whose behalf assets are invested in a qualified default investment alternative to direct the investment of those assets to any other investment alternative under the plan, including a description of any applicable restrictions, fees or expenses in connection with such transfer; and

(5) An explanation of where the participants and beneficiaries can obtain investment information concerning the other investment alternatives available under the plan.

(e) Qualified default investment alternative. For purposes of this section, a qualified default investment alternative means an investment alternative available to participants and beneficiaries that:

(1)

(i) Does not hold or permit the acquisition of employer securities, except as provided in paragraph (ii).

(ii) Paragraph (e)(1)(i) of this section shall not apply to:

(A) Employer securities held or acquired by an investment company registered under the Investment Company Act of 1940 or a similar pooled investment vehicle regulated and subject to periodic examination by a State or Federal agency and with respect to which investment in such securities is made in accordance with the stated investment objectives of the investment vehicle and independent of the plan sponsor or an affiliate thereof; or

(B) with respect to a qualified default investment alternative described in paragraph (e)(4)(iii) of this section, employer securities acquired as a matching contribution from the employer/plan sponsor, or employer securities acquired prior to management by the investment management service to the extent the investment management service has discretionary authority over the disposition of such employer securities;

(2) Satisfies the requirements of paragraph (c)(5) of this section regarding the ability of a participant or beneficiary to transfer, in whole or in part, his or her investment from the qualified default investment alternative to any other investment alternative available under the plan;

(3) Is:

(i) Managed by:

(A) an investment manager, within the meaning of section 3(38) of the Act;

(B) a trustee of the plan that meets the requirements of section 3(38)(A), (B) and (C) of the Act; or

(C) the plan sponsor, or a committee comprised primarily of employees of the plan sponsor, which is a named fiduciary within the meaning of section 402(a)(2) of the Act;

(ii) An investment company registered under the Investment Company Act of 1940; or

(iii) An investment product or fund described in paragraph (e)(4)(iv) or (v) of this section; and

(4) Constitutes one of the following:

(i) An investment fund product or model portfolio that applies generally accepted investment theories, is diversified so as to minimize the risk of large losses and that is designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures based on the participant's age, target retirement date (such as normal retirement age under the plan) or life expectancy. Such products and portfolios change their asset allocations and associated risk levels over time with the objective of becoming more conservative (i.e., decreasing risk of losses) with increasing age. For purposes of this paragraph (e)(4)(i), asset allocation decisions for such products and portfolios are not required to take into account risk tolerances, investments or other preferences of an individual participant. An example of such a fund or portfolio may be a “life-cycle” or “targeted-retirement-date” fund or account.

(ii) An investment fund product or model portfolio that applies generally accepted investment theories, is diversified so as to minimize the risk of large losses and that is designed to provide long-term appreciation and capital preservation through a mix of equity and fixed income exposures consistent with a target level of risk appropriate for participants of the plan as a whole. For purposes of this paragraph (e)(4)(ii), asset allocation decisions for such products and portfolios are not required to take into account the age, risk tolerances, investments or other preferences of an individual participant. An example of such a fund or portfolio may be a “balanced” fund.

(iii) An investment management service with respect to which a fiduciary, within the meaning of paragraph (e)(3)(i) of this section, applying generally accepted investment theories, allocates the assets of a participant's individual account to achieve varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures, offered through investment alternatives available under the plan, based on the participant's age, target retirement date (such as normal retirement age under the plan) or life expectancy. Such portfolios are diversified so as to minimize the risk of large losses and change their asset allocations and associated risk levels for an individual account over time with the objective of becoming more conservative (i.e., decreasing risk of losses) with increasing age. For purposes of this paragraph (e)(4)(iii), asset allocation decisions are not required to take into account risk tolerances, investments or other preferences of an individual participant. An example of such a service may be a “managed account.”

(iv)

(A) Subject to paragraph (e)(4)(iv)(B) of this section, an investment product or fund designed to preserve principal and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with liquidity. Such investment product shall for purposes of this paragraph (e)(4)(iv):

(1) Seek to maintain, over the term of the investment, the dollar value that is equal to the amount invested in the product; and

(2) Be offered by a State or federally regulated financial institution.

(B) An investment product described in this paragraph (e)(4)(iv) shall constitute a qualified default investment alternative for purposes of paragraph (e) of this section for not more than 120 days after the date of the participant's first elective contribution (as determined under section 414(w)(2)(B) of the Code).

(v)

(A) Subject to paragraph (e)(4)(v)(B) of this section, an investment product or fund designed to preserve principal; provide a rate of return generally consistent with that earned on intermediate investment grade bonds; and provide liquidity for withdrawals by participants and beneficiaries, including transfers to other investment alternatives. Such investment product or fund shall, for purposes of this paragraph (e)(4)(v), meet the following requirements:

(1) There are no fees or surrender charges imposed in connection with withdrawals initiated by a participant or beneficiary; and

(2) Such investment product or fund invests primarily in investment products that are backed by State or federally regulated financial institutions.

(B) An investment product or fund described in this paragraph (e)(4)(v) shall constitute a qualified default investment alternative for purposes of paragraph (e) of this section solely for purposes of assets invested in such product or fund before December 24, 2007.

(vi) An investment fund product or model portfolio that otherwise meets the requirements of this section shall not fail to constitute a product or portfolio for purposes of paragraph (e)(4)(i) or (ii) of this section solely because the product or portfolio is offered through variable annuity or similar contracts or through common or collective trust funds or pooled investment funds and without regard to whether such contracts or funds provide annuity purchase rights, investment guarantees, death benefit guarantees or other features ancillary to the investment fund product or model portfolio.

(f) Preemption of State laws.

(1) Section 514(e)(1) of the Act provides that title I of the Act supersedes any State law that would directly or indirectly prohibit or restrict the inclusion in any plan of an automatic contribution arrangement. For purposes of section 514(e) of the Act and this paragraph (f), an automatic contribution arrangement is an arrangement (or the provisions of a plan) under which:

(i) A participant may elect to have the plan sponsor make payments as contributions under the plan on his or her behalf or receive such payments directly in cash;

(ii) A participant is treated as having elected to have the plan sponsor make such contributions in an amount equal to a uniform percentage of compensation provided under the plan until the participant specifically elects not to have such contributions made (or specifically elects to have such contributions made at a different percentage); and

(iii) Contributions are invested in accordance with paragraphs (a) through (e) of this section.

(2) A State law that would directly or indirectly prohibit or restrict the inclusion in any pension plan of an automatic contribution arrangement is superseded as to any pension plan, regardless of whether such plan includes an automatic contribution arrangement as defined in paragraph (f)(1) of this section.

(3) The administrator of an automatic contribution arrangement within the meaning of paragraph (f)(1) of this section shall be considered to have satisfied the notice requirements of section 514(e)(3) of the Act if notices are furnished in accordance with paragraphs (c)(3) and (d) of this section.

(4) Nothing in this paragraph (f) precludes a pension plan from including an automatic contribution arrangement that does not meet the conditions of paragraphs (a) through (e) of this section.

[72 FR 60478, Oct. 24, 2007; 73 FR 23350, Apr. 30, 2008]

• Default Investment Alternatives Under Participant Directed Individual Account Plans (306KB PDF file - PDF Help)

US Department of Labor

29 CFR Parts 2550 and 2578 Amendments to Safe Harbor for Distributions From Terminated Individual Account Plans and Termination of Abandoned Individual Account Plans To Require Inherited Individual Retirement Plans for Missing Nonspouse Beneficiaries

Final Rule

Employee Benefits Security Administration

29 CFR Parts 2550 and 2578
RIN 1210–AB16

Amendments to Safe Harbor for Distributions From Terminated Individual Account Plans and Termination of Abandoned Individual Account Plans To Require Inherited Individual Retirement Plans for Missing Nonspouse Beneficiaries

AGENCY: Employee Benefits Security Administration

ACTION: Interim final rule with request for comments.

SUMMARY: This document contains an interim final rule amending regulations under the Employee Retirement Income Security Act of 1974 (ERISA or the Act) that provide guidance and a fiduciary safe harbor for the distribution of benefits on behalf of participants or beneficiaries in terminated and abandoned individual account plans.

The Department is amending these regulations to reflect changes enacted as part of the Pension Protection Act of 2006, Public Law 109–280, to the Internal Revenue Code of 1986 (the Code), under which a distribution of a deceased plan participant’s benefit from an eligible retirement plan may be directly transferred to an individual retirement plan established on behalf of the designated nonspouse beneficiary of such participant. Specifically, the amended regulations require as a condition of relief under the fiduciary safe harbor that benefits for a missing, designated nonspouse beneficiary be directly rolled over to an individual retirement plan that fully complies with Code requirements. This interim final rule will affect fiduciaries, plan service providers, and participants and beneficiaries of individual account pension plans.

DATES: Effective and Applicability Dates: The amendments made by this rule are effective March 19, 2007. This interim final rule is applicable to distributions made on or after March 19, 2007.

Comment Date: Written comments must be received by April 2, 2007.

SUPPLEMENTARY INFORMATION:

A. Background

This interim final rule amends two regulations under ERISA that facilitate the termination of individual account plans, including abandoned individual account plans, and the distribution of benefits from such plans. The first regulation, codified at 29 CFR 2550.404a–3, provides plan fiduciaries of terminated plans and qualified termination administrators (QTAs) of abandoned plans with a fiduciary safe harbor for making distributions on behalf of participants or beneficiaries who fail to make an election regarding a form of benefit distribution, commonly referred to as missing participants or beneficiaries. The second regulation, codified at 29 CFR 2578.1, establishes a procedure for financial institutions holding the assets of an abandoned individual account plan to terminate the plan and distribute benefits to the plan’s participants or beneficiaries, with limited liability.[FN1]

Appendices to these two regulations contain model notices for notifying participants or beneficiaries of the plan’s termination and distribution options. The safe harbor regulation provides that both a fiduciary and a QTA will be deemed to have satisfied ERISA’s prudence requirements under section 404(a) of the Act if the conditions of the safe harbor are met with respect to the distribution of benefits on behalf of missing participants from terminated individual account plans.[FN2]

In general, the regulation provides that a fiduciary or QTA qualifies for the safe harbor if a distribution is made to an individual retirement plan within the meaning of section 7701(a)(37) of the Code. See§ 2550.404a–3(d)(1)(i). However in April 2006, when the Department published this safe harbor regulation, a distribution of benefits from an individual account plan to a nonspouse beneficiary was not considered an eligible rollover distribution under the provisions of section 402(c) of the Code and, therefore, could not be rolled over into an individual retirement plan.[FN3]

As a result, the safe harbor regulation mandated, among other requirements, the distribution of benefits on behalf of a missing nonspouse beneficiary to an account that was not an individual retirement plan. See § 2550.404a– 3(d)(1)(ii). Consequently, such distributions were subject to income tax and mandatory tax withholding in the year distributed into the account.[FN4]

The Pension Protection Act changed the characterization of certain distributions from tax exempt plans and trusts to permit such distributions to qualify for eligible rollover distribution treatment.[FN5]

Section 829 of the Pension Protection Act amended section 402(c) of the Code to permit the direct rollover of a deceased participant’s benefit from an eligible retirement plan to an individual retirement plan established on behalf of a designated nonspouse beneficiary.[FN6]

These rollover distributions would not trigger immediate income tax consequences and mandatory tax withholding for the nonspouse beneficiary. In light of the Pension Protection Act’s changes to the Code allowing a rollover distribution on behalf of a nonspouse beneficiary into an inherited individual retirement plan with the resulting deferral of income tax consequences, the Department is amending the regulatory safe harbor for distributions from a terminated individual account plan, including an abandoned plan, at 29 CFR 2550.404a–3. These amendments require that a deceased participant’s benefit be directly rolled over to an inherited individual retirement plan established to receive the distribution on behalf of a missing, designated nonspouse beneficiary. These amendments eliminate the prior safe harbor condition that required a distribution on behalf of a missing nonspouse beneficiary to be made only to an account other than an individual retirement plan. See§ 2550.404a–3(d)(1)(ii). Therefore, when these amendments become applicable, a distribution on behalf of a missing nonspouse beneficiary would satisfy this condition of the safe harbor only if directly rolled into an individual retirement plan that satisfies the requirements of new section 402(c)(11) of the Code.[FN7]

Conforming changes are made to the content requirements of the mandated participant and beneficiary termination notice and its model notice under the safe harbor. The amendments to 29 CFR 2578.1 also make conforming changes to the content of the required participant and beneficiary termination notice and model notice for abandoned plans. Concurrently with publication of this rule, the Department is publishing proposed amendments to PTE 2006–06,[FN8] which, when finalized, will clarify that the exemption provides relief to a QTA that designates itself or an affiliate as the provider of an inherited individual retirement plan for a missing, designated nonspouse beneficiary pursuant to the exemption’s conditions.As noted in the preamble to the proposed amendments, however, the Department interprets PTE 2006–06 as currently available to the QTA for its self-selection as an inherited individual retirement plan provider subject to the conditions of the exemption.

