Prohibited Transaction Class Exemptions for Multiemployer Plans: PTE 76-1, Parts A and C and PTE 77-10

fi 16,602
Prohibited Transaction Class Exemption 76-1,March 25, 1976

(41 FR 12740).

Multiple employer plans: Delinquent employer contributions: Conetruction
1oane.--Certain a r r a n g e m e n t # are permitted between multiple e m p l o y e r plane
a n d contributing e m p l o y o r r i n v o l v i n g delinquent e m p l o y e r c o n t r i b u t i o n s .
U n d e r thie claes exemptSon, proviaion m a y be made for (1)exteneion o f time f o r
m a k i n g employer eantrfbutiono, (2) acceptance of less t h a n the f i l l a m o u n t o f a
contribution owed by an exmployer in u t l f a c t i o n of the employer's contribut i o n to p a y t h e entire .mount, a n d (3) terminating efforta to collect contributions to a n employer beaame s u c h oontributionr a m uncollectable, i n whole or
in p a r t ' T h e exemption a1.o a l l o w s construction loanm to be m a d e b y a multiple
e m p l o y e r plan to a p a r t i c i p a t i n g employer if the decbion to m a k e t h e loan i s
m a d e on behalf o f the p l a n by a bank, insurance company, or loan aseociation.
Annotation referen-:
See "Finding Limb."
There have been identified to the DepartLabor-Management Scrricer Administ r a t i o n [Prohibited Transaction Exemption ment and the Service several classes of such
transactions. Three of these classes of trans76-11
actions are the subject of the class exemp
tions set forth herein.
EMPLOYEE BENEFIT PLANS
The Department and the Service have deC l a s s Exemptions From P r o h i b i t i o n s
termined that class exemptions are nRespecting Certain T r a n s a c t i o n s in
sary in the case of multiemployer plans and
Which Multiemployer a n d M u l t i p l e
other collectively bargained multiple ernEmployer Plane A r e Involved
ployer plane because such plans frequently
in operationally similar transactions
On June 2, 1975, notice was published in engage
the FEDREG(40FR 23798) that having common characteristics which are
the Department of Labor (the Department) distinctive for multiemployer and other
and the Internal Revenue Service (the Ser- multiple employer plans generally notwithvice) had under consideration proposals to standing that a variety of industries with a
exempt certain
of transactions in multiplicity of parties and differing relationwhich multiemployer plans (- defined in s h i p are involved. Class exemptions are al=
3(37) of the Employee Retirement justifiable for classes of transactions engaged
Income Security ~~t of 1 ~ (the
4
and in by multiemployer plans and other mllecsection 414(f) of the Internal Revenue Code tively bargained multiple employer plans beof 1954 (the Code) are involved from the C8UBe S U C ~plam are jointly administered
restrictions of sections M a ) and 407(a) of within the meaning of section 302(c~5)of
1947
the A d and the taxes imposed by section the Lettor Management Relations k,
(29
USC
.
1@3cN5)).
For
PurPoses
of
these
4975(a) and (b) of the Code, by reason of
exemptione and except as otherwise
section 4975(c)(l)(A) through (D) of the
specified
below* m u l t i e m ~ l o ~ eplans
r
and
Code, pursuant to section 408(a) of the Act
and &ion 4975(cM2) of the
The ex- multiple employer plans will hereinafter be
emptions were proposed in accordance with cOI1ectively referred as multiple employer
plans, aa that term is defined in Sec. Il of the
the procedures set forth in ERISA
dure 7 5 1 (40
18471, ril 28, 1975) and exemption relating to delinquent employer
&v. Roc. 75-26. 1 9 7 5 1 9 B.722, and aII m n t n h t m *
m of the
reinterested persons were invited to submit lating to construction loans, and Sef. 111 of
comments on the proposed exemptions. The the exemption relating to office Wee, adDepartment and the Servi,
have given minbtrahveaervices. and goods.
careful consideration to t h e comments
General Inforriuxtion. The attention of inwhich were received and have determined terested pereons is directed to the following:
' 0 grant the
exemptions,
modi(1)m e fact that a transaction is the
fied, as set forth below.
ject of an exemption granted under section
As indicated in the notice of June 2. 1975. W a ) of the Act and section 4975(c) of the
the Department and the Service have been Code does not relieve a fiduciary or other
informed that multiemployer plane engage party in interest o r disqualified p e m with
in numerous transactim which are estah resgect to a plan to which the exemption is
lbhed and customary in nature, widespread a plicable fmrn certain other provisions of
e Act and the Code. including any prohih
in usage. and reasonable in their terms,but
which may be prohibited transactions ited transaction pmvisione to which the exwithin the meaning of sections 406 and emption does not apply and t h e general
107(a)of the Act and &ion 497S(c)(l) of the fiduciary responsibility p r o v i s i o ~of meetion
404 of the Act which, among other tbinge,
Code.
P

me.

