It has been almost four months since the Employee Benefit Security Administration (EBSA) of the Department of Labor (“DOL”) published its proposed amendments to regulations for the procedures by which applications for class and individual prohibited transaction exemptions are granted. The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) broadly prohibits certain transactions between plans and their fiduciaries and other parties in interest to the plan. The Internal Revenue Code has similar prohibited transaction rules for tax-favored retirement vehicles such as Individual Retirement Accounts (IRAs). ERISA includes a number of statutory exemptions for otherwise prohibited transactions, such as the delivery of services or office space (ERISA Section 408(b)(2)).
Congress recognized that it could not possibly anticipate all the possible and legitimate needs for exemptive relief at the time of ERISA’s enactment, so it also provided the DOL with the authority to grant exemptions on an individual or class basis. For administrative ease and convenience, the authority to grant exemptions for IRA holders was also transferred to DOL. All exemptions are conditioned on findings that the exemption is: (i) administratively feasible, (ii) in the interests of participants and beneficiaries, and (iii) protective of the rights of participants and beneficiaries. Over the years, EBSA has granted many class exemptions, and hundreds of individual exemptions which are designed to benefit plan participants and beneficiaries by allowing for the execution of certain transactions that otherwise are technically disallowed under ERISA. These exemptions are subject to a rigorous review by EBSA and it is our experience that the DOL oversight has resulted in enhanced returns and security for plans. Despite this, the number of exemptions granted by EBSA has decreased significantly over the last several years.
EBSA’s proposed amendments to its existing regulation would further reduce the number of applications for and issuance of prohibited transaction exemptions. For example, the proposal would make any pre-submission communications with EBSA an official part of the exemption record that is open to the public and would eliminate the longstanding policy allowing potential applicants to speak with EBSA staff on a “no-name” basis. The proposal would also add new terms and conditions on an exemption applicant concerning the necessary “independence” of an independent fiduciary or an independent appraiser hired to support the application, and would require the applicant to apply those terms for the first time to accountants, and to service providers not directly involved in the transaction for which an exemption is sought. These new burdens on the exemption applicant would restrict the entities that could so serve and likely increase fees, and EBSA did not provide an adequate rationale to support such an outcome. Another proposal would also impose the impartial conduct standards (as known in PTE Class Exemption 2020-02) as a requirement on every applicant for an exemption.
For a more complete discussion of the proposal and its terms and conditions, please see the comment letter we filed with EBSA on the proposed regulation and our previous article on Proposed Changes to Prohibited Transaction Exemption Procedures.
If adopted in its proposed form, the exemption process will become more difficult and more costly, and the proposed procedural changes will almost certainly limit the availability of exemptions that would benefit and protect participants by allowing for useful transactions with favorable outcomes. We hope and expect that EBSA will weigh and accept the comments it has received on the proposed procedure.