4.72.11  Prohibited Transactions

Manual Transmittal

December 17, 2015


(1) This transmits revised IRM 4.72.11, Employee Plans Technical Guidance, Prohibited Transactions.

Material Changes

(1) Revised, clarified and reorganized content throughout.

Effect on Other Documents

This supersedes IRM 4.72.11, dated September 22, 2014.


Tax Exempt and Government Entities
Employee Plans

Effective Date


Robert S. Choi
Director, Employee Plans
Tax Exempt and Government Entities  (12-17-2015)

  1. This IRM provides guidance for Employee Plans (EP) agents to help identify prohibited transactions during the examination of a qualified pension or profit-sharing plan.

  2. The purpose of these guidelines is to assist the examining specialist to determine the issues to raise with respect to certain areas for which it was believed guidelines would be helpful. The techniques identified herein may be modified based on examination issues encountered. These guidelines are not intended to be all-inclusive. It is not expected that the guidance presented in these guidelines will be relevant in every examination.

  3. These guidelines are not intended to be and should not be treated as a comprehensive statement of precedent or of the Service’s legal position on the issues herein presented.

  4. The information in this IRM is also written to provide guidelines for prohibited transactions and:

    1. Computation of applicable excise taxes

    2. Exclusive benefit requirements under IRC 401(a)

    3. Assignment and alienation provisions under IRC 401(a)(13)  (12-17-2015)
Technical Overview

  1. IRC 4975 imposes a nondeductible excise tax on the amount involved for each prohibited transaction that occurs in a year. See IRC 275(a)(6). The disqualified person (DP) who participated in the prohibited transaction pays the excise tax. See IRC 4975(a).


    The term prohibited transaction, is described in IRC 4975(c)(1)(A) through (F). However, 26 CFR 141.4975-13 refers to 26 CFR 53.4941(e)-1 for certain terms that appear in both IRC 4941(e) and IRC 4975(f) (e.g., descriptions of amount involved and correction).

  2. The legislative history to the Employee Retirement Income Security Act of 1974 (ERISA) indicates that Congress believed the sanction of an excise tax was desirable in many instances in lieu of disqualifying plans under the prohibited transaction rules of IRC 503. IRC 503(b):

    1. Governs whether a transaction that was entered into prior to January 1, 1975, constitutes a prohibited transaction.

    2. Continues to apply to IRC 414(d) governmental plans and to those church plans that don’t make an election under IRC 410(d) to be covered by ERISA. See IRC 4975(g)(2) and (3).

  3. For a plan to be qualified (and the related trust tax-exempt) at any time prior to satisfying its liabilities for its employees and their beneficiaries, it must be impossible to divert the trust’s corpus or income other than for the exclusive benefit of the employees and their beneficiaries. See IRC 401(a)(2).

    1. A proposed disqualification of a plan for an exclusive benefit violation involving fiduciary action per ERISA, Title I, Subtitle B, Part 4 is subject to mandatory technical advice under Rev. Proc. 2015-2. See IRM 4.71.13, Technical Assistance and Technical Advice Requests.

    2. There are special rules for multiemployer plans. See IRM 4.72.14, Employee Plans Examination Guidelines - Multiemployer Plans.

  4. A trust isn’t a qualified trust under IRC 401 unless the plan of which it is a part provides that benefits under the plan may not be assigned or alienated. See IRC 401(a)(13).  (12-17-2015)
Relationship Between Exclusive Benefit and Prohibited Transaction

  1. The exclusive benefit rule of IRC 401(a) doesn’t conflict with the prohibited transaction provisions of IRC 4975. A DP may engage in a prohibited transaction and at the same time cause a violation of the exclusive benefit rule. Therefore, a trust officer, etc., can’t claim that the imposition of an IRC 4975 excise tax prevents the application of the exclusive benefit rule.

    1. If a transaction violates the exclusive benefit rule, you must consider revoking the trust’s qualified status.

    2. If you invoke revocation, the prohibitions and sanctions of IRC 4975 continue to apply to the disqualified plan. See IRC 4975(e)(1)(G) and IRM 4.71.3, Unagreed Form 5500 Examination Procedures and EP Exam Closing Agreements.

  2. Generally any transaction described in IRC 4975(c) between the plan and the employer or other persons related to the plan or the employer (i.e., a DP) constitute a prohibited transaction under IRC 4975. In some cases, these transactions may be exempt from IRC 4975 taxes because of a statutory or an administrative exemption. However, even though a transaction may be exempt from IRC 4975 taxes, it must still meet the exclusive benefit and the assignment or alienation requirements.  (12-17-2015)
Exclusive Benefit Rule

  1. A trust’s investment policies must be for the exclusive benefit of the employer’s employees or their beneficiaries is a qualification requirement under IRC 401(a).