&

9 16,602

01994, Comfnww Cluring Houw, Im.

require a fiduciary to dlschage his duties
respecting the plan solely in the interests of
the plan's participants and beneficiaries and
in a prudent fashion in accordance with subsection (aH1MB)of section 404 of t h e Act; nor
does it affect the requirement of section
401(a) of the Code that a
must operate
for the exclusive benefit o the employees of
the employer maintaining the plan and their
beneficiaries.
(2) T h e exemptions contained herein do
not extend to transadions prohibited under
section 406(b) of t h e Act and section
4975(cXlXE)and (F)of t h e Code.
(3) T h e exemptions set forth herein are
supplemental to, and not in derogation of.
any other provisions of the Act and the
Code, including statutory exemptions and
transitional rules. Furthermore. the fact
that a transaction is the subject of an exemption is not dispositive of whether the transaction would have been a prohibited
transaction in the absence of such exemption
or, though it would have been a prohibited
tradsaction, is exempt by operation of a Statutory exemption or a transitional rule.
(4) Each class exemption contained herein
is applicable to a particular tramadion only
if the transaction sati&~ea t h e conditions
specified for the class in which it falls.
(5) T h e three class exemptions set forth
herein are available by their terms not only
for multiernployer plans, but also for other
multiple employer plans which would be
multiemployer plans under section 3(37) of
the Act and section 414(f) of t h e Code, except that the amount of contributions made
under the plan for a plan year by each employer making such contributions is not less
than 50 percent of t h e aggregate amount of
contributions made under the plan for that
year by all employers making such contribution (as required by section 3(37XAXiii) of
the Act and section 414(fKl)(Q of the Code),
or benefits are not payable with respect to
each participant without regard to the cessation of contributions by t h e employer who
had employed the participant (as required
by section 3(37XAXiv) of t h e Act and section
414tfM 1ID) of the Code). Thus,for purposes
of these class exemptions. a plan will be
deemed to be a multiple employer plan so
long as more than one employer is required
to contribute to the plan (section 3(37MA)(i)
of the Act and section 41YfKlXA) of the
Code) and the plan is maintained pursuant
to one or more collective-bargaining agreements between an employee organlvltion or
employee representatives and more than one
employer (section 3(37XAXii) of t h e Act and
section 414tfMIMB) of t h e Code). This modi-

p"

Penslon Plan Gulde

fication is based on information brought to
the attention of t h e Department and the
Service in several written comments that
such plans engage in transactions which are
similar to thase engaged in by multiemployer plans and should be treated in a similar fashion.
(6)In accordance with mxtion M a ) of the
Act and section 497S(c)(2) of the Code. and
based upon t h e entire record, including the
written comments mbnitted in response to
the notice of June 2. 1975. the Department
and the Service make t h e following findings
and determinations
(i) The class exemptions set forth herein
are administratively feasible;
(ii) They are in t h e interests of plans and
of their participants and beneficiaries; and
(iij) They are protective of the rights of
part~cipantsand beneficiaries of plans.
A. Delinquent employer contributions. .4n
employer participating in a multiple employer plan (a "participating employer'') IS
generally obligated under t h e terms of the
plan or of a collective bargaining agreement
to make periodic contributions to the plan.
Multiple employer plans are often confronted with the problem of delinquency in
participating employer contributions since
such plans, by their very nature. have a multiplicity of participating employers of varying size and financial strength, and at times
one or more participating employers may be
delinquent in making such contributions. In
the course of their collection efforts, multiple employer plane ftequentry delay or extend the time for payment of contributions
pursuant to understandings. arrangements,
or agreements in circumstances where ~t appears that collection of t h e full amount due
the plan would be jeopardized were the plan
to attempt to force immediate full payment.
In the notice of June 2, 1975, the Department and the Service stated that a question
had been raised as to t h e extent to which
such delinquencies, delays, or extensions
constitute prohibited transactions under sections 406 and 407(a) of the Act and section
4975(cXl)of the Code and that the class exemption relating t o delinquent employer
contributions was proposed in order to elirninate the uncertainty that may exist In this
area and the adverse effects to plans and
their participants and beneficiaries that
may be c a d by such uncertainty.
After considering t h e comments which
have been submitted, it is the view of the
Department and t h e Senrice that generally
neither the failure of a participating employer in a multiple employer plan to make a

16,602

contribution to the plan when t h e c o n t n i tion is due nor the faiiure of the plan to
collect such a delinqumt &bution
constitutes a prohibited transaction undar settione 406 and 407ia) of the Act and section
497qcM1) of t h e Code. However, if the plan
ia not making syatematie. ~ n a b l and
e diligent effort8 to collect,&liaquent amtributiona, or the failurn to a o l k t m the d t of
an ammgement, ammnmt o r understand'
in& exp& or impliai, betrsrsn tb. plnn and
the delmauent ern~lbyer,arh fail- to dlect a dc&quent &pi&
contribution may
be deemed to be a prohibited tramadon-

