Prohibited Transactions in Employee Benefit Plans

For business owners managing employee-benefit plans, understanding prohibited transactions is critical. The Internal Revenue Code and ERISA outline these specific “don’ts” to protect plan participants. They help prevent conflicts of interest and ensure retirement plan integrity.

What are Prohibited Transactions?

A party-in-interest cannot engage with the plan in certain transactions, such as:

1. Sale or Exchange of Property: No lease or sell between the party-in-interest and these plans.

2. Lending Money: No money lending or other credit extensions between a party-in-interest and the plan.

3. Provision of Goods or Services: No provision for goods, services or facilities between a party-in-interest and the plan.

4. Transfer of Plan Assets: Any use by, transfer to or for benefit of a party in interest can’t involve any assets under consideration.

5. Acquisition of Employer Securities: The plan can’t go beyond specified limits acquiring employer securities or real property.

A “party-in-interest” includes:

• Any fiduciary counsels or employees working within it.

• Persons providing services to them.

• Employers whose staff members are covered by such plans.

• Employee organizations with members who belong to those plans.

• Owners having 50% ownership interests in such firms/organizations.

Statutory And Administrative Exemptions

Due to their broad nature there are statutory exemptions and provisions for administrative exemptions regarding prohibited transaction rules:

• Loans To Participants: Allowed subject to certain regulations.

• ESOP Transactions: Loans made towards ESOPs as well as acquisitions involving employer securities/real estate may be permitted under defined circumstances.

• Reasonable Fees: Legal/accounting/other service charges paid by parties involved should not exceed reasonable amounts.

• Financial Services: Banks/insurance companies can offer various financial services related to this scheme.

• Benefit Distributions: Normal benefit distributions do not fall within prohibited transaction rules scope.

The Department Of Labor (DOL) has powers over granting exemptions on specific transactions/classes thereof if they serve interests belonging to both sides concerned with it, with its plans & its participants.

Penalties For Prohibited Transactions

Internal Revenue Code Penalties: An initial penalty of 15% of the amount involved, with an additional 100% penalty if the transaction is not corrected in time.

ERISA Penalties: A violation can result in a 5% penalty and may also constitute a breach of fiduciary duty.