  2. Consider these four factors to determine whether a trust’s investment policies are for the exclusive benefit of the employees/beneficiaries (Rev. Rul. 69-494 as incorporated into ERISA 404):

    1. The cost of an investment must not exceed its fair market value (FMV) at the time of its purchase.

    2. A fair return commensurate with the prevailing rate must be provided.

    3. The investment must be sufficiently liquid to permit distributions per the plan terms.

    4. The safeguards and diversity that a prudent investor would adhere to must be present.

  3. Also consider these other issues for investments:

    1. The use or diversion of the trust’s corpus or income.

    2. Whether there is a reversion of the trust’s corpus or income to the employer.

  4. For IRC 401(a), a custodial account under IRC 401(f) is treated as if it were a trust and a custodian is treated as a trustee. See Winger's Department Store v. Commissioner, 82 T.C. 869 (1984), for a discussion of the IRS's post-ERISA enforcement authority.  (12-17-2015)
Relationship Between Assignment or Alienation and Prohibited Transaction

  1. The assignment or alienation rule of IRC 401(a)(13) doesn’t conflict with the prohibited transaction provisions of IRC 4975. As a result, imposing the IRC 4975 excise tax doesn’t prevent the IRS from applying the assignment or alienation provisions of IRC 401(a)(13).


    IRC 401(a)(13) may not be violated if:

    1. Not more than 10 percent of any benefit payment made to any participant who is receiving benefits under the plan is for defraying plan administration costs.

    2. There is a qualified domestic relations order per IRC 414(p).

    3. A loan meets the requirements of IRC 4975(d)(1).

    4. There is a federal tax levy or a federal tax lien.


      See 26 CFR 1.401(a)-13 (b) through (g).  (12-17-2015)
Examination Steps

  1. Inspect the Form 5500 series return to determine the nature of investments. Also inspect the trust balance sheet and statement of receipts and disbursements to determine if their dollar amounts agree with the Form 5500 return amounts.

  2. If the employer establishes the trustees’ investment powers and duties in the trust document, determine whether the trustees are following the trust instrument.

  3. If the trust document is silent as to investment powers or in situations that go beyond the document, determine whether the investments meet the law governing investments by employee trusts.


    For plans covered by Title I of ERISA, as described in DOL regulation 2510.3–3, state law doesn’t apply after January 1, 1975.


    Plans not covered by Title I, such as "one-participant" plans covering only (i) sole proprietor and her/his spouse, or (ii) partners and their spouses and corporate plans whose sponsoring corporation is wholly owned by an individual or her/his spouse and the plan covers only the owner and the owner’s spouse, continue to be subject to state trust investment law.

  4. Inspect the trust receipts and disbursements to detect:

    1. Disbursements of funds that are contrary to IRC 401(a)(2).

    2. Payments made to the employer/sponsor.

  5. Be alert to the diversion of trust assets or income for purposes other than for the exclusive benefit of the employees for whom the funds were originally allocated.

  6. Review the plan and/or trust documents and be alert for payments made to the employer/sponsor that violate the plan and/or trust provisions.

  7. Complete Form 6212-B, Examination Referral Checksheet B, for all full scope and focused EP exams involving plans under DOL jurisdiction. See IRM, EP Group Procedures – Making Referrals to the Department of Labor (DOL), and IRM, Referrals to the Department of Labor.  (12-17-2015)
Excise Taxes

  1. If you determine that a prohibited transaction has occurred and Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, hasn’t been filed, solicit one.

    1. If the taxpayer files a return, process it in accordance with IRM, Processing Agreed Forms 5330.

    2. If the taxpayer refuses to file the return, process the case in accordance with IRM, Unagreed Cases.  (12-17-2015)
Identifying Prohibited Transactions

  1. A prohibited transaction means any direct or indirect transaction described in IRC 4975(c)(1) between the plan and a DP.

  2. If a prohibited transaction falls within one of the statutory exemptions under IRC 4975(d), the excise tax may not apply.


    The statutory exemptions under IRC 4975(d) (other than IRC 4975(d)(9) and (12)) don’t apply to certain types of transactions involving owner-employees (as defined in IRC 401(c)(3)) and persons or entities deemed to be owner-employees. See IRC 4975(f)(6).

  3. In addition, there are two types of administrative exemptions that may be granted under IRC 4975(c)(2):

    • Individual exemptions

    • Class exemptions  (12-17-2015)
Disqualified Person

  1. The term "disqualified person," as defined in IRC 4975(e)(2), covers a range of people including:

    • Employers

    • Unions and their officials

    • Fiduciaries and persons providing services to a plan such as lawyers and accountants

  2. A disqualified person may also be someone whose relationship to the plan may not be immediately apparent. You’ll have to diligently investigate relationships of:

    • A service provider

    • The employer or employee organization involved

    • Persons who have a 50 percent or more interest


      See IRC 4975(e)(2)(E) and (G).

    • A member of the family as defined in IRC 4975(e)(6) of any individual described in IRC 4975(e)(2)(A), (B), (C) or (E)

    • Individuals with a 10 percent or more interest


      See IRC 4975(e)(2)(H) and (I).

  3. The term "fiduciary" is specifically defined in IRC 4975(e)(3). The term fiduciary includes any person who does any of the following:

    1. Exercises any discretionary authority or control in managing the plan

    2. Exercises any authority or control over the trust’s assets

    3. Renders investment advice concerning plan assets for which he/she receives direct or indirect compensation

    4. Has any discretionary authority or responