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February 16, 2009

Prohibited Transaction

Your Guide

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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. 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.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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