Proposed Amendment to Prohibited Transaction Exemption 92-6 (PTE
92-6) Involving the Transfer of Individual Life Insurance Contracts and
Annuities From Employee Benefit Plans to Plan Participants, Certain
Beneficiaries of Plan Participants, [Notices] [05/10/2002]
Proposed Amendment to Prohibited Transaction Exemption 92-6 (PTE
92-6) Involving the Transfer of Individual Life Insurance Contracts and
Annuities From Employee Benefit Plans to Plan Participants, Certain
Beneficiaries of Plan Participants, [05/10/2002]
Volume 67, Number 91, Page 31835-31838
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application Number D-10786]
Proposed Amendment to Prohibited Transaction Exemption 92-6 (PTE
92-6) Involving the Transfer of Individual Life Insurance Contracts and
Annuities From Employee Benefit Plans to Plan Participants, Certain
Beneficiaries of Plan Participants, Personal Trusts, Employers and
Other Employee Benefit Plans
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Notice of proposed amendment to PTE 92-6.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed amendment to PTE 92-
6. PTE 92-6 is a class exemption that enables an employee benefit plan
to sell individual life insurance contracts and annuities to: (1) A
plan participant insured under such policies; (2) a relative of such
insured participant who
[[Page 31836]]
is the beneficiary under the contract; (3) an employer any of whose
employees are covered by the plan; or (4) another employee benefit
plan, for the cash surrender value of the contract, provided certain
conditions are met. The proposed amendment, if adopted, would affect,
among others, certain participants, beneficiaries and fiduciaries of
plans engaged in the described transactions.
DATES: If adopted, the proposed amendment would be effective February
12, 1992. Written comments and requests for a public hearing should be
received by the Department on or before June 24, 2002.
ADDRESSES: All written comments and requests for a public hearing
(preferably three copies) should be addressed to the U.S. Department of
Labor, Office of Exemption Determinations, Pension and Welfare Benefits
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington,
DC 20210, (attention: PTE 92-6 Amendment). Interested persons are also
invited to submit comments and/or hearing requests to PWBA via e-mail
or FAX. Any such comments or requests should be sent either by e-mail
to: ``moffittb@pwba.dol.gov'' or by FAX to (202)219-0204 by the end of
the scheduled comment period. The application pertaining to the
exemptive relief proposed herein (Application No. D-10786) and the
comments received will be available for public inspection in the public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz, Office of
Exemption Determinations, Pension and Welfare Benefits Administration,
U.S. Department of Labor, (202)693-8540. (This is not a toll-free
number).
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed amendment to PTE 92-6 (57 FR 5189,
February 12, 1992), which amended Prohibited Transaction Exemption 77-8
(PTE 77-8) (42 FR 31574, June 21, 1977). PTE 92-6 provides an exemption
from the restrictions of section 406(a) and 406(b)(1) and (b)(2) of the
Employee Retirement Income Security Act of 1974 (ERISA or the Act) and
from the taxes imposed by section 4975(a) and (b) of the Internal
Revenue Code of 1986 (the Code), by reason of section 4975(c)(1)(A)
through (E) of the Code.
The amendment to PTE 92-6 proposed herein was requested in an
exemption application filed by the Chicago, Illinois law firm of
Sonnenschein, Nath & Rosenthal on behalf of the General American Life
Group (the Applicant). The Department is proposing the amendment
pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code,
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (55 FR 32836, 32847, August 10, 1990).\1\
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\1\ Section 102 of the Reorganization Plan No. 4 of 1978 (5
U.S.C. App. 1 [1996]) generally transferred the authority of the
Secretary of the Treasury to issue administrative exemptions under
section 4975 of the Code to the Secretary of Labor.
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A. General Background
The prohibited transaction provisions of the Act generally prohibit
various transactions between plans covered by Title I of ERISA and
certain related parties with respect to such plans. Specifically,
section 406(a)(1)(A) and (D) of the Act states that a fiduciary with
respect to a plan shall not cause the plan to engage in a transaction,
if he knows or should know that such transaction constitutes a direct
or indirect--
(A) sale or exchange, or leasing, of any property between the plan
and a party in interest; or
(D) transfer to, or use by or for the benefit of, a party in
interest of any assets of the plan.
Accordingly, unless a statutory or administrative exemption is
applicable, the sale of a life insurance contract, or annuity contract,
by a plan to a party in interest is prohibited.
