Federal Register: July 21, 2006 (Volume 71, Number 140)
DOCID: FR Doc E6-11548
DEPARTMENT OF LABOR
Employee Benefits Security Administration
DOCUMENT ID: [Application No. D-11330, et al.]
ACTION: Employee benefit plans; individual exemptions:
DOCUMENT ACTION: Notice of proposed exemptions.
Proposed Exemptions; The Young Men's Christian Association Retirement Fund-Retirement Plan (the Plan)
DATES: Effective Date: This proposed exemption, if granted, will be
effective as of July 1, 2006, the date of the beginning of the Plan year.
Summary of Facts and Representations
1. The Application for this proposed exemption was submitted on behalf of the Young Men's Christian Association Retirement Fund (the Sponsor or Fund) and the Plan it sponsors, The Young Men's Christian Association Retirement FundRetirement Plan (the Plan) with respect to the Plan's procedures for the collection of employer contributions from participating employers in the Plan for plan years commencing July 1, 2006 and thereafter. The Applicant states that no provision of the proposed exemption would extend to the failure of an employer to timely forward participant contributions to the Plan.
The Fund is the named fiduciary for the Plan and acts as trustee of the Plan. The Applicant states that other ERISA fiduciaries include the senior officers of the Fund in their capacity as plan administrator. These executive officers are employees of the Fund, who may act as plan administrator, and they acknowledge fiduciary responsibility in that context. The Sponsor will bear the costs of the exemption application and notifying interested persons.
2. The Applicant states that the Plan is a multiple employer church
money purchase pension plan under Code section 401(a). The Applicant
further states that as of July 1, 2006, the Plan will be treated as
having made an election under Code section 410(d) and, thus, will be an
``electing'' money purchase defined contribution church plan, subject
to the applicable provisions of ERISA and the Code.\1\ The Sponsor is a
separately incorporated New York notforprofit corporation, which was
established in 1921 for the express purpose of providing retirement
benefits to employees of Young Men's Christian Associations (YMCAs or employers) throughout the United States.
\1\ The Applicant notes that pursuant to legislation passed by Congress and signed into law by President Bush on December 21, 2004 (Pub. L. 108476) (Legislation), the Sponsor's status as a church pension fund (within the meaning of Code section 414(e)(3)(A)) and the Plan's status as a defined contribution money purchase church pension plan (within the meaning of Code section 414(e)) was confirmed.
Since its founding, the Plan has provided retirement benefits to the employees of participating YMCAs. As of June 30, 2005, the Plan covered more than 75,000 participants, including over 8,600 retired participants and beneficiaries. The Plan's participating employers consist entirely of separately incorporated YMCAs throughout the United States. As of May 5, 2006, there were 967 corporate chartered YMCAs that operate 2,600 branches. As of June 30, 2005, the Plan had 920 participating employers, and in the last year, has received over $168 million in plan contributions. As of June 30, 2005, the most recent available valuation date for the Plan, the aggregate fair market value of the Plan's assets was $2,171,230,098, and as of June 30, 2005, the fair market value of the total assets that are attributable to the contributions to the Plan was approximately $803,355,137. The fair market value of the total assets that are attributable to contributions made to the Plan in the three year period ending June 30, 2005 was $480 million of which approximately $400,000 represented delinquent employer contributions. The delinquent amounts represent less than one tenth of 1% of such contribution to the Retirement Plan.
3. The Applicant states that, under the Plan, a participant's benefit is based upon the sum of the contributions made by the participant and his employer, plus interest that is periodically credited as determined by the Board of Trustees of the Sponsor. According to the Applicant, pursuant to the terms of the Plan, participation by a YMCA employer in the Plan is voluntary but if a YMCA does participate, it is mandatory that the YMCA submit employer contributions to the Plan on behalf of all of its eligible employees, including employees located at the YMCA's various chapters (also known as branches). The Applicant represents that, pursuant to the Legislation, commencing with the plan year beginning on July 1, 2006, the Plan (but not any reserves held by the Sponsor with respect to such Plan or other assets held by the Sponsor) will be treated as having made an election under Code section 410(d). At that time, the Plan will be treated as an ``electing'' church plan subject to the applicable provisions of ERISA and the Code.
The Applicant notes that, pursuant to Sections 1.4 and 14.3 of the Plan, participating YMCA employers are required to sign a written participation agreement with the Board of Trustees of the Sponsor, pursuant to which the employer agrees to make participation in the Plan a condition of employment for all new employees and also agrees to enroll its eligible employees and make regular timely payments required by the Plan on behalf of its employees. In addition, each participating association agrees to permit auditors selected by the Sponsor's Board of Trustees to examine the books and records of the participating employer to determine whether the participating employer is participating in accordance with the provisions of the Plan.
4. The Applicant asserts that the Plan, like many other multiple employer plans, especially plans analogous in size, from time to time encounters participating employers who fail to make timely contributions to the Plan. This delinquency in the past has resulted from various reasons, including personnel changes at the participating YMCA which caused an administrative failure to make the contribution on time and failures relating to data collection issues at the participating employers. These delinquencies have been pursued through reasonable, diligent and systematic collection efforts by the Sponsor, which require that the employer make up the contributions with interest.