Act and aection M5(eM1) d the Code in

failing to call& delinquent contributions
Under certain cifiumatances m u l t ~ e employer p L a rmy find it -n
d i n the
~ntereatsof the plan and of its participants
and beneficiariep to permit employers in a p
propriate s i t u s b o ~to pay contnbutione after the date on wbach such c a a t n i t i o n s are
due, often in periodic inshllinents, m the
only meam by which it can reatmnably be
excepted that the plan ultimatdy will receive payments of such contributions, in
light of the poor financial condition of the
delinquent employer and the
that
plan would incur in contrrmmg to atNwertKelesa, because m c i p a t i n g em- the
ployers have little. if any, control over the tempt fo collect t h e ernployer'a entire oontricontribution collection efforta d e by bution immediately.
In addition, many of the l&rs of complans, paragraph (b) of the aemption now
provides that participating employers ahall ment have a s ~ ~ +that basd on the poor
not be subject ta the civil penalty which may financial conditron of some delinquent embe assessed under section 502(i) of the A d or ployers and>he expenses of collecting delinthe taxes imposed by section 4975(a) and (b) quent contnhtions from such employers, it
of the Code for prohibited tramactions in- is often found to be in the interests of multivolving delinquent employer contributions, ple employer plans and of their participants
except in the case of arrangements, agree and beneficiaries for the plan to discontinue
ments or understandings which are clearly colledion efforts with respect to such emunreasonable. Thus,with this limited excep- ployers and either to enter into an agreetion only plan fiduciaries will be liable for ment for the payment of lee8 than the full
prohibited transactions involving delin- amount of the contribution due in satisfacquent employer contributions when such tion of the entire amount of the employer's
transactions are not exempt under the class contribution or to write off such employer's
delinquent contribut~onas ~ l l e c t a b l e .
exemption provided herein.
Stkh arrangements, agreements or underThe written comments which have been
standings
whereby a multiple empioyer plan
submitted indicate that many multiple e m
ployer plans have adopted written proce- agrees to the late or delayed payment of
dures for t h e orderly collection of employer contributions, or payment of less
delinquent employer contributions which than the full amount of such contribution,
involve reasonable, diligent and systemat= or thoee situations in which a plan writes off
methods for the review of employer contri- an employer contribution ae uncollectable,
bution accounts by means of, for example, may constitute prohibited transactions
reports and questionnaires from employers under sections 406 and 407(a) of the Act and
and field audits, and which involve reasdha- section 497$(cK1) of the Cixk. '
ble, diligent and systematic methods for the
Nevertheless, based on the information
collection of delinquent employer contribu- furnished and t h e representations made in
tions by means of, far example, t h e a u b the written comments, the Department and
rnatic, contradual imposition on delinquent the Service find that it is administratively
employers of charges for Liquidated damages, feasible, in the interests of p l m and of their
interest, or plan expenses for collection of participants and beneficiaries, and protecdelinquent contributions, the placing of e m tive of the rights of participants and benefiployer contributions in escrow accounts ciaries of plans to grant the exemption set
prior to the date such c o n t n i t i o n s are due, forth in section I below with resped to such
the purchase of bonds by employers to guar- classes of transactions.
antee the payment of contributions to a
As noted in paragraph (5)of the General
plan, or the institution of various forms of
Information
section of the Preamble, this
appropriate legal action.
class exemption covers not only multiemPlans which do not establish and irnple- ployer plans, but also other multiple emment collection procedures which are rea- ployer plans. In this regad, an employer
sonable, diligent and systematic may be association which is the spolrsor'of an emfound to be engaging in prohibited transac- ployee benefit plan which is not collectively
tions under &ions 406 and 407(a) of the bargained, but which has a significant num01994, Commercr Gkukrg House, Inc.

ber of unaffiliated employem contrihting to
ti) Prior to entering into uch arrange
the plan; submitted a letter of comment stat- ment, agmme& or understadin& the p h n
ing that ita plan ha6 many of t h e same hm mde, or hm c a w to be made, a h
problem regarding delinquent employer ret#nable, di-t
and systemticefforts M
contribtrtions that am e n a n m by
~ d-are rpproprkte tmder tbe ciramaLances to
tiemployer plam and..thareforei -that gM c d l e c t d amkributioq
dass exemption for tmmadxm
(ii)
The
tern of such arrangaenf atpeshoul
vo
l
a
delinquent employer amtriWiom
. in
m
t
'
o
r
mder&ndiw
are rst forth m wntbe mnde applicable to plans rhich are m t
collectively bargained. However, b e a w e ing a n d a r e reamnsble under t h e
bared o n - t hWihaod of colplans which an not collectmdy bargained
a n not jointly administered .within t h e lecting sneh contribution or tbu approrimate
eqepm that would be inanred if the plan
meaning of d o n 302(cM5) of the Labor cont~mred
to attempt to colkct arh contriManagement RehtiOIM Act, ' lSI7, the cir- bution
t
h
r
h means other than such araunatanms and d e g u a d inwived in the rangement,w gagreement
or understanding;
collection'of. delinquent amp1
contribu.
.
tionsby-euchplansrnay be
erent frc~m and
those involved in collectively bargained,
(iii) Such anangernent, agreement or unjointly administered multiple employer derstanding is entered into or renewed by
plans. The letter of comment did not contain the pran in connection with tbe collection of
sufficient information regarding this ques- such contribution and for the exclusive purtion and, therefore, the Department and the poee of..facilitating. the collection of such
Service are not able at this time to grant a contribution.
class exemption covering plans which are
(2) Any arrangement, agreement or undernot collectivelv bareained. The anencies are. standing
between a multiple employer plan
however,
"to consider ~pplications d,
any
employer
of w h employees
for an exemption for transactions involving are covered by suchany
plan, whereby the plan
the collection of delinquent employer contrito accept less than *.entire amount
butions by employee benefit plans which are agrees
of
a contribution owed by such employer in
not collectively bargained.
satisfaction of such employer's obligation to
It should be noted that even if a transac- pay the entire amount of
contribution.
tion is not in violation of, or ia exempt from, if the following conditions are Rd:
the prohibited transaction provisions, any
(i) Prior to ,entering into mch arrangefailure to make a contribution may result in ment,
agreement or understanding, the plan
a failure to meet the minimum funding stan- has
made,
has caused to be made, such
dards contained in Part 3 of Title I of the reasonable, or
diligent and qdematic efforts as
Act and, w h e e rerevant. &ion 412 of the are appropriate under the.cireurnstances to
Code, and may 'subject the delinquent employer t o a tax under section 4971 of the collect such contribution initsentirety; and
(ii) The terms of such e e r n e n t , agreeCode. Nothing in thia class exemption shall
be construed to exempt participating em- ment or understanding are set forth in writployers from the funding requirements of ing and a r e reasonable under t h e
circumstances based on the likelihood of colthe Act or t h e Code.
lecting such contribution or the approximate
Exemptiori. Accordingly, the following ex- expenses
would be incurred if the plan
emption is,granted under the authority of continuedthat
to attempt to collect such contrisection 408(a) of t h e Act and section bution through means other than such ar4975(c)(2) of the Code and in accordance rangement, agreement or understanding.
with the procedures set forth in ERISA Pro(3) A determination by a multiple emcedure 75-1 (40 FR 18471, April 28, 1975)
ployer plan to consider a contribution due
and Rev. Proc. 75-26,1975-1 C. B. 722:
the plan from any employer any of whose
Sec. I. Effective January 1,1975employee are covered by the plan as uncol(a) The restrictions of sections 406(a) and lectable, in whole or in part, and to termi407(a) of the Act shall not apply to:
nate effortsto collect such contribution, if
(1) Any arrangement, agreement or under- the following condition5 are met:
standing between a multiple employer plan
(i) Prior to making such determination,
and any employer any of w h m employees the plan has made, or haacaused to be made,
are covered by such plan, whereby the time such reasonable, diligent' and systematic efis extended for the making of a contribution forts as are appropriate under the circumby such employer to such plan, if the follow- stances to collect such contribution or any
ing conditions are met:
part thereat and

