Prohibited Transactions

ERISA's prohibited-transaction rules ban certain transactions between the plan and parties in interest to prevent conflicts of interest and self-dealing. Violations subject fiduciaries to personal liability for plan losses and potential Department of Labor (DOL) excise taxes.

Parties in Interest

A party in interest is anyone with a close relationship to the plan:

• Plan fiduciaries (administrator, trustee, investment committee members)
• Service providers to the plan (accountants, attorneys, recordkeepers)
• The sponsoring employer
• Employee organizations (unions) whose members are covered
• 50%+ owners of the sponsoring employer
• Relatives (spouse, ancestors, lineal descendants) of any party in interest
• Entities 50%+ owned by any of the above

Prohibited Dealings with Parties in Interest

A fiduciary shall not cause the plan to engage in any of the following with a party in interest:

1. Sale, exchange, or lease of property between the plan and a party in interest
2. Lending money or extending credit between the plan and a party in interest
3. Furnishing goods, services, or facilities between the plan and a party in interest
4. Transfer of plan assets to, or use by or for the benefit of, a party in interest
5. Acquisition of employer securities or employer real property in excess of limits (generally 10% of plan assets)

Fiduciary Self-Dealing

A fiduciary shall not:

1. Deal with plan assets in their own interest or for their own account
2. Act in a transaction involving the plan on behalf of a party adverse to the plan or its participants
3. Receive personal consideration (kickbacks) from any party dealing with the plan in connection with a plan transaction

Exam Tip: Gotchas

• Prohibited transaction rules are strict liability. Intent does not matter. Even a well-intentioned transaction (e.g., a short-term loan from the plan to the employer to cover payroll) is prohibited if it falls within the prohibited-transaction rules and no exemption applies.

Statutory Exemptions (PTEs)

Not every transaction between a plan and a party in interest is prohibited. The prohibited-transaction exemptions (PTEs) cover several common arrangements. Key exemptions include:

• Reasonable compensation for necessary services: a party in interest may provide services to the plan if the services are necessary, the arrangement is reasonable, and compensation is no more than reasonable
• The service contract must permit termination by the plan without penalty on reasonably short notice
• Loans to participants if made available to all participants on a reasonably equivalent basis, at a reasonable interest rate, and adequately secured
• Distribution of plan assets in accordance with plan terms

Exam Tip: Gotchas

• Paying a party in interest for necessary services at reasonable compensation is NOT prohibited under the necessary-services exemption. Without this exemption, a plan could not hire any service provider since every service provider is automatically a party in interest.

Common Exam Examples