Labor Department Proposes Interest Free Loans And Credit For Plan Y2k Problems

Archived News Release — Caution: Information may be out of date.

The U. S. Department of Labor’s Pension and Welfare Benefits Administration (PWBA) today proposed an amendment to an existing class exemption which would allow plans to receive interest free loans and extensions of credit from related parties to pay for unanticipated Y2K computer problems. Since 1998, PWBA has been providing guidance to the plan community in an effort to help them prepare for their Y2K contingency planning.

Employee benefit plans use computers to perform a variety of calculations, including benefit calculations and payments, eligibility, vesting, funding calculations, health claims processing, and plan investments. The President’s Council on Year 2000 Conversion, in its November 1999 quarterly assessment of the Year 2000 problem, reported a high degree of confidence in the financial services sector, with available information indicating that over 99 percent of this sector is Year 2000 ready. Nevertheless, it remains possible that unanticipated Y2K related problems could temporarily disrupt computer systems, and plan officials must, therefore, develop contingency plans to assure continuity of plan operations.

Alan Lebowitz, Deputy Assistant Secretary of Labor for PWBA said, "While the department believes that most plans will continue to operate without interruption, our exemption gives plans access to additional resources in prudently planning for all Y2K contingencies. If adopted, the exemption will remove technical restrictions while protecting plan funds and workers’ benefits from unanticipated problems associated with malfunction of plan computers."

One side-effect of a possible Y2K disruption for plans could be temporary cash flow problems or computer malfunctions that affect essential plan operations. The interest free loans or extension of credit could be used to facilitate transfers of all or part of participants’ accounts from one investment option to another, participant loans, temporary overdraft protection or repairs to a plan’s internal computer systems.

The proposed exemption would allow plans to receive temporary loans and extensions of credit to meet Y2K contingencies if certain conditions are met. This action amends an existing exemption — Prohibited Transaction Exemption 80-26. The department has authority to provide administrative exemptions for transactions which otherwise would be forbidden under the Employee Retirement Income Security Act (ERISA).

The conditions of the amendment, which are identical to PTE 80-26, would allow loans and extensions of credit for no more than 14 months, beginning Nov. 1, 1999. All loans must be repaid by Dec. 31, 2000. Among the conditions of the temporary exemption are requirements that:

— no interest or other fee is charged to the plan and no discount for payment in cash is relinquished by the plan;

— the loans and extensions of credit are unsecured;

— proceeds of the loans and extensions of credit are used only for purposes incidental to ordinary plan operations which are affected by the Y2K problem; and

— the loans or extensions of credits are not directly or indirectly made by a plan.

Written comments and requests to hold a public hearing should be submitted by Jan. 13, 2000 to the Office of Exemption Determinations, Pension and Welfare Benefits Administration, Room N-5649, U. S. Department of Labor, 200 Constitution Avenue, N.W., Washington, D. C. 20210, Attention: Y2K Interest Free Loans.

U.S. Department of Labor news releases are accessible on the Internet. The information in this news release will be made available in alternate format upon request (large print, Braille, audio tape or disc) from the Central Office for Assistive Services and Technology. Please specify which news release when placing your request. Call 202.693.7773 or TTY 202.693.7755.

Archived News Release — Caution: Information may be out of date.

Contact Name: Gloria Della
Phone Number: 202.219.892