C~T

(ii)Such determination m aet forth in writ- clam exemption for construction loam on
ing and is reamnable and appropriate baaed June 2, 1975. and the letten of comment
on the likelihood of collecting apcb awtrih- submitted with respect to the propoaal did
tion or the approximate e q m a a t that would not pmlide a
besi for the grantbe incurred if the plan cabtinned to attempt ing of a clam exemption for permrment,mortto collect such contribution or aey part ga& loam Accordingly. the exernptioa as
proooeed. and an aanted herein. relatea only
thereof.
io
ionstntctioaa ham. It doea nut apply ti
(b) If an employer any of atma a n p l q e e s permanent
mortgage loma between multiple
are covered by a multiple employer pian anployer
plane
and participating employers,
fails to make a required coatxibution to arh
or to commitments from such plans to parplan when such contribution idue, or em- ticipating
employers to provide mortgage
ters into an arrangement, agmement or unde~.standing with such plan desaibwt in loam to pemm who purchase.improved
real property from participating employers.
puagraph (aM1) or (aM2) with respet tn the As
indicated in the notice of June 2. 1976.
payment of such contribution. or if theplan
makes a determination described in para- however. the Department .and the Service
are prepared - to consider any a p p l i c a b
graph (aM3), such employer shall nqt be s u b which
may hereafte~be made to the ageniect to the civil penalty which may be cies
for
exemptions with respect to other
assessed under section 502(i) of the Act, or to
t h e taxes imposed by section 4975(a) and:(b) clasees of transactions involving multiple
of' t h e Code. bv reason of section employer plans;
4975(cXlXA)through (D) of the Code, exg?pt
A question was raised in several Ietters of
in the case of an arrangement, agreement or comment with respect to whether a loan by
understanding described in paragraph (aM1) a multiple employer plan to an owner of real
or (aM2). where the terms thereof are clearly property who is not a party in interest or
unreasonable under the circumstances based disqualified person with respect to such plan
on the likelihood of collecting such contribu- would constitute a prohibited transaction
tion or the approximate expenses that would under section M a ) of the Act and &ion
be incurred if the plan continued to attempt .4975(cMlXA) through (D) of the Code if the
to colIect such contribution through means loan is for the purpose of enabling such prop
other than such arrangement, agreement or erty owner to make construction improveunderstanding.
,ments on such real property and the
Sec. II. Definitions. For purposes of atx- property owner contracts with an employer
tion I above. the term "multiple employer participating in the plan to make such conplan" shall mean an employee benefit plan struction improvements. It is the view of the
which is a multiemployer plan within the Department and the Service, based on the
meaning of section 3(37) of the Act and scc- principles enunciated in ERISA IB 75-2 and
tion 4140 of the Code. or a plan -which TIR-1346 (February 6. 1975), that such loan
meets all of the requirements of such eec- .would not constitute a prohibited transactions other than the requirements of eeher tion under section M a ) of the Act and secor both (a)section 3(37XAXiii)of the Act and tion 4975(cMlMA) through (D) of the Code;
section 414f)(lXC) of the Code. and (b)sec- although, of course, such a loan may give
tion 3(37HA)(iv) of the Act and section rise to a prohibited transaction if, for example. the loan is made in the context of an
4lNfJlXD) of the Code.
arrangement for a specific participating emR Construction loans. Multiple employer ployer to furnish a portion of the construcplans, including those covering employeee.in &on. and such employer has a controHing
t h e building and construction tradea, have influence over the plan's decision to make
traditjonally invested a percentage of their the loan.
asgets' in construction loans as an appropriOne of the conditions contained in the proate inirestment in the interests of such plans
and of their participants and beneficiaries posed exemption was that the decision by a
and as a means of providing work opportuni- multiple employer plan to make a constructies for plan participants. Several written tion loan to a participating employer must
comments urged that the class exemption be made by a bank or insurance company
for such loans be extended to include perma- which meets the requirements of section
nent mortgage loans by a multiple employer 3(38) of the Act, pursuant to its sole discreplan to employers any of whose employees tionary authority or control with respect to
are awered by the plan ("participating em- t h e management or disposition of the plan
plopm"). However, the information that assets used to make such loan, in accordance
was provided to the Department and the with the standards established by such instiService as the basis for the proposal of the tution for making similar loans from its own
01994, C o m m Clearing House, Inc.

