Prohibited Transactions

ERISA Section 406 prohibits 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

Section 406(a): Transactions 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)

Section 406(b): 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 Section 406 and no exemption applies.

Statutory Exemptions Under Section 408

Not every transaction between a plan and a party in interest is prohibited. 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 (Section 408(b)(2))
• 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 (Section 408(b)(2)). Without this exemption, a plan could not hire any service provider since every service provider is automatically a party in interest.

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