29 CFR Part 2550
Employee benefit plans, Employee Retirement Income Security Act, Employee stock ownership plans, Exemptions, Fiduciaries, Investments, Investments foreign, Party in interest, Pensions, Pension and Welfare Benefit Programs Office, Prohibited transactions, Real estate, Securities, Surety bonds, Trusts and Trustees.

29 CFR Part 2578
Employee benefit plans, Pensions, Retirement.
For the reasons set forth in the preamble, the Department of Labor amends 29 CFR chapter XXV as follows:

Title 29—Labor
Subchapter F—Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974

PART 2550—RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

1. The authority citation for part 2550 continues to read as follows: Authority: 29 U.S.C. 1135; and Secretary of Labor’s Order No. 1–2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2550.401b–1 also issued under sec. 102, Reorganization Plan No. 4 of 1978, 43 FR 47713 (Oct. 17, 1978), 3 CFR, 1978 Comp. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), 3 CFR, 1978 Comp. 332. Sec. 2550.401c–1 also issued under 29 U.S.C. 1101. Sec. 2550.404c–1 also issued under 29 U.S.C. 1104. Sec. 2550.407c–3 also issued under 29 U.S.C. 1107. Sec. 2550.404a–2 also issued under 26 U.S.C. 401 note (sec. 657, Pub. L. 107–16, 115 Stat. 38). Sec. 2550.408b–1 also issued under 29 U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp. p. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978 Comp. 332, Sec. 2550.412–1 also issued under 29 U.S.C. 1112.

2. Amend § 2550.404a–3 by revising (d)(1)(ii), (d)(1)(iii)(C), (d)(2)(ii)(A), (d)(2)(iii), (d)(2)(iv), (d)(3), (e)(1)(iv), (e)(1)(v), (e)(1)(vi) to read as follows:

§ 2550.404a–3 Safe Harbor for Distributions from Terminated Individual Account Plans.
* * * * *
(d) * * *
(1) * * *
(ii) In the case of a distribution on behalf of a designated beneficiary (as defined by section 401(a)(9)(E) of the Code) who is not the surviving spouse of the deceased participant, to an inherited individual retirement plan (within the meaning of section 402(c)(11) of the Code) established to receive the distribution on behalf of the
nonspouse beneficiary; or
(iii) * * *
* * * * *
(C) An individual retirement plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) offered by a financial institution other than the qualified termination administrator to the public at the time of the distribution.
(2) * * *
(ii) * * *
(A) Seek to maintain, over the term of the investment, the dollar value that is equal to the amount invested in the product by the individual retirement plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section), and
* * * * *
(iii) All fees and expenses attendant to the transferee plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) or account (described in paragraph (d)(1)(iii)(A) of this section), including investments of such plan, (e.g., establishment charges, maintenance fees, investment expenses, termination costs and surrender charges), shall not exceed the fees and expenses charged by the provider of the plan or account for comparable plans or accounts established for reasons other than the receipt of a distribution under this section; and
(iv) The participant or beneficiary on whose behalf the fiduciary makes a distribution shall have the right to enforce the terms of the contractual agreement establishing the plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) or account (described in paragraph (d)(1)(iii)(A) of this section), with regard to his or her transferred account balance, against the plan or account provider.
(3) Both the fiduciary’s selection of a transferee plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) or account (described in paragraph (d)(1)(iii)(A) of this section) and the investment of funds would not result in a prohibited transaction under section 406 of the Act, unless such actions are exempted from the prohibited transaction provisions by a prohibited transaction exemption issued pursuant to section 408(a) of the Act.
(e) * * *
(1) * * *
(iv) A statement explaining that, if a participant or beneficiary fails to make an election within 30 days from receipt of the notice, the plan will distribute the account balance of the participant or beneficiary to an individual retirement plan (i.e., individual retirement account or annuity described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) and the account balance will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity;
(v) A statement explaining what fees, if any, will be paid from the participant or beneficiary’s individual retirement plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section), if such information is known at the time of the furnishing of this notice;
(vi) The name, address and phone number of the individual retirement plan (described in paragraph (d)(1)(i) or (d)(1)(ii) of this section) provider, if such information is known at the time of the furnishing of this notice; and
* * * * *
BILLING CODE 4510–29–P

Subchapter G—Administration and Enforcement Under the Employee Retirement Income Security Act of 1974

PART 2578—RULES AND REGULATIONS FOR ABANDONED PLANS

3. The authority citation for part 2578.1 continues to read as follows: Authority: 29 U.S.C. 1135; 1104(a); 1103(d)(1).

4. Amend § 2578.1 by revising (d)(2)(vi)(A)(5)(ii), (d)(2)(vi)(A)(5)(iii), (d)(2)(vi)(A)(6), (d)(2)(vi)(A)(7), (d)(2)(vi)(A)(8) to read as follows:

§ 2578.1 Termination of Abandoned Individual Account Plans
* * * * *
(d) * * *
(2) * * *
(vi) * * *
(A) * * *
(5) * * *
(ii) To an inherited individual retirement plan described in§ 2550.404a–3(d)(1)(ii) of this chapter (in the case of a distribution on behalf of a distributee other than a participant or spouse),
(iii) In any case where the amount to be distributed meets the conditions in§ 2550.404a–3(d)(1)(iii), to an interestbearing federally insured bank account, the unclaimed property fund of the State of the last known address of the participant or beneficiary, or an individual retirement plan (described in§ 2550.404a–3(d)(1)(i) or (d)(1)(ii) of this chapter) or
* * * * *
(6) In the case of a distribution to an individual retirement plan (described in§ 2550.404a–3(d)(1)(i) or (d)(1)(ii) of this chapter) a statement explaining that the account balance will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity;
(7) A statement of the fees, if any, that will be paid from the participant or beneficiary’s individual retirement plan (described in § 2550.404a–3(d)(1)(i) or (d)(1)(ii) of this chapter) or other account (described in § 2550.404a– 3(d)(1)(iii)(A) of this chapter), if such information is known at the time of the furnishing of this notice;
(8) The name, address and phone number of the provider of the individual retirement plan (described in§ 2550.404a7–3(d)(1)(i) or (d)(1)(ii) of this chapter), qualified survivor annuity, or other account (described in§ 2550.404a–3(d)(1)(iii)(A) of this chapter), if such information is known at the time of the furnishing of this notice; and
* * * * *

Footnotes:

[1] Under § 2578.1(d)(2)(vii)(B), a QTA is directed to make distributions in accordance with the safe harbor regulation.

[2] 71 FR 20830 n. 21.

[3] See 26 CFR 1.402(c)–2, Q&A–12.

[4] 71 FR 20828 n.14.

[5] Section 829 of the Pension Protection Act.

[6] Section 829 of the Pension Protection Act requires that the individual retirement plan established on behalf of a nonspouse beneficiary must be treated as an inherited individual retirement plan within the meaning of Code§ 408(d)(3)(C) and must be subject to the applicable mandatory distribution requirements of Code§ 401(a)(9)(B).

[7] See also I.R.S. Notice 2007–07 (January 10, 2007).

[8] 71 FR 20856 (April 21, 2006).

US Department of Labor

29 CFR Parts 2550
RIN 1210–AB17

Statutory Exemption for Cross-Trading of Securities

AGENCY: Employee Benefits Security Administration, Department of Labor

ACTION: Interim final rule with request for comments.

SUMMARY: This document contains an interim final rule that implements the content requirements for the written cross-trading policies and procedures required under section 408(b)(19)(H) of the Employee Retirement Income Security Act of 1974 (ERISA or the Act). Section 611(g) of the Pension Protection Act of 2006, Public Law 109–280, 120 Stat. 780, 972, amended section 408(b) of ERISA by adding a new subsection (19) that exempts the purchase and sale of a security between a plan and any other account managed by the same investment manager if certain conditions are satisfied. Among other requirements, section 408(b)(19)(H) stipulates that the investment manager must adopt, and effect cross-trades in accordance with, written cross-trading policies and procedures that are fair and equitable to all accounts participating in the cross-trading program. This interim final rule would affect employee benefit plans, investment managers, plan fiduciaries and plan participants and
beneficiaries.

DATES: Effective Date: This interim final rule is effective April 13, 2007.

Subchapter F, part 2550 of title 29 of the Code of Federal Regulations is amended as follows:

SUBCHAPTER F—FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974

PART 2550—RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

1. The authority citation for part 2550 is revised to read as follows: Authority: 29 U.S.C. 1135; sec. 657, Pub. L. 107–16, 115 Stat. 38; sec. 611, Pub. L. 109– 280, 120 Stat. 780; and Secretary of Labor’s Order No. 1–2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2550.401c–1 also issued under 29 U.S.C. 1101. Sec. 2550.404c–1 also issued under 29 U.S.C. 1104. Sec. 2550.407c–3 also issued under 29 U.S.C. 1107. Sec. 2550.408b–1 also issued under 29 U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp., p. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978 Comp., p. 332. Sec. 2550.408b–19 also issued under sec. 611, Pub. L. 109–280, 120 Stat. 780, 972, and sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp., p. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1979), and 3 CFR, 1978 Comp., p. 332. Sec. 2550.412–1 also issued under 29 U.S.C. 1112.
2. Add § 2550.408b–19 to read as follows:

§ 2550.408b–19 Statutory exemption for cross-trading of securities.

(a) In General.

(1) Section 408(b)(19) of the Employee Retirement Income Security Act of 1974 (the Act) exempts from the prohibitions of section 406(a)(1)(A) and 406(b)(2) of the Act any cross-trade of securities if certain conditions are satisfied. Among other conditions, the exemption requires that the investment manager adopt, and effect cross-trades in accordance with, written cross-trading policies and procedures that are fair and equitable to all accounts participating in the crosstrading program, and that include:

(i) A description of the investment manager’s pricing policies and procedures, and
(ii) The investment manager’s policies and procedures for allocating crosstrades in an objective manner among accounts participating in the crosstrading program.

(2) Section 4975(d)(22) of the Internal Revenue Code of 1986 (the Code) contains parallel provisions to section 408(b)(19) of the Act. Effective December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 214 (2000 ed.), transferred the authority of the Secretary of the Treasury to promulgate regulations of the type published herein to the Secretary of Labor. Therefore, all references herein to section 408(b)(19) of the Act should be read to include reference to the parallel provisions of section 4975(d)(22) of the Code.

(3) Section 408(b)(19)(D) of the Act requires that a plan fiduciary for each plan participating in the cross-trades receive in advance of any cross-trades disclosure regarding the conditions under which the cross-trades may take place. This disclosure must be in a document that is separate from any other agreement or disclosure involving the asset management relationship. The disclosure must contain a statement that any investment manager participating in a cross-trading program will have a potentially conflicting division of loyalties and responsibilities to the parties involved in any cross-trade transaction.

(4) The standards set forth in this section apply solely for purposes of determining whether an investment manager’s written policies and procedures satisfy the content requirements of section 408(b)(19)(H) of the Act. Accordingly, such standards do not determine whether the investment manager satisfies the other requirements for relief under section 408(b)(19) of the Act.

(b) Policies and Procedures.

(1) In General. This paragraph specifies the content of the written policies and procedures required to be adopted by an investment manager and disclosed to the plan fiduciary prior to authorizing cross-trading in order for transactions to qualify for relief under section 408(b)(19) of the Act.

(2) Style and Format. The content of the policies and procedures required by this paragraph must be clear and concise and written in a manner calculated to be understood by the plan fiduciary authorizing cross-trading. Although no specific format is required for the investment manager’s written policies and procedures, the information contained in the policies and procedures must be sufficiently detailed to facilitate a periodic review by the compliance officer of the crosstrades and a determination by such compliance officer that the cross-trades comply with the investment manager’s written cross-trading policies and procedures.

(3) Content.

(i) An investment manager’s policies and procedures must be fair and equitable to all accounts participating in its cross-trading program and reasonably designed to ensure compliance with the requirements of section 408(b)(19)(H) of the Act. Such policies and procedures must include:

(A) A statement of policy which describes the criteria that will be applied by the investment manager in determining that execution of a securities transaction as a cross-trade will be beneficial to both parties to the transaction;

(B) A description of how the investment manager will determine that cross-trades are effected at the‘‘ independent current market price’’ of the security (within the meaning of§ 270.17a–7(b) of Title 17, Code of Federal Regulations and SEC no-action and interpretative letters thereunder) as required by section 408(b)(19)(B) of the Act, including the identity of sources used to establish such price;

(C) A description of the procedures for ensuring compliance with the $100,000,000 minimum asset size requirement of section 408(b)(19). A plan or master trust will satisfy the minimum asset size requirement as to a transaction if it satisfies the requirement upon its initial participation in the cross-trading program and on a
quarterly basis thereafter;

(D) A description of how the investment manager will mitigate any potentially conflicting division of loyalties and responsibilities to the parties involved in any cross-trade
transaction;

(E) A requirement that the investment manager allocate cross-trades among accounts in an objective and equitable manner and a description of the allocation method(s) available to and used by the investment manager for assuring an objective allocation among accounts participating in the crosstrading program. If more than one allocation methodology may be used by the investment manager, a description of what circumstances will dictate the use of a particular methodology;

(F) Identification of the compliance officer responsible for periodically reviewing the investment manager’s compliance with section 408(b)(19)(H) of the Act and a statement of the compliance officer’s qualifications for this position; and

(G) A statement which describes the scope of the review conducted by the compliance officer, specifically noting whether such review is limited to compliance with the policies and procedures required by 408(b)(19)(H), or whether such review extends to any determinations regarding the overall level of compliance with the other requirements of section 408(b)(19) of the Act.

(ii) Nothing herein is intended to preclude an investment manager from including such other policies and procedures not required by this regulation as the investment manager may determine appropriate to comply with the requirements of section 408(b)(19).

(c) Definitions. For purposes of this section:

(1) The term "account" includes any single customer or pooled fund or account.

(2) The term "compliance officer" means an individual designated by the investment manager who is responsible for periodically reviewing the crosstrades made for the plan to ensure compliance with the investment manager’s written cross-trading policies and procedures and the requirements of section 408(b)(19)(H) of the Act.

(3) The term "plan fiduciary" means a person described in section 3(21)(A) of the Act with respect to a plan (other than the investment manager engaging in the cross-trades or an affiliate) who has the authority to authorize a plan’s participation in an investment manager’s cross-trading program.

(4) The term "investment manager" means a person described in section 3(38) of the Act.

(5) The term "plan" means any employee benefit plan as described in section 3(3) of the Act to which Title I of the Act applies or any plan defined in section 4975(e)(1) of the Code.

(6) The term "cross-trade" means the purchase and sale of a security between a plan and any other account managed by the same investment manager.

Signed at Washington, DC, this 6th day of February, 2007.
Bradford P. Campbell,
Acting Assistant Secretary, Employee Benefits Security Administration, Department of Labor.

[FR Doc. E7–2290 Filed 2–9–07; 8:45 am]
BILLING CODE 4510–29–P

April 27, 1995 (60 FR 20874)

Agency: Department of Labor, Employee Benefits Security Administration

Action: Grant of Class Exemption

Effective Date: March 28, 2002

Program

Section 1 - Delinquent Filer Voluntary Compliance (DFVC) Program

The DFVC Program is intended to afford eligible plan administrators (described in Section 2 of this Notice) the opportunity to avoid the assessment of civil penalties otherwise applicable to administrators who fail to file timely annual reports for plan years beginning on or after January 1, 1988. Eligible administrators may avail themselves of the DFVC Program by complying with the filing requirements and paying the civil penalties specified in Section 3 or Section 4, as appropriate, of this Notice.

Section 2 - Scope, Eligibility and Effective Date

Scope. The DFVC Program described in this Notice provides relief from assessment of civil penalties otherwise applicable to plan administrators who fail or refuse to file timely annual reports. Relief under this Program does not extend to penalties that may be assessed for annual reports that are determined by the Department to be incomplete or otherwise deficient.

Eligibility. The DFVC Program is available only to a plan administrator that complies with the requirements of Section 3 or Section 4, as appropriate, of this Notice prior to the date on which the administrator is notified in writing by the Department of a failure to file a timely annual report under Title I of ERISA.

Effective date. The DFVC Program described herein shall be effective March 28, 2002. The Department intends that this DFVC Program to be of indefinite duration; however, the Program may be modified from time to time or terminated in the sole discretion of the Department upon publication of notice in the Federal Register.

Section 3 - Plan Administrators Filing Annual Reports

General. A plan administrator electing to file a late annual report (Form 5500 Series Annual Return/Report) under this DFVC Program must comply with the requirements of this Section 3.

Filing a Complete Annual Report.

(a) The plan administrator must file a complete Form 5500 Series Annual Return/Report, including all required schedules and attachments, for each plan year for which the plan administrator is seeking relief under the Program. This filing shall be sent to PWBA at the appropriate EFAST address listed in the instructions for the most current Form 5500 Annual Return/Report, or electronically in accordance with the EFAST electronic filing requirements. See the EFAST Internet site at www.efast.dol.gov to view forms and instructions.

Note: Do not forward the applicable penalty amount described in Section 3.03 to the EFAST addresses listed above.

(b) For purposes of subparagraph (a), the plan administrator shall file either: (1) The Form 5500 Series Annual Return/Report form (but not a Form 5500-R) issued for each plan year for which the relief is sought, or (2) the most current Form 5500 Annual Return/Report form issued (and, if necessary, indicate in the appropriate space on the first page of the Form 5500 the plan year for which the annual return/report is being filed). Forms may be obtained from the IRS by calling 1-800-TAX-FORM (1-800-829-3676). Forms for certain pre-1999 plan years also are available through the Internet sites for PWBA and the Internal Revenue Service (IRS) (www.dol.gov/dol/pwba, www.irs.gov). For further information on EFAST filing requirements, see the EFAST Internet site (www.efast.dol.gov) and the instructions for the most current Form 5500.

Payment of Applicable Penalty Amount.

(a) The plan administrator shall pay the applicable penalty amount by submitting to the DFVC Program the information described in subparagraph (b) along with a check made payable to the "U.S. Department of Labor" for the applicable penalty amount determined in accordance with subparagraph (c). This separate submission shall be made by mail to: DFVC Program, PWBA, P.O. Box 530292, Atlanta, GA 30353-0292. The annual returns/reports for multiple plans may not be included in a single DFVC Program submission. A separate submission to the DFVC Program (including a separate check for the applicable penalty amount) must be made for each plan.

Note: Personal or private delivery service cannot be made to this address.

(b)

(1) The administrator shall submit to the DFVC Program, with the applicable penalty amount, a paper copy of the Form 5500 Annual Return/Report filed as described in paragraph .02(a), without schedules and attachments. In the event that the plan administrator files as described in paragraph .02(a) using a 1998 or prior plan year form, a paper copy of only the first page of the Form 5500 or Form 5500-C, as applicable, should be submitted to the DFVC Program.

(2) In the case of a plan sponsored by a Code section 501(c)(3) organization described in paragraph .03(c)(4), the administrator shall clearly note "501(c)(3) Plan" in the upper-right hand corner of the first page of the Form 5500 Annual Return/Report submitted to the DFVC Program (in Atlanta, Georgia). This notation should not be included on the annual report filed with PWBA pursuant to paragraph .02 (in Lawrence, Kansas) because it may interfere with the proper processing of the required report.

(c) The applicable penalty amount shall be determined as follows:

(1) In the case of a plan with fewer than 100 participants at the beginning of the plan year (or a plan that would be treated as such a plan under the "80-120" participant rule described in 29 CFR 2520.103-1(d) for the subject plan year) (hereinafter "small plan"), the applicable penalty amount is $10 per day for each day the annual report is filed after the date on which the annual report was due (without regard to any extensions), not to exceed the greater of: $750 per annual report or, in the case of a DFVC submission relating to more than one delinquent annual report filing for the plan, $1,500 per plan.

(2) In the case of a plan with 100 or more participants at the beginning of the plan year (other than a plan that is eligible to use and uses the "80-120" participant rule) (hereinafter "large plan"), the applicable penalty amount is $10 per day for each day the annual report is filed after the date on which the annual report was due (without regard to any extensions), not to exceed the greater of: $2,000 per annual report or, in the case of a DFVC submission relating to more than one delinquent annual report filing for the plan, $4,000 per plan.

(3) In the case of a DFVC submission relating to more than one delinquent annual report filing for a plan, the applicable penalty amount shall be determined by reference to paragraph (c)(2) if for any plan year for which the submission is made the plan was a "large plan."

(4) In the case of a plan administrator filing an annual report for a "small plan" that is sponsored by a Code section 501(c)(3) organization (including a Code section 403(b) plan), the applicable penalty amount is $10 per day for each day the annual report is filed after the date on which the annual report was due (without regard to any extensions), not to exceed $750 per DFVC submission, including DFVC submissions that relate to more than one delinquent annual report filing for the plan. This paragraph (c)(4) shall not apply if, as of the date the plan files pursuant to this DFVC Program, there is a delinquent or late annual report due for a plan year for which the plan was a "large plan." See paragraph .03(b)(2) for special instructions pertaining to small plans sponsored by Code section 501(c)(3) organizations.

