Many sponsors of employee benefit plans have found it necessary to lend money to a plan, as a way of easing a liquidity problem or otherwise facilitating the plan’s operation. Such loans have occurred in the context of failed insurance companies, other illiquid assets, or delays in the disbursement of distributions by plan trustees or custodians. Because a plan sponsor is a “party-in-interest,” however, such a loan constitutes a “prohibited transaction” under both ERISA and the parallel Tax Code provisions.
The Department of Labor has long recognized that – under appropriate circumstances – such loans work to the advantage of plan participants and beneficiaries. Accordingly, shortly after ERISA’s enactment, the DOL adopted a class exemption to the prohibited transaction rules for certain no-interest, unsecured loans from a party-in-interest to a benefit plan. As adopted, this Prohibited Transaction Exemption (“PTE”) 80-26 applied to any such loan for the payment of ordinary operating expenses (including the payment of benefits) or – for a period of up to three days – a purpose “incidental to the ordinary operation of the plan.”
In a recent amendment to PTE 80-26, the DOL has generally eliminated this distinction between loans made for these two different purposes. That is, the three-day limit no longer applies to “incidental purpose” loans. This change was made effective as of December 15, 2004 – the date the amendment was first proposed.
While plan sponsors (and other parties-in-interest) will welcome this removal of the three-day limit on incidental-purpose loans, they should note another change made by this amendment. Although not a part of the proposed amendment, this final amendment to PTE 80-26 also requires that any loan for a period of more than 60 days, whether for ordinary operating expenses or incidental expenses, be in writing. A written loan agreement must contain all of the material terms of the loan.
This aspect of the amended exemption confirms that PTE 80-26 did not previously require a written loan agreement. Going forward, however, any loan that might conceivably remain outstanding for more than 60 days should be documented in writing before the loan is made.
Moreover, the DOL notes in a preamble to this amendment that any party seeking to rely on an administrative exemption to the prohibited transaction rules bears the burden of demonstrating that the conditions of the exemption have been met. One of those conditions to reliance on PTE 80-26 is that a disbursement of funds from a party-in-interest to a plan be intended as a loan, and not as a contribution. Satisfaction of this condition can best be demonstrated through contemporaneous, written documentation. Thus, wherever possible, even loans of fewer than 60 days’ duration should be put in writing.