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Employee Benefits Security Administration

DOL > EBSA > Publications > Exemption Procedures

Exemption Procedures Under Federal Pension Law

Note: The publication is currently being updated to reflect  the final rule amending the procedures for filing and processing prohibited transaction exemptions under ERISA.

Introduction

This booklet provides information about the exemption provisions under Section 408(a) of Title I of the Employee Retirement Income Security Act (ERISA). The booklet is intended to provide employers, plan administrators and employee benefit practitioners with the basic requirements and procedures needed to apply for exemptions from the prohibited transaction rules of ERISA . Included are discussions of the statutory criteria for granting an exemption under the law; description of the procedures for requesting an exemption from the U. S. Department of Labor; examples of exemption requests; and where to go for assistance with exemption application requests.

The Employee Retirement Income Security Act of 1974 (ERISA) prohibits certain classes of transactions between employee benefit plans and certain persons defined as parties in interest. The law does, however, contain a number of statutory exemptions from the prohibited transaction rules.

In addition, ERISA gives the Department of Labor authority to grant administrative exemptions from the prohibited transaction provisions if the department first finds that the exemption is:

• Administratively feasible
• In the interest of the plan and of its participants and beneficiaries
• Protective of the rights of participants
• Beneficiaries of the plan

Most of the transactions prohibited by ERISA are likewise prohibited under the Internal Revenue Code. The Code also contains exemptive authority similar to that found under ERISA. By virtue of Reorganization Plan No. 4 of 1978, the authority of the Treasury Department to grant exemptions for prohibited transactions under the Code was largely transferred to the department.

On August 10, 1990, the department adopted a final exemption procedure detailing the steps to be taken by applicants in applying for an exemption and the steps normally taken by the department in considering the applications. With adoption of those procedures, the department believes the process for reviewing exemption applications can be expedited.

The department has gained 20 years of experience with the processing of large numbers of applications for exemptions from ERISA's prohibited transaction provisions. Through that experience with a wide variety of transactions, a number of transactions have emerged which have similar characteristics. This booklet describes the factors the department ordinarily requires in routine exemption requests.

Questions or requests for advice about an exemption or application should be put in writing and directed to the:

U.S. Department of Labor
Employee Benefits Security Administration
Office of Exemption Determinations
200 Constitution Avenue, NW, Suite N-5649
Washington, DC 20210

Statutory Exemptions

The ERISA law contains several specific exemptions whereby plans may engage in transactions otherwise prohibited by law. In order to use these statutory exemptions, parties must meet the conditions of the applicable exemption.

ERISA generally provides statutory exemptions for, among other things, loans to participants, the provision of services necessary for the operation of a plan for no more than reasonable compensation, loans to employee stock ownership plans, and deposits in certain financial institutions regulated by other State or federal agencies.

Administrative Exemptions

Under ERISA, the department may grant administrative exemptions to an individual or a class of individuals allowing them to engage in a variety of transactions involving employee benefit plans.

The department notes that each application it receives must be considered on its own merits. Therefore, the fact that an application contains all of the information described herein does not, in itself, guarantee that an exemption will be granted. Further, the transactions described herein are intended to represent the ordinary case; many applications will involve factors so unique in nature that they must be given special consideration before the department can make a determination on the case. Nonetheless, this brochure is intended to assist applicants by describing the information that is typically required in order to obtain an exemption for a number of common transactions.

Class Exemptions

Class exemptions are administrative blanket exemptions which permit persons to engage in similar transactions with plans in accordance with the conditions of the class exemption without asking for an individual exemption. For information see section 2570.34 of the exemption procedures in the Appendix.