funds, subject only to broad investment
guidelines, if any, establhhcd by the truetcer
of the plan. It was suggested in the written
eomrnents that this condition should be expanded to permit the internal investment
soramittee of a plan to make such decisions
for the plan, and to permit sapinlZs and loan
associations subject to regulationby the F d
era1 Home Loan Bank Board to make arh
decisions for a plan, under similar circum
stances aa those set forth with respect to
banks and insurance companies. As regards
the &ion
with respect to internal pIan
investment' committees, t h e letters of comment and the information made available to
the Department and the Service have not
furnished sufficient supportive data to permit the Department and t h e Service to
grant an expanded exemption, particularly
with respect to the safeguards which should
be imposed for the inclusion of internal investmeiit committees in order to protect the
rights and interests of plans and plan participants and beneficiaries. Accordingly, the exemption has not been modified to extend
decision-making authority to internal plan
investment committees. As noted above.
however, the Department and the Service
are prepared to consider any application
which may hereafter be made to the agencies for exemptions with respect to classes of
transactions involving multiple employer
plans other than those transactions covered
by the dass exemptions granted herein.
With regard to federally chartered savings
and loan arrsociations, which are subject to
extensive regulation by the Federal Home
Loan Bank Board with respect to their real
estate lending practices (see 12 CFR Part
545). the exemption has been extended to
permit federal savings and loan associations
to make plan decisions for construction
loans to participating employers under conditions*dmilar to those imposed on banks
and insurance companies.
The retroactive exemption set forth in section II below is effective with respect to all
construction loans made by multiple e m
ployer plans ta participating employers for
which a multiple employer plan was committed under a binding contract in effect
prior to June 3, 1975. T h e Department and
the Service note that transactions which do
not meet the conditions of this class exemp
tion may nevertheless meet the conditions
)
2003(cX2XA) of the
of sedions 4 1 4 ~ x 1 and
Act which provide an exemption from the
prohibited transaction provisions of sections
406 and 407fa) of the Act and section 4975 of
the Code until June 30, 1984 for a loan of
money ar other extension of credit between

a plan and a party in interest or diaqualifi
person under a binding contract in effect on

July 1.1974 (or p u ~ u a n to
t renewals of such
a contract), if such loan o r other extension of
credit remains a t least as favorable to the
plan as an ann's-length tranaadion with an
unrelated party would be, and if the examtion of the contract, the making ofthe lonn.
or the extemioa of credit wan mt, a t tbe
time of such execution, making, or exterr
sion, a prohl-ted
transaction (within tbe
meaning of section 803(b)of tbe Code or tbe
eorraponding provisions of prior La).
Other modifmbona intended to clarify the
terms and conditions of the exemption have
also been made.
.In Addition, many of the comments urged
that the proposed exemption be extended to
loam other than thoee which are related to
construction. T h e Department and' the Service do not consider it appropriate to extend
the wpe of this exemption to such loam on
the basis of the comments received; howwer. they will consider applications for exemptions for loans common t o other
industries upon receipt of such applications.
Exemption. Accordingly, the following exemption is granted under the authority of
section 408(a) of t h e Act and section
4975(cX2) of the Code and in accordance
with the ~roceduresset forth in ERISA Procedure 7 5 1 (40 FR 18471, April 28, 1975)
and Rev. Proc. 7526,19751 C. B. 722:
Sec. I. Prospective. Effective June 3,1975,
the restrictions of sections W a ) and 407(a)
uf the Act and the taxes imposed by section
(975(a) and (b)of the Code, by reason of
section 4975(cMIMA) through (D) of the
Code, shall net apply to a loan made by a
multiple employer plan to a participating
employer, provided that the following mnditions are met:
(a) The loan is a construction loan.
@I) The dkeision to make the loan is made
on behalf ef the plan by a bank or insurance
wmpany which meets the requirements of
section 338)of the Act, or by a savings and
Loan association subject to regulation by the
FederaI Home Loan Bank Board, pursuant
to such bank's, insurance company's, or savings and loan association's sole discretionary
authority or control with respect to the
management or disposition of the plan assets
used to make such loan (as defined in section
III(b)).
(c) Neither the plan, the participating employer to whom the loan is made, nor the
employee organization any of whose rnembers are covered by the plan has the power
to exercise a controlling influence over the

7 16,602

-

management or policies of nrh hank, insuran- company or aavin[p and loan d a tion.
(d) The bank i M m company, or savings and 1-tion
aMnmonly
c o ~ r u h o n 1on
and conditions f b m its own funds
(e) Srach 1-tisftba qualifications
established by tbe bank, +~JMX
compy,
or savin(~s
baa
for m h n g
such loan fmm its own tonda
(0W o n the 1nude. the prtkipting employer to whom the loan ie made and
the'plan have received a written mmmitment running to both the plan cts cpnstruction lender and such emplnyer for
permanent financing from a person other
than the plan to enable full repayment of
such loanupon completion of construction.
(g) Immediately after the making of such
roan. (1) the at3.regate amount of investments (including loans) of the plan in such
participating employer does not exceed 10
percent of the fair market value of the aasets
of the plan, and (2) the aggregate amount of
investments of the plan in loans to 4 1 participating employers does not exceed 35 percent of the fair market value of the =ts of
the plan.
(h) The pran maintains or
to be
maintained for a period of six yearn from the
date of such transaction such records as are
n m r y to enable the persons described in
paragraph (i)of this section to determine
whether the conditions of t h b exemption
have been met. except that (1) a prohibited
transaction will not be deemed to have occurred if. due to ci-cee
beyond the
control of the plan fiduciaries, sllch records
are lost or destroyed prior to the end of such
six-~earperiod. and (2)
employer Shall
not be subject to the civil penalty which may
be assessed under section 5Wi) dfthe Ad, or
to the taxes imposed by section 4975(a) and
(b) of the Code. if such rew* are not maintained, or are not available for examination
as required by paragraph (i)
below.
(i) Notwithstanding anything to the contrary in subsections (aX2) and (b) of section
504 of the A d , the records referred to in
paragraph (h) are unconditionally avaiIable
a t their customary location for examination
during normal business hours by duly authorized employees of (1)the Department of
Labor, (2) the Internal Revenue Service, (3)
plan participants and beneficiaries, (4) any
employer of plan participants and beneficiaries, and (5) any employee organization
any of whose members are covered by the
- .
plan.

