What Is PTE 77-4? Selling Plan Insurance Contracts

Prohibited Transaction Exemption (PTE) 77-4 is a provision established under the Employee Retirement Income Security Act of 1974 (ERISA). Its purpose is to provide a “safe harbor,” allowing an employee benefit plan to sell an individual life insurance or annuity contract to certain parties without triggering penalties associated with prohibited transactions. ERISA generally forbids transactions between a plan and its fiduciaries or other “parties in interest” to prevent self-dealing.

This exemption recognizes that selling a policy can be more advantageous for the plan than surrendering it to the insurance carrier for its cash value. By allowing the sale to a specific group of individuals, PTE 77-4 enables the plan to potentially receive a higher value for the asset, benefiting all plan participants. As of a September 2024 amendment, the relief is limited to the sale of the contract itself and does not extend to compensation received by a fiduciary for providing investment advice.

Eligible Transactions Under the Exemption

The scope of PTE 77-4 is specific, applying only to two types of assets held by an employee benefit plan. The first is an individual life insurance contract, and the second is an individual annuity contract, a product designed to provide a stream of income during retirement. This exemption is limited to these individual contracts and does not extend to other plan assets, such as stocks, bonds, or real estate.

The exemption also defines a limited group of permissible buyers. The primary eligible buyer is the plan participant who is insured under the life insurance or annuity contract, giving them the first opportunity to acquire it. If the participant declines, the contract can be sold to a relative of the insured.

Beyond the participant and their relatives, the employer whose employees are covered by the plan is also an eligible purchaser. An employer might wish to continue the policy for the employee outside of the plan for other business purposes. Finally, another employee benefit plan may purchase the contract, transferring the policy from one qualified plan to another.

Key Conditions for Using PTE 77-4

To use the relief offered by PTE 77-4, a plan fiduciary must satisfy several conditions designed to protect the plan and its participants. The first requirement is that the plan must have otherwise intended to surrender the contract. This means the policy is no longer considered a prudent or necessary investment for the plan’s portfolio, perhaps because the participant has terminated employment or the plan’s investment objectives have shifted.

A condition of the exemption is that the plan must receive a price for the contract that is at least equal to its cash surrender value. This requirement establishes a price floor for the sale, ensuring the plan is not financially disadvantaged compared to simply terminating the contract with the insurance carrier. The plan fiduciary remains responsible for ensuring the sale price is fair and in the best interest of the plan.

Another condition is the participant’s right of first refusal. Before the contract can be offered to any other eligible party, the plan participant insured by the policy must be given the first opportunity to purchase it. The plan fiduciary must provide written notice to the participant, informing them of the plan’s intent to sell and offering them the right to buy the contract.

Finally, the exemption stipulates that the contract cannot be subject to a loan that would be considered a prohibited transaction under ERISA. For PTE 77-4 to apply, any existing policy loans must be compliant with ERISA’s general requirements, ensuring the contract is not encumbered by a pre-existing prohibited transaction.

Executing the Transfer

Once all prerequisite conditions are met, the plan fiduciary can proceed with the transfer process. The first step is to formally notify the insured participant in writing of their right to purchase the contract. This notification must clearly state the sale price and provide a reasonable deadline for the participant to respond.

The participant’s response must be carefully documented for the plan’s official records. If the participant agrees to purchase the contract, they should provide a written acceptance of the offer. If they decline, either by explicit rejection or by failing to respond by the deadline, this decision should also be recorded to show the participant’s rights were honored.

Upon receiving the participant’s acceptance, the fiduciary coordinates the completion of the sale. This involves working with the insurance carrier to execute the necessary change of ownership forms and ensuring the plan receives payment for the full fair market value. If the participant declines the offer, the fiduciary may then proceed to offer the contract to one of the other eligible buyers.

Throughout this process, maintaining meticulous records is necessary. The plan fiduciary must keep a complete file documenting every step, from the initial determination that the contract should be sold to the final transfer of ownership and receipt of funds. This file should include the fair market value calculation, the written notice to the participant, their response, and all legal transfer documents.