§ 54.4975-15 Other transitional rules.
(a)-(c) [Reserved]
(d) Provision of certain services until June 30, 1977—(1) In general. Section 2003(c)(2)(D) of the Employee Retirement Income Security Act of 1974 (the Act) (88 Stat. 979) provides that section 4975 shall not apply to the provision of services before June 30, 1977, between a plan and a disqualified person if the three requirements contained in section 2003(c)(2)(D) of the Act are met. The first requirement is that such services must be provided either (in) under a binding contract in effect on July 1, 1974 (or pursuant to a renewal or modification of such contract); or (ii) by a disqualified person who ordinarily and customarily furnished such services on June 30, 1974. The second requirement is that the services be provided on terms that remain at least as favorable to the plan as an arm's-length transaction with an unrelated party would be.
For this purpose, such
services are provided on terms that remain at least as favorable to the
plan as an arms-length transaction with an unrelated party would be if, at the time of execution (or renewal) of such binding contract, the contract (or renewal) is on terms at least as favorable to the
plan as an arm's-length transaction with an unrelated party would be. However, if in a normal commercial setting an unrelated party in the position of the
plan could be expected to insist upon a renegotiation or termination of a binding contract, the
plan must so act. Thus, for
example, if a
disqualified person provides services to
a plan on a month-to-month basis, and a party in the position of the
plan could be expected to renegotiate the price paid under such contract because of a decline in the fair market value of such
services, the
plan must so act in order to avoid participation in a prohibited transaction. The third
requirement is that the provision of
services must not be, or have been, at the time of such provision a prohibited transaction within the meaning of section 503(b) or the corresponding provisions of prior law. If these three
requirements are met, section 4975 will apply neither to
services provided before June 30, 1977 (both to customers to whom such
services were being provided on June 30, 1974, and to new customers) nor to the receipt of compensation therefor. Thus, if these three
requirements are met, section 4975 will not apply until June 30, 1977, to the provision of services to
a plan by a
disqualified person (including a fiduciary) even if such
services could not be furnished pursuant to the exemption provisions of sections 4975(d)(2) or (6) and
§ 54.4975-6. For
example, if the three
requirements of section 2003(c)(2)(D) of the Act are met, a person serving as fiduciary to
a plan who already receives full-time pay from an
employer or an association of
employers, whose
employees are participants in such
plan, or from an employee organization whose members are participants in such
plan, may continue to receive reasonable compensation from the
plan for
services rendered to the
plan before June 30, 1977. Similarly, until June 30, 1977,
a plan consultant who may be a fiduciary because of the nature of the consultative and administrative
services being provided may, if these three
requirements are met, continue to cause the sale of insurance to the
plan and continue to receive commissions for such sales from the
insurance company writing the policy. Further, if the three
requirements of section 2003 (c)(2)(D) of the Act are met, a securities
broker dealer who renders
investment advice to
a plan for a fee, thereby becoming a fiduciary may furnish other services to the
plan, such as brokerage services, and receives compensation therefor. Also, if a registered representative of such a broker-dealer were a fiduciary, the registered representative may receive compensation, including commissions, for brokerage services performed before June 30, 1977.
(2) Persons deemed to be June 30, 1974, service providers. A disqualified person with respect to a plan which did not, on June 30, 1974, ordinarily and customarily furnish a particular service, will nevertheless be considered to have ordinarily and customarily furnished such service on June 30, 1974, for purposes of this section and section 2003(c)(2)(D) of the Act, if either of the following conditions are met:
(i) At least 50 percent of the outstanding beneficial interests of such disqualified person are owned directly or through one or more intermediaries by the same person or persons who owned, directly or through one or more intermediaries, at least 50 percent of the outstanding beneficial interests of a person who ordinarily and customarily furnished such service on June 30, 1974; or
(ii) Control, or the power to exercise a controlling influence over the management and policies of such disqualified person is possessed, directly or through one or more intermediaries, by the same person or persons who possessed directly or through one or more intermediaries control, or the power to exercise a controlling influence over the management and policies of a person who ordinarily and customarily furnished such service on June 30, 1974. For purposes of this paragraph (d)(2) a person shall be deemed to be an “intermediary” of another person if at least 50 percent of the outstanding beneficial interests of such person are owned by such other person, directly or indirectly, or if such other person controls or has the power to exercise a controlling influence over the management and policies of such person.
(3) Examples. The principals of § 54.4975-15(d)(2) may be illustrated by the following examples.
Example 1.
A owns 50 percent of the outstanding beneficial interests of ABC
Partnership which ordinarily and customarily furnished certain
services on June 30, 1974. On July 2, 1974, ABC
Partnership was incorporated into ABC Corporation with one class of stock outstanding. A owns 50 percent of the shares of such stock. ABC Corporation furnishes the same
services that were furnished by ABC
Partnership on June 30, 1974. ABC Corporation will be deemed to have ordinarily and customarily furnished such
services on June 30, 1974, for purposes of section 2003(c)(2)(D) of the Act.
Example 2.
A and B together own 100 percent of the beneficial interests of AB Partnership, which ordinarily and customarily furnished certain services on June 30, 1974. On September 1, 1974, AB Partnership was incorporated into AB Corporation with one class of stock outstanding. A and B each own 20 percent of such outstanding class of stock and together have control over the management and policies of AB Corporation. AB Corporation furnishes the same services that were furnished by AB Partnership on June 30, 1974. AB Corporation will be deemed to have ordinarily and customarily furnished such services on June 30, 1974, for purposes of section 2003(c)(2)(D) of the Act.
Example 3.
On June 30, 1974, M Corporation was ordinarily and customarily furnishing certain
services. On that date, X, Y and Z together owned 50 percent of all classes of the outstanding shares of M Corporation. On January 28, 1975, all of the shareholders of M Corporation exchanged their shares in M Corporation for shares of a new N Corporation. As a result of that
exchange, X, Y and Z together own 50 percent of the common stock of N Corporation, the only class of N Corporation stock outstanding after the
exchange. N Corporation furnishes the
services formerly furnished by M Corporation. N Corporation will be deemed to have ordinarily and customarily furnished such
services on June 30, 1974, for purposes of section 2003(c)(2)(D) of the Act.
Example 4.
I Corporation ordinarily and customarily furnished certain services on June 30, 1974. On November 3, 1975, I Corporation organizes a wholly owned subsidiary, S Corporation, which furnishes the same services ordinarily and customarily furnished by I Corporation on June 30, 1974. S Corporation will be deemed to have ordinarily and customarily furnished such services on June 30, 1974, for purposes of section 2003(c)(2)(D) of the Act.
Example 5.
X Corporation, wholly-owned and controlled by A, ordinarily and customarily furnished certain services on June 30, 1974. Y Corporation did not perform such services on that date. On January 2, 1976, X Corporation is merged into Y Corporation and although A received less than 50 percent of the total outstanding shares of Y Corporation, after such merger A has control over the management and policies of Y Corporation. Y Corporation furnishes the same services that were formerly furnished by X Corporation. Y Corporation will be deemed to have ordinarily and customarily furnished such services on June 30, 1974, for purposes of section 2003(c)(2)(D) of the Act.