The YMCA Retirement Fund Collection Procedure submitted by the Applicant in a June 28, 2006 correspondence to the Department provides that employer contributions are required to be transmitted by the YMCA employers to the Fund by the 15th business day of the month following the due date. On the 9th business day of the following month, the Fund sends an ``urgent reminder'' fax or email to the Plan Administrator of the participating employers who have not yet remitted their contributions. On the 12th business day, a second notice is sent to the employer's CFO and on the 14th business day, a third notice is sent to the employer's CEO. On the 16th day, the Fund sends a letter indicating contributions are delinquent to the employer's CFO and copies the CEO and the Chairman of the employer's Board of Trustees. At 2 months past due, a personal letter is sent to the CEO of the employer and at 3 months past due, a personal letter is sent to the CEO and the Chairman. At 4 months past due, the Fund sends a letter to each participant at the employer outlining the situation with copies to the CEO and the Chairman. At 5 months past due, the Fund sends a letter to the CEO and the Chairman detailing the IRS consequences for delinquent contributions and offering assistance in working out a payment schedule if the YMCA is experiencing ``extreme financial hardship.'' At 6 to 8 months past due, there are continued efforts to encourage payments by the employer and a possible warning of expulsion from the Fund.
Delinquencies are reported monthly to the corporate offices of the YMCA of the U.S.A. and to the appropriate regional Network Consultants after the close of the month. Quarterly confirmations are sent to the CEO of each employer indicating whether contributions were made timely. The Fund's Finance Department periodically runs reports to track any employers that are delinquent and the Executive V.P. of the Fund maintains a ``Past Due Contributions Report'' on the status of each delinquent employer. The Fund's management may determine that yearly reminders or questionnaires regarding timely remittance of employer contributions should be sent to previously delinquent employers to encourage compliance. On occasion, the Fund's internal audit staff will conduct onsite reviews to access an employer's compliance.
5. The Plan will distribute a notice to the participating employers
describing the Plan's procedures for the collection of late employer
contributions and the determination by the Plan that a delinquent
contribution is uncollectible (the Notice).\2\ New participating
employers will receive the Notice within 30 days of signing the written
participation agreement. The Notice will provide the participating
employers with a detailed explanation of the steps used by the Plan to
determine: the time period for the making of such delinquent
contribution; whether to permit such delinquent contribution to be made in periodic payments; that the delinquent contribution is
uncollectible; and whether to terminate efforts to collect such contribution.
\2\ The Notice will be distributed in conjunction with the notice to interested persons that is required to be provided within 30 days after this proposed exemption is published in the Federal Register.
6. The Applicant states that often the delinquency is a result of an administrative failure, and as a result of its diligent collection efforts, the contributions and interest, are made to the Plan. The Applicant notes, however, that in certain situations, the participating employer is not able to make the required contributions, for example, when the participating employer's solvency is in jeopardy or where there are other adverse financial conditions that exist. In such cases, the Sponsor still seeks full contributions from the participating employer, although often the Sponsor will agree to accept the required contributions over a longer period of time in installments until the solvency issues are resolved. In rare cases, the Sponsor decides to terminate further collection efforts based on the participating employer's insolvency coupled with the expense of continued collection efforts with respect to such participating employer. The Sponsor may, as it deems appropriate, expel a delinquent YMCA employer and preclude it from all future participation in the Plan or pursue civil action against a delinquent YMCA employer to collect contributions. The Applicant further states that, although the Sponsor seeks to prevent such delinquent payments through communication and the use of the audit function permitted by the Plan, given the size of the Plan, the number of participating employers, and the varying size of the workforces at the participating employers, it is likely that the Plan will face delinquent contributions in the future. This is even more significant given the amount of contributions the Plan receives.
The approximately 920 participating employers in the Plan vary in size and financial health, which can at times result in the delinquent payment of contributions to the Plan. The Plan, through diligent and systematic collection efforts, has been able to recover delinquent employer contributions, plus interest. By virtue of the Plan's efforts to collect delinquent payments, including extending the time by which participating employers must make such contributions, the Plan has benefited by increasing the total assets available to provide retirement benefits to its participants. By continuing such collection efforts, the participants and beneficiaries of the Plan will benefit through the receipt of the full amount of their promised plan benefits.
7. Once the Plan's Code section 410(d) election becomes effective, for the July 1, 2006 plan year and plan years thereafter, the Plan will be subject to the prohibited transaction provisions of section 406 of ERISA. Under ERISA sections 406(a)(1)(B) and 406(a)(1)(D), a fiduciary shall not cause a plan to engage in a transaction if he knows or should know that such transaction constitutes a direct or indirect (i) lending of money or other extension of credit between the plan and a party in interest; or (ii) a transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan. Section 4975 of the Code contains parallel prohibited transaction provisions. By allowing participating employers to make payments at a later date, over a longer period of time than prescribed by the Plan or in rare instances, ceasing collection efforts against a participating employer (where the costs of collection may far outweigh the amounts involved), the Plan may be viewed as extending credit from the Plan to the participating employer, (i.e., a party in interest pursuant to ERISA section 3(14)(C)), or transferring plan assets to a participating employer in violation of ERISA sections 406(a)(1)(B) and 406(a)(1)(D) (and the related parallel prohibited transaction provisions under the Code).