B. Description of Existing Relief
Section I of PTE 92-6 permits the sale of an individual life
insurance or annuity contract by an employee benefit plan to: (1) A
plan participant; (2) a relative of such insured participant who is the
beneficiary under the contract; (3) an employer any of whose employees
are covered by the plan; or (4) another employee benefit plan, if: (a)
Such participant is the insured under the contract; (b) such relative
is a ``relative'' as defined in section 3(15) of the Act (or a ``member
of the family'' as defined in section 4975(e)(6) of the Code), or is a
brother or sister of the insured (or a spouse of such brother or
sister), and the beneficiary under the contract; (c) the contract
would, but for the sale, be surrendered by the plan; (d) with respect
to sales of the policy to the employer, a relative of the insured or
another plan, the participant insured under the policy is first
informed of the proposed sale and is given the opportunity to purchase
such contract from the plan, and delivers a written document to the
plan stating that he or she elects not to purchase the policy and
consents to the sale by the plan of such policy to such employer,
relative or other plan; (e) the amount received by the plan as
consideration for the sale is at least equal to the amount necessary to
put the plan in the same cash position as it would have been had it
retained the contract, surrendered it, and made any distribution owing
to the participant on his vested interest under the plan; and (f) with
regard to any plan which is an employee welfare benefit plan, such plan
must not, with respect to such sale, discriminate in form or in
operation in favor of plan participants who are officers, shareholders
or highly compensated employees.
Section II of PTE 92-6 amended PTE 77-8 to provide that the relief
for transactions described in part I would be available, effective
October 22, 1986, for plan participants who are owner-employees (as
defined in section 401(c)(3) of the Code) or shareholder-employees (as
defined in section 1379 of the Internal Revenue Code of 1954 as in
effect on the day before the date of enactment of the Subchapter S
Revision Act of 1982), if the conditions set forth in part I are met.
C. Discussion of the Proposed Amendment
The Department, at the request of the Applicant, proposes to amend
PTE 92-6 in order to expand the coverage of the exemption to include
the sale by an employee benefit plan (the Plan) of an individual life
insurance or annuity contract to a personal or private trust (the
Trust) established by or for the benefit of an individual who is a
participant in the Plan and the insured under the policy, or by or for
the benefit of one or more relatives (as defined in section I(2) of PTE
92-6) of the participant.\2\
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\2\ Section 402(a)(1)(A) of the Act prohibits a direct or
indirect sale or exchange of any property between a Plan and a party
in interest. Section 406(a)(1)(D) of the Act prohibits a transfer
to, or use by or for the benefit of, a party in interest, of any
assets of the Plan. In most cases, the participant will be a party
in interest with respect to the Plan under section 3(14)(H) of the
Act, as an employee of an employer any of whose employees are
covered by the Plan. In some cases, the participant or relative will
also be a party in interest under section 3(14)(A) or (E) as a
fiduciary of the Plan, or as an owner of 50% or more of the employer
maintaining the Plan. The Trust would be a party in interest under
section 3(14)(G) of the Act if 50% or more of the beneficial
interest of such Trust is owned or held by persons described in
section 3(14)(A) or (E) of the Act.
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The Applicant notes that many Plans provide pre-retirement death
benefit protection that is funded in whole or in part by the purchase
of individual whole life and universal life insurance policies on the
lives of the Plan's
[[Page 31837]]
participants. This is particularly true for Plans of small employers
offering a pre-retirement death benefit, which do not have a sufficient
number of participants to incur the actuarial risk of premature death
of one or more participants in the absence of insurance. In addition,
the cash value element of life insurance creates a funding vehicle for
post-retirement pension benefits. The Internal Revenue Service has
historically permitted Plans to invest in whole life insurance and
universal life insurance by establishing specific standards for the
provision of incidental death benefits funded by whole and universal
life insurance.\3\
In conformity with these tax standards for insurance in Plans, pre-
retirement death benefit protection under a Plan typically ceases upon
the retirement of a covered participant. At that time, the Plan will
need to obtain the policy's cash value to support post-retirement
pension benefits, either by converting the policy's cash value to an
annuity payment from the issuer of the policy, or realizing such cash
value through a surrender of the policy to the issuer, or by a sale of
the policy for an amount at least equal to the cash surrender value.
Insured death benefit protection supported by policies may also cease
before retirement when a participant terminates employment with a
vested or partially vested benefit, when a Plan converts its funding
method from individual policies to a group contract or to a different
funding medium, when a Plan is amended to cease death benefit coverage
for participants or for the class of employees to which a particular
participant belongs, or when a Plan terminates.
