What Are the Rules for PTE 80-26 Loans to a Plan?

The Employee Retirement Income Security Act of 1974 (ERISA) establishes standards for individuals and entities managing employee benefit plans and their assets. A core component of ERISA is the prohibition of certain transactions between a plan and individuals or entities defined as “parties in interest.” These rules are designed to prevent self-dealing and conflicts of interest that could jeopardize the financial health of the plan. The lending of money or extension of credit between a plan and a party in interest is one such prohibited transaction.

Recognizing that some of these transactions could be beneficial to a plan, the Department of Labor (DOL) has the authority to grant exemptions. These Prohibited Transaction Exemptions (PTEs) permit specific transactions to occur, provided that conditions are met to protect the interests of plan participants and beneficiaries. One such exemption is PTE 80-26, which specifically addresses loans or other extensions of credit. This exemption provides a pathway for plans to receive necessary short-term funding under a controlled framework.

Understanding the Scope of PTE 80-26

The protections of PTE 80-26 are available only for a specific type of transaction involving a “party in interest.” Under ERISA, a party in interest is a broad category that includes the employer sponsoring the plan, any fiduciary of the plan (such as a trustee or investment manager), and persons providing services to the plan. It also encompasses certain employees, owners, and relatives of these individuals and entities. The rules are designed to cover anyone who might be in a position to exercise improper influence over the plan.

A fundamental aspect of PTE 80-26 is the direction of the financial arrangement. The exemption exclusively applies to loans or extensions of credit made from a party in interest to an employee benefit plan. It provides no relief for the reverse scenario, where a plan lends money to a party in interest, which remains a prohibited act under ERISA.

The exemption is also not universally available for all parties in interest. PTE 80-26 cannot be used for any transaction that involves an owner-employee, which is generally defined as a sole proprietor or a partner who owns more than 10 percent of either the capital or profits interest in a partnership. The restriction also extends to their family members and any corporation in which they own 50 percent or more of the stock.

Furthermore, the exemption explicitly carves out certain types of loans that are governed by other specific statutory rules. For instance, loans used to facilitate an employee stock ownership plan’s (ESOP) acquisition of employer securities are not covered by PTE 80-26. These transactions have their own detailed exemption under ERISA.

Required Conditions for the Exemption

To utilize the relief offered by PTE 80-26, a series of conditions must be satisfied. The first requirement governs the use of the loan proceeds. The funds may only be used for the payment of the plan’s ordinary operating expenses, such as legal, accounting, or trustee fees, or for a purpose incidental to the ordinary operation of the plan. This ensures the loan serves a legitimate administrative or operational need of the plan rather than speculative or improper purposes.

The loan must be for a temporary period. All loans under this exemption must be short-term solutions to address temporary liquidity issues, such as a cash shortfall needed to pay benefits or insurance premiums. The loan cannot serve as a form of long-term financing for the plan.

Another condition is that the loan must be unsecured. The party in interest making the loan cannot require the plan to pledge any of its assets as collateral. This provision protects the plan’s assets from being encumbered by the debt.

The transaction must also be structured so that no interest or other fees are charged to the plan. This reinforces that the loan is for the plan’s benefit, not a profit-making opportunity for the lender.

The fiduciary who authorizes the loan cannot personally benefit from the transaction. ERISA prohibits a fiduciary from receiving any consideration for their own personal account from any party dealing with the plan, such as a commission or kickback from the party making the loan.

Finally, the loan must be approved in advance by a plan fiduciary. While PTE 80-26 does not explicitly require this fiduciary to be independent, ERISA’s general standards of conduct still apply. This means the authorizing fiduciary must act prudently and solely in the interest of plan participants.

Implementing the Loan and Documentation

Proper execution and documentation are necessary to comply with PTE 80-26. The process begins with a formal, written loan agreement, which is a mandatory requirement for any loan with a term of 60 days or longer. This written document serves as the primary evidence of the transaction’s terms and compliance.

The loan agreement must be comprehensive and contain all of the material terms of the loan. This includes the legal names of the lender and the borrower, the principal amount of the loan, and the specific repayment schedule. It should also include a clear statement detailing the purpose of the loan, confirming it will be used for permitted operating expenses.

Documenting the fiduciary’s approval is another procedural step. The approval should be formally recorded, for instance, in the minutes of a trustee meeting or through a separate written resolution. This documentation should explicitly state that the fiduciary has reviewed the loan agreement and all relevant circumstances.

The fiduciary’s resolution or meeting minutes should affirm their determination that the loan is prudent and solely in the interest of the plan’s participants and beneficiaries. This record should demonstrate that the fiduciary considered factors such as the plan’s actual need for the funds, the temporary nature of the liquidity problem, and the reasonableness of the loan’s terms. This creates a clear record of the due diligence performed, which is invaluable in the event of a DOL audit or inquiry.