The Applicant represents that the Sponsor, as a church pension fund
sponsoring a multiple employer church pension plan under the Code, is a
unique organization. However, in the context of multiple employer plans
generally, the practice of delaying or extending the time for payment
of employer contributions under the plan is not uncommon. Prohibited
Transaction Class Exemption 761 (41 FR 12740, Mar. 26, 1976) (PTE 76
1) provides an exemption from ERISA sections 406(a) and 407(a) for
multiple employer plans maintained pursuant to one or more collective
bargaining agreements between an employee organization and more than one employer. The preamble to the proposed
class exemption recognizes that ``multiemployer plans are often confronted with the problem of delinquency in participating employer contributions * * * and at times one or more participating employers may be delinquent in making such contributions.'' 40 FR 23798 (Jun. 2, 1975). Further, the preamble notes, ``[I]n the course of their collection efforts, multiemployer plans frequently delay or extend the time for payment of contributions pursuant to understandings, arrangements or agreements in circumstances where it appears that collection of the full amount due the plan would be jeopardized were the plan to attempt to force immediate full payment.'' Id.
8. The Applicant states that although PTE 761 was reserved for
multiple employer plans \3\ maintained pursuant to a collective
bargaining agreement, such fact does not decrease the significance of
the acknowledgement that multiple employer plans (regardless of the
industry or whether it is pursuant to a collective bargaining
agreement) face the same issues that were the basis for such class
exemption. Any multiple employer plan, especially one that is similar
in size to the Plan, would confront the issue of delinquent
contributions and the need for reasonable and cost effective collection procedures.
\3\ As the Department noted in paragraph (5) of the General Information section of the preamble, this class exemption covers not only multiemployer plans, but also other multiple employer plans.
The Department notes that the preamble to PTE 761 recognized that the delinquency problem existed in other contexts in responding to a comment received from an employer association, the sponsor of an employee benefit plan which was not collectively bargained, that had a significant number of unaffiliated employers contributing to the plan. The employer association stated that its plan had many of the same problems regarding delinquent employer contributions that are encountered by multiemployer plans and, therefore, PTE 761 should be made applicable to plans that are not collectively bargained. The Department responded that ``because plans which are not collectively bargained are not jointly administered within the meaning of section 302(c)(5) of the LMRA, the circumstances and safeguards involved in the collection of delinquent employer contributions by such plans may be different from those involved in collectively bargained, jointly administered multiple employer plans.'' The Department further noted that the ``letter of comment did not contain sufficient information regarding this question and, therefore, the Department and the Service are not able at this time to grant a class exemption covering plans which are not collectively bargained.'' The Department, however, noted that the agencies are ``prepared to consider applications for an exemption for transactions involving the collection of delinquent employer contributions by employee benefit plans which are not collectively bargained.''
9. The Applicant asserts that the Plan requires employers to make contributions in order to provide participants and beneficiaries with retirement benefits. To the extent that an employer does not make such required contributions, delinquent contributions would directly and adversely affect the value of the account balances for the plan participants of that employer, which in turn could adversely affect the amount converted into a retirement annuity by the Sponsor for such participants. As a defined contribution plan, benefits are measured directly by the value of a participant's account balance, which account is credited with employer contributions. Failure to receive all required contributions will diminish a participant's account balance value and, thus, his or her retirement benefit amount and post retirement financial security. Participants have a reasonable expectation that the full amount of their employer's contributions will be made on their behalf. The Sponsor's procedure for the recovery of delinquent contributions allows the participants' retirement benefit expectations to be realized.
Additionally, the Applicant states that the extended payment plan contributions are required under Plan procedures to include lost earnings (based upon the Plan's crediting interest rate) and thus, the Plan's procedures are designed to make the participants whole.
The Applicant notes that, because the proposed transaction is expected to be a recurring transaction between the Plan and the participating employers, the Plan has established specified written collection procedures, which create appropriate safeguards that should make it feasible for the Department to grant the requested exemption. The proposed transaction is in the interests of the Plan and its participants and beneficiaries since the ability of the Plan to collect employer contributions promotes the purpose of the Plan of providing retirement benefits to its participants and beneficiaries. Additionally, the ability of the Plan to delay or extend the time for a participating employer to make its contributions to the Plan aides the Plan in helping a participating employer manage its retirement plan obligations when the participating employer is going through a difficult financial period or when it experiences personnel changes or administrative issues that prevent the employer from making its contributions on time.
The Applicant believes the proposed exemption will permit the Plan to facilitate employer participation, which, in turn, supports the provision of retirement benefits to all YMCA employees. The proposed transaction is protective of the rights of the Plan participants and its beneficiaries because the ability to collect delinquent employer contributions will result in increased assets for the Plan. The Applicant adds that the manner in which collection of such delinquent contributions is proposed to be carried out protects participants' and beneficiaries' interests.
10. In summary, the Applicant represents that the proposed
transactions meet the requirements set forth in the proposed exemption
in light of the Plan's adoption of procedures for the orderly
collection of delinquent employer contributions that involve
reasonable, diligent and systematic methods for the review of employer
contribution accounts. Prior to the Plan entering into an alternative
arrangement, agreement or understanding, the Plan uses reasonable, diligent and systematic efforts, as appropriate under the
circumstances, to collect outstanding employer contributions. The terms of such arrangement or the Plan's determination to consider a contribution due to the Plan as uncollectible and to terminate efforts to collect such contribution, are in writing and are reasonable under the circumstances in light of the likelihood of collecting the contributions weighed against the expenses that would be incurred by continuing to attempt to collect the contributions through other means. Any arrangement by the Plan in connection with the collection of such contributions will be for the exclusive purposes of facilitating the collection of such contributions. The Plan's procedures and the general guidelines to be followed in undertaking to collect such contributions or in determining that the delinquent contribution is uncollectible and in deciding to terminate efforts to collect such contribution are described in a notice to be provided to all the participating employers in the Plan.