For example, class exemptions have been granted covering:

• Transfers of individual life insurance contracts between plans and their participants (PTE's 92-5 and 92-6)
• Sales of customer notes to plans by their sponsoring employers (PTE 85-68)
• Interest-free loans made to plans by their sponsoring employers (PTE 80-26)

Individual Exemptions

Applications for individual exemptions must, at a minimum, include the following information:

• Description of the transaction
• Description of relevant safeguards and conditions
• Percentage of assets involved in the exemption transaction
• Names of persons with investment discretion
• Extent of plan assets already invested in loans to, property leased by, and securities issued by parties in interest involved in the transaction
• Copies of all contracts, agreements, instruments and relevant portions of plan documents and trust agreements bearing on the exemption transaction
• Information regarding plan participation in pooled funds when the exemption transaction involves such funds
• Declaration, under penalty of perjury by the applicant, attesting to the truth of representations made in such exemption submissions
• Statement of consent by third-party experts acknowledging that their statements are being submitted to the department as part of an exemption application

Hypothetical Examples of Common Transactions

Sale of Property by Plan to Party-in-Interest or Disqualified Person for Cash

C Corporation sponsors a retirement plan for its employees. The Plan owns an asset, such as a parcel of real property, which it wishes to sell to C Corporation. These are the factors which the department ordinarily would consider and that should be addressed by applicants:

• The Plan pays no commissions or other expenses in connection with the sale
• If there is no generally recognized market for the property, the fair market value of the property must be determined by a Qualified Independent Appraiser and reflected in a Qualified Appraisal Report. If there is a generally recognized market for the property, the fair market value of the property is the value objectively determined by reference to the price on such market on the date of the transaction (e.g., the closing price on the New York Stock Exchange)
• If the party in interest engaging in the transaction (or a related entity) caused the Plan to invest in the property, then the Plan should receive no less than the greater of its cost of acquiring and holding the property (e.g., original purchase price, insurance, real estate taxes, etc.) or the current fair market value of the property at the time of the sale; provided, however, that a purchase price in excess of such fair market value may not be required if:
  • The applicant provides sufficient documentation that the Plan's original investment was consistent with ERISA's fiduciary standards
  • The sale is made from a one-participant Plan, an IRA not subject to Title I of ERISA, or an individual account or accounts in the Plan and the affected participant voluntarily consents to the sale.
• In order to complete our consideration of the application, we need to know the background history of the property: from whom was it acquired (party in interest?), date of acquisition, and price paid. Information must also be furnished concerning whether the property has been used by or leased to anyone, including parties in interest, since its acquisition by the Plan. We also need to know why the Plan proposes to sell the property, and whether it has made any efforts to sell the property to an unrelated third party.
• Where the sale of property eliminates an on-going prohibited transaction (such as a prohibited lease to a party in interest), we will not grant an exemption unless the prohibited transaction is corrected (within the meaning of section 502(i) of ERISA and section 4975 of the Internal Revenue Code and the regulations there under), and the party in interest pays the appropriate excise taxes.
• If the sale of the property will result in a contribution to the Plan under the Code, the applicant must represent that such contribution will not result in any violation of the requirements for tax-qualification (or, if there would be a violation, that it will be remedied without any adverse consequences for the Plan).

Loan by Plan to Party-in-Interest or Disqualified Person

The Huge Corporation, Inc. would like to borrow $100,000 from its pension plan. These are the factors which the department ordinarily would consider and that should be addressed by the applicants:

• At the time the loan is made, the sum of the principal amount of the loan, plus the amount⁽¹⁾ of all other Plan loans and leases to such party in interest (or a related entity), does not exceed 25% of the aggregate fair market value of the Plan's (or individually-directed account's) assets. The aggregate fair market value is to be determined as of the Plan's most recent valuation date (no more than 12 months before the transaction). This 25% limitation is a continuing requirement that must be met throughout the term of the loan.
• The exemption request must include a statement that the terms of the loan (interest rate, repayment schedule, duration of the loan, etc.) are not less favorable to the Plan than those obtainable in an arm's-length transaction between unrelated parties. The exemption request must also set forth the basis for this determination. To assure comparability with arm's-length loans, a statement from a third party in the business of lending money under similar circumstances may be required.
• The loan is secured by collateral having a fair market value, at the time the loan is made, which is at least 150% of the principal amount of the loan if the collateral is real property, and at least 200% of the principal amount of the loan if the collateral is personal property or accounts receivable.
• The collateral securing the loan has been appraised by a Qualified Independent Appraiser who has issued a Qualified Appraisal Report.
• The property securing the loan is insured against casualty loss in an amount not less than the amount of the outstanding principal of the loan (plus accrued but unpaid interest), and the Plan is a named beneficiary of the policy.
• The Plan's security interest must be perfected in the manner required by applicable state law. For example, if recording is required for perfection, the security agreement must be recorded with the appropriate government officials.
• Unless the loan is from an individually-directed account or a non-Title I IRA, a Qualified Independent Fiduciary who has the experience necessary to effectively review and monitor loans of this type:
  • Has reviewed the terms of the loan and compared the terms with the terms for similar loans between unrelated parties
  • Has examined the Plan's overall investment portfolio, considered the Plan's liquidity and diversification requirements, in light of the proposed transaction, and determined whether the proposed transaction complies with the Plan's investment objectives and policies
  • Has stated that he/she believes that the proposed transaction is in the best interests of the Plan and its participants and beneficiaries and has explained in detail the reasons for such opinion
  • Has agreed to monitor the loan and the conditions of the exemption on behalf of the Plan throughout the term of the loan, taking all appropriate actions to safeguard the interests of the Plan and has stated that he/she has been or will be given the authority to so act.

