Prohibited Transactions

With fiduciary duties, the participant-directed-plan 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 is a defined ERISA term covering specific people and entities connected to the plan, including (not an exhaustive list):

Exam Tip: Gotchas

• The list above is a representative summary, not the full statutory list. "The employer" is broader than it sounds: any employee, officer, or director of the sponsoring employer is a party in interest, even with no plan role at all. A customer of the employer, a competitor, or a government regulator overseeing the plan is not a party in interest: none of them holds a fiduciary role, ownership stake, service-provider relationship, employment relationship, or family tie to someone on the list.
• Certain relatives count regardless of age. A lineal descendant (child or grandchild) of certain parties in interest (such as a fiduciary) is itself a party in interest whether that relative is a minor or a grown adult with no involvement in the plan at all.

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
• Acting for an adverse party: a fiduciary acting on behalf of a party whose interests are adverse to 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 main exception is when a service provider performs work the plan genuinely needs and charges a fair price for it; the DOL can also grant other administrative exemptions, for an individual transaction or a class of transactions.

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 have no "reasonable compensation" exception. A fiduciary putting their own interests first is prohibited by default, though the DOL can grant an administrative exemption (individual or class) after review.

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 trigger IRS excise taxes and personal liability for a fiduciary who breached their duty, who can be required to restore any losses to the plan out of personal assets. The transaction generally must also be corrected (unwound, to the extent possible) so the plan's financial position is restored.

• 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.

What Should You Check on Exam Day?

• ERISA bars dealings between the plan and "parties in interest," a defined, non-exhaustive list including fiduciaries, service providers, the employer and its employees/officers/directors, unions, certain relatives, and participant-fiduciaries
• The necessary-services exception permits reasonable compensation for genuinely needed services (legal, accounting, record-keeping)
• Self-dealing, acting for an adverse party, and kickbacks have no reasonable-compensation exception, though the DOL can grant administrative exemptions (individual or class)
• Violations can trigger IRS excise taxes and personal fiduciary liability; the DOL enforces and can grant exemptions