3980 / What are prohibited transactions?

Any transaction, whether direct or indirect, between a plan and a disqualified person (see Q 3981) constitutes a prohibited transaction under the IRC. These transactions include:

(1)  a sale, exchange, or lease of any property, including a transfer of property subject to a security interest assumed by the plan or placed on it within 10 years prior to the transfer;¹

(2)  lending of money or other extension of credit;

(3)  furnishing of goods, services, or facilities; and

(4)  the transfer of plan assets or income to, or use of them by or for the benefit of, a disqualified person.

Note, however, that there are statutory and regulatory exemptions from what would ordinarily be a prohibited transaction.

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Planning Point: Before a plan enters any transaction, counsel should scrutinize the transaction to determine whether it is prohibited. If the transaction is prohibited, counsel should first determine whether a statutory exemption is available under ERISA Section 408. If so, counsel should make sure that each requirement is met, that the trustees approve the transaction and document the decision-making process in the plan’s minutes, and that the transaction is adequately documented in writing. If no statutory exemption is available, then counsel should check class action exemptions to determine if one applies. Finally, if no other exemptions are available, counsel can apply for an individual exemption.²

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It is a prohibited transaction for a disqualified person who is a fiduciary to deal with income or assets of a plan in his or her own interest or to receive consideration for his or her own personal account from a party dealing with the plan in connection with a transaction involving plan income or assets.³

Title I of ERISA prohibits a fiduciary from acting, in any transaction involving the plan, on behalf of anyone having interests adverse to those of the plan or plan participants or
beneficiaries.⁴

The Department of Labor has issued final regulations on ERISA Section 408(b)(2) required fee disclosures by service providers to plan fiduciaries and participants ( Q 4124).⁵

The definition of a plan for this purpose includes not only any qualified pension, profit sharing, stock bonus, or annuity plan, but also an individual retirement plan ( Q 3641), health savings account (“HSA”) ( Q 399), Archer medical savings account (“MSA”) ( Q 431), or Coverdell education savings account. The term “plan” includes such plans even after they are no longer qualified. Government and church plans are excluded.⁶