Prohibited transactions under the Employee Retirement Income Security Act (ERISA) broadly refer to transactions with potential conflicts of interest.
Understanding what the prohibited transactions are is essential.
Types of prohibited transactions
There are two general types of prohibited transactions: Transactions with “parties in interest” involve direct or indirect transactions between the plan and individuals or entities considered “parties in interest.” For example, if a plan fiduciary causes the plan to enter into a transaction with a party in interest, it may be considered a prohibited transaction.
Fiduciary self-dealing transactions occur when a fiduciary (such as a plan administrator or trustee) uses plan income or assets for their own interest. Self-dealing can lead to conflicts of interest and is prohibited under ERISA.
Complying with the law
To help plan sponsors and fiduciaries operate successfully while staying in compliance with the law, ERISA provides several exemptions for prohibited transactions:
- Statutory Exemptions: Section 408 of ERISA outlines specific prohibited transaction rule exemptions. These allow plan fiduciaries to make necessary transactions with parties in interest under certain circumstances.
- Administrative Exemptions: The Department of Labor (DOL) has its guidelines and can grant individual exemptions based on specific circumstances. Plan sponsors must apply for these exemptions.
- Class Exemptions: The DOL can also grant exemptions for transactions within specific categories or classes. These exemptions can be utilized without applying for individual exemptions.
Here are a couple of key exemptions to know about:
- Loans to Plan Participants & Beneficiaries: While ERISA prohibits extending credit from the plan to parties in interest, an exemption allows participant loan program guidelines.
- Paying Third-Party Vendors for Necessary Services: Prohibited transactions prevent self-dealing between plan sponsors or fiduciaries and the company’s health benefit or retirement plan. Paying third-party vendors for necessary services is generally allowed, but caution is necessary to avoid conflicts of interest.
Remember that compliance with ERISA rules and exemptions is crucial to maintaining a successful plan while avoiding prohibited transactions. Always consult legal or financial professionals for specific advice related to your plan.