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employer securities and of employer real property (combined) to 10 percent of plan assets. (Employer securities are securities issued by an employer with employees covered by the plan or its affiliates. Employer real property is real property which is leased by a plan to an employer (or its affiliates) with employees covered by the plan.)

However, a special rule is provided for individual account plans which are profit-sharing plans, stock bonus plans, employee stock ownership plans, or thrift or savings plans, since these plans commonly provide for substantial investments in employer securities or real property. Also, money purchase plans which were in existence on the date of enactment, and which invested primarily in employer securities on that date are to be treated the same way as profit-sharing, etc., plans. (However, employer-established individual retirement accounts are not to be eligible individual account plans.)

In recognition of the special purpose of these individual account plans, the 10 percent limitation with respect to the acquisition or holding of employer securities or employer real property does not apply to such plans if they explicitly provide for greater investment in these assets. In addition, the diversification requirements of the substitute and any diversification principle that may develop in the application of the prudent man rule is not to restrict investments by eligible individual account plans in qualifying employer securities or qualifying employer real property.

These exceptions apply only if the plan explicitly provides for the relevant amount of acquisition or holding of qualifying employer securities or qualifying real property. For example, if a profit-sharing plan is to be able to invest half of its assets in qualifying employer securities, the plan must specifically provide that up to 50 percent of plan assets may be so invested. In this way, the persons responsible for asset management, as well as participants and beneficiaries, will clearly know the exten to which the plan can acquire and hold these assets. Plans in existence on the date of enactment will have one year from January 1, 1975, to be amended to comply with this requirement. If the plan does not comply within one year (but, e.g., complies 2 years after January 1, 1975), then during the interim period, the plan will be subject to the 10 percent rule as well as the diversification requirement. This means, generally, that the plan will not be able to acquire any additional employer securities or employer real property during this period (and preparation should be made for divestiture of half of the excess of employer securities and real property by January 1, 1980.)

Under the substitute, only "qualifying" employer securities may be acquired and held by individual account plans under the rules described above. Stock of the employer will constitute qualifying securities. Also, certain debt will be qualifying employer securities if it is traded on a national securities exchange or has a price otherwise established by independent persons, and if the plan holds no more than a quarter of the issue and independent persons hold at least one-half of the issue. (Qualifying employer debt securities essentially are debt securities that meet the present rules of section 503 (e) of the Internal Revenue Code.)

Also, under the substitute only "qualifying" employer real property may be acquired and held by eligible individual account plans under

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the rules described above. Real property which is leased to an employer is qualifying employer real property if a substantial number of the parcels are distributed geographically and if each parcel of real property and the improvements on it are suitable (or adaptable without excessive cost) for more than one use. For example, the plan might acquire and lease to the employer multipurpose buildings which are located in different geographical areas. It is intended that the geographic dispersion be sufficient so that adverse economic conditions peculiar to one area would not significantly affect the economic status of the plan as a whole. All of the qualifying real property may be leased to one lessee, which may be the employer or an affiliate of the employer.

To the extent that an eligible individual account plan can acquire qualifying employer securities, it may acquire these securities from parties-in-interest if the acquisition is for adequate consideration and no commission is charged in the transaction. (The conferees intend that if a purchase is made from an underwriter who assumes the risks of market fluctuations after the award date, the underwriter's margin is not to be regarded as a "commission.") A similar exception from the prohibited transaction rules (in both the labor and tax provisions) is available for the acquisition from an employer of qualifying employer real property, the leasing of such property to the employer (or its affiliate) and the sale of such real property back to the employer on termination of the lease for adequate consideration. However, real property is not qualifying employer real property unless it is leased to the employer. Therefore, except for qualifying leasebacks, a plan generally is prohibited from acquiring real property from the employer.

Other plans.-Under the substitute, a plan other than an eligible individual account plan cannot acquire any employer securities or real property if immediately after doing so the plan would hold more than 10 percent of the fair market value of its assets in employer securities or real property. The acquisition rules apply not only to the purchase of employer securities, etc., but also to acquisition in other ways such as by exercise of warrants or by acquisition on default of a loan where the stock was made security for the loan. Also, these plans (as eligible individual account plans) are not to acquire any employer securities or employer real property other than qualifying employer securities or qualifying employer real property.

In addition, if a plan holds more than 10 percent of the fair market value of it assets in employer securities and real property on January 1, 1975, it is to dispose of enough of these assets to bring its holdings of employer securities, etc. to no more than 10 percent of plan assets on or before December 31. 1984.

In general, the 10 percent holding rule will be met on the first date. after January 1. 1975 (and on or before December 31, 1984) that a plan holds no more than 10 percent of the fair market value of its assets in employer securities or employer real property. Thus, if a plan on January 1, 1975, holds qualifying employer securities and qualifying em

Qualifying employer real property includes the real property and related personal property.

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ployer real property worth $200,000 and has total assets worth $1,000,000, the plan must bring its employer securities, etc., down to 10 percent of plan assets. If, e.g., there is a substantial market rise in the value of the plan's other assets in the year 1976, so all plan assets are now worth $2,000,000, but employer securities are still worth $200,000, then the holding requirement has been met and from that time on, only the acquisition rule will affect the plan. (Under the acquisition rule, the plan could not acquire any more qualifying employer securities in 1976, since immediately after the acquisition more than 10 percent of plan assets would be invested in employer securities.) Also, if the fair market value of other plan assets decrease to $1,500,000 in 1977, so the plan has $200,000 of employer securities and $1,500,000 total assets, the plan will not violate the holding (or acquisition) rules, since it met the holding rules in 1976.

Under the substitute, a plan is not required to dispose of more qualifying employer securities than would bring its holdings down to 10 percent of the fair market value of assets on the date of enactment. Thus, if a plan had $200,000 of employer securities and $1,000,000 total assets on date of enactment, it would satisfy the 10 percent holding rule when it had employer securities of $100,000, even if its total assets had dropped to $900,000.

The substitute allows a special election for calculating the 10 percent holding rule (but not the 10 percent acquisition rule). Under this election, the 10 percent holding rule is met if on or before December 31, 1984, the value of employer securities which are held on January 1, 1975, is no greater than 10 percent of the fair market value of plan assets on January 1, 1975, plus employer contributions to the plan made after December 31, 1974, and prior to January 1, 1985. For this purpose, employer contributions are to be included only to the extent of the growth in the value of plan assets (other than employer securities) from January 1, 1975, through December 31, 1984. Election to make this provision applicable must be made prior to January 1, 1976, and the election is irrevocable once it is made. For purposes of this rule, employer securities held on January 1, 1975, are to include employer securities the ownership of which is derived solely from the employer securities held on January 1, 1975, or from the exercise of rights derived from such ownership under regulations to be prescribed by the Secretary of Labor. This election is to be available only for a plan which holds no employer real property, and does not acquire employer real property until after December 31, 1984.

A plan must be half-way toward meeting the 10-percent rule by December 31, 1979. The maximum percentage of assets that a plan may have in employer securities and employer real property on that date is to be established by regulations (which are to be issued by December 31, 1976). Generally, it is expected that the regulations will provide that the maximum percentage of assets that a plan may have in employer securities and real property on (or before) December 31, 1979, is to be determined by adding 10 percent to half of the percentage of employer securities, etc., held by the plan on January 1, 1975 in excess of 10 percent. For example, if 15 percent of the plan's assets are in employer securities on January 1, 1975, generally it is expected that the plan

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must have reduced its percentage of employer securities to 1211⁄2 perpercent on or before December 31, 1979. (That is, 10+ (15-10)=1212.)

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If securities are qualifying employer securities they generally can. be acquired or held notwithstanding the prohibited transaction rules, if acquisition is for adequate consideration and no commission is charged and if acquisition is allowed by the employer securities rules. However (except as noted above for eligible individual account plans), acquisition and holding of these assets must also meet the rules of prudence, diversification, etc. Therefore, if the diversification and prudence rules require that less than 10 percent of plan assets are to be held in employer securities and employer real property, the lower limit is to govern. Furthermore, the exclusive benefit rule also may apply. Thus, while a plan may be able to acquire employer securities or real property under the employer securities rules, the acquisition must be for the exclusive benefit of participants and beneficiaries. Consequently, if the real property is acquired primarily to finance the employer, this would not meet the exclusive benefit requirements.

