Compliance Alert is The Segal Company's periodic electronic newsletter summarizing important federal legislation, regulations and guidance. This issue discusses the following topics:

• Department of Labor Proposes Permitting Loans to Plans to Fix Year 2000 Problems
• DOL Publishes Cash Balance Plan Guidance for Participants

Department of Labor Proposes Permitting Loans to Plans to Fix Year 2000 Problems

The Department of Labor (DOL) has proposed allowing "parties in interest," including employers and unions, to make interest-free loans to employee benefit plans to address Year 2000 problems. Loans or extension of credit would be subject to certain conditions listed in a prohibited transaction class exemption and to ERISA’s requirements regarding fiduciary responsibility. The exemption would permit such loans beginning November 1, 1999 through December 31, 2000, and all money would have to be repaid within this 14-month period.

The DOL proposed the expansion on its own initiative, and will accept comments regarding the proposal that are submitted on or before January 13, 2000.

Background

The DOL has been crusading to make plan fiduciaries aware of Y2K problems and to assure that they and their service providers are ready for the millennium. However, DOL is concerned that some small and medium businesses are not sufficiently prepared for Y2K. In addition, DOL is concerned that plans may have liquidity problems that would affect whether plan officials have sufficient assets available to pay benefits and administer the plan. Finally, DOL is worried that plans will need additional funds to pay costs associated with addressing and fixing Y2K problems. Consequently, DOL decided to expand a class exemption to allow plans to receive, under certain conditions, loans from "parties in interest" to address these problems.

Proposed Conditions for Y2K Loans

Prohibited Transaction Exemption (PTE) 80-26 permits loans or extensions of credit from a party in interest or other disqualified person (for example, an employer or union that sponsors a plan) to an employee benefit plan for up to three (3) days, subject to various conditions. Under the expanded version of PTE 80-26, ERISA’s prohibited transaction rules would not apply to loans or extensions of credit from a party in interest to an employee benefit plan if the following criteria are met:

• No interest or other fee is charged to the plan;
• No discount for payment in cash is made by the plan;
• The loan or extension of credit is made due to a Y2K problem that affects certain plan operations, liquidity of plan assets, or data problems;
• The loan or extension of credit is unsecured;
• The loan or extension of credit is not directly or indirectly made by an employee benefit plan; and
• The loan or extension of credit begins on or after November 1, 1999, and is repaid or terminated no later than December 31, 2000.

Under the proposal, once these conditions are met, the old three-day payback rule would not apply.

Examples of transactions that may require loans covered by the exemption would include the following:

• Transfer of all or part of a participant’s account balance from one investment option to another;
• Participant loans;
• Payment of health claims;
• Temporary overdraft protection;
• Failure of a plan’s internal computer systems; and
• Crediting of dividends or interest by a bank trustee prior to receipt of such dividends or interest.

The proposed prohibited transaction exemption was published in the November 29, 1999 Federal Register and is available on the Internet at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=1999_register&docid=99-30932-filed.pdf.

DOL Publishes Cash Balance Plan Guidance for Participants

On November 30, 1999, the DOL's Pension and Welfare Benefits Administration (PWBA) added a new publication to its Web site: "Cash Balance Plans: Questions and Answers" (http://www.dol.gov/dol/pwba/public/pubs/cashbq&a.htm) Through answers to 15 questions, this publication, which is geared to plan participants, explains the differences between cash balance plans and traditional defined benefit plans and 401(k) plans. Individuals who do not have Internet access can order a paper copy of this publication by calling (800) 998-7542.

The PWBA has also created an E-mail box for participants who have questions that the publication does not address. The E-mail address is cbalance@pwba.dol.gov.

Back to Top