Prohibited Transactions

With fiduciary duties, the 404(c) safe harbor, and the IPS framework in place, the final piece of the Employee Retirement Income Security Act (ERISA) protective structure is its outright ban on certain transactions. ERISA's prohibited transaction rules prevent fiduciaries and other insiders from using plan assets for their own benefit.

What Are Prohibited Transactions?

ERISA prohibits certain transactions between the plan and "parties in interest"; these are people and entities with a relationship to the plan who could exploit that relationship for personal gain.

The purpose is straightforward: plan assets exist for participants and beneficiaries, not for the benefit of insiders.

Who Are Parties in Interest?

A party in interest includes anyone with a connection to the plan:

Types of Prohibited Transactions

ERISA bans the following between the plan and 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 (except for reasonable compensation for necessary services)
• Transfer of plan assets to, or use of plan assets by or for the benefit of, a party in interest
• Fiduciary self-dealing: a fiduciary acting in their own interest rather than the plan's
• Receiving kickbacks: accepting personal consideration from parties dealing with the plan

Think of it this way: If a transaction lets an insider benefit from plan assets in any way, it is almost certainly prohibited. The only exception is when a service provider performs work the plan genuinely needs and charges a fair price for it.

The "Necessary Services" Exception

Not all transactions with parties in interest are prohibited. A party in interest may provide necessary services to the plan (such as legal, accounting, or record-keeping services) as long as:

• The services are necessary for the plan's operation
• The compensation is reasonable
• No other prohibited transaction is involved

Exam Tip: Gotchas

• Reasonable compensation for necessary services is the key exception. Not all transactions with parties in interest are prohibited; a record-keeper charging market rates for administrative work is allowed.
• Self-dealing and kickbacks are always prohibited. There is no "reasonable compensation" exception for a fiduciary putting their own interests first.

Here are typical scenarios the exam may present:

• A plan trustee sells property they own to the plan → Prohibited (sale between plan and fiduciary)
• A plan fiduciary hires their spouse's consulting firm at above-market rates → Prohibited (self-dealing, unreasonable compensation)
• A record-keeper provides administrative services at market rates → Not prohibited (necessary services at reasonable compensation)
• A plan lends money to the sponsoring employer → Prohibited (lending between plan and party in interest)

Consequences of Violations

Violations of the prohibited transaction rules can result in excise taxes (imposed by the IRS) and personal liability for the fiduciary, who must restore any losses to the plan out of personal assets. The transaction itself must also be unwound so that the plan is made whole.

• The Department of Labor (DOL) is the primary enforcer of ERISA's prohibited transaction rules
• The IRS imposes the excise taxes
• The DOL has authority to grant exemptions for certain otherwise-prohibited transactions

Exam Tip: Gotchas

• The DOL enforces ERISA and can grant exemptions; the IRS imposes excise taxes. Know which agency does what.