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\3\ See, for example, Treas. Reg. Section 1.401-1(b)(1)(i); and
Rev. Rul. 66-143, 1966-1 C.B. 79.
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In these circumstances, where a Plan will not continue the Policy
in effect, Plans have historically permitted the insured participant,
or other persons with consent of the participant, to purchase the
policy. Sale of the policy by a Plan to, or for the benefit of, a
participant allows the participant (or other owner) to keep the policy
death benefit in effect while simultaneously allowing the Plan to
realize the policy cash value. Maintaining the death benefit in effect
is particularly advantageous where a participant, at the time the
policy would otherwise be surrendered, is medically impaired so that he
or she is uninsurable or insurable only at substantially higher premium
rates (to reflect the higher risk of death) or where the policy
contains valuable options or features that cannot be replicated for the
same premium cost in the current market. All of the above
circumstances, and the advantage to the participants of allowing the
Plan to sell the policy to his or her designee in lieu of surrender,
were recognized by the Department in granting PTE 77-8 and PTE 92-6.
In many circumstances, the participant will have created a Trust as
part of his or her estate plan to hold a policy or policies on his or
her life. The Trust beneficiaries are typically the participant's
spouse or children or both, or other relatives. The Trust will
typically purchase insurance contracts on the life of the participant,
including the policy from the Plan, if available, with funds
contributed by the participant or by one or more of his relatives. The
Trust will almost always be irrevocable (although a right to amend and
revoke may be given to a person other than the insured who created the
Trust) and will commonly provide for the participant's spouse or
another relative, or an independent person, to be the trustee of the
Trust. The governing instruments of Trusts holding life insurance
policies vary markedly in format (depending on the applicable state
law, the types of contracts held, the insured's desired disposition of
the proceeds and other Trust assets, the likely tax impact, and the
drafter's style).
The principal reason a participant will want someone other than
himself or herself to own a policy purchased from a Plan is to conform
to the federal estate tax standards for excluding the proceeds of the
policy from the participant's gross estate. The aim is for the
participant to divest himself or herself of all ``incidents of
ownership,'' or never to have had in the first instance any ``incidents
of ownership,'' in the policy.\4\ In general, this estate tax result
can be achieved by having a policy (including all its ``incidents of
ownership'') held by a relative of the participant (as allowed under
PTE 92-6), as well as by a Trust. Accordingly, use of a Trust is not
necessary for a participant to achieve this estate tax exclusion.
However, a participant may prefer that a policy available from a Plan
be purchased by a Trust rather than by an individual for a variety of
non-tax reasons related to his or her family situation. Having the
policy held by a spouse or other relative may expose the policy to
undesirable consequences related to probate if, for instance, the owner
should become incapacitated or pre-decease the participant. Those
participants who are unsure of their own or their relatives' continued
capacity to act as owners and stewards of the policy and its proceeds
may indeed prefer to have the policy held within a Trust under the
control of an independent trustee. In addition, ownership by a spouse
or family member subjects the participant's desired ultimate
disposition of the policy proceeds to risks associated with changes in
family relationships or discord among family members. Also, a policy
owned by the participant or relative may be exposed to claims of the
owner's future creditors, which result can often be avoided by having
the policy held in a properly structured Trust. Finally, a Trust can
embody a carefully tailored, intricate dispositive scheme that
precisely carries out the participant's intentions. Simply allowing the
Plan to sell the policy to a relative or other individual owner will
not always reflect what a participant really wants to do.
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\4\ See, generally, section 2042 of the Code.
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Based upon the arguments presented by the Applicant and the
protections already embodied in PTE 92-6, the Department has determined
to amend PTE 92-6 to expand the scope of relief for sales of life
insurance policies by Plans. Accordingly, effective February 12,
1992,\5\ the proposed amendment to PTE 92-6 would expand the coverage
of the exemption to include the sale by a Plan of an individual life
insurance or annuity contract to a Trust established by or for the
benefit of an individual who is a participant in the Plan and the
insured under the policy, or by or for the benefit of one or more
relatives (as defined in Section I(2) of PTE 92-6) of the participant.
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\5\ i.e., the date of publication in the Federal Register of PTE
92-6.
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General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of ERISA and section 4975(c)(2) of the Code does
not relieve a fiduciary, or other party in interest or disqualified
person with respect to a plan, from certain other provisions of ERISA
and the Code, including any prohibited transaction provisions to which
the exemption does not apply and the general fiduciary responsibility
provisions of section 404 of ERISA which require, among other things,
that a fiduciary discharge his or her duties respecting the plan solely
in the interests of the participants and beneficiaries of the plan; nor
does it affect the requirement of section 401(a) of the Code that the
plan must operate
[[Page 31838]]
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) This exemption, if granted, would not extend to transactions
prohibited under section 406(b)(3) of the Act or section 4975(c)(1)(F)
of the Code;
(3) Before an exemption may be granted under section 408(a) of
ERISA and 4975(c)(2) of the Code, the Department must find that the
exemption is administratively feasible, in the interests of the plan
and its participants and beneficiaries, and protective of the rights of
participants and beneficiaries of the plan;
(4) If granted, the proposed amendment is applicable to a
particular transaction only if the transaction satisfies the conditions
specified in the exemption; and
(5) The proposed amendment, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA and the Code,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
Written Comments and Hearing Requests
The Department invites all interested persons to submit written
comments or requests for a public hearing on the proposed amendment to
the address and within the time period set forth above. All comments
received will be made a part of the record. Comments and requests for a
hearing should state the reasons for the writer's interest in the
proposed exemption. Comments received will be available for public
inspection at the above address.
Paperwork Reduction Act
Prohibited Transaction Exemption 92-6 includes a disclosure
provision that requires an insured participant to be informed prior to
the sale of an applicable life insurance policy. Although this
disclosure requirement constitutes a collection of information as
defined in the Paperwork Reduction Act of 1995, that collection of
information as currently approved under OMB control number 1210-0063 is
not substantially or materially altered by the terms of this proposed
amendment. Accordingly, no information collection request has been
submitted to the Office of Management and Budget in connection with
this Notice of Proposed Amendment to PTE 92-6.
Proposed Amendment
Under section 408(a) of the Act and section 4975(c)(2) of the Code
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (55 FR 32836, 32847, August 10, 1990), the Department
proposes to amend PTE 92-6 as set forth below:
I. Effective January 1, 1975, the restrictions of sections 406(a),
406(b)(1) and 406(b)(2) of the Act, and the taxes imposed by section
4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply to the sale of an individual life
insurance or annuity contract by an employee benefit plan to: (1) A
participant under such plan; (2) a relative of a participant under such
plan; (3) an employer any of whose employees are covered by the plan;
(4) another employee benefit plan; or (5) effective February 12, 1992,
a trust established by or for the benefit of one or more of the persons
described in (1) or (2) above;, if:
(a) Such participant is the insured under the contract;
(b) Such relative is a ``relative'' as defined in section 3(15) of
the Act (or a ``member of the family'' as defined in section 4975(e)(6)
of the Code), or is a brother or sister of the insured (or a spouse of
such brother or sister), and such relative or trust is the beneficiary
under the contract;
(c) The contract would, but for the sale, be surrendered by the
plan;
(d) With respect to sales of the policy to the employer, a relative
of the insured, a trust, or another plan, the participant insured under
the policy is first informed of the proposed sale and is given the
opportunity to purchase such contract from the plan, and delivers a
written document to the plan stating that he or she elects not to
purchase the policy and consents to the sale by the plan of such policy
to such employer, relative, trust or other plan;
(e) The amount received by the plan as consideration for the sale
is at least equal to the amount necessary to put the plan in the same
cash position as it would have been had it retained the contract,
surrendered it, and made any distribution owing to the participant on
his vested interest under the plan; and
(f) With regard to any plan which is an employee welfare benefit
plan, such plan must not, with respect to such sale, discriminate in
form or in operation in favor of plan participants who are officers,
shareholders or highly compensated employees.
II. Effective October 22, 1986, the exemption provided for
transactions described in part I is available for plan participants who
are owner-employees (as defined in section 401(c)(3) of the Code) or
shareholder-employees as defined in section 1379 of the Internal
Revenue Code of 1954 as in effect on the day before the date of
enactment of the Subchapter S Revision Act of 1982) if the conditions
set forth in part I are met.
Signed at Washington, DC, this 6th day of May, 2002.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Pension and Welfare
Benefits Administration, Department of Labor.
[FR Doc. 02-11661 Filed 5-9-02; 8:45 am]
BILLING CODE 4520-29-P
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