On March 7th, 2022, the U.S. Department of Labor (DOL) announced amendments to class exemptions in prohibited transaction rules within the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC). Specifically, the amendments deal with the use of credit ratings as a part of these class exemptions. In short, they comply with related requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The DOL’s amendments will affect participants and beneficiaries in various benefit plans. Earlier, in January 2022, the DOL announced an enforcement policy regarding group health plan disclosure requirements.

Dodd-Frank Wall Street Reform and Consumer Protection Act

Created following the 2007-2008 financial crisis, the Dodd-Frank Act set forth restrictions on several sectors of the U.S. financial system. In particular, it established new government agencies to regulate banks, mortgage lenders, and credit rating agencies. One such agency the Dodd-Frank Act established was the Securities and Exchange Commission (SEC) Office of Credit Ratings. In brief, this entity evaluates and oversees credit rating agencies. Explicitly, under Section 939A of the Dodd-Frank Act, departments are required to remove references to credit ratings from class exemptions. Instead, departments should use “standards of creditworthiness” they deem appropriate. Nonetheless, the Dodd-Frank Act provided that alternative standards of creditworthiness should:

  • Be simple and easy to understand or apply;
  • Provide a quantifiable result with a binary “Yes or No” decision mechanism; and
  • Enable an institution to make an expeditious decision whether or not to purchase the credit.

Prohibited Transaction Rules Under ERISA and the IRC

ERISA and the IRC include prohibited transaction rules involving employee benefit plans and individual retirement accounts (IRAs). Indeed, the DOL may grant such exemptions under ERISA as long as the Secretary of Labor finds that they are:

  1. Administratively feasible.
  2. In the interests of plans and IRAs, and their participants and beneficiaries.
  3. Protective of the rights of participants and beneficiaries of plans and IRAs.

However, the DOL’s review of the class exemptions revealed several prohibited transaction rules that rely on credit ratings conditions like requiring a rating in one of the four highest credit rating categories. Consequently, these class exemptions were not in keeping with provisions under the Dodd-Frank Act.

DOL Amends Class Exemptions

Therefore, the DOL announced amendments to the six class exemptions within the respective prohibited transaction rules in ERISA and the IRC. In sum, the amendments affect participants and beneficiaries of several benefit plans and IRAs. These include employee benefit plans, owners of IRAs, fiduciaries of such plans and IRAs, and the financial institutions that deal with those plans and IRAs. In other words, beneficiaries of those plans and owners of IRAs would not be subject to class exemptions based on their credit rating. Instead, the department would rely on appropriate alternative standards of creditworthiness to evaluate those participants and beneficiaries.