Sale of Property to Plan with a Simultaneous Lease-Back to the Party-in-Interest

The Great Big Corporation, Inc. sponsors a pension plan for its employees. The Corporation wishes to sell a parcel of land to the Plan, which then will be leased back to the Corporation. These are the factors that the department ordinarily would consider and that should be addressed by the applicants:

• At the time that the sale and leaseback transactions are effectuated, the sum of the fair market value of the property, plus the amount⁽²⁾ of all other Plan loans and leases to such party in interest (or a related entity), does not exceed 25% of the aggregate fair market value of the Plan's assets. The aggregate fair market value is to be determined as of the Plan's most recent valuation date (no more than 12 months before the transaction). This 25% limitation is a continuing requirement which must be met throughout the term of the lease.
• Both the fair market value of the property acquired by the Plan and the fair market rental value of the property to be leased to the party in interest have been appraised by a Qualified Independent Appraiser and reflected in a Qualified Appraisal Report.
• The exemption request must include a representation that the terms of the lease (e.g., rent, duration, allocation of expenses, etc.) are not less favorable to the Plan than those obtainable in an arm's-length transaction between unrelated parties. The exemption request must also set forth the basis for this determination.
• A Qualified Independent Fiduciary who has the experience necessary to effectively review and monitor transactions of this type:
  • Has reviewed the terms of the purchase by the Plan and of the lease and compared them with the terms of similar transactions involving unrelated parties
  • Has examined the Plan's overall investment portfolio, considered the Plan's liquidity and diversification requirements in light of the proposed transactions, and determined whether the proposed transactions comply with the Plan's investment objectives and policies
  • Has stated that he/she believes the proposed transactions are in the best interests of the Plan and its participants and beneficiaries and has explained in detail the reasons for such opinion
  • Has agreed to monitor the lease on behalf of the Plan throughout the term of the lease, taking all appropriate actions to safeguard the interests of the Plan and has stated that he/she has been or will be given the authority to so act.
• The lease must provide for periodic adjustments (no less frequently than every year) to the rents payable there under, so that the rents will be no less than the fair market rental value of the leased premises at the time of the adjustment. Generally, the initial rent will be the floor rental during the term of the lease, even if the fair market rental value has decreased. The adjustment may be made by using the consumer price index, or by retaining a Qualified Independent Appraiser satisfactory to the Qualified Independent Fiduciary. The Qualified Independent Fiduciary will determine which method is appropriate for making such adjustment. (The method need not be the same for all periods.)

