Prohibited Transaction

Definition

A transaction that would result in loss of tax-deferred status or other penalties being assessed on the retirement plan or retirement plan assets involved in the transaction . Prohibited transactions are defined under the Code and under ERISA.

The Code defines a prohibited transaction as any direct or indirect—

1. 1. sale or exchange, or leasing, of any property between a plan and a disqualified person
   2. lending of money or other extension of credit between a plan and a disqualified person;
   3. furnishing of goods, services, or facilities between a plan and a disqualified person;
   4. transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
   5. act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
   6. receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

ERISA defines a prohibited transaction as

• sale or exchange, or leasing, 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, or 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 section ERISA Section 407(a).

Referring Cite

IRC § 4975, IRC §408(e), ERISA § 406(a).

Additional Helpful Information

• Under IRC § 4975(a), a tax of 15% of the amount involved in the prohibited transaction  would be imposed on the disqualified person involved in the transaction .  In any case in which the 15% tax is imposed,  and the transaction is not corrected within the taxable period, a tax equal to 100 percent of the amount will also be imposed on the disqualified person who participated in the prohibited transaction (other than a fiduciary acting only as such).
• Under ERISA, civil or criminal penalties may be applied on the party-in-interest who engaged in the prohibited transaction. ERISA §§501, 502. The  fine is usually limited to  not more than $100,000 or imprisonment  of  not more than 10 years, or both; or  $500,000 on a non-person.
• 29 CFR 2509.75-2- Interpretive bulletin relating to prohibited transactions.