INTEREST Free LOANS TO EMPLOYEE BENEFIT PLANs

 

DEPARTMENT OF LABOR AMENDS PROHIBITED TRANSACTION EXEMPTION

Mary G. Eaves

Greenebaum Doll & McDonald pllc

Louisville, Kentucky

mge@gdm.com

 

From time to time an employee benefit plan may not have available cash to pay expenses of the plan or to pay benefits due from the plan (for example, to participants who have terminated employment). Unless an exemption applies, a party in interest to the plan, such as the sponsoring employer, is generally prohibited from lending money or otherwise extending credit to the plan. See section 406(a)(1)(B) and (D) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and section 4975(c)(1)(B) and (D) of the Internal Revenue Code of 1986, as amended (“Code”). In Prohibited Transaction Exemption (”PTE”) 80-26, the Employee Benefits Security Administration of the U.S. Department of Labor (“DOL”) issued a class exemption specifying certain conditions for an interest free loan or other extension of credit to a plan by a party in interest.

On April 7, 2006, the DOL amended PTE 80-26 to remove a three-business-day limit on certain loans and extensions of credit and to require that a loan with a term of at least 60 days be made pursuant to a written loan agreement. PTE 80-26, as amended (and retroactively effective to December 15, 2004), sets forth the following conditions, each of which must be satisfied as applicable, for an exempt loan or other extension of credit to a plan from a party in interest:

·      No interest or other fee is charged to the plan, and no discount for payment in cash is relinquished by the plan, in connection with the loan; and

 

·      The proceeds of the loan or extension of credit are used only (a) for paying ordinary operating expenses of the plan, such as the payment of benefits under the terms of the plan and periodic premiums under an insurance or annuity contract, or (b) for a purpose incidental to the ordinary operation of the plan;

 

·      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;

 

·      The loan is not for the purpose of purchasing employer securities as described in section 408(b)(3) of ERISA and section 4975(d)(3) of the Code, and the regulations related to these sections; and

 

·      Any loan under PTE 80-26 (for example, to pay benefits due from the plan) that is entered into on or after April 7, 2006, and that has a term of at least 60 days must be made pursuant to a written loan agreement that contains all the material term of the loan.

 

To provide a starting point for preparation of a written loan agreement for an exempt loan under PTE 80-26, please see the attached model Loan Repayment Agreement. Note that this article and the attached model do not, nor are they intended to, constitute legal advice. Anyone seeking to make an exempt loan or extend credit under PTE 80-26, or wishing to use the attached model Loan Repayment Agreement, should consult an attorney.

Attachment

August 2006

1121177_1.doc