Notice to Interested Persons
The notice to interested persons, along with the supplemental statement required by Department Regulation 2570.43(b)(2), will be provided by mailing notices to all terminated YMCA employees who have a deferred vested benefit under the Plan by firstclass mail to their last known address on the books and records of the Fund and to all active YMCA employees who currently participate in the Plan by posting such notice at their place of employment in those locations which are customarily reserved for employeremployee communications or by personal delivery. Interested persons include all active employees who currently participate in the Plan and all former YMCA employees with deferred vested benefits. The notice to interested persons, which will contain the information required by Department Regulation Sec. 2570.43, will be mailed, posted or delivered, as the case may be, within 30 days after the Notice of Proposed Exemption is published in the Federal Register. The notice to interested persons will inform such persons of their right to comment on the proposed exemption within 60 days after the Notice of Proposed Exemption is published in the Federal Register.
This document contains notices of pendency before the Department of Labor (the Department) of proposed exemptions from certain of the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (the Act) and/or the Internal Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or requests for a hearing on the pending exemptions, unless otherwise stated in the Notice of Proposed Exemption, within 45 days from the date of publication of this Federal Register Notice. Comments and requests for a hearing should state: (1) The name, address, and telephone number of the person making the comment or request, and (2) the nature of the person's interest in the exemption and the manner in which the person would be adversely affected by the exemption. A request for a hearing must also state the issues to be addressed and include a general description of the evidence to be presented at the hearing.
Young Men's Christian Association Retirement Fund-Retirement Plan,
The proposed exemptions were requested in applications filed pursuant to section 408(a) of the Act and/or section 4975(c)(2) of the Code, and in accordance with procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). Effective December 31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the Secretary of the Treasury to issue exemptions of the type requested to the Secretary of Labor. Therefore, these notices of proposed exemption are issued solely by the Department.
The applications contain representations with regard to the proposed exemptions which are summarized below. Interested persons are referred to the applications on file with the Department for a complete statement of the facts and representations.
The Young Men's Christian Association Retirement FundRetirement Plan, (the Plan) Located in New York, NY, [Application No. D11330]. Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act (or ERISA) and section
4975(c)(2) of the Code and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). Transactions and Conditions
(a) If the proposed exemption is granted, the restrictions of section 406(a) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the Code, shall not apply, effective July 1, 2006, to:
(1) Any arrangement, agreement or understanding between The Young Men's Christian Association Retirement FundRetirement Plan (the Plan) and any participating employer whose employees are covered by the Plan, whereby the time is extended for the making of a contribution by such a participating employer to such Plan, if the following conditions are met:
(i) Prior to entering into such arrangement, agreement or understanding, the Plan has made, or has caused to be made, such reasonable, diligent and systematic efforts as are appropriate under the circumstances to collect such contribution;
(ii) The terms of such arrangement, agreement or understanding are set forth in writing and are reasonable under the circumstances based on the likelihood of collecting such contribution or the approximate expenses that would be incurred if the Plan continued to attempt to collect such contribution through means other than such arrangement, agreement or understanding;
(iii) Such arrangement, agreement or understanding is entered into or renewed by the Plan in connection with the collection of such contribution and for the exclusive purpose of facilitating the collection of such contribution;
(iv) The Plan's procedures and the guidelines to be followed in undertaking to collect such contributions are described in a notice provided to all the employers participating in the Plan. This notice details the Plan's standard operating guidelines for the collection of late employer contributions (the Notice). The Notice provided to all participating employers contains the methodology of the Plan that applies with respect to the determination to extend the time period for the making of such delinquent contribution or to permit such delinquent contribution to be made in periodic payments. New participating employers will receive the Notice within 30 days of signing the written participation agreement; and
(v) The extension of time does not apply to any failure of an employer to timely remit participant contributions to the Plan. (2) A determination by the Plan to consider a contribution due to the Plan from any participating employer any of whose employees are covered by the Plan as uncollectible and to terminate efforts to collect such contribution, if the following conditions are met: (i) Prior to making such determination, the Plan has made, or has caused to be made, such reasonable, diligent and systematic efforts as are appropriate under the circumstances to collect such contribution or any part thereof;
(ii) Such determination is set forth in writing and is reasonable and appropriate based on the likelihood of collecting such contribution or the approximate expenses that would be incurred if the Plan continued to attempt to collect such contribution or any part thereof; (iii) The Notice provided to all participating employers, which is described in section (a)(1)(iv) above, must also contain the methodology used by the Plan with respect to the determination that the delinquent contribution is uncollectible and in deciding to terminate efforts to collect such contribution; and
(iv) The determination that the contribution is uncollectible and the decision to terminate efforts to collect such contribution do not apply to any failure of an employer to timely remit participant contributions to the Plan.
(b) If an employer any of whose employees are covered by the Plan enters into an arrangement, agreement or understanding with the Plan as described in subparagraph (a)(1) with respect to the payment of such contribution, or if the Plan makes a determination described in subparagraph (a)(2), such employer shall not be subject to the civil penalty which may be assessed under section 502(i) of the Act, or to the taxes imposed by section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) through (D) of the Code, except in the case of an arrangement, agreement or understanding described in subparagraph (a)(1), where the terms thereof are clearly unreasonable under the circumstances based on the likelihood of collecting such contribution or the approximate expenses that would be incurred if the Plan continued to attempt to collect such contribution through means other than such arrangement, agreement or understanding.