Liability for Applicability Amount.

The plan administrator is personally liable for the payment of civil penalties assessed under section 502(c)(2) of ERISA, therefore, civil penalties, including amounts paid under this DFVC Program, shall not be paid from the assets of an employee benefit plan.

Section 4 - Plan Administrators Filing Notices for Apprenticeship and Training Plans and Statements for "Top Hat" Plans

General. Administrators of apprenticeship and training plans, described in 29 CFR 2520.104-22, and administrators of pension plans for a select group of management or highly compensated employees, described in 29 CFR 2520.104-23(a) ("top hat plans"), who elect to file the applicable notice and statement described in sections 2520.104-22 and 2520.104-23, respectively, as a condition of relief from the annual reporting requirements may, in lieu of filing any past due annual report and paying otherwise applicable civil penalties, comply with the requirements of this Section 4. Administrators who have complied with the requirements of this Section 4 shall be considered as having elected compliance with the exemption(s) and/or alternative method of compliance prescribed in Secs. 2520.104-22, or 2520.104-23, as appropriate, for all subsequent plan years.

Filing Applicable Notice or Statement with the U.S. Department of Labor.

The plan administrator must prepare and file a notice or statement meeting the requirements of Secs. 2520.104-22, or 2520.104-23, as appropriate.

The apprenticeship and training plan notice described in Sec. 2520.104-22 shall be sent by mail or by private delivery service to: Apprenticeship and Training Plan Exemption, Pension and Welfare Benefits Administration, Room N-1513, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210.

The "top hat" plan statement described in Sec. 2520.104-23 shall be sent by mail or by private delivery service to: Top Hat Plan Exemption, Pension and Welfare Benefits Administration, Room N-1513, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210.

Note: A plan sponsor maintaining more than one "top hat" plan is not required to file a separate statement for each such plan. See Sec. 2520.104-23(b).

Payment of Applicable Penalty Amount.

(a) The plan administrator shall pay the applicable penalty amount by submitting to the DFVC Program the information described in subparagraph (b) along with a check made payable to the "U.S. Department of Labor" for the applicable penalty amount determined in accordance with subparagraph (c). This submission shall be made by mail to: DFVC Program, PWBA, P.O. Box 530292, Atlanta, GA 30353-0292.

Note: Personal or private delivery service cannot be made to this address.

(b) The administrator shall submit to the DFVC Program with the applicable penalty amount the most current Form 5500 Annual Return/Report (without schedules and attachments). For purposes of this requirement, the plan administrators must complete Form 5500 line items 1a-1b, 2a-2c, 3a-3c, and use plan number 888 for all "top hat" plans and plan number 999 for all apprenticeship and training plans. In the case of plan sponsors maintaining more than one "top hat" plan and plan sponsors maintaining more than one apprenticeship and training plan described in Sec. 2520.104-22, the plan administrator shall clearly identify each such plan on the Form 5500 filed with the Department of Labor or on an attachment thereto. The plan administrator also must sign and date the Form 5500.

(c) The applicable penalty amount is $750 for each DFVC submission, without regard to the number of plans maintained by the same plan sponsor for which notices and statements are filed pursuant to Section 4 and without regard to the number of plan participants covered under such plan or plans.

Liability for Applicability Amount.

The plan administrator is personally liable for the payment of civil penalties assessed under section 502(c)(2) of ERISA, therefore, civil penalties, including amounts paid under this DFVC Program, shall not be paid from the assets of an employee benefit plan.

Section 5 - Waiver of Right to Notice, Abatement of Assessment and Plan Status

i. Payment of a penalty under the terms of this DFVC Program constitutes, with regard to the filings submitted under the Program, a waiver of an administrator's right both to receive notices of intent to assess a penalty under Sec. 2560.502c-2 from the Department and to contest the Department's assessment of the penalty amount.

ii. Although this Notice does not provide relief from late filing penalties under the Code, the Internal Revenue Service (IRS) has provided the Department with the following information. The Code and the regulations thereunder require information to be filed on the Form 5500 Series Annual Return/Report and provide the IRS with authority to impose or assess penalties for failing to timely file. The IRS has agreed to provide certain penalty relief under the Code for delinquent Form 5500 Annual Returns/Reports filed for Title I plans where the conditions of this DFVC Program have been satisfied. See IRS Notice 2002-23.

iii. Although this Notice does not provide relief from late filing penalties under Title IV of ERISA, the Pension Benefit Guaranty Corporation (PBGC) has provided the Department with the following information. Title IV of ERISA and the regulations thereunder require information to be filed on the Form 5500 Series Annual Return/Report and provide the PBGC with authority to assess penalties against a plan administrator under ERISA Sec. 4071 for late filing of the Form 5500 Series Annual Return/Report. The PBGC has agreed that it will not assess a penalty against a plan administrator under ERISA Sec. 4071 for late filing of a Form 5500 Series Annual Return/Report filed for a Title I plan where the conditions of this DFVC Program have been satisfied.

iv. Acceptance by the Department of a filing and penalty payment made pursuant to this DFVC Program does not represent a determinationby the Department of Labor as to the status of the arrangement as a plan, the particular type of plan under Title I or ERISA, the status of the plan sponsor under the Code, or a determination by the Department of Labor that the provisions of Secs. 2520.104-22 or 2520.104-23 have been satisfied.

Signed at Washington, DC, this 25th day of March, 2002.

Ann L. Combs,
Assistant Secretary,
Pension and Welfare Benefits Administration,
U.S. Department of Labor.

[FR Doc. 02-7514 Filed 3-27-02; 8:45 am]
Billing Code 4510-29-P

Department of Labor
Regulation 2550.407a-1
29 C.F.R. 2550.407a-1

Originally issued September 20, 1977 (42 FR 47201)

1. In General. Section 407(a)(1) of the Employee Retirement Income Security Act of 1974 (the Act) states that except as otherwise provided in section 407 and section 414 of the Act, a plan may not acquire or hold any employer security which is not a qualifying employer security or any employer real property which is not qualifying employer real property. Section 406(a)(1)(E) prohibits a fiduciary from knowingly causing a plan to engage in a transaction which constitutes a direct or indirect acquisition, on behalf of a plan, of any employer security or employer real property in violation of section 407(a), and section 406(a)(2) prohibits a fiduciary who has authority or discretion to control or manage assets of a plan to permit the plan to hold any employer security or employer real property if he knows or should know that holding such security or real property violates section 407(a).
2. Requirements applicable to all plans. A plan may hold or acquire only employer securities which are qualifying employer securities and employer real property which is qualifying employer real property. A plan may not hold employer securities and employer real property which are not qualifying employer securities and qualifying employer real property, except to the extent that:
1. The employer security is held by a plan which has made an election under section 407(c)(3) of the Act; or
2. The employer security is a loan or other extension of credit which satisfies the requirements of section 414(c)(1) of the Act or the employer real property is leased to the employer pursuant to a lease which satisfies the requirements of section 414(c)(2) of the Act.

Regulation published in Federal Register September 20, 1977 (42 FR 47201) and amended November 22, 1977 (42 FR 59842).

Codified to 29 C.F.R. 2550.407a-1.

Department of Labor
Regulation 2550.407a-2
29 C.F.R. 2550.407a-2

Originally issued September 20, 1977 (42 FR 47201)

1. In General. Section 407(a)(2) of the Employee Retirement Income Security Act of 1974 (the Act) provides that a plan may not acquire any qualifying employer security or qualifying employer real property, if immediately after such acquisition the aggregate fair market value of qualifying employer securities and qualifying employer real property held by the plan exceeds 10 percent of the fair market value of the assets of the plan.
2. Acquisitions. For purposes of section 407(a) of the Act, an acquisition by a plan of qualifying employer securities or qualifying employer real property shall include, but not be limited to, an acquisition by purchase, by the exchange of plan assets, by the exercise of warrants or rights, by the conversion of a security (except any acquisition pursuant to a conversion exempt under section 408(b)(7) of the Act), by default of a loan where the qualifying employer security or qualifying employer real property was security for the loan, or by the contribution of such securities or real property to the plan. However, an acquisition of a security shall not be deemed to have occurred if a plan acquires the security as a result of a stock dividend or stock split.
3. Fair Market Value - Indebtedness incurred in connection with the acquisition of a plan asset. In determining whether a plan is in compliance with the limitation on the acquisition of qualifying employer securities and qualifying employer real property in section 407(a)(2), the limitation on the holding of qualifying employer securities and qualifying employer real property in section 407(a)(3) and the requirement regarding the disposition of employer securities and employer real property in section 407(a)(4) thereunder, the fair market value of total plan assets shall be the fair market value of such assets less the unpaid amount of:
1. Any indebtedness incurred by the plan in acquiring such assets;
2. Any indebtedness incurred before the acquisition of such assets if such indebtedness would not have been incurred but for such acquisition; and
3. Any indebtedness incurred after the acquisition of such assets if such indebtedness would not have been incurred but for such acquisition and the incurrence of such indebtedness was reasonably foreseeable at the time of such acquisition. However, the fair market value of qualifying employer securities and qualifying employer real property shall be the fair market value of such assets without any reduction for the unpaid amount of any indebtedness incurred by the plan in connection with the acquisition of such employer securities and employer real property.
4. Examples.
1. Plan assets have a fair market value of $100,000. The plan has no liabilities other than liabilities for vested benefits of participants and does not own any employer securities or employer real property. The plan proposes to acquire qualifying employer securities with a fair market value of $10,000 by paying $1,000 in cash and borrowing $9,000. The fair market value of plan assets would be $100,000 ($100,000 of plan assets less $1,000 cash payment plus $10,000 of employer securities less $9,000 indebtedness), the fair market value of the qualifying employer securities would be $10,000, which is 10 percent of the fair market value of plan assets. Accordingly, the acquisition would not contravene section 407(a).
2. Plan assets have a fair market value of $100,000. The plan has liabilities of $20,000 which were incurred in connection with the acquisition of those assets, and does not own any employer securities or employer real property. The plan proposes to pay cash for qualifying employer securities with a fair market value of $10,000. The fair market value of plan assets would be $80,000 ($100,000 of plan assets less $10,000 cash payment plus $10,000 of employer securities less $20,000 indebtedness), the fair market value of the qualifying employer securities would be $10,000, which is 12.5 percent of the fair market value of plan assets. Accordingly, the acquisition would contravene section 407(a).

