Prohibited Transactions Under ERISA

ERISA generally forbids certain transactions between employee benefit plans and parties-in-interest.

Parties-in-interest are defined as:

  • Fiduciaries or employees of the employee benefit plan,
  • Persons providing services to the employee benefit plan,
  • Employers whose employees are covered by the employee benefit plan, and/or
  • Persons who own 50% or more of such an employer or relatives of such persons.

Prohibited transactions include the following:

  • Sale, exchange, or lease of any property between the plan and a party-in-interest; 
  • lending of money or other extension of credit between the plan and a party–in-interest; 
  • furnishing of goods, services, or facilities between the plan and a party-in-interest; 
  • transfer to, use by, or for the benefit of a party-in-interest, of any assets of the plan; or 
  • acquisition, on behalf of the plan, of any employer security or employer real property in violation of the 10% limitation for certain types of plans.

Although the definitions above appear self-explanatory, it is significant to point out that a plan fiduciary is anyone who has discretionary authority in administering and managing an employee benefit plan or controlling that plan’s assets.  Therefore, fiduciary status is not based on a title; it is based on the functions performed for the employee benefit plan.  This is important to note as fiduciaries may be held personally liable for a loss resulting from a prohibited transaction.  In managing fiduciary responsibility, a plan sponsor benefits from formally identifying all parties-in-interest to the employee benefit plan, gaining an understanding of any transactions with these parties, and having a process by which to consistently monitor for such transactions.

A prohibited transaction must be reported on Form 5500 each year until it is corrected; may result in fines and penalties assessed from both the IRS and the DOL; and could even result in the loss of the employee benefit plan’s tax-exempt status.  However, the DOL, under its Voluntary Fiduciary Correction Program (VFCP), allows plan sponsors to correct certain prohibited transactions, reduce fines and penalties, and maintain tax-exempt status.

New 408(b)(2) regulations create a new prohibited transaction that should be considered for the 2012 filing year.  These regulations require plan fiduciaries to receive and evaluate fee disclosures from covered service providers.  In general, covered service providers must provide the plan fiduciaries in writing disclosure of indirect and direct compensation received and the services provided to the plan.  These disclosures have to be such that the plan fiduciaries can prudently evaluate the adequacy of disclosures received and ultimately serve to assist plan fiduciaries with their due diligence as to reasonableness of compensation paid.  Failure to comply with 408(b)(2) and receive adequate disclosures may result in a prohibited transaction between the plan and the covered service provider.

All transactions with parties-in-interest are not prohibited.  For a list of exempt party-in-interest transactions as well as more information on prohibited transactions, visit the DOL website   


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