(c) The Plan maintains for a period of six years the records necessary to enable the persons described in paragraph (d)
below to determine whether the conditions of this exemption have been met, except that:
(1) A prohibited transaction will not be considered to have occurred if, due to circumstances beyond the control of the Plan, the records are lost or destroyed prior to the end of the sixyear period, and
(2) No party in interest other than the Plan's fiduciaries shall be subject to the civil penalty that may be assessed under section 502(i) of ERISA or to the taxes imposed by section 4975(a) and (b) of the Code if the records are not maintained or not available for examination as required by paragraph (d) below.
(d)(1) Except as provided in subparagraph (d)(2) below and notwithstanding any provisions of section 504(a)(2) and (b) of ERISA, the records referred to in paragraph (c) above are unconditionally available at their customary location for examination during normal business hours by:
(i) Any duly authorized employee or representative of the Department of Labor or the Internal Revenue Service;
(ii) Any fiduciary of the Plan or any duly authorized employee or representative of such fiduciary;
(iii) Any participating employer of the Plan; and
(iv) Any participant or beneficiary of the Plan or duly authorized employee or representative of such participant or beneficiary. (2) None of the persons described in subparagraph (d)(1)(ii), (iii) and (iv) above shall be authorized to examine commercial or financial information which is privileged or confidential, or records that are unrelated to the Plan.
FOR FURTHER INFORMATION CONTACT
Wendy M. McColough of the Department, telephone (202) 6938540. (This is not a tollfree number.) Little Rock Diagnostic Clinic, P.A., Profit Sharing Plan (the Plan). Located in Little Rock, AR, [Application No. D11350].
The Department is considering granting an exemption under the authority of section 408(a) of the Act (or ERISA) and section 4975(c)(2) of the Code and in accordance with the procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption is granted, the restrictions of sections 406(a), 406(b)(1) and (b)(2) of the Act and the sanctions resulting from the application of section 4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the Code, shall not apply to the proposed cash sale by the Plan of a leased fee interest (the Leased Fee Interest) in certain real property (the Property) to LRDC Real Estate, LLC (the LLC), a party in interest with respect to the Plan.
This proposed exemption is subject to the following conditions: (a) The sale is a onetime transaction for cash.
(b) The sales price for the Leased Fee Interest is based on its fair market value as established by a qualified, independent appraiser, who updates the appraisal on the date the sale is consummated. (c) The terms of the proposed transaction are at least as favorable to the Plan as those obtainable in an arm's length transaction with an unrelated party.
(d) The Plan does not pay any real estate fees or commissions in connection with the sale.
(e) An independent fiduciary is appointed to approve and monitor the sale transaction on behalf of the Plan.
(f) Within 90 days of the date the notice granting this exemption is published in the Federal Register, the Little Rock Diagnostic Clinic, P.A. (LRDC), the Plan sponsor, files a Form 5330 with the Internal Revenue Service (the Service) and pays all applicable excise taxes that are attributed to the past and continued leasing arrangement (the Ground Lease) between the Plan and the LRDC Land Company (the Land Company) of certain land (the Land) comprising part of the Property. Summary of Facts and Representations
1. The Plan is a defined contribution profit sharing plan, which as stated above, is sponsored by LRDC. The Plan's current trustees and decision makers with respect to Plan investments are Richard W. Houk, J. Neal Beaton and Paul Williams (the Trustees). The Trustees are employees and shareholders of LRDC, and participants in the Plan.
As of December 31, 2005, the Plan had 137 participants and beneficiaries. As of December 31, 2005, the Plan had approximately $23,917,262 in assets.
2. LRDC is a professional corporation located on the campus of the Baptist Medical Center at 10001 Lile Drive, Little Rock, Arkansas. LRDC provides medical services in the internal medicine field as well as ancillary services such as laboratory work and radiology services.
3. The Land Company is a general partnership that was created in 1974 for the sole purpose of leasing real property to LRDC for the operation of a medical clinic. The Land Company is owned 24% by current shareholder/employees of LRDC. The 76% remainder of the Land Company is owned by former shareholder/employees of LRDC and former employees of LRDC who were not shareholders of LRDC.
4. The LLC is a limited liability company that was formed in 2005 for the purpose of purchasing real estate. The principals of the LLC are LRDC physicians. Six of the physician owners are also partners in the Land Company.
5. Among the assets of the Plan is its Leased Fee Interest in the
Property, which also bears the 10001 Lile Drive address and is legally
described as ``Lot 4A, Baptist Medical Center Development, City of
Little Rock, Pulaski County, Arkansas.'' The Plan's Leased Fee Interest
or ``leased fee estate'' \4\ consists of a present possessory interest
in approximately 4.444 acres of land that was acquired by the Plan in
1972 for $56,000 from an unrelated party. The Land is subject to the
provisions of the Ground Lease executed between the Plan and the Land
Company. In addition, the Plan's Leased Fee Interest includes a future
reversionary interest in a 64,945 square foot medical building (the
Building) that was constructed on the Land by the Land Company in 1976.
The Land Company leases the Building to LRDC. At the conclusion of the
Ground Lease, both the Land and the Building will revert to the Plan.