-*
*

-

7 16,602

Sec III. R e M i v e . Effective from January 1,1975, the r e s t r i c t i o ~of sction -a)
and 407(a) of the Act and the trues imposed
by sxtion 4975(a) and Cb) of
Code. by
m n of d o n 4976(cMlMA)throueh (D)
of
the Code, shall not a ly a
made by a
multiple employer p
to a participating
employer, pmvided that tbe fdloring d i tiom are m
(a) Such loan was made aa or before June
2. 1975, or waa made after nrh date pusuant to a written mmm-tment to make such
,1
w h i h rs.binding on
p4non such
date.
(b) At the time such loan
made, it was
not a prohibited transaction- within the
meaning of section 503(b)of tbe Code or the
corresponding provisions of prior law.

%

-

(c) Except for paragraphs (fJ, and (g), such
loan meets the requirements of section I of
this exemption. T h e requirements of
paragraphs (h) and (i) of &n
1 of this
exemption shall be deemed met if met on or
before May 23,1976.
Ikfinitions.
For P U T
Set.
tiom I and *above-employer planw
(a) me
shall mean an employee benefit plan which
is a multiemployer plan within the meaning
of section 3(37)of the Act and seetion 414(f)
of the Code. or a plan which meeta all of the
requirements of such sections other than the
requirements of either or both (1)&ion
3(37)(A)(iii) of t h e Act and section
414(f)(lXC) of the Code. and (2) section
3(37)(A)(iv) of t h e Act and section
414(fKlXD)of the Code.
(b)~h~
6asolediscretionary authority
ar control with resped to t h e management
or disposition of the plan, -ta
a
to
make such
means that the
insurance company, or =vingS and 1tion has sufficient authority or control with
to enabk i c without
respect to such
its appmval
reporting to the plan,
or comments. or permitting it a veto, other
than as may be necessary to comply with the
conditions of this exemption. to entertain a
proposal to make such loan, negotiate its
terms, and make such loan. The fact that
the bank, insurance company, or saving and
loan association performs these functions
under broad investment guidelines from the
plan, which may include instructions to the
bank, insurance company. or savings and
loan association generally to muse a part of
the plan's assets to be invested in a certain
type of loan, shall not prevent the bank,
insurance company, or saving and loan asso91994, Commerce Clearing Houre,Inc.

ciation from being d d e r e d to have such
"eole discretionary authority o r oontrd."
(C] An,affiliate of any
cipating emplayer shall be treated as t e same entity as
participating employer. For this
a cormration or -enhi.
s an
irte of ai incorpora&d o r &MX)
participating e m p ~ o y nY i t i a rnemEmX
controlled ~ X I D which includes such participating em- loier, and a controlled-group
shall be de lned in t h e same manner aa the
term "controlled group of
~ t ie O
Code,
m "
exdefined in section 1563(a) of
cept t h a t "50 percent" shall be -ted
for '730 percent" wherever the latter percentage appears in such section, and except
that in the case of a partnership, t h e term
"corporation" shall be read as including a
partnership, and the term "stock" shall be
read as including a capital or profita interest
in a partnership.
C. Office space. administrative services
and goods. Multiple employer plans frequently share office space and administrative services, and the costs associated with
such office space and services, with parties
in interest and disqualified persons (as defined in section 3(14) of the Act and &ion
4975(e)(2)of the Code), such as an employee
organization any of whose members are covered by the plan (a "participatin~employee
organiiation"), an employer a n y of wh-ke
employees are covered by the plan (a "participating employer"), or an association of such
employers (a "participating employer association"). Multiple employer plans also frequently
s h a r e office space and
administrative services with other multiple
employer plans which may be parties in in- .
terest or disqualified persons with respect to
such plan by reason of section 3(14) of the
Act and section 4975(eX2) of the Code.
In this regard, two or more 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. While the presence of trustees or fiduciaries who are common to more than one multiple employer
plan does not make such plans parties in
interest or disqualified persons to one another, a multiple employer plan may be a
party in interest or a disqualified person
with respect to another multiple employer
plan (a) under section 3(14)(B)of the Act and
section 4975(eXZ)(B) of the Code if i t provides services to such other multiple employer plan, (b) under section 3(14)(H) of the
Act and section 4975(eX2NH) of the Code if
i t holds, directly or indirectly, 10 percent or
more of the shares of a person described,

e"

