FAQ - What is a Prohibited Transaction under ERISA | Boutwell Fay | Irvine, CA (2024)

FAQs

FAQ - What is a Prohibited Transaction under ERISA | Boutwell Fay | Irvine, CA? ›

1 Two general types of transactions are prohibited: transactions with “parties in interest” and “fiduciary self-dealing transactions.” Certain exemptions apply: exemptions can be statutory or granted by the United States Department of Labor either on a class or individual basis.

Some prohibited transactions include: A sale, exchange, or lease between the plan and party-in-interest; Lending money or other extension of credit between the plan and party-in-interest; and.

ERISA prohibits fiduciaries from misusing funds and also sets minimum standards for participation, vesting, benefit accrual, and funding of retirement plans. It also grants retirement plan participants the right to sue for benefits and breaches of fiduciary duty.

Note: One of the most common prohibited transactions involving the plan fiduciary is the failure to timely remit participant deferral contributions and loan repayments to the plan in accordance with DOL regulations.

(1) General rule For purposes of this section, the term “prohibited transaction” means any direct or indirect— (A) sale or exchange, or leasing, of any property between a plan and a disqualified person; (B) lending of money or other extension of credit between a plan and a disqualified person; (C) furnishing of goods, ...

There are three types of prohibited transaction exemptions available: (i) Individual Exemptions, (ii) Class Exemptions; and (iii) Statutory Exemptions. 1 Most notably the QPAM Class Exemption 84-14, as amended. See U.S. ERISA QPAM Exemption.

Prohibited Transaction Exemptions

These statutory exemptions were enacted by Congress to prevent the disruption of a number of customary business practices involving employee benefit plans, parties in interest, and fiduciaries.

A prohibited transaction is the improper use of IRA assets by the IRA owner, their beneficiary or "disqualified person" such as a fiduciary. Borrowing from an IRA or pledging IRA assets as loan collateral are both prohibited. IRAs are restricted from buying life insurance or collectibles.

The Department of Labor (DOL), the agency responsible for enforcing the prohibited transaction rules under ERISA, can impose against the parties to the transaction a five percent civil penalty under ERISA Sec. 502(i) on the total dollar amount involved in the prohibited transaction.

Section 406(a)(1)(C) of ERISA provides that a fiduciary with respect to a plan shall not cause the plan to engage in a transaction if he or she knows or should know that such transaction constitutes a direct or indirect furnishing of goods, services or facilities between the plan and a party in interest.

Who is a disqualified person in a prohibited transaction? ›

Prohibited transactions in an IRA

Disqualified persons include the IRA owner's fiduciary and members of his or her family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). The following are examples of possible prohibited transactions with an IRA.

When it comes to determining prohibited transactions through your self-directed IRA, the following are considered disqualified persons: You and your spouse. Your employer. Your lineal ascendants and descendants, as well as their spouses (children, parents, etc.)

LAW AND ANALYSIS

Section 4975(a) of the Internal Revenue Code provides that an excise tax is imposed as a result of each prohibited transaction on any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such).

A guarantee on an extension of credit is part of a credit transaction and therefore subject to the regulation.

The Equal Credit Opportunity Act (ECOA) prohibits discrimination in any aspect of a credit transaction. It applies to any extension of credit, including extensions of credit to small businesses, corporations, partnerships, and trusts.

(q) Extend credit and extension of credit mean the granting of credit in any form (including, but not limited to, credit granted in addition to any existing credit or credit limit; credit granted pursuant to an open-end credit plan; the refinancing or other renewal of credit, including the issuance of a new credit card ...

Final answer:

Investing in foreign stocks is not a prohibited transaction between an IRA and its owner. Other transactions like taking a loan from the IRA, selling property to the IRA, or buying property for personal use with IRA funds are prohibited.

A disqualified person who participated in a prohibited transaction can avoid the 100% tax by correcting the transaction as soon as possible. Correcting the transaction means undoing it as much as you can without putting the plan in a worse financial position than if you had acted under the highest fiduciary standards.