Department of Labor
Regulation 2550.407d-5
29 C.F.R. 2550.407d-5

Originally issued September 2, 1977 (42 FR 44388)

1. In General. For purposes of this section and section 407(d)(5) of the Employee Retirement Income Security Act of 1974 (the Act), the term "qualifying employer security" means an employer security which is:
1. Stock; or
2. A marketable obligation, as defined in paragraph (b) of this section and section 407(e) of the Act.
2. For purposes of paragraph (a)(2) of this section and section 407(d)(5) of the Act, the term "marketable obligation" means a bond, debenture, note, or certificate, or other evidence of indebtedness (hereinafter in this paragraph referred to as "obligation") if:
1. Such obligation is acquired -
1. On the market, either
1. At the price of the obligation prevailing on a national securities exchange which is registered with the Securities and Exchange Commission, or
2. If the obligation is not traded on such a national securities exchange, at a price not less favorable to the plan than the offering price for the obligation as established by current bid and asked prices quoted by persons independent of the issuer;
2. From an underwriter, at a price -
1. Not in excess of the public offering price for the obligation as set forth in a prospectus or offering circular filed with the Securities and Exchange Commission, and
2. At which a substantial portion of the same issue is acquired by persons independent of the issuer; or
3. Directly from the issuer at a price not less favorable to the plan than the price paid currently for a substantial portion of the same issue by persons independent of the issuer;
2. Immediately following acquisition of such obligation,
1. Not more than 25 percent of the aggregate amount of obligations issued in such issue and outstanding at the time of acquisition is held by the plan, and
2. At least 50 percent of the aggregate amount referred to in paragraph (A) is held by persons independent of the issuer; and
3. Immediately following acquisition, of the obligation, not more than 25 percent of the assets of the plan is invested in obligations of the employer or an affiliate of the employer.

Department of Labor
Regulation 2550.407d-6
29 C.F.R. 2550.407d-6

Originally issued September 2, 1977 (42 FR 44388)

1. In General -
1. Type of plan. To be an "ESOP" (employee stock ownership plan), a plan described in section 407(d)(6)(A) of the Employee Retirement Income Security Act of 1974 (the Act) must meet the requirements of this section. See section 407(d)(6)(B).
2. Designation as ESOP. To be an ESOP, plan must be formally designated as such in the plan document.
3. Retroactive amendment. A plan meets the requirements of this section as of the date that it is designated as an ESOP if it is amended retroactively to meet, and in fact does meet, such requirements at any of the following times:
1. 12 months after the date on which the plan is designated as an ESOP;
2. 90 days after a determination letter is issued with respect to the qualification of the plan as an ESOP under this section, but only if the determination is requested by the date in paragraph (a)(3)(i) of this section; or
3. A later date approved by the Internal Revenue Service district director.
4. Addition to other plan. An ESOP may form a portion of a plan the balance of which includes a qualified pension, profit-sharing, or stock bonus plan which is not an ESOP. A reference to an ESOP includes an ESOP that forms a portion of another plan.
5. Conversion of existing plan to an ESOP. If an existing pension, profit-sharing, or stock bonus plan is converted into an ESOP, the requirements of section 404 of the Act, relating to fiduciary duties, and section 401(a) of the Internal Revenue Code (the Code), relating to requirements for plans established for the exclusive benefit of employees, apply to such conversion. A conversion may constitute a termination of an existing plan. For definition of a termination, see the regulations under section 411(d)(3) of the Code and section 4041(f) of the Act.
6. Certain arrangements barred. (i) buy-sell agreements. An arrangement involving an ESOP that creates a put option must not provide for the issuance of put options other than as provided under Section 2550.408b-3(j), (k) and (l). Also, an ESOP must not otherwise obligate itself to acquire securities from a particular security holder at an indefinite time determined upon the happening of an event such as the death of the holder.
2. Plan designed to invest primarily in qualifying employer securities. A plan constitutes an ESOP only if the plan specifically states that it is designed to invest primarily in qualifying employer securities. Thus, a stock bonus plan or a money purchase pension plan constituting an ESOP may invest part of its assets in other than qualifying employer securities. Such plan will be treated the same as other stock bonus plans or money purchase pension plans qualified under section 401(a) of the Code with respect to those investments.
3. Regulations of the secretary of the treasury. A plan constitutes an ESOP for a plan year only if it meets such other requirements as the Secretary of the Treasury may prescribe by regulation under section 4975(e)(7) of the Code. See 26 C.F.R. 54.4975-11.

Department of Labor
Regulation 2550.408b-1
29 C.F.R. 2550.408b-1

Originally issued July 20, 1989 (54 FR 30520)

1. General Statutory Exemption.
1. In General. Section 408(b)(1) of the Employee Retirement Income Security Act of 1974 (the Act of ERISA) exempts from the prohibitions of section 406(a), 406(b)(1), and 406(b)(2) loans by a plan to parties in interest who are participants or beneficiaries of the plan, provided that such loans:
1. Are available to all such participants and beneficiaries on a reasonably equivalent basis;
2. Are not made available to highly compensated employees, officers or shareholders in an amount greater than the amount made available to other employees;
3. Are made in accordance with specific provisions regarding such loans set forth in the plan;
4. Bear a reasonable rate of interest; and
5. Are adequately secured.

The Internal Revenue Code (the Code) contains parallel provisions to section 408(b)(1) of the Act. 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 promulgate regulations of the type published herein to the Secretary of Labor. Therefore, all references herein to section 408(b)(1) of the Act should be read to include reference to the parallel provisions of section 4975(d)(1) of the Code.

Section 1114(b)(15)(B) of the Tax Reform Act of 1986 amended section 408(b)(1)(B) of ERISA by deleting the phrase "highly compensated employees, officers or shareholders" and substituting the phrase "highly compensated employees (within the meaning of section 414(q) of the Internal Revenue Code of 1986)." Thus, for plans with participant loan programs which are subject to the amended section 408(b)(1)(B), the requirements of this regulation should be read to conform with the amendment.

2. Scope.

Section 408(b)(1) of the Act does not contain an exemption from acts described in section 406(b)(3) of the Act (prohibiting fiduciaries from receiving consideration for their own personal account from any party dealing with a plan in connection with a transaction involving plan assets). If a loan from a plan to a participant who is a party in interest with respect to that plan involves an act described in section 406(b)(3), such an act constitutes a separate transaction which is not exempt under section 408(b)(1) of the Act. The provisions of section 408(b)(1) are further limited by section 408(d) of the Act (relating to transactions with owner-employees and related persons).

3. Loans.
1. Section 408(b)(1) of the Act provides relief from the prohibitions of section 406(a), 406(b)(1) and 406(b)(2) for the making of a participant loan. The term "participant loan" refers to a loan which is arranged and approved by the fiduciary administering the loan program primarily in the interest of the participant and which otherwise satisfies the criteria set forth in section 408(b)(1) of the Act. The existence of a participant loan or participant loan program will be determined upon consideration of all relevant facts and circumstances. Thus, for example, the mere presence of a loan document appearing to satisfy the requirements of section 408(b)(1) will not be dispositive of whether a participant loan exists where the subsequent administration of the loan indicates that the parties to the loan agreement did not intent the loan to be repaid. Moreover, a loan program containing a precondition designed to benefit a party in interest (other than the participant) is not afforded relief by section 408(b)(1) or this regulation. In this regard, section 408(b)(1) recognizes that a program of participant loans, like other plans investments, must be prudently established and administered for the exclusive purpose of providing benefits to participants and beneficiaries of the plan.
2. For the purpose of this regulation, the term "loan" will include any renewal or modification of an existing loan agreement, provided that, at the time of each such renewal or modification, the requirements of section 408(b)(1) and this regulation are met.
4. Examples. The following examples illustrate the provisions of section 2550.408b-1(a).

   Example (1): T, a trustee of plan P, has exclusive discretion over the management and disposition of plan assets. As a result, T is a fiduciary with respect to P under section 3(21)(A) of the Act and a party in interest with respect to P pursuant to section 3(14)(A) of the Act. T is also a participant in P. Among T's duties as fiduciary is the administration of a participant loan program which meets the requirements of section 408(b)(1) of the Act. Pursuant to strict objective criteria stated under the program, T, who participates in all loan decisions, receives a loan on the same terms as other participants. Although the exercise of T's discretion on behalf of himself may constitute an act of self-dealing described in section 406(b)(1), section 408(b)(1) provides an exemption from section 406(b)(1). As a result, the loan from P to T would be exempt under section 408(b)(1), provided the conditions of that section are otherwise satisfied.

   Example (2): P is a plan covering all the employees of E, the employer who established and maintained P. F is a fiduciary with respect to P and an officer of E. The plan documents governing P give F the authority to establish a participant loan program in accordance with section 408(b)(1) of the Act. Pursuant to an arrangement with E, F establishes such a program but limits the use of loan funds to investments in a limited partnership which is established and maintained by E as general partner. Under these facts, the loan program and any loans made pursuant to this program are outside the scope of relief provided by section 408(b)(1) because the loan program is designed to operate for the benefit of E. Under the circumstance described, the diversion of plan assets for E's benefit would also violate sections 403(c)(1) and 404(a) of the Act.

   Example (3): Assume the same facts as in Example 2, above, except that F does not limit the use of loan funds. However, E pressures his employees to borrow funds under P's participant loan program and then reloan the loan proceeds to E. F, unaware of E's activities, arranges and approves the loans. If the loans meet all the conditions of section 408(b)(1), such loans will be exempt under that section. However, E's activities would cause the entire transaction to be viewed as an indirect transfer of plan assets between P and E, who is a party in interest with respect to P, but not the participant borrowing from P. By coercing the employees to engage in loan transactions for its benefit, E has engaged in separate transactions that are not exempt under section 408(b)(1). Accordingly, E would be liable for the payment of excise taxes under section 4975 of the Code.

   Example (4): Assume the same facts as in Example 2, above, except that, in return for structuring and administering the loan program as indicated, E agrees to pay F an amount equal to 10 percent of the funds loaned under the program. Such a payment would result in a separate transaction not covered by section 408(b)(1). This transaction would be prohibited under section 406(b)(3) since F would be receiving consideration from a party in connection with a transaction involving plan assets.

   Example (5): F is a fiduciary with respect to plan P. D is a party in interest with respect to plan D. Section 406(a)(1)(B) of the Act would prohibit F from causing P to lend money to D. However, F enters into an agreement with Z, a plan participant, whereby F will cause P to make a participant loan to Z with the express understanding that Z will subsequently lend the loan proceeds to D. An examination of Z's credit standing indicates that he is not creditworthy and would not, under normal circumstances, receive a loan under the conditions established by the participant loan program. F's decision to approve the participant loan to Z on the basis of Z's prior agreement to lend the money to D violates the exclusive purposes requirements of sections 403(c) and 404(a). In effect, the entire transaction is viewed as an indirect transfer of plan assets between P and D, and not a loan to a participant exempt under section 408(b)(1). Z's lack of credit standing would also cause the transaction to fail under section 408(b)(1)(A) of the Act.

   Example (6): F is a fiduciary with respect to Plan P. Z is a plan participant. Z and D are both parties in interest with respect to P. F approves a participant loan to Z in accordance with the conditions established under the participant loan program. Upon receipt of the loan, Z intends to lend the money to D. If F has approved this loan solely upon consideration of those factors which would be considered in a normal commercial setting by an entity in the business of making comparable loans, Z's subsequent use of the loan proceeds will not affect the determination of whether loans under P's program satisfy the conditions of section 408(b)(1).

   Example (7): A is the trustee of a small individual account plan. D, the president of the plan sponsor, is also a participant in the plan. Pursuant to a participant loan program meeting the requirements of section 408(b)(1), D applies for a loan to be secured by a parcel of real property. D does not intent to repay the loan; rather, upon eventual default, he will permit the property to be foreclosed upon and transferred to the plan in discharge of his legal obligation to repay the loan. A, aware of D's intention, approves the loan. D fails to make two consecutive quarterly payments of principal and interest under the note evidencing the loan thereby placing the loan in default. The plan then acquires the real property upon foreclosure. Such facts and circumstances indicate that the payment of money from the plan to D was not a participant loan eligible for the relief afforded by section 408(b)(1). In effect, this transaction is a prohibited sale or exchange of property between a plan and a party in interest from the time D receives the money.

   Example (8): Plan P establishes a participant loan program. All loans are subject to the condition that the borrowed funds must be used to finance home purchases. Interest rates on the loans are the same as those charged by a local savings and loan association under similar circumstances. A loan by P to a participant to finance a home purchase would be subject to the relief provided by section 408(b)(1) provided that the conditions of 408(b)(1) are met. A participant loan program which is established to make loans for certain stated purposes (e.g., hardship, college tuition, home purchases, etc.) but which is not otherwise designed to benefit parties in interest (other than plan participants) would not, in itself, cause such program to be ineligible for the relief provided by section 408(b)(1). However, fiduciaries are cautioned that operation of a loan program with limitations may result in loans not being made available to all participants and beneficiaries on a reasonably equivalent basis.

2. Reasonably Equivalent Basis.
1. Loans will not be considered to have been made available to participants and beneficiaries on a reasonably equivalent basis unless:
1. Such loans are available to all plan participants and beneficiaries without regard to any individual's race, color, religion, sex, age or national origin:
2. In making such loans, consideration has been given only to those factors which would be considered in a normal commercial setting by an entity in the business of making similar types of loans. Such factors may include the applicant's creditworthiness and financial need; and
3. An evaluation of all relevant facts and circumstances indicates that, in actual practice, loans are not unreasonably withheld from any applicant.
2. A participant loan program will not fail the requirement of paragraph (b)(1) of this section or section 2550.408b-1(c) if the program establishes a minimum loan amount of up to $1,000, provided that the loans granted meet the requirements of section 2550.408b-1(f).
3. Examples. The following examples illustrate the provisions of section 2550.408b-1(b)(1):

   Example (1): T, a trustee of plan P, has exclusive discretion over the management and disposition of plan assets. T's duties include the administration of a participant loan program which meets the requirements of section 408(b)(1) of the Act. T receives a participant loan at a lower interest rate than the rate made available to other plan participants of similar financial condition or creditworthiness with similar security. The loan by P to T would not be covered by the relief provided by section 408(b)(1) because loans under P's program are not available to all plan participants on a reasonably equivalent basis.

   Example (2): Same facts as in example 1 except that T is a member of a committee of trustees responsible for approving participant loans. T pressures the committee to refuse loans to other qualified participants in order to assure that the assets allocated to the participants loan program would be available for a loan by P to T. The loan by P to T would not be covered by the relief provided by section 408(b)(1) since participant loans have not been made available to all participants and beneficiaries on a reasonably equivalent basis.

   Example (3): T is the trustee of plan P, which covers the employees of E. A, B and C are employees of E, participants in P, and friends of T. The documents governing P provide that T, in his discretion, may establish a participant loan program meeting certain specified criteria. T institutes such a program and tells A, B and C of his decision. Before T is able to notify P's other participants and beneficiaries of the loan program, A, B, and C file loan applications which, if approved, will use up substantially all of the funds set aside for the loan program. Approval of these applications by T would represent facts and circumstances showing that loans under P's program are not available to all participants and beneficiaries on a reasonably equivalent basis.

3. Highly Compensated Employees.
1. Loans will not be considered to be made available to highly compensated employees, officers or shareholders in an amount greater that the amount made available to other employees if, upon consideration of all relevant facts and circumstances, the program does not operate to exclude large numbers of plan participants from receiving loans under the program.
2. A participant loan program will not fail to meet the requirement in paragraph (c)(1), of this section, merely because the plan documents specifically governing such loans set forth either (i) a maximum dollar limitation, or (ii) a maximum percentage of vested accrued benefit which no loan may exceed.
3. If the second alternative in paragraph (c)(2) of this section (maximum percentage of vested accrued benefit) is chosen, a loan program will not fail to meet this requirement solely because maximum loan amounts will vary directly with the size of the participant's accrued benefit.
4. Examples. The following examples illustrate the provisions of section 2550.408b-1(c).

   Example (1): The documents governing plan P provide for the establishment of a participant loan program in which the amount of any loan under the program (when added to the outstanding balance of any other loans under the program to the same participant) does not exceed the lesser of (i) $50,000, or (ii) one-half of the present value of that participant's vested accrued benefit under the plan (but not less than $10,000). P's participant loan program does not fail to meet the requirement in section 408(b)(1)(B) of the Act, and would be covered by the relief provided by section 408(b)(1) if the other conditions of that section are met.

   Example (2): The documents governing plan T provide for the establishment of a participant loan program in which the minimum loan amount would be $25,000. The documents also require that the only security acceptable under the program would be the participant's vested accrued benefit. A, the plan fiduciary administering the loan program, finds that because of the restrictions in the plan documents only 20 percent of the plan participants, all of whom earn in excess of $75,000 a year, would meet the threshold qualifications for a loan. Most of these participants are high-level supervisors or corporate officers. Based on these facts, it appears that loans under the program would be made available to highly compensated employees in an amount greater than the amount made available to other employees. As a result, the loan program would fail to meet the requirements in section 408(b)(1)(B) of the Act and would not be covered by the relief provided in section 408(b)(1).

4. Specific Plan Provisions. For the purpose of section 408(b)(1) and this regulation, the Department will consider that participant loans granted or renewed at any time prior to the last day of the first plan year beginning on or after January 1, 1989, are made in accordance with specific provisions regarding such loans set forth in the plan if:
1. The plan provisions regarding such loans contain (at a minimum) an explicit authorization for the plan fiduciary responsible for investing plan assets to establish a participant loan program; and
2. For participant loans granted or renewed on or after the last day of the first plan year beginning on or after January 1, 1989, the participant loan program which is contained in the plan or in a written document forming part of the plan includes, but need not be limited to, the following:
1. The identify of the person or positions authorized to administer the participant loan program;
2. A procedure for applying for loans;
3. The basis on which loans will be approved or denied;
4. Limitations (if any) on the types and amount of loans offered;
5. The procedure under the program for determining a reasonable rate of interest;
6. The types of collateral which may secure a participant loan; and
7. The events constituting default and the steps that will be taken to preserve plan assets in the event of such default.

Example (1): Plan P authorizes the trustee to establish a participant loan program in accordance with section 408(b)1) of the Act. Pursuant to this explicit authority, the trustee establishes a written program which contains all of the information required by section 2550.408b-1(d)(2). Loans made pursuant to this authorization and the written loan program will not fail under section 408(b)(1)(C) of the Act merely because the specific provisions regarding such loans are contained in a separate document forming part of the plan. The specific provisions describing the loan program whether contained in the plan or in a written document forming part of a plan, do affect the rights and obligations of the participants and beneficiaries under the plan and, therefore, must in accordance with section 102(a)(1) of the Act, be disclosed in the plan's summary plan description.

5. Reasonable Rate of Interest. A loan will be considered to bear a reasonable rate of interest if such loan provides the plan with a return commensurate with the rates of charged by persons in the business of lending money for loans which would be made under similar circumstances.

   Example (1): Plan P makes a participant loan to A at the fixed interest rate of 8% for 5 years. The trustees, prior to making the loan, contacted two local banks to determine under what terms the banks would make a similar loan taking into account A's creditworthiness and the collateral offered. One bank would charge a variable rate of 10% adjusted monthly for a similar loan. The other bank would charge a fixed rate of 12% under similar circumstances. Under these facts, the loan to A would not bear a reasonable rate of interest because the loan did not provide P with a return commensurate with interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances. As a result, the loan would fail to meet the requirement of section 408(b)(1)(D) and would not be covered by the relief provided by section 408(b)(1) if the Act.

   Example (2): Pursuant to the provisions of plan P's participant loan program, T, the trustee of P, approves a loan to M, a participant and party in interest with respect to P. At the time of execution, the loan meets all of the requirements of section 408(b)(1) of the Act. The loan agreement provides that at the end of two years M must pay the remaining balance in full or the parties may renew for an additional two year period. At the end of the initial two year period, the parties agree to renew the loan for an additional two years. At the time of renewal, however, A fails to adjust the interest rate charged on the loan in order to reflect current economic conditions. As a result, the interest rate on the renewal fails to provide a "reasonable rate of interest" as required by section 408(b)(1)(D) of the Act. Under such circumstance, the loan would not be exempt under section 408(b)(1) of the Act from the time of renewal.

   Example (3): The documents governing plan P's participant loan program provide that loans must bear an interest rate no higher than the maximum interest rate permitted under State X's usury law. Pursuant to the loan program, P makes a participant loan to A, a plan participant, at a time when the interest rates charged by financial institutions in the community (not subject to the usury limit) for similar loans are higher than the usury limit. Under these circumstances, the loan would not bear a reasonable rate of interest because the loan does not provide P with a return commensurate with the interest rates charged by persons in the business of lending money under similar circumstances. In addition, participant loans that are artificially limited to the maximum usury ceiling then prevailing call into question the status of such loans under sections 403(c) and 404(a) where higher yielding comparable investment opportunities are available to the plan.

6. Adequate Security.
1. A loan will be considered to be adequately secured if the security posed for such loan is something in addition to and supporting a promise to pay, which is so pledged to the plan that it may be sold, foreclosed upon, or otherwise disposed of upon default of repayment of the loan, the value and liquidity of which security is such that it may reasonably be anticipated that loss of principal or interest will not result from the loan. The adequacy of such security will be determined in light of the type and amount of security which would be required in the case of an otherwise identical transaction in a normal commercial setting between unrelated parties on arms'-length terms. A participant's vested accrued benefit under a plan may be used as security for a participant loan to the extent of the plan's ability to satisfy the participant's outstanding obligation in the event of default.
2. For purposes of this paragraph -
1. no more than 50% of the present value of a participant's vested accrued benefit may be considered by a plan as security for the outstanding balance of all plan loans made to that participant;
2. a plan will be in compliance with paragraph (f)(2)(i) of this section if, with respect to any participant, it meets the provisions of paragraph (f)(2)(i) of this section immediately after the origination of each participant loan secured in whole in part by that participant's vested accrued benefit; and
3. any loan secured in whole or in part by a portion of a participant's vested accrued benefit must also meet the requirements of paragraph (f)(1) of this section.
3. Effective date. This section is effective for all participant loans granted or renewed after October 18, 1989, except with respect to paragraph (d)(2) of this section relating to specific plan provisions. Paragraph (d)(2) of this section is effective for participant loans granted or renewed on or after the last day of the first plan year beginning on or after January 1, 1989.