!-

Pension Plan Gulde

other multiple emwith mqm% to
ployer plan. in s u b p a m p h (B), (0,
(D).
(E),or (G) of a3(14) of the Act or sub
p a g r a p h (C), D
L (E).or (G)of section
4975(eX2) of the Code. or (c) under section
3(14XI) of the Act and section 4975(eW2WD of
the Code if it is a I0 percent or more (in
capital or profits) partner or joint ventwer
of a person deacri'bed. with respect to sucb
employer lan, in subpara(DL (El, or ( of a d i o n 3(14)
graph
Other (B),(
of the Act of subparagra h (C).(DL (E),or
(Qof section 4975Ml)ofthe code.
One [sic] many occasions, office space and
administrative services are furnished to a
multiple employer plan by a participating
employee organization. employer, or employer association. or by another multiple
employer plan which is a party in interest or
disqualified person with respect to the plan.
The furnishing of ofice space o r administrative semces ib a plan by such parties in
interest or disqualified persow will generally be exempt from the prohl%ited transaction provisions of section M a ) of the Act
and from the taxes imposed by section
4975(a) and (b) of the code by reason of
wction 4975(c)(I)(A) through (D) of t h e
Code, if the conditions of section 408(bM2)of
the Act and section 4975(d3(2) of the Code
are met.
In some instances, a multiple employer
plan will secure office space and adminbtrative servicesjointly with a participating employee organization, employer, or employer
association, or with anothet multiple employer plan which is a party m interest or
disqirahfied person with respect to the plan,
and will share the costs of securing such
office space or administrative services on a
pro rata basis with respect to each party's
use of such space or services. Such joint use
of office space o r administrative services
does not constitute a prohibited transaction
under either eection M a ) of the Act or
section 4975(c)(l)(A) through (D)of the
Code.
On occasion, however,. a multiple employer plan will independently aecure for its
own use office space or administrative services, and will furnish part of such office
space or administrative services to a participating employee organization,'employer, or
employer association, or to another multiple
employer plan which is a party in interest or
disqualified person with respect to the plan.
Such transactions are prohibited- transactions under section 406(ak;of the Act and
section 4975(cMIWA)through.(D)of the Code
for which no statutory eremption is p r e
vided. However, the c1ase"exemption set

mdt8?

8

forth below is intended to provide an exemp
tion for such tmmctiona under conditions
designed to protect the interests of the plans
involved and of their participants and beneficiaries.
The c l w exemption p r o p d on June 2,
1975 for such
-OM rejafed only
the p-on
b T b of ofice
or
ahinidrative
a @"pstinr
employee organization, partidpating employer, or participdting employer association, or to a r e l a M plan. Baaed on the
letten
reprentations contained j.,,
of comment. the D e p a r h e n t and the Service have determind to extend the eremp
tion to the furnj&ing of
suchss office
furniture and
by a plan
mch
persons.
In addition, in respotme to comments noting that multiple employer plans occasionally provide ofice space, services and goads
to plans which are unrelated to such plan,
the exemption as gfanted has been revised to
permit a multiple employer plan to furnish
office space, administrative servim or
not only to multipk employer plarrs with
the same plan sponsor, but to any multiple
employer plan which is a party in interest or
disqualified person, regardless of plan spon-

-

being locked into ururgemmts which may
become disadvantageam to such p l a m However. this condition should not be d e e d to

prevent a multiple employer plan from, for
example. entering into a long-term lease for
the provision of 0space to a ~ a h c i ~ a t ing employee organktion, participating ernP I o Y ~ ~ , o r panicipating em layer
d a t i o n . or to .mtb.lplan, if
leaae
~ m v i d e sthat the W b the option term i ~ t such
e
lemolr
short notice
under the c i e c e s . notwithstanding
the termination date set forth in the lease.
hw the circmm&mm that
be considered in determining whether there is a
reamnably short notie period for the & m i nation of such a lis the length of the
notice period aa compared to the length of
the lease. For example, a one year notice
period would not be - d e d
urueasonable for teminatinra m year lease.
The language of the recordkeeping requirement of paragraph (d) of the exemption
that a
has been modified to require
diligent and good faith effort be made to
maintain the recor* necessary to verify
mm~liancewith the exemptionI t was also noted in many comment letters
that multiple employer plans which have
SOTS.
common trustees or plan sponsors may on
nUmerOUS OCC~S~OIEJ
be prevented from sharproposed, the conditions of the sal.,
ing
office
space,
administrative
services or
exemption required that the terms of
which would
transactions must be a t least as favorable to gds under
the plan as an m*s-length transadion with beneficial to the interests of the plans involved and of their participants and benefian unrelated
be. jt was
out in several letters of comment that multi- ciaries by reason of the provisions of section
pie employer plans do not commonly engage 406(bM2) of the Act which, as here relevant
In such transactions with persons other than prohibit a fiduciary with resped to a plan
employee organizations, em- from acting in any transaction involving the
ployers. or employer associations, or other plan On
of a party
a
the
multiple employer plans, and that it would party) whose interests are adverse
not, therefore, be possible for many plans to interests of the plan or the interests of its
make the -armBs-length- evaluation re- participants or beneficiaries. However, none
quired by the
B ~ ~on
~ . Jof the comments provided a sufficient basis
these comments t h e exemption, as set forth for the granting of an exemption in connecbelow, has been revised to replace t h e tion wtih this application-The Department
is prepared to consider app~icationsfor a
"arm's-len@h" rnndition with a reasonablec
l a s exemption from the prohibitions ofsecness test which
for purposes of the
exemption, provides fiat reasonable corn- tion 406(bH2)of the Act with rffpect to such
pensation need not include a profit which transactions when such applications are rewould ordinarily be received in an arm's- ceived by the Departmentlength transaction, but must be sufficient to
Exemption. Accordingly, the following exreimburse the plan for its costs.
ernption is granted under the authority of
ti^^^ were also raised in the letters of section 408(a) of t h e Act and section
comment regarding the conditions of the ex- 4975(cM2) of the Code and in accordance
with the procedures set forth in ERISA Proemption requiring that the plan be
ted to terminate the relationship for the cedure 75-1 (40 FR 184171, ApriI 28. 1975)
provision of office space or administrative and Rev. Prm. 75-26*lg7&l C- B. 722:
Sec. I. Pmpective. Effective June 12,
services on reasonably short notice under
the circumstances and without penalty. This 1975, the restrictions of sections 406(a) and
condition is designed to preclude plans from 407(a) of t h e Act and the taxes imposed by

