DOL CLASS EXEMPTION FOR SETTLEMENTS
Prepared by: Debra L. Mackey, Esq.
Johnston Barton Proctor & Powell LLP
Birmingham, AL
The Department of Labor recently issued Prohibited Transaction Exemption 2003-39 that exempts the release of claims and extensions of credit in connection with certain settlements of litigation from prohibited transaction restrictions. The exemption is retroactively effective to January 1, 1975, and therefore applies to covered settlements entered into before issuance of the exemption. For settlements entered into after January 30, 2004, additional conditions apply in order for the exemption to be available.
Under the exemption, the ERISA-imposed prohibited transaction and the related excise taxes imposed under the Internal Revenue Code are inapplicable to two types of settlements, if the relevant conditions are also satisfied. These are:
1. The release by a plan (or plan fiduciary) of a legal or equitable claim against a party in interest in exchange for consideration given by or on behalf of the party in interest in partial or complete settlement of the plan’s (or fiduciary’s) claim; and
2. An extension of credit by a plan to a party in interest in connection with a settlement whereby the party in interest agrees to repay, over time, an amount owed to the plan in settlement of a legal or equitable claim by the plan (or fiduciary) against the party in interest.
The general conditions applicable to all settlement transactions (retroactive and prospective) are:
1. There is a genuine controversy involving the plan (deemed to exist where the case is certified as a class action);
2. The fiduciary authorizing the settlement has no relationship to or interest in any of the parties involved (other than the plan) that might affect the fiduciary’s judgment;
3. The settlement is reasonable in light of the likelihood of full recovery, the risks and costs of litigation, and the value of foregone claims;
4. The terms and conditions of the settlement are no less favorable to the plan than would have been agreed to by unrelated parties under similar circumstances;
5. The settlement is not part of an agreement, arrangement, or other understanding designed to benefit a party in interest;
6. An extension of credit is on terms that are reasonable, taking into account the creditworthiness of the party in interest and the time value of money; and
7. The settlement is not related to delinquent employer contributions to multiemployer and multiple employer collectively bargained plans.
The above-described conditions apply to settlement transactions covered by retroactive relief. In addition to these conditions, settlement transactions entered into after January 30, 2004, must meet the following conditions:
1. If not certified as a class action, an attorney advises the plan that there is a genuine controversy involving the plan. The attorney may not have a relationship with any party other than the plan;
2. The settlement terms are specifically described in a written settlement agreement or consent decree;
3. In connection with a settlement, a plan may receive assets other than cash from a party in interest only if necessary to rescind a transaction that is the subject of litigation or if the assets are securities for which there is a generally recognized market and which can be objectively valued;
4. Any assets received other than cash must be specifically described in the written agreement, including the methodology for determining fair market value;
5. Settlement may include an agreement to make future contributions, adopt plan amendments, or provide additional benefits;
6. The fiduciary acting on behalf of the plan acknowledges, in writing, that it is a fiduciary with respect to the settlement;
7. For a period of six years, the fiduciary maintains records sufficient to show that the conditions for exemption are satisfied; and
8. The records described above must be made available for examination by DOL, IRS, fiduciaries, contributing employers and organizations, participants, and beneficiaries, or the representatives of them.
For years, many fiduciaries have reached settlements with parties in interest without giving much thought to the settlement being a prohibited transaction. This exemption essentially gives a free pass to those prior settlements, and also now serves to put fiduciaries on notice that settlement of plan claims is a fiduciary act subject to fiduciary rules. Note that the class exemption does not apply to the more frequent type of settlement, which is settlement on behalf of the plan of claims brought against the plan.
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