ERISA Section 406 prescribes “prohibited transaction” rules that generally forbid “parties in interest” (including plan fiduciaries, plan service providers, employers, owners, employees, officers, directors, and ten percent shareholders) from engaging in certain transactions involving plan assets. Because the “prohibited transaction” rules are very broad and could prohibit transactions that benefit ERISA plans, Congress provided, in ERISA Section 408, certain statutory exemptions from the “prohibited transaction” rules. ERISA Section 408 also authorizes the Secretary of Labor to grant administrative exemptions to certain transactions or classes of transactions.
When a claim is made of an ERISA violation, “prohibited transaction” rules can apply in the settlement or adjudication of the ERISA claims. For example, the parties make seek to settle a claim of breach of fiduciary duty or prohibited transaction by making payment to the plan, or a court may order payment to the plan as a remedy to the ERISA violation. The Department of Labor has previously issued class exemptions dealing with court approved settlements (PTE 79-15), Department of Labor Investigation Settlements (PTE 94-71), and Private Settlements (PTE 2003-39). The Department of Labor agrees that, in general, no prohibited transaction exemption is needed to settle benefits disputes, following the Supreme Court’s ruling in Lockheed v. Spink, 517 U.S. 882, 892-893 (1996) that the release of a claim for payment of benefits is not a prohibited transaction.
On November 21, 2007, the Department of Labor proposed an amendment to further clarify the class exemption applicable to the settlement of litigation and the transactions arising out of those settlement agreements. Presently, the class exemption limits the ability of ERISA plans to receive cash in exchange for releasing claims. The proposed amendment expands the types of non-cash consideration that could be accepted by an Authorized Fiduciary in settlement of litigation on behalf of the plan. These forms of non-cash consideration include: 1) employer securities, including bonds, warrants to acquire employer stock, and stock rights; 2) a written promise by the employer to increase future contributions to the plan; and/or 3) a written agreement to adopt future plan amendments or provide additional employee benefits as approved by the Authorizing Fiduciary. The plan may not, however, pay commissions related to the acquisition of exempt assets.
In order for the proposed non-cash consideration to be used, the Department of Labor will require that
- The Authorizing Fiduciary conduct a thorough review of the reasonableness of the settlement, including the scope of the release of claims contained in the settlement agreement, and determine that a cash settlement is not feasible or not as beneficial as a non-cash settlement.
- Any non-cash assets used as consideration for settlement under the proposed amendment must be valued at their fair market value.
- Both non-cash assets and benefits enhancements must be fully described in the settlement agreement.
- If employer securities are received by the plan from the employer as part of the settlement, either an independent fiduciary or the Authorizing Fiduciary must retain sole responsibility for making investment decisions regarding the assets (unless such responsibility has been delegated to the plan participants).
If the proposed amendment is granted, it would apply to all employee benefits plans covered by ERISA, those plans’ participants, and those parties interested in the plans engaging in the newly permitted transactions. Although the Department of Labor still prefers that fiduciary litigation be resolved through cash settlements, the Department has recognized that the current class exemptions were often inadequate in resolving fiduciary and prohibited transaction disputes. Cash based settlements are not always feasible or appropriate in settling such litigation.
Comments regarding the proposed class exemption amendment must be submitted to the Department of Labor before January 22, 2008, but the expanded exemption is likely to be favorably received by litigants and plan fiduciaries.