Department of Labor
Regulation 2550.408b-2
29 C.F.R. 2550.408b-2

Originally issued June 24, 1977 (42 FR 32390)

1. In General. Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (the Act) exempts from the prohibitions of section 406(a) of the Act payment by a plan to a party in interest, including a fiduciary, for office space or any service (or a combination of services) if (1) such office space or service is necessary for the establishment or operation of the plan (2) such office space or service is furnished under a contract or arrangement which is reasonable and (3) no more than reasonable compensation is paid for such office space or service. However, section 408(b)(2) does not contain an exemption from acts described in section 406(b)(1) of the Act (relating to fiduciaries dealing with the assets of plans in their own interest or for their own account), section 406(b)(2) of the Act (relating to fiduciaries in their individual or in any other capacity acting in any transaction involving the plan on behalf of a party (or representing a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries) or section 406(b)(3) of the Act (relating to fiduciaries receiving consideration for their own personal account from any party dealing with a plan in connection with a transaction involving the assets of the plan). Such acts are separate transactions not described in section 408(b)(2). See 2550.408b-2(e) and  (f) for guidance as to whether transactions relating to the furnishing of office space or services by fiduciaries to plans involve acts described in section 406(b)(1) of the Act. Section 408(b)(2) of the Act does not contain an exemption from other provisions of the Act, such as section 404, or other provisions of law which may impose requirements or restrictions relating to the transactions which are exempt under section 408(b)(2). See, for example, section 401 of the Internal Revenue Code of 1954. The provisions of section 408(b)(2) of the Act are further limited by section 408(d) of the Act (relating to transactions with owner-employees and related persons).
2. Necessary service. A service is necessary for the establishment or operation of a plan within the meaning of section 408(b)(2) of the Act and 2550.408b-2(a)(1) if the service is appropriate and helpful to the plan obtaining the service in carrying out the purposes for which the plan is established or maintained. A person providing such a service to a plan (or a person who is a party in interest solely by reason of a relationship to such a service provider described in section 3(14)(F), (G), (H), or (I) of the Act) may furnish goods which are necessary for the establishment or operation of the plan in the course of, and incidental to, the furnishing of such service to the plan.
3. Reasonable contract or arrangement. No contract or arrangement is reasonable within the meaning of section 408(b)(2) of the Act and 2550.408b-2(a)(2) if it does not permit termination by the plan without penalty to the plan on reasonably short notice under the circumstances to prevent the plan from becoming locked into an arrangement that has become disadvantageous. A long-term lease which may be terminated prior to its expiration (without penalty to the plan) on reasonably short notice under the circumstances is not generally an unreasonable arrangement merely because of its long term. A provision in a contract or other arrangement which reasonably compensates the service provider or lessor for loss upon early termination of the contract, arrangement or lease is not a penalty. For example, a minimal fee in a service contract which is charged to allow recoupment of reasonable start-up costs is not a penalty. Similarly, a provision in a lease for a termination fee that covers reasonably foreseeable expenses related to the vacancy and reletting of the office space upon early termination of the lease is not a penalty. Such a provision does not reasonably compensate for loss if it provides for payment in excess of actual loss or if it fails to require mitigation of damages.
4. Reasonable compensation. Section 408(b)(2) of the Act and 2550.408b-2(a)(3) permit a plan to pay a party in interest reasonable compensation for the provision of office space or services described in section 408(b)(2). Section 2550.408c-2 of these regulations contains provisions relating to what constitutes reasonable compensation for the provision of services.
5. Transactions with fiduciaries.
1. In General. If the furnishing of office space or a service involves an act described in section 406(b) of the Act (relating to acts involving conflicts of interest by fiduciaries), such an act constitutes a separate transaction which is not exempt under section 408(b)(2) of the Act. The prohibitions of section 406(b) supplement the other prohibitions of section 406(a) of the Act by imposing on parties in interest who are fiduciaries a duty of undivided loyalty to the plans for which they act. These prohibitions are imposed upon fiduciaries to deter them from exercising the authority, control, or responsibility which makes such persons fiduciaries when they have interests which may conflict with the interests of the plans for which they act. In such cases, the fiduciaries have interests in the transactions which may affect the exercise of their best judgment as fiduciaries. Thus, a fiduciary may not use the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary (or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary) to provide a service. Nor may a fiduciary use such authority, control, or responsibility to cause a plan to enter into a transaction involving plan assets whereby such fiduciary (or a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary) will receive consideration from a third party in connection with such transaction. A person in which a fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary includes, for example, a person who is a party in interest by reason of a relationship to such fiduciary described in section 3(14)(E), (F), (G), (H), or (I).
2. Transactions not described in Section 406(b)(1). A fiduciary does not engage in an act described in section 406(b)(1) of the Act if the fiduciary does not use any of the authority, control or responsibility which makes such person a fiduciary to cause a plan to pay additional fees for a service furnished by such fiduciary or to pay a fee for a service furnished by a person in which such fiduciary has an interest which may affect the exercise of such fiduciary's best judgment as a fiduciary. This may occur, for example, when one fiduciary is retained on behalf of a plan by a second fiduciary to provide a service for an additional fee. However, because the authority, control or responsibility which makes a person a fiduciary may be exercised "in effect" as well as in form, mere approval of the transaction by a second fiduciary does not mean that the first fiduciary has not used any of the authority, control or responsibility which makes such person a fiduciary to cause the plan to pay the first fiduciary an additional fee for a service. See paragraph (f) below.
3. Services without compensation. If a fiduciary provides services to a plan without the receipt of compensation or other consideration [other than reimbursement of direct expenses properly and actually incurred in the performance of such services within the meaning of 2550.408c-2(b)(3)], the provision of such services does not, in and of itself, constitute an act described in section 406(b) of the Act. The allowance of a deduction to an employer under section 162 or 12 of the Code for the expense incurred in furnishing office space or services to a plan established or maintained by such employer does not constitute compensation or other consideration.
6. Examples. The provisions of 2550.408b-2(e) may be illustrated by the following examples.

   Example (1). E, an employer whose employees are covered by plan P, is a fiduciary of P. I is a professional investment adviser in which E has no interest which may affect the exercise of E's best judgment as a fiduciary. E causes P to retain I to provide certain kinds of investment advisory services of a type which causes I to be a fiduciary of P under section 3(21)(A)(ii) of the Act. Thereafter, I proposes to perform for additional fees portfolio evaluation services in addition to the services currently provided. The provision of such services is arranged by I and approved on behalf of the plan by E. I has not engaged in an act described in section 406(b)(1) of the Act, because I did not use any of the authority, control or responsibility which makes I a fiduciary (the provision of investment advisory services) to cause the plan to pay I additional fees for the provision of the portfolio evaluation services. E has not engaged in an act which is described in section 406(b)(1). E, as the fiduciary who has the responsibility to be prudent in this selection and retention of I and the other investment advisers of the plan, has an interest in the purchase by the plan of portfolio evaluation services. However, such an interest is not an interest which may affect the exercise of E's best judgment as a fiduciary.

   Example (2). D, a trustee of plan P with discretion over the management and disposition of plan assets, relies on the advice of C, a consultant to P, as to the investment of plan assets, thereby making C a fiduciary of the plan. On January 1, 1978, C recommends to D that the plan purchase an insurance policy from U, an insurance company which is not a party in interest with respect to P. C thoroughly explains the reasons for the recommendation and makes a full disclosure concerning the fact that C will receive a commission from U upon the purchase of the policy by P. D considers the recommendation and approves the purchase of the policy by P. C receives a commission. Under such circumstances, C has engaged in an act described in section 406(b)(1) of the Act (as well as sections 406(b)(2) and (3) of the Act) because C is in fact exercising the authority, control or responsibility which makes C a fiduciary to cause the plan to purchase the policy. However, the transaction is exempt from the prohibited transaction provisions of section 406 of the Act, if the requirements of Prohibited Transaction Exemption 77-9 are met.

   Example (3). Assume the same facts as in Example (2) except that the nature of C's relationship with the plan is not such that C is a fiduciary of P. The purchase of the insurance policy does not involve an act described in section 406(b)(1) of the Act (or sections 406(b)(2) or (3) of the Act) because such sections only apply to acts by fiduciaries.

   Example (4). E, an employer whose employees are covered by plan P, is a fiduciary with respect to P. A, who is not a party in interest with respect to P, persuades E that the plan needs the services of a professional investment adviser and that A should be hired to provide the investment advice. Accordingly, E causes P to hire A to provide investment advice of the type which makes A a fiduciary under 2510.3-21(c)(1)(ii)(B). Prior to the expiration of A's first contract with P, A persuades E to cause P to renew A's contract with P to provide the same services for additional fees in view of the increased costs in providing such services. During the period of A's second contract, A provides additional investment advice services for which no additional charge is made. Prior to the expiration of A's second contract, A persuades E to cause P to renew his contract for additional fees in view of the additional services A is providing. A has not engaged in an act described in section 406(b)(1) of the Act, because A has not used any of the authority, control or responsibility which makes A a fiduciary (the provision of investment advice) to cause the plan to pay additional fees for A's services.

   Example (5). F, a trustee of plan P with discretion over the management and disposition of plan assets, retains C to provide administrative services to P of the type which makes C a fiduciary under section 3(21)(A)(iii). Thereafter, C retains F to provide for additional fees actuarial and various kinds of administrative services in addition to the services F is currently providing to P. Both F and C have engaged in an act described in section 406(b)(1) of the Act. F, regardless of any intent which he may have had at the time he retained C, has engaged in such an act because F has, in effect, exercised the authority, control or responsibility which makes F a fiduciary to cause the plan to pay F additional fees for the services. C, whose continued employment by P depends on F, has also engaged in such an act, because C has an interest in the transaction which might affect the exercise of C's best judgment as a fiduciary. As a result, C has dealt with plan assets in his own interest under section 406(b)(1).

   Example (6). F, a fiduciary of plan P with discretionary authority respecting the management of P, retains S, the son of F, to provide for a fee various kinds of administrative services necessary for the operation of the plan. F has engaged in an act described in section 406(b)(1) of the Act because S is a person in whom F has an interest which may affect the exercise of F's best judgment as a fiduciary. Such act is not exempt under section 408(b)(2) of the Act irrespective of whether the provision of the services by S is exempt.

   Example (7). T, one of the trustees of plan P, is president of bank B. The bank proposes to provide administrative services to P for a fee. T physically absents himself from all consideration of B's proposal and does not otherwise exercise any of the authority, control or responsibility which makes T a fiduciary to cause the plan to retain B. The other trustees decide to retain B. T has not engaged in an act described in section 406(b)(1) of the Act. Further, the other trustees have not engaged in an act described in section 406(b)(1) merely because T is on the board of trustees of P. This fact alone would not make them have an interest in the transaction which might affect the exercise of their best judgment as fiduciaries.

Internal Revenue Code
Revenue Ruling 59-60

As Modified by 65-193

In valuing the stock of closely held corporations, or the stock of corporations where market quotations are not available, all other available financial data, as well as all relevant factors affecting the fair market value must be considered for estate tax and gift tax purposes. No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such stock. However, the general approach, methods, and factors which must be considered in valuing such securities are outlined.

Revenue Ruling 54-77, C.B. 1954-1, 187, superseded.

Section 1. Purpose.

The purpose of this Revenue Ruling is to outline and review in general the approach, methods and factors to be considered in valuing shares of the capital stock of closely held corporations for estate tax and gift tax purposes. The methods discussed herein will apply likewise to the valuation of corporate stocks on which market quotations are either unavailable or are of such scarcity that they do not reflect the fair market value.

Sec. 2. Background and Dfinitions

1. All valuations must be made in accordance with the applicable provisions of the Internal Revenue Code of 1954 and the Federal Estate Tax and Gift Tax Regulations. Sections 2031(a), 2032 and 2512(a) of the 1954 Code (sections 811 and 1005 of the 1939 Code) require that the property to be included in the gross estate, or made the subject of a gift, shall be taxed on the basis of the value of the property at the time of death of the decedent, the alternate date if so elected, or the date of gift.
2. Section 20.2031-1(b) of the Estate Tax Regulations (section 81.10 of the Estate Tax Regulations 105) and section 25.2512-1 of the Gift Tax Regulations (section 86.19 of Gift Tax Regulations 108) define fair market value, in effect, as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.
3. Closely held corporations are those corporations the shares of which are owned by a relatively limited number of stockholders. Often the entire stock issue is held by one family. The result of this situation is that little, if any, trading is the shares takes place. There is, therefore, no established market for the stock and such sales as occur at irregular intervals seldom reflect all of the elements of a representative transaction as defined by the term "fair market value."