The Land and the Building, which are together referred to herein as
``the Property,'' are contiguous to other real property owned by the LLC.\5\
\5\ The term ``leased fee estate'' refers to an ownership interest held by a landlord with the right of use and occupancy conveyed by lease to others. The rights of the lessor (the leased fee estate owner) and the lessee are specified by contract terms contained within the lease. See APPRAISAL INSTITUTE, THE DICTIONARY OF REAL ESTATE APPRAISAL (4th ed. 2002).
\6\ Specifically, in Final Authorization Number 200511E (July 11, 2005), the Department approved a transaction involving the sale by the Plan to the LLC of a 2.2 acre tract of vacant real property (Tract 2), that is adjacent to the subject Property.
6. On July 20, 1982, the Department granted Prohibited Transaction
Exemption (PTE) 82126 at 47 FR 31457. PTE 82126 permitted the Plan to
lease the Land \6\ underlying the Building to the Land Company under
the provisions of the Ground Lease. In addition, PTE 82126 allowed the
Plan to subordinate its title on the leased premises to the mortgage
lien holder of the Building constructed thereon, which was an unrelated bank.
\6\ Although PTE 82126 states that the Land consists of 4.368 acres, this description is in error and should have been revised to read ``4.444 acres.''
The Ground Lease was divided into two parts. It had a temporary
term beginning April 1, 1974 and ending July 31, 1975, and a permanent
term of 25 years, beginning August 1, 1975 and ending July 31, 2000.
The rent for the temporary term was equal to the 1974 real estate taxes
and any other taxes assessed against the premises. The rent for the
permanent term was equal to $27,000 per year subject to adjustment every five years based on the Cost of
Living Index published by the Department. At the time the proposal underlying PTE 82126 was published in the Federal Register (see 47 FR 22251, May 21, 1982), the annualized rent being paid to the Plan was $41,196 or $3,433 per month, which was in excess of fair market value. The Ground Lease was triple net to the Plan and it could be extended for two additional five year terms, provided appropriate notice was given to the Plan.
Pursuant to an agreement dated May 8, 1974 and commencing August 1, 1975 for a period of 25 years (but subject to extensions), the Land Company started leasing the Building to LRDC under the provisions of a written lease (the Building Lease). Rents generated from the Building Lease were intended to pay the Land Company's obligations under the Ground Lease and to amortize its indebtedness under the mortgage. (In effect, LRDC also commenced subleasing the Land from the Land Company under the established leasing arrangements.)
Eventually, the Trustees and the Land Company proposed to amend the Ground Lease to provide for annual cost of living adjustments. On April 8, 1982, the partners of the Land Company, who had a net worth in excess of $8 million agreed to indemnify the Plan from all losses, damages, and expenses the Plan might sustain by the subordination of its title under the terms of an indemnification agreement. No other modifications of the Ground Lease were made.
The fair market rental value of the amended Ground Lease was determined by Ronald E. Bragg, MAI, a qualified, independent appraiser. In an appraisal report dated August 28, 1981, Mr. Bragg placed the fair market rental value of the Land at $3,161.67 per month or $37,940, annually. Mr. Bragg also determined that the fair market value of the Land was $271,000 as of August 1981.
On September 10, 1981, Twin City Bank (TCB) of North Little Rock, Arkansas, was appointed as an ``independent real estate investment manager.'' In this capacity, TCB had sole responsibility and discretion to direct the Trustees regarding the management of real property held by the Plan. TCB was responsible for making the determination that the amended Ground Lease was an appropriate and suitable investment for the Plan and in the best interests of the Plan's participants and beneficiaries. TCB was required to reconsider the appropriateness of the amended Ground Lease prior to the time of its execution and to monitor and enforce the terms of such lease on behalf of the Plan, including making demand for timely payment, bringing suit in the event of a breach, keeping accurate records regarding computations of the costofliving adjustments, and reporting annually to the Trustees.
Further, TCB reviewed the subordination provision of the amended
Ground Lease.\7\ In this regard, TCB determined that the subordination
provisions were in accordance with normal business practices and the
requirements of lenders in the area and this factor did not alter its opinion of the contemplated transactions.
\7\ The original loan for the construction of the Building was $1.35 million. At the time PTE 82126 was proposed, the loan balance was approximately $1.2 million. TCB estimated that the fair market value of the Building was $2.28 million as of July 1, 1980 and that there was sufficient equity present to protect the Plan and its participants.
On December 31, 1983, the Ground Lease was again amended to make the cost of living adjustment annual instead of once every five years and to remove an option to purchase provision. In addition, the base period for the calculating the cost of living adjustment was revised to ``June 30, 1980'' instead of ``December 31, 1981.''
7. The Ground Lease is currently in its first five year extension
and there is no mortgage encumbering the Building.\8\ As of August 31,
2005, the amount of monthly rental was $7,994, which is above fair
market rental value. At the end of the Ground Lease on July 31, 2010,
the Land and the Building will revert to the Plan.\9\ Although it is
represented that the provisions of the Ground Lease have been complied
with by the parties (i.e., rent has been paid in a timely manner and
there have been no defaults or delinquencies), LRDC acknowledges that
the ``independent real estate investment manager'' described in the
proposal to PTE 82126 was not always present to oversee such lease.
Accordingly, LRDC has agreed to file a Form 5330 with the Service
within 90 days of the date the notice granting this proposed exemption
is published in the Federal Register and pay all applicable excise
taxes that are attributed to the past and continued prohibited leasing
of the Land between the Plan and the Land Company under the Ground
Lease, due to the lack of oversight of such lease on a continuing basis by a qualified, independent fiduciary.\10\
\8\ Similarly, the Building Lease is subject to two five year extensions.