Receipt of Stock Rights by Plan from Sponsor⁽³⁾

The Power Corporation, Inc. wishes to raise capital by issuing, to all holders of its stock, Rights which will entitle such stockholders to acquire additional shares. The Power Corporation's profit sharing plan currently owns shares of stock of the Corporation, and, thus, is entitled to acquire these Rights. These are the factors that the department ordinarily would consider and that should be addressed by the applicants:

• The Plan's acquisition of the stock rights results from a business decision on behalf of the Plan's sponsor (or its affiliate) in its capacity as issuer of the securities, and not in its capacity as Plan fiduciary.
• The Plan is treated in the same manner as any other holder of the affected class of securities.
• If the Plan provides for individually-directed investment of the assets in each participant's account, all decisions with respect to the Plan's acquisition, holding and control of the rights are made by the individual Plan participants.
• With respect to Plans other than those providing for individually-directed accounts, a Qualified Independent Fiduciary who is qualified to review and monitor transactions of this type:
  • Has examined the Plan's overall investment portfolio, considered the Plan's liquidity and diversification requirements, and considered the Plan's investment objectives and policies in light of the receipt of the stock rights
  • Will exercise the authority for all decisions regarding the acquisition, holding and control of the rights, including the decision as to whether the Plan should exercise or sell the rights acquired through the offering.
• If the receipt of employer securities upon exercise of the stock rights would otherwise violate section 407 of ERISA, the exemption will include additional relief for the receipt and holding of such securities provided that the securities are disposed of by the Plan within an agreed-upon period of time from their receipt by the Plan or another prohibited transaction exemption is obtained. (There is a general prohibition on the acquisition of additional employer securities by a defined benefit plan or welfare plan if the plan already holds qualifying employer securities up to the limit imposed under ERISA.)

Lease of Property by Plan to a Party-in-Interest or Disqualified Person

The Gray Company sponsors a defined benefit plan. The Company would like to lease a parcel of land owned by the Plan to use as a parking lot. These are the factors the department ordinarily would consider and that should be addressed by the applicants:

• At the time the lease is entered into, the sum of the fair market value of the leased property, plus the amount⁽⁴⁾ of all other Plan loans and leases to such party in interest (or a related entity) does not exceed 25% of the aggregate fair market value of the Plan's assets, such aggregate fair market value to be determined as of the Plan's most recent valuation date (but no more than 12 months before the transaction). This 25% limitation is a continuing requirement that must be met throughout the term of the lease.
• The fair market rental value of the property to be leased to the party in interest has been appraised by a Qualified Independent Appraiser and reflected in a Qualified Appraisal Report.
• The exemption request must include a representation that the terms of the lease (rent, duration, allocation of expenses, etc.) are not less favorable to the Plan than those obtainable in an arm's-length transaction between unrelated parties. The exemption request must also set forth the basis for this determination (e.g., comparable to the terms of similar leases between unrelated parties).
• A Qualified Independent Fiduciary who has the experience necessary to effectively review and monitor leases of this type:
  • Has reviewed the terms of the lease and compared them with terms of similar leases between unrelated parties
  • Has examined the Plan's overall investment portfolio, considered the Plan's liquidity and diversification requirements in light of the proposed transaction, and determined whether the proposed transaction complies with the Plan's investment objectives and policies
  • Has stated that he/she believes the proposed transaction is in the best interests of the Plan and its participants and beneficiaries and has explained in detail the reason for such opinion
  • Has agreed to monitor the lease and the conditions of the exemption on behalf of the Plan throughout the term of the lease, taking all appropriate actions to safeguard the interests of the Plan and has stated that he/she has been or will be given the authority to so act.
• The lease must provide for periodic adjustments (no less frequently than every year) to the rents payable there under, so that the rents will be no less than the fair market rental value of the leased premises at the time of the adjustment. Generally, the initial rent will be the floor rental during the term of the lease, even if the fair market rental value has decreased. The adjustment may be made by using the consumer price index, or by retaining a Qualified Independent Appraiser satisfactory to the Qualified Independent Fiduciary. The Qualified Independent Fiduciary will determine which method is appropriate for making such adjustment. (The method need not be the same for all periods).

Glossary

Qualified Independent Fiduciary - A Qualified Independent Fiduciary is any individual or entity which is qualified (i.e., knowledgeable as to its duties and responsibilities as an ERISA fiduciary and knowledgeable as to the subject transaction) to serve in that capacity and which is independent of the party in interest engaging in the transaction and its affiliates.

Thus, for example, the independent fiduciary cannot be an affiliate of the person engaging in the transaction under the exemption.

