The U.S. Department of Labor recently issued a proposed prohibited transaction exemption allowing privately held conglomerate ABARTA to contribute real property to its defined benefit plan and simultaneously lease back the property. 

Newsworthy? Yes, because there have been so few prohibited transaction exemption (PTE) offerings from the DOL in recent years. Sponsors of defined benefit plans looking for a way to improve the funded status of their plans while preserving cash have historically considered contributing property rather than cash. Today, key drivers in an employer’s decision to bring a plan’s funded status to the 80 percent level are to avoid benefit restrictions and to reduce Pension Benefit Guaranty Corp. (PBGC) premiums.

The ABARTA proposal is important because it offers a glimpse into current DOL thinking as to how to structure a contribution-leaseback transaction. In ABARTA, the DOL imposed several conditions required in previous rulings, including the retention of an independent fiduciary to negotiate and approve the transaction and a requirement to secure an appraisal report from an independent qualified appraiser confirming the fair market value of the property.

In ABARTA, the transaction was structured using a cash “sweetener,” requiring the employer to make a tag-along cash contribution with the in-kind contribution. Additionally, a “make whole” provision, requiring the sponsor to guarantee a minimum rate of return to the plan, was included.

Securing a DOL PTE can be arduous and the terms required by the DOL may be stringent, but under the right circumstances an in-kind contribution may be beneficial to both the sponsor and its employees.