Alert June 04, 2013

DOL Proposes Amendment to Prohibited Transaction Exemption Concerning Interest-Free Loans

The Department of Labor (the “DOL”) has proposed an amendment to Prohibited Transaction Exemption 80-26 (“PTE 80-26”) under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  PTE 80-26 is a class exemption that permits parties-in-interest with respect to employee benefit plans to make interest-free loans to such plans if certain conditions are met.  The proposed amendment was requested by SIFMA out of concern that the position taken by the DOL in a 2011 advisory opinion indicated that individual retirement accounts (“IRAs”) engage in prohibited transactions (which could disqualify the IRA) when the IRA owner’s agreements with the financial services company sponsoring the IRA provide for indemnification or cross-collateralization (or any other type of credit support) from the IRA owner’s personal account for the benefit of the IRA.  If finalized, the proposed amendment would give retroactive relief to certain covered extensions of credit to or from an employee benefit plan and to or from a related account, such as pursuant to an indemnification agreement, cross-collateralization agreement or other grant of a security interest to a financial institution as set forth in an account opening agreement.  The proposed amendment would be effective from January 1, 1975 until the date that is six months after the date the final exemption is published in the Federal Register.  Because the relief provided by the proposed amendment will expire six months after it is finalized, financial services companies that sponsor IRAs should review their relevant agreements with IRA owners to determine whether they include provisions that will not be permissible after the expiration of the proposed amendment’s relief, and consider the appropriate steps to be taken in response to that anticipated development.  Comments are due to the DOL no later than July 23, 2013.