DOL Finalizes Amendments to Application Process for Prohibited Transaction Exemptions

On January 24, 2024, the DOL finalized rules to amend the individual application procedure for prohibited transaction exemptions under ERISA and the Code. The final rules (termed the “Final Amendments”) follow the proposed rules published on March 15, 2022, but reflect certain changes in response to public comments received. Please see our prior article for further information regarding the proposed rules.

ERISA sets forth standards and rules that govern the conduct of ERISA plan fiduciaries and safeguard the integrity of employee benefit plans. ERISA and the Code generally prohibit a plan fiduciary from causing a plan to engage in a variety of transactions with certain related parties (including sponsoring employers, affiliates, and service providers) unless a statutory or administrative exemption applies. The DOL and IRS have the authority to grant class or individual administrative exemptions from the prohibited transaction rules if the relief sought is administratively feasible, in the interest of the plan and its participants and beneficiaries, and protective of the rights of participants and beneficiaries.

The DOL is responsible for maintaining procedures for granting individual administrative exemptions, including the application process. According to the DOL, the March 2022 proposed rules were designed to, among other items, clarify the necessary reports and documentation for a complete exemption application, the information made available as part of the public record, the related timing aspects, and the options for submitting information electronically.

In the Final Amendments, the DOL addresses public comments received regarding the proposed rules. For example, many commenters expressed that the application process was longer than necessary and overly prescriptive. The DOL acknowledged the process can be lengthy but asserted that the Final Amendments make the exemption application process more efficient by reducing or eliminating delays caused when information is missing or incomplete.

Like the proposed rules, the Final Amendments largely retain language providing the DOL with sole discretionary authority to issue administrative exemptions (based on ERISA’s criteria). Commenters expressed concern that such discretionary authority could result in arbitrary decisions and that the DOL should be bound by previously issued exemptions to foster predictability and consistent treatment of applicants. The DOL did not agree to be bound by prior exemptions but modified the Final Amendments to indicate that previously issued exemptions may inform their determination of whether to allow future exemptions based on the unique facts and circumstances of each application.

Under the Final Amendments, conferences with the DOL prior to submission of an exemption application, and any related documents, will be part of the public record if a formal exemption application is submitted. Additionally, the prior conferences would need to be identified in the formal application. However, unlike the proposed rules, the Final Amendments allow potential applicants to seek a pre-submission conference anonymously without a public record created unless a formal application follows.

The Final Amendments also include provisions that affect those retained as independent fiduciaries or appraisers to represent the plan or establish the fair market value of an asset in a transaction, respectively. For example, the Final Amendments change the definition of an independent fiduciary or appraiser with modifications from the proposed rules. Additionally, the exemption application requires significantly more information regarding independent fiduciaries, appraisers, accountants, and auditors. An independent fiduciary’s liability insurance must be included, although specific levels of coverage are not required, as had been proposed. The Final Amendments also affect the contract terms between plans and independent fiduciaries and appraisers, among other parties (e.g., by prohibiting indemnification for contract breaches or violations of laws).

The Final Amendments reflect numerous other significant changes to the prohibited transaction exemption application process. Employers who sponsor ERISA plans and are considering filing an application for an individual administrative exemption should carefully review the Final Amendments and consult with legal counsel for further guidance. The Final Amendments are effective on April 8, 2024.

Final Amendments »