The Qualified Independent Fiduciary must represent in writing its qualifications to serve in that capacity, and must also detail any relationship it may have with the party in interest engaging in the transaction with the Plan, or its affiliates, in order to determine whether such Fiduciary may be subject to improper influence by a party to the transaction other than the Plan, or whether such Fiduciary has an interest which may conflict with the interests of the Plan for which it acts. In addition, the Qualified Independent Fiduciary must represent that it understands its ERISA duties and responsibilities in acting as a fiduciary with respect to the Plan.

The general rule for individual exemption requests involving a financial institution serving as the Qualified Independent Fiduciary is that less than 1% of the financial institution's deposits and less than 1% of its outstanding loans (both in dollar amounts) are attributable to the deposits and loans of the party in interest and its affiliates.

If an individual is to serve as the Qualified Independent Fiduciary, less than 1% of his/her annual income (generally measured on the basis of the prior year's income) may be derived from the party in interest and its affiliates. Fixed, non-discretionary retirement income would not be included for purposes of this test.

If a firm is to serve as the Qualified Independent Fiduciary, less than 1% of that firm's annual income (generally measured on the basis of the prior year's income) may come from business derived from the party in interest and its affiliates.⁽⁵⁾

Qualified Independent Appraiser - A Qualified Independent Appraiser is any individual or entity qualified to serve in that capacity and which is independent of the party in interest engaging in the transaction and its affiliates.

The Qualified Independent Appraiser must represent in writing its qualifications to serve in that capacity, and must also detail any relationship it may have with the party in interest engaging in the transaction with the Plan, or its affiliates, that could enable the party in interest or its affiliates to control or materially influence the actions of the Appraiser, or vice versa.

If the property in question is real property, the appraiser should be an M.A.I., or a member of a similar sanctioning body.

If the property is an asset other than real property, the appraiser must demonstrate that he/she has experience in valuing assets of that type.

If an individual is to serve as the Qualified Independent Appraiser, less than 1% of his/her annual income (generally measured on the basis of the prior year's income, but including amounts received for performing the appraisal) may be derived from the party in interest and its affiliates. Fixed, non-discretionary retirement income would not be included for purposes of this test.

If an entity is to serve as the Qualified Independent Appraiser, less than 1% of that firm's annual income (generally measured on the basis of the prior year's income, but including amounts received for performing the appraisal) may come from business derived from the party in interest and its affiliates.

Qualified Appraisal Report - The appraisal must be in writing and set forth the methods used in determining the fair market value and the reasons used for the valuation in light of those methods.

The appraisal should be no more than one year old; if an appraisal report older than one year is submitted, there must be a written update by the Qualified Independent Appraiser reaffirming the prior appraisal as of the date of the transaction.

The document submitted by the Qualified Independent Appraiser should describe the methodology used to determine the fair market value of the property, and explain why such methodology best represented the fair market value of the property.

The appraisal must take into account any special benefit that the party in interest (or its affiliate) may derive from the property such as the fact that it owns an adjacent parcel of property or would gain voting control over a company.

Footnotes

1. In the case of a loan, such amount will be the outstanding principal amount. In the case of a lease, such amount will be the fair market value of the leased property determined by a Qualified Independent Appraiser and reflected in a Qualified Appraisal Report.
2. In the case of a loan, such amount will be the outstanding principal amount. In the case of a lease, such amount will be the fair market value of the leased property determined by a Qualified Independent Appraiser and reflected in a Qualified Appraisal Report.
3. This prohibited transaction involves stock rights, which are not considered qualifying employer securities under ERISA. In these cases, the stock rights are issued to the Plan by reason of its being a holder of stock of the employer, which is a qualifying employer security. When a business decision is made to issue stock rights to all shareholders of the employer, the Plan's acquisition and holding of such rights would be prohibited in the absence of an administrative exemption.
4. In the case of a loan, such amount will be the outstanding principal amount. In the case of a lease, such amount will be the fair market value of the leased property determined by a Qualified Independent Appraiser and reflected in a Qualified Appraisal Report.
5. While in certain cases the department has permitted an independent fiduciary to receive as much as 5% of its annual income from the party in interest and its affiliates, these cases have involved unusual circumstances, and the general standard of independence remains a 1% test.