\9\ The term ``reversionary right'' refers to ``the right to possess and resume full and sole use and ownership of real property that has been temporarily alienated by a lease, an easement, etc.; [sic] may become effective at a stated time or under certain conditions, e.g., the termination of a leasehold, the abandonment of a right of way, the end of the estimated economic life of the improvements.'' See APPRAISAL INSTITUTE, THE DICTIONARY OF REAL ESTATE APPRAISAL (4th ed. 2002).
\10\ The Department is of the view that the presence of an independent fiduciary to represent the Plan's interest with respect to the Leased Fee Interest was a material factor in the Department's determination to grant exemptive relief. Accordingly, PTE 82126 was no longer effective when TCB stopped acting on behalf of the Plan as the ``independent real estate investment manager.''
8. Although there has been development around the vicinity of the Property, the value of the Property has not appreciated significantly in recent years. Moreover, the Building is a singleuse building that was constructed in 1976. Due to the age of the Building, significant improvements would be required to bring it up to current medical office standards. The Property has been on the market since December 2001 but it has drawn no firm offers. In order that the Plan may divest itself of its Leased Fee Interest in the Property, the Trustees propose to sell such interest to the LLC. Accordingly, an administrative exemption is requested from the Department.
If the exemption is granted, the sale will allow the Plan to convert the Property into a liquid asset and provide a better opportunity for growth and permit Plan participants to direct their account balances in the Plan into other investment vehicles. Also, in order to pay participants who will retire in the coming years, a significant amount of liquidity will be needed in the Plan's portfolio. Therefore, a cash sale of the Property will provide the needed liquidity. Furthermore, due to its ownership of a Leased Fee Interest, the Plan's options for administration and management are limited.
9. The proposed sale will be a onetime transaction for cash. The sales price for the Leased Fee Interest will be based upon its fair market value, as determined by a qualified, independent appraiser on the date the sale is consummated. Moreover, the Plan will not be required to pay any real estate fees or commissions in connection with the transaction.
10. The Property has been appraised annually by Mr. Ronald Bragg, the same qualified, independent appraiser utilized in PTE 82126. Mr. Bragg represents that he is independent of the parties involved in the proposed transaction, and states that he derives less than 1% of his gross annual revenues from LRDC and its affiliates. Mr. Bragg also states he is aware that his appraisal will be used by the LLC for purposes of obtaining an administrative exemption from the Department. [[Page 41477]]
In an appraisal report dated January 6, 2006 (the 2006 Appraisal), Mr. Bragg states that the Property rights being appraised are the rights of the holder of a ``leased fee estate.'' Mr. Bragg notes that this ownership interest does not confer to the Plan direct ownership rights in the Building. However, he explains that the Plan will have reversion rights to the Building upon the termination of the Ground Lease. For these reasons, Mr. Bragg does not believe the sales comparison approach or the cost approach to valuation is applicable. Nonetheless, he states that the sales comparison approach will be utilized in projecting the future reversion value of the Property.
Therefore, Mr. Bragg concludes in the 2006 Appraisal that the only approach to valuation that can directly address the ownership benefits that accrue to the Plan is the income capitalization approach. He explains that the ownership benefits are limited to the Plan's right to receive rental income under the Ground Lease and the right to the reversion of the Land and the Building at the termination of the Ground Lease. Under the income capitalization approach, he notes that the valuation would consist of a discounted cash flow analysis based upon the projected net cash flows to be generated under the terms of the Ground Lease and the projected reversion. This analysis would include current rent, projections of future rent increases as required by the Ground Lease, and an estimate of the net reversion value upon the termination of the Ground Lease.
Mr. Bragg states that based on his inspection, investigation and analysis of the Property, it is his opinion that the fair market value of the Leased Fee Interest was $3.1 million as of December 31, 2005. In making this determination, Mr. Bragg projected the Plan's reversionary interest in the Property at $4.6 million upon the termination of the Ground Lease. Then, selecting a discount rate of 12% to discount the Property's income stream, Mr. Bragg arrived at the $3.1 million estimated market value of the Leased Fee Interest. Mr. Bragg will update his appraisal on the date of the sale.
Thus, based upon the 2006 Appraisal, the Leased Fee Interest represents approximately 13% of the Plan's assets.
11. In an addendum to the 2006 Appraisal dated January 9, 2006, Mr. Bragg has provided three related value issues concerning the subject Property: (a) The fee simple value of the Property, as if unencumbered by the Ground Lease; (b) the contributory present value of the projected future reversion value of the Property; and (c) the relationship between the current rent paid by the Land Company under the Ground Lease and the current fair market ground rent.
With respect to the fee simple value of the Property, Mr. Bragg states that it would be the fair market value of the Property if it were not encumbered by either the Ground Lease or the Building Lease. In the 2006 Appraisal, he states that he provided an estimate of $4.6 million as the projected reversion value of the Property upon the termination of the Ground Lease. He says this estimate of value can also be considered as an estimate of the fee simple value of the Property at that point in time when it is no longer encumbered by either the Ground Lease or the Building Lease.
With respect to the contributory present value of the Property upon the termination of the Ground Lease, Mr. Bragg again utilizes the $4.6 million projected reversion value for the Property. He also has utilized a discount rate of 12% in converting the projected reversion value (and the projected ground rent) into an indication of present value. On the basis of his calculations, Mr. Bragg concludes that the projected reversion value of $4.6 million, four years and seven months from January 9, 2006, discounted at 12% would be $2,736,476.
As for the relationship between contract rent under the Ground Lease and the current fair market ground rent, Mr. Bragg states that if the Ground Lease was negotiated today, the first year's rent would be based upon 10% of the fee simple value of the Land ($700,000). Mr. Bragg explains that the annualized rent would be $70,000 or $5,833.33 per month. Because the current ground rent of $7,994 per month is contract rent, Mr. Bragg further explains that such rent substantially exceeds the fair market rental value of the Land. He notes that this is not a recent occurrence.
12. With respect to the proximity of the subject Property to other real property owned by the LLC (i.e., Tract 2, see Footnote 2), Mr. Bragg maintains that the proximity of the Property to Tract 2 had no impact on his estimate of the fair market value of the Leased Fee Interest and that no premium is warranted. In this regard, Mr. Bragg notes that there is an abundance of vacant, undeveloped land on the Baptist Medical Center Campus and it is ``basic supply and demand that creates value.'' According to Mr. Bragg, market value does not consider the specific buyer and seller but rather the market at large. Although Mr. Bragg concedes that the Property is adjacent to Tract 2, he states that the Property is also contiguous to vacant land along its southern and western sides. Due to the presence of the vacant land, Mr. Bragg represents that prospective buyers would have choices. Therefore, he does not believe the LLC should be required to pay a premium in order to acquire the Leased Fee Interest.
13. The Bank of Ozarks (the Bank) located in Little Rock, Arkansas will act on behalf of the Plan as the independent fiduciary with respect to the proposed sale. Specifically, the Bank through its Trust Division, has agreed to undertake the duties of the independent fiduciary. The Bank is a custodian of plan assets only and it maintains no retail banking relationship with LRDC, its affiliates, or their principals.
Writing on behalf of the Bank, Mr. Rex W. Kyle, President of the Bank's Trust Division states, in a letter dated January 4, 2006, that the Bank is an Arkansas statechartered bank with trust powers. He explains that the Trust Division administers and/or manages in excess of $500 million in accounts which include ERISA accounts.
Mr. Kyle states that the Bank is the largest state chartered bank fiduciary in Arkansas and has $2.1 billion in assets. Moreover, he indicates that the Bank's staff has over 150 years of combined experience and has served as both an independent and special trustee in various fiduciary capacities. Mr. Kyle represents that the Bank understands and accepts its duties, responsibilities and liabilities under the Act in serving as independent fiduciary for the Plan.
14. In determining whether the sale transaction is in the best interest of the Plan and its participants and beneficiaries, Mr. Kyle states that the Bank has relied on various appraisals of the Property, including the 2006 Appraisal. Based on these appraisals, Mr. Kyle states that the sale would permit the conversion of an illiquid investment with potentially high future maintenance costs into cash. Mr. Kyle also notes that the Building is over 20 years old and extensive renovations would be necessary to modernize it. He explains that without these renovations, LRDC would be required to move. Because there are no potential tenants in the immediate area, Mr. Kyle indicates that the Plan would hold an asset that would generate no income.
Mr. Kyle states that based on the 2006 Appraisal, the sale is
consistent with sales of similar properties which might be achieved in
the marketplace. He also indicates that the sale would eliminate any
conflict of interest and associated administrative burdens of ongoing
supervision that would be involved in continuing the Ground Lease. Moreover, Mr. Kyle notes that the current rent
under the Ground Lease exceeds fair market rent for the Land.
Additionally, Mr. Kyle states that the sale would allow a greater portion of the Plan's assets to be allocated to participantdirected accounts and would lower the overall cost of administration of the Plan.
As independent fiduciary, the Bank will monitor the sale transaction on behalf of the Plan and take all actions that are necessary and proper to enforce and protect the rights of the Plan and its participants and beneficiaries. In this regard, the Bank will be given full and complete discretion regarding all aspects of the sale.
15. In summary, it is represented that the proposed sale
transaction will satisfy the statutory criteria for an exemption under section 408(a) of the Act because:
(a) The sale will be a onetime transaction for cash.
(b) The sales price for the Leased Fee Interest will be based on its fair market value as established by a qualified, independent appraiser, who will update the appraisal on the date of the sale is consummated.
(c) The terms of the sale will be at least as favorable to the Plan as those obtainable in an arm's length transaction with an unrelated party.
(d) The Plan will not pay any real estate fees or commissions in connection with the sale.
(e) An independent fiduciary will approve and monitor the proposed sale transaction on behalf of the Plan.
(f) Within 90 days of the date the notice granting this exemption is published in the Federal Register, LRDC will file a Form 5330 with the Service and pay all applicable excise taxes that are attributed to the past and continued prohibited leasing of the Land under the provisions of the Ground Lease.
Notice to Interested Persons
Notice of the proposed exemption will be given to interested persons within 5 calendar days of the publication of the notice of proposed exemption in the Federal Register. The notice will be provided to active participants in the Plan by personal delivery and it will be mailed by firstclass mail to all others. The notice will inform interested persons of their right to comment on and/or to request a hearing with respect to the proposed exemption. Comments and requests for a hearing are due within 35 days of the publication of the proposed exemption in the Federal Register.