WASHINGTON - In most cases two wrongs don't make a right, but a proposal on the table would allow pension plans already involved in a prohibited transaction to commit a second one to correct the first.
The proposal, by the Labor Department's Pension and Welfare Benefits Administration, is "an indication that the Labor Department is interested in facilitating the exemption process," according to Peter Turza, an attorney at Gibson, Dunn & Crutcher in Washington.
Under current regulations, plans may do a second prohibited transaction if the Labor Department and a U.S. District Court approve it, or if the plan applies for a prohibited transaction exemption and it is approved by the department.
Under the proposed regulation, however, the court step would be eliminated as would the prohibited transaction exemption application. But, the pension plan would have to meet certain Labor Department requirements, and the Labor Department would have to be involved in the settlement.
Frequently, the Labor Department investigates plans and finds they committed a prohibited transaction.
According to Seth Tievsky, a principal at Ernst & Young, Washington, it's fairly common for a plan to unknowingly involve itself in a prohibited transaction.
What's more, to get out of the first prohibited transaction, plans sometimes need to commit a second one.
A prohibited transaction is a violation of the Employee Retirement Income Security Act of 1974, outlawing certain transactions between a plan and a related party, such as a plan fiduciary, plan sponsor or service provider.
"The rules are set to deal with all kinds of conflict of interest situations, and there are situations that are not at all clear," Mr. Tievsky said.
The proposed regulation would only apply to plans that receive a voluntary compliance letter from the Labor Department.
Charles Lerner, the department's director of enforcement, said substantially fewer than the 500 or so voluntary compliance letters that go out each year would be affected by the proposed regulation.
In one example described by Labor Department officials in the Federal Register, the department might find that a plan has made a loan to a company wholly owned by a plan fiduciary, which would qualify as a prohibited transaction.
In such a case, the Labor Department would send the plan fiduciaries a voluntary compliance letter outlining the violation and what the department would like the plan to do with the problem. The matter is then settled or taken to court.
Under the proposed regulation, the department and the plan fiduciary in the example could more easily agree to settle out of court. As part of the agreement, the plan fiduciary might purchase the loan from the plan for more than its market value or what's owed on the loan plus interest - itself a prohibited transaction under normal circumstances - to remedy the first transaction.
In the past, the second transaction would have been subject to the department's lengthy prohibited transaction exemption process.
In addition, the party who commits the prohibited transaction with the plan may not have to pay additional taxes for committing either prohibited transaction.
Under current law, in certain cases, the party who commits the transaction must pay a determined tax on a prohibited transaction once it's discovered.
Ivan Strasfeld, director of exemption determinations for Labor Department, said the proposal is part of Vice President Al Gore's plan to streamline federal government.
"It may make (the prohibited transaction exemption process) easier, and employers might not incur additional expenses," according to Mr. Strasfeld.