EBSA Issues Final Rule on the Application Procedures for Prohibited Transaction Exemptions | Practical Law

EBSA Issues Final Rule on the Application Procedures for Prohibited Transaction Exemptions | Practical Law

On October 27, 2011, the Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) issued final regulations governing the filing and processing of applications for administrative exemptions from the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.

EBSA Issues Final Rule on the Application Procedures for Prohibited Transaction Exemptions

by PLC Employee Benefits & Executive Compensation
Published on 28 Oct 2011 • USA (National/Federal)
On October 27, 2011, the Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) issued final regulations governing the filing and processing of applications for administrative exemptions from the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.
On October 27, 2011, the DOL's Employee Benefits Security Administration issued final regulations updating the prohibited transaction exemption procedures to reflect changes in DOL practices since the current procedure was implemented in 1990. The final regulations provide a comprehensive description of the procedure governing the filing and processing of applications for administrative exemptions from the prohibited transaction provisions of:
The final rule is effective December 27, 2011 and applies to all exemption applications filed on or after that date. The rule attempts to streamline the procedures governing all exemption applications by:
  • Providing applicants with a comprehensive description of the prohibited transaction exemption process.
  • Clarifying the types of information and documentation generally required for a complete filing.
  • Affording expanded opportunities for the electronic submission of information and comments relating to an exemption.
  • Providing plan participants and other interested persons with a more thorough understanding of the exemption under consideration.
The rule also clarifies:
  • Exemption applications that the DOL will not usually consider.
  • Information that must be included in every exemption application.
Specifically, the final rule states that:
  • The DOL will not usually consider an exemption application involving any transaction that is the subject of an investigation under the reporting, disclosure and fiduciary responsibility provisions contained in Title 1 of ERISA.
  • Any statement provided by a qualified independent appraiser or fiduciary in support of an exemption application must include a representation disclosing the percentage of the appraiser or fiduciary's income derived from any party in interest involved in the transaction (see Status as a Party in Interest Checklist). The rule explains how the percentage is calculated.
The rule defines the terms "qualified independent appraiser" and "qualified independent fiduciary" and, in doing so, provides that an independent fiduciary or appraiser retained in connection with an exemption transaction must not receive more than a de minimis amount of compensation from the parties in interest to the transaction (or their affiliates). Compensation includes amounts received for preparing fiduciary reports and other related duties. If there are no facts or circumstances demonstrating a lack of independence, the DOL will presume that the appraiser or fiduciary is independent if the revenues it receives in the current federal tax year, from parties in interest (and their affiliates) to the transaction are either:
  • Not more than 2% of the appraiser or fiduciary's annual revenues based on its prior income tax year.
  • Not more than 5% of the appraiser or fiduciary's annual revenues based on its prior income tax year if there are other circumstances indicating that the appraiser or fiduciary is independent.
In both cases, the burden is on the applicant to demonstrate the independence of the fiduciary.
The rule also provides guidance to applicants seeking retroactive relief for past prohibited transactions. The rule reaffirms the DOL's current practice to only consider granting retroactive relief for transactions if the safeguards necessary for the grant of a prospective exemption were in place at the time the transaction took place. Therefore an applicant should provide evidence that it acted in good faith at the time of the transaction by taking reasonable and appropriate steps to protect the plan from abuse and unnecessary risk. The rule lists factors the DOL takes into account when evaluating whether the conduct of the applicant at the time of a previously consummated transaction satisfies the good faith standard.
The rule requires that while an exemption application is pending, an exemption applicant promptly notify the DOL if:
  • Any material fact or representation contained in the application changes or is inaccurate.
  • He discovers that a material fact or representation was omitted.
The rule also provides a simplified procedure to facilitate the prompt and efficient scheduling of conferences concerning final denial letters.
For more information on prohibited transaction exemptions, see Practice Note, ERISA Fiduciary Duties: Overview: Avoiding Prohibited Transactions. To determine whether an individual or entity is a party in interest under ERISA, see Status as a Party in Interest Checklist.