Sec. 3. Approach to Valuation

1. A determination of fair market value, being a question of fact, will depend upon the circumstances in each case. No formula can be devised that will be generally applicable to the multitude of different valuation issues arising in estate and gift tax cases. Often, an appraiser will find wide differences of opinion as to the fair market value of a particular stock. In resolving such differences, he should maintain a reasonable attitude in recognition of the fact that valuation is not an exact science. A sound valuation will be based upon all the-relevant facts, but the elements of common sense, informed judgment and reasonableness must enter into the process of weighing those facts and determining their aggregate significance.
2. The fair market value of specific shares of stock will vary as general economic conditions change from "normal" to "boom" or "depression," that is, according to the degree of optimism or pessimism with which the investing public regards the future at the required date of appraisal. Uncertainty as to the stability or continuity of the future income from a property decreases its value by increasing the risk of loss of earnings and value in the future. The value of shares of stock of a company with very uncertain future prospects is highly speculative. The appraiser must exercise his judgment as to the degree of risk attaching to the business of the corporation which issued the stock, but that judgment must be related to all of the other factors affecting value.
3. Valuation of securities is, in essence, a prophesy as to the future and must be based on facts available at the required date of appraisal. As a generalization, the prices of stocks which are traded in volume in a free and active market by informed persons best reflect the consensus of the investing public as to what the future holds for the corporations and industries represented. When a stock is closely held, is traded infrequently, or is traded in an erratic market, some other measure of value must be used. In many instances, the next best measure may be found in the prices at which the stocks of companies engaged in the same or a similar line of business are selling in a free and open market.

Sec. 4. Factors to Consider

1. It is advisable to emphasize that in the valuation of the stock of closely held corporations or the stock of corporations where market quotations are either lacking or too scarce to be recognized, all available financial data, as well as all relevant factors affecting the fair market value, should be considered. The following factors, although not all-inclusive are fundamental and require careful analysis in each case:
1. The economic outlook in general and the condition and outlook of the specific industry in particular.
2. The book value of the stock and the financial condition of the business.
3. The earning capacity of the company.
4. The dividend-paying capacity.
5. Whether or not the enterprise has goodwill or other intangible value.
6. Sales of the stock and the size of the block of stock to be valued.
7. The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.
2. The following is a brief discussion of each of the foregoing factors:
1. The history of a corporate enterprise will show its past stability or instability, its growth or lack of growth, the diversity or lack of diversity of its operations, and other facts needed to form an opinion of the degree of risk involved in the business. For an enterprise which changed its form of organization but carried on the same or closely similar operations of its predecessor, the history of the former enterprise should be considered. The detail to be considered should increase with approach to the required date of appraisal, since recent events are of greatest help in predicting the future; but a study of gross and net income, and of dividends covering a long prior period, is highly desirable. The history to be studied should include, but need not be limited to, the nature of the business, its products or services, its operating and investment assets, capital structure, plant facilities, sales records and management, all of which should be considered as of the date of the appraisal, with due regard for recent significant changes. Events of the past that are unlikely to recur in the future should be discounted, since value has a close relation to future expectancy.
2. A sound appraisal of a closely held stock must consider current and prospective economic conditions as of the date of appraisal, both in the national economy and in the industry or industries with which the corporation is allied. It is important to know that the company is more or less successful than its competitors in the same industry, or that it is maintaining a stable position with respect to competitors. Equal or even greater significance may attach to the ability of the industry with which the company is allied to compete with other industries. Prospective competition which has not been a factor in prior years should be given careful attention. For example, high profits due to the novelty of its product and the lack of competition often lead to increasing competition. The public's appraisal of the future prospects of competitive industries or of competitors within an industry may be indicated by price trends in the markets for commodities and for securities. The loss of the manager of a so-called "one-man" business may have a depressing effect upon the value of the stock of such business, particularly if there is a lack of trained personnel capable of succeeding to the management of the enterprise. In valuing the stock of this type of business, therefore, the effect of the loss of the manager on the future expectancy of the business, and the absence of management- succession potentialities are pertinent factors to be taken into consideration. On the other hand, there may be factors which offset, in whole or in part, the loss of the manager's services. For instance, the nature of the business and of its assets may be such that they will not be impaired by the loss of the manager. Furthermore, the loss may be adequately covered by life insurance, or competent management might be employed on the basis of the consideration paid for the former manager's services. These, or other offsetting factors, if found to exist, should be carefully weighed against the loss of the manager's services in valuing the stock of the enterprise.
3. Balance sheets should be obtained, preferably in the form of comparative annual statements for two or more years immediately preceding the date of appraisal, together with a balance sheet at the end of the month preceding that date, if corporate accounting will permit. Any balance sheet descriptions that are not self-explanatory, and balance sheet items comprehending diverse assets or liabilities, should be clarified in essential detail by supporting supplemental schedules. These statements usually will disclose to the appraiser (1) liquid position (ratio of current assets to current liabilities); (2) gross and net book value of principal classes of fixed assets; (3) working capital; (4) long-term indebtedness; (5) capital structure; and (6) net worth. Consideration also should be given to any assets not essential to the operation of the business, such as investments in securities, real estate, etc. In general, such nonoperating assets will command a lower rate of return than do the operating assets, although in exceptional cases the reverse may be true. In computing the book value per share of stock, assets of the investment type should be revalued on the basis of their market price and the book value adjusted accordingly. Comparison of the company's balance sheets over several years may reveal, among other facts, such developments as the acquisition of additional production facilities or subsidiary companies, improvement in financial position, and details as to recapitalizations and other changes in the capital structure of the corporation. If the corporation has more than one class of stock outstanding, the charter or certificate of incorporation should be examined to ascertain the explicit rights and privileges of the various stock issues including: (1) voting powers, (2) preference as to dividends, and (3) preference as to assets in the event of liquidation.
4. Detailed profit-and-loss statements should be obtained and considered for a representative period immediately prior to the required date of appraisal, preferably five or more years. Such statements should show:
1. Gross income by principal items;
2. Principal deductions from gross income including major prior items of operating expenses, interest and other expense on each item of long-term debt, depreciation and depletion if such deductions are made, officers' salaries, in total if they appear to be reasonable or in detail if they seem to be excessive, contributions (whether or not deductible for tax purposes) that the nature of its business and its community position require the corporation to make, and taxes by principal items, including income and excess profits taxes;
3. Net income available for dividends;
4. Rates and amounts of dividends paid on each class of stock;
5. Remaining amount carried to surplus; and
6. Adjustments to, and reconciliation with, surplus as stated on the balance sheet.

With profit and loss statements of this character available, the appraiser should be able to separate recurrent from nonrecurrent items of income and expense, to distinguish between operating income and investment income, and to ascertain whether or not any line of business in which the company is engaged is operated consistently at a loss and might be abandoned with benefit to the company. The percentage of earnings retained for business expansion should be noted when dividend-paying capacity is considered. Potential future income is a major factor in many valuations of closely-held stocks, and all information concerning past income which will be helpful in predicting the future should be secured. Prior earnings records usually are the most reliable guide as to the future expectancy, but resort to arbitrary five-or-ten-year averages without regard to current trends or future prospects will not produce a realistic valuation. If, for instance, a record of progressively increasing or decreasing net income is found, then greater weight may be accorded the most recent years' profits in estimating earning power. It will be helpful, in judging risk and the extent to which a business is a marginal operator, to consider deductions from income and net income in terms of percentage of sales. Major categories of cost and expense to be so analyzed include the consumption of raw materials and supplies in the case of manufacturers, processors and fabricators; the cost of purchased merchandise in the case of merchants; utility services; insurance; taxes; depletion or depreciation; and interest.

5. Primary consideration should be given to the dividend-paying capacity of the company rather than to dividends actually paid in the past. Recognition must be given to the necessity of retaining a reasonable portion of profits in a company to meet competition. Dividend-paying capacity is a factor that must be considered in an appraisal, but dividends actually paid in the past may not have any relation to dividend-paying capacity. Specifically, the dividends paid by a closely held family company may be measured by the income needs of the stockholders or by their desire to avoid taxes on dividend receipts, instead of by the ability of the company to pay dividends. Where an actual or effective controlling interest in a corporation is to be valued, the dividend factor is not a material element, since the payment of such dividends is discretionary with the controlling stockholders. The individual or group in control can substitute salaries and bonuses for dividends, thus reducing net income and understating the dividend-paying capacity of the company. It follows, therefore, that dividends are less reliable criteria of fair market value than other applicable factors.
6. In the final analysis, goodwill is based upon earning capacity. The presence of goodwill and its value, therefore, rests upon the excess of net earnings over and above a fair return on the net tangible assets. While the element of goodwill may be based primarily on earnings, such factors as the prestige and renown of the business, the ownership of a trade or brand name, and a record of successful operation over a prolonged period in a particular locality, also may furnish support for the inclusion of intangible value. In some instances it may not be possible to make a separate appraisal of the tangible and intangible assets of the business. The enterprise has a value as an entity. Whatever intangible value there is, which is supportable by the facts, may be measured by the amount by which the appraised value of the tangible assets exceeds the net book value of such assets.
7. Sales of stock of a closely held corporation should be carefully investigated to determine whether they represent transactions at arm's length. Forced or distress sales do not ordinarily reflect fair market value nor do isolated sales in small amounts necessarily control as the measure of value. This is especially true in the valuation of a controlling interest in a corporation. Since, in the case of closely held stocks, no prevailing market prices are available, there is no basis for making an adjustment for blockage. It follows, therefore, that such stocks should be valued upon a consideration of all the evidence affecting the fair market value. The size of the block of stock itself is a relevant factor to be considered. Although it is true that a minority interest in an unlisted corporation's stock is more difficult to sell than a similar block of listed stock, it is equally true that control of a corporation, either actual or in effect, representing as it does an added element of value, may justify a higher value for a specific block of stock.
8. Section 2031(b) of the Code states, in effect, that in valuing unlisted securities the value of stock or securities of corporations engaged in the same or a similar line of business which are listed on an exchange should be taken into consideration along with all other factors. An important consideration is that the corporations to be used for comparisons have capital stocks which are actively traded by the public. In accordance with section 2031(b) of the Code, stocks listed on an exchange are to be considered first. However, if sufficient comparable companies whose stocks are listed on an exchange cannot be found, other comparable companies which have stocks actively traded in on the over-the-counter market also may be used. The essential factor is that whether the stocks are sold on an exchange or over-the-counter there is evidence of an active, free public market for the stock as of the valuation date. In selecting corporations for comparative purposes, care should be taken to use only comparable companies. Although the only restrictive requirement as to comparable corporations specified in the statute is that their lines of business be the same or similar, yet it is obvious that consideration must be given to other relevant factors in order that the most valid comparison possible will be obtained. For illustration, a corporation having one or more issues of preferred stock, bonds or debentures in addition to its common stock should not be considered to be directly comparable to one having only common stock outstanding. In like manner, a company with a declining business and decreasing markets is not comparable to one with a record of current progress and market expansion.