Quick Answer
ERISA bars a plan fiduciary from dealing with "parties in interest," a defined list that includes fiduciaries, service providers, the sponsoring employer, and their relatives. These prohibited-transaction rules are strict liability, so intent is irrelevant, but statutory exemptions allow reasonable-compensation service arrangements and properly structured participant loans.
This lesson covers who counts as a party in interest, the two prohibited-transaction categories under ERISA, and the statutory exemptions that let plans still hire ordinary service providers.
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, plus an excise tax imposed by the IRS.
The Department of Labor (DOL) enforces ERISA's fiduciary and reporting duties, but the prohibited-transaction excise tax itself is a Treasury matter, not a DOL one.
Who Counts as a Party 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
Exam Tip: Gotchas
- A party in interest must fall into one of the listed categories: a fiduciary, service provider, the sponsoring employer, a covered union, a 50%+ owner, a relative of any of those, or an entity 50%+ owned by any of those. Having some other business or professional connection to the employer isn't enough; the connection has to run to the plan itself.
What Transactions Are Prohibited With a Party in Interest?
A fiduciary shall not cause the plan to engage in any of the following with a party in interest:
- Sale, exchange, or lease of property between the plan and a party in interest
- Lending money or extending credit between the plan and a party in interest
- Furnishing goods, services, or facilities between the plan and a party in interest
- Transfer of plan assets to, or use by or for the benefit of, a party in interest
- Acquisition of employer securities or employer real property in excess of limits (generally 10% of plan assets)
What Counts as Fiduciary Self-Dealing?
A fiduciary shall not:
- Deal with plan assets in their own interest or for their own account
- Act in a transaction involving the plan on behalf of a party adverse to the plan or its participants
- 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.
What Statutory Exemptions Apply?
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, which must satisfy all five conditions: available to all participants and beneficiaries on a reasonably equivalent basis, not available to highly compensated employees in greater amounts than to other employees, made under specific loan provisions set out in the plan document, bearing a reasonable rate of interest, 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.
What Do Common Exam Scenarios Look Like?
| Scenario | Prohibited? | Why |
|---|---|---|
| Plan trustee directs plan to invest in their own real estate project | Yes | Fiduciary self-dealing |
| Employer borrows money from the plan | Yes | Lending plan assets to a party in interest |
| Plan pays reasonable fees to its recordkeeper | No | Exempt: necessary services at reasonable compensation |
| Fiduciary receives a kickback from a mutual fund company | Yes | Personal consideration from a party dealing with the plan |
| Plan makes a loan to a participant under plan terms | No | Exempt: participant loan on equivalent terms, reasonable rate, adequately secured |
What Should You Check on Exam Day?
- A party in interest includes fiduciaries, service providers, the sponsoring employer, covered unions, 50%+ owners, their relatives (spouse, ancestors, lineal descendants), and entities 50%+ owned by any of the above.
- Prohibited-transaction rules are strict liability. A well-intentioned deal, like a short-term loan from the plan to the employer, is still prohibited if it falls within the rules and no exemption applies.
- Violations create personal fiduciary liability for plan losses, plus an excise tax imposed by the IRS, not the DOL: the DOL enforces the fiduciary duties, but the excise tax itself is a Treasury matter.
- Reasonable compensation for necessary services is exempt; without that exemption, a plan could not hire any service provider, since every service provider is automatically a party in interest.