Generally these rules apply only to the holding (or acquiring) of qualified employer securities or qualified employer real property. Under the general prohibited transaction rules, a plan is not to hold (or acquire) any other employer securities or employer real property (since this would be a prohibited loan or lease, respectively). Of course, the general transition rules discussed below will apply to employer securities or real property held on July 1, 1974.

Civil liability

Fiduciaries.-Under the labor provisions (but not the tax provisions) of the substitute, a fiduciary who breaches the fiduciary requirements of the bill is to be personally liable for any losses to the plan resulting from this breach. Such a fiduciary is also to be liable for restoring to the plan any profits which he has made through the use of any plan asset. In addition, such a fiduciary is to be subject to other appropriate relief (including removal) as ordered by a court. The place and manner of bringing civil actions against a fiduciary is described below.

Generally, a plan fiduciary is not to be liable for any breach of fiduciary duty if it occurred before he became a fiduciary or after he was no longer a fiduciary.

Party-in-interest.-A party-in-interest who engages in a prohibited transaction with respect to a plan that is not qualified (at the time of the transaction) under the Internal Revenue Code may be subject to a civil penalty of up to 5 percent of the amount involved in the transaction. If the transaction is not corrected after notice from the Secretary of Labor, the penalty may be up to 100 percent of the transaction.

Exculpatory provisions and liability insurance.-Under the substitute, exculpatory provisions which relieve a fiduciary from liability for breach of the fiduciary responsibility rules are to be void and of no effect. (However, this is not to affect the fiduciary's ability to allocate or delegate his responsibilities, as described above.) The substitute also provides, however, that a plan may purchase insurance for itself and for its fiduciaries to cover liability or loss re

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sulting from their acts or omissions if the insurance permits recourse by the insurer against the fiduciaries in case of a breach of fiduciary responsibility. Also, under the substitute, a fiduciary may purchase insurance to cover his own liability, and an employer or union may purchase liability insurance for plan fiduciaries (and these policies need not provide for recourse).

Excise tax on prohibited transactions

In general.-As indicated above, the substitute establishes an excise tax on disqualified persons who participate in specific prohibited transactions respecting a pension plan. The tax applies with respect to a plan which has qualified after the effective date of the prohibited transaction provisions (or has been determined to qualify by the Secretary of the Treasury under section 401, 403 (a), or 405 (a) of the Code) and with respect to a qualified individual retirement account, bond or annuity (under sections 408 or 409). The prohibited transaction rules and excise tax sanctions are to continue to apply even if the plan, etc., should later lose its tax qualification.

This excise tax generally follows the same procedures as the tax on self-dealing enacted in 1969 Tax Reform Act with respect to private foundations. The tax is at two levels; initially, disqualified persons who participate in a prohibited transaction are to be subject to a tax of 5 percent of the amount involved in the transaction per year. A second tax of 100 percent is imposed if the transaction is not corrected after notice from the Internal Revenue Service that the 5-percent tax is due.

Following present law with respect to private foundations, under the substitute where a fiduciary participates in a prohibited transaction in a capacity other than that, or in addition to that, of a fiduciary, he is to be treated as other disqualified persons and subject to tax. Otherwise, a fiduciary is not to be subject to the excise tax.

The first-level tax is owed for each taxable year (or part of a year) in the period that begins with the date when the prohibited transaction occurs and ends on the earlier of the date of collection or the date of mailing of a deficiency notice for the first-level tax (under section 6212 of the Internal Revenue Code). The first-level tax is imposed automatically without regard to whether the violation was inadvertent. If more than one person is liable for the excise tax as a result of a particular prohibited transaction, they all are to be jointly and severally liable. For example, if the prohibited transaction involves $100,000, all disqualified persons who participated in the transaction will be jointly and severally liable for the first-level tax of $5,000 (per year in the taxable period) and also jointly and severally liable for the second-level tax of $100,000.

The excise tax on a prohibited transaction is dependent upon the amount involved in the transaction. The substitute provides that the amount involved is the greater of the fair market value of the property (including money) given or received in a transaction. However, with regard to services which are necessary to the operation of the plan and which generally may be paid for if the compensation is not excessive, the amount involved generally is the excess compensation. For the firstlevel tax, the amount involved in a prohibited transaction is valued as of the date of the transaction. However, for the second-level tax,

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