DOL Proposes Updates to Application Process for Prohibited Transaction Exemptions

On March 9, 2022, the DOL proposed rules to update the application process for prohibitive transaction exemptions under ERISA and the Code. According to the DOL, the changes are designed to create greater consistency and transparency in the exemption application process. The proposed rule amends the existing prohibited transaction exemption procedure, which was published back in 2011.

ERISA establishes an extensive framework of standards and rules that govern the conduct of ERISA plan fiduciaries and safeguard the integrity of employee benefit plans. As part of this structure, ERISA and the Code generally prohibit a plan fiduciary from causing the 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.

However, the DOL and IRS have the authority to grant administrative exemptions from the prohibited transaction rules upon a finding that relief is: (1) administratively feasible, (2) in the interests of the plan and its participants and beneficiaries and (3) protective of the rights of participants and beneficiaries of such plan. Such exemptions may be granted on a class or individual basis.

The regulators are also responsible for maintaining procedures for granting administrative exemptions, including the application and documentation requirements. Accordingly, the proposed rule clarifies the types of information and documentation required to complete an application to the DOL and the related timing requirements. It expands opportunities for applicants to submit information electronically. The proposed rule also explains which documents are included in the administrative record for an application and when the administrative record is available for public inspection.

The scope of the application procedures is also addressed. Specifically, the proposed rule indicates the DOL will grant administrative exemptions in its sole discretion and is not bound by prior exemptions based upon similar facts nor by DOL commentary provided in response to oral inquiries. If retroactive relief is requested for a prior prohibited transaction, the DOL will apply a high level of scrutiny and consider whether the plan participants and beneficiaries were harmed by the transaction.

The proposed rule also explains the types of exemption applications the DOL will not consider. The DOL would not review applications that fail to include current information, involve a transaction subject to an investigation under ERISA or federal or state law, or include confidential information.

Additionally, the proposed rule revises and adds certain definitions. For example, the definition of an affiliate is expanded to include all employees and officers (rather than only those who are highly compensated or have authority, responsibility, or control related to the custody, management or disposition of relevant plan assets).

Employers who sponsor ERISA plans, and particularly those considering filing an application for a prohibited transaction exemption, should be aware of the proposed rule. The DOL requests comments regarding the proposed rule and encourages electronic submission in accordance with the specified instructions. The proposed rule is scheduled to take effect 90 days after publication in the federal register.

Proposed Rule: Procedures Governing the Filing and Processing of Prohibited Transaction Exemption Applications »