-

7 16,602

01994, Commerce Clearing House. Inc.

section 4975(a)and (b)of the Code, by reamn
of section 4975(cKlXA) through (Dl of the
Code, shall not apply to the 1easing.of office
space or the provision of administrative services or sale or leming of
by a multiple
employer plan to a parhcipating employee
organization. participating employer, or participating employer association. o r to another multiple employer plan which is a
party in interest or disqual~fied Ron with
respect to such plan. provided t t t h e following conditions are met:
(a) The plan receives reasonable compensation for the leasing of such office space or
the provision of such administrative services or the sale or leasing of goods. Solely
for purposes of this exemption, "reasonable
compensation" need not include a profit
which would ordinarily have been received
in an arm's-length transaction, but must be
sufficient to reimburse the plan for its mts.
(b) The arrangement allows any multiple
employer plan which is a party to the transaction to terminate the relationship on a
reasonably short notice under the circumstances.
(c) With regard to the leasing of office
space by a multiple employer plan to a partlc~pat~ng
em loyer, s
on will be
e*empr&ihe
p
z sections
406(aXlXE), 406(a)(2)and 407(a) of t h e Act
only to the extent such provisions require
that such office space constitute "qualifying
employer real property" as that term is defined in section 407(d)(4) of the Act. T h e 10
percent limitation provision8 of sections
W(a)(l)(E), 406(a)(2) and 407(a) of the Act
will apply to such transactions as if the employer real property involved in the transaction were "qualifying employer real
property."
(d) The plan which is the lessor of such
office space or which provides such administrative services or goods, maintains o r c a w
to be maintained during the period of such
lease or of such provision of services or sale
or leasing of goods and for a pericd of six
years from the date of termination of such
sion of services or sale or
ch records as are necessary
ns described in paragraph
(e) of this section to determine whether the
conditions of this exemption have been met,
except that (1)a prohibited transaction will
not be deemed to have occurred if, due to
circumstances beyond the control of the
plan fiduciaries, such records are lost o r destroyed prior to the end of such six-year period, and (2) such participating employee
organization, participating employer, participating employer association, or other multi-

e

E

Pension Plan Gulde

ple employer plan shall not be subject b the
civil penalty which may be asseased urder
section 502(i) of the Act. or the taxes imposed by section 49754a) and (b) of tbe Code.
if such records are not maintained. .or ue
not availabte for examination as requlral by
paragraph (elbelow.
(e) Notwithstanding anything to 'the contrary in subeections (a)(2) and (b)of d o n
504 of the Act. the records referred to in
paragraph (d) a& unconditionally avaihble
at their customary location for examination
during normal &iness houra by duly authorized employees of (1)the Department of
Labor. (2) the Internal Revenue Service. (3)
plan partici
ts and beneficiaries, (4) any
employer o$"
plan participants and beneficiaries. and (6) any employee organization
any of whose members are covered by the
plan.
See. II. Retroactive. Effective January 1,
1975, the restrictions of &ions M a ) and
407(a) of the Act and the taxes imposed by
section 4975(a) and (b)of the Code. by reason
of section 4975(c)(l)(A) through (D) of the
Code, shall not apply to the leasing of office
space or the provision of administrative services or the sale or leasing of goods by a
multiple employer plan to a participating
employee organization. participating employer, or participating employer association, or to another multiple employer plan
which is a party in interest or disqualified
person with respect to such plan, which occurred before June 12. 1975, or which occurred before October 1. 1975 pursuant to a
binding arrangement entered into before
June 2. 1975, provided that such transaction
was(a) Of a type that was ordinarily and customarily engaged in by multiple employer
plans before January 1,1975; and
(b)A t the time it was entered into, not a
prohibited transaction within the meaning
of section 503(b) of the Code or the corresponding provisions of prior law, except that
solely for purposes of this exemption the
terms of such arrangement need not provide
for a profit which would ordinarily have
been received by the plan in an arm's-length
transaction, provided that the compensation
received by the plan is otherwise reasonable.
Sec.III. Lkfinitions. For purposes of sections I and I1 above, the term "multiple employer plan" shall mean an employee benefit
plan which is a multiemployer plan within
the meaning of section 3(37) of the Act and
section 414(f) of the Code, or a plan which
meets all of the requirements of such sections other than the requirements of either

or both (a)section W37nAUiii) of the A d and

section 414(fl(lnC) of the Code, and (b) sec-

tim 3(37MAHiv) of the Act and section
4rr(fl(lMD)of the Code.

Signed at W d k r g t o n , D.C. thia 23rd day
of March 1976.

Jlsams D.Hrrmmrso~,

Administrator of Pension and Welfare
&nefitRograms.
U. S. Department of Labor.
DONALD C. I ~ L ~ X A N D E R .
C o m m W n e r o f Internal Revenue.