1. Sale, exchange, or lease of any property between the plan and a party in interest;
2. Loan or other extension of credit between the plan and a party in interest;
3. Furnishing of goods, services, or facilities between the plan and a party in interest;
4. Transfer of plan assets to a party in interest or the use of plan assets by or for the benefit of a party in interest; or
5. Acquisition of employer securities or employer real property in excess of the limits set by law.

In addition, ERISA prohibits a fiduciary from:

1. Dealing with plan assets in the fiduciary's own interest or for the fiduciary's own account;
2. Acting in any transaction involving the plan on behalf of a party whose interests are adverse to the interest of the plan or its participants or beneficiaries; or
3. Receiving any consideration for the fiduciary's own personal account from any person dealing with the plan in connection with any transaction involving plan assets.

For example, receipt of commissions by a fiduciary's wholly owned subsidiary on loans from a plan to unrelated borrowers is a prohibited transaction.   A plan's payment of legal fees to the attorneys defending a trustee in a criminal prosecution is a prohibited transaction between the plan and the trustee.

Loans from a law firm's qualified retirement plan to clients of the law firm pending settlement of their lawsuits are prohibited transactions because the loans benefit the law firm's business.  Similarly, a loan from a plan to a partnership in which a trustee had a 39% interest was a prohibited transaction between the plan and the trustee because of the loan's benefit to the partnership in which the trustee had a significant interest.

An investment by a qualified retirement plan in a participating mortgage loan made to a limited partnership in which the plan investment advisor held a 7.5% interest was a prohibited transaction because the ownership interest created a conflict of interest resulting in the advisor having divided loyalties.  The mere retention of an investment management company (a party in interest because it was half-owned by a corporation that also wholly owned a company sponsoring the qualified retirement plan) to manage the plan's assets did not result in a prohibited transaction because the sponsoring company, not the plan, paid the investment management fees.

1. Any fiduciary, counsel, or employee of the plan;
2. A person providing services to the plan;
3. An employer any of whose employees are covered by the plan, and any direct or indirect owner of 50% or more of such employer;
4. A relative - that is, spouse, ancestor, lineal descendant, or spouse of a lineal descendant - of any of the persons described in (1), (2), or (3) above;
5. An employee organization, any of whose members are covered by the plan;
6. A corporation, partnership, estate, or trust of which at least 50% is owned by any person or organization described in (1), (2), (3), (4), or (5) above;
7. Officers, directors, 10%-or-more shareholders, and employees of any person or organization described in (2), (3), (5), or (6) above; and
8. A 10%-or-more partner of, or joint venturer with, any person or organization described in (2), (3), (5), or (6) above.

Plans that cover only a sole shareholder and/or the shareholder's spouse and plans that cover only partners are not subject to ERISA and, therefore, are not subject to ERISA's prohibited-transaction provision.  However, such plans are subject to the prohibited-transaction provisions of the Code.

In addition, the prohibited-transaction provisions under the Code apply to individual retirement accounts (IRAs) while ERISA's prohibited-transaction provisions do not.

Under ERISA, any fiduciary who engages in a prohibited transaction is personally liable for any losses to the plan and must restore to the plan any profit made by the fiduciary through the use of the plan's assets. Also, the civil penalty imposed by the Department of Labor (DOL) for certain breaches of fiduciary duty applies to prohibited transactions, but the penalty is reduced by any penalty tax imposed under Section 4975.

A subsidiary that sold customer loans to its parent corporation's profit sharing plan was not entitled to an exemption from the 5% tax on prohibited transactions because no class exemption was available since the plan trustee was also the sole shareholder and president of the parent corporation and president of the subsidiary.  The plan could not cure the prohibited transaction by retroactively appointing an unrelated co-trustee.   However, the subsidiary was not assessed the 100% because the plan timely sold the loans.

A sole shareholder's transfer of assets from the employer's two retirement plans to the employers' checking account constituted a prohibited transaction.  Furthermore, the sole shareholder's payments to former participants from the employer's assets and from his own funds did not correct the prohibited transaction because the plans were not restored to the same financial position they would have been in had the prohibited transaction not occurred.  The employer and the shareholder were found jointly and severally liable for both the 5% the the additional 100% penalty taxes.

1. Loans made by a plan to a party in interest who is a plan participant or beneficiary if such loans (1) are available to all participants and beneficiaries on a reasonably equivalent basis, (2) are not made available to highly compensated employees in an amount greater than the amount made available to other employees, (3) are made in accordance with specific provisions regarding such loans set forth in the plan, (4) bear a reasonable rate of interest, and (5) are adequately secured.
     
2. Services rendered by a party in interest to a plan that are necessary for the establishment or operation of the plan if no more than reasonable compensation is paid.  DOL has found no violation when a fiduciary received investment management fees from a plan.
     
3. A loan to an employee stock ownership plan (ESOP), provided the interest rate is not in excess of a reasonable interest rate.
     
4. Ancillary services provided by a federal or state supervised bank or similar financial institution that is a fiduciary to the plan, provided (1) the bank or similar financial institution has adopted adequate internal safeguards to ensure that provision of the ancillary service is consistent with sound banking and financial practice, and (2) no more than reasonable compensation is paid for such services.
     
5. The acquisition or sale by a plan of qualifying employer securities or the acquisition, sale, or lease by a plan of qualifying employer real property if (1) the acquisition, sale, or lease is for adequate consideration, (2) no commission is changed, and (3) the restrictions and limitation of ERISA Section 407 are satisfied.  In one case, disqualified persons sold their interest in land including mineral rights to an ESOP.  Because the mineral rights were not leased to the employer and, with respect to the land leased, such properties were not dispersed geographically, the land did not constitute qualifying employer real property and the exemption did not apply.  In another case, a real estate transaction between a disqualified person and a profit sharing plan did not satisfy the requirement for an exemption because the property was never leased to the corporation sponsoring the plan or to an affiliate and was not composed of a substantial number of land parcels dispersed geographically.

Alpha & Omega, Inc. Financial Management Consultants
8580 La Mesa Blvd, Suite 100
La Mesa, CA 91941
Phone:  800-755-5060  ~  Fax:  619-462-1766
Email:  info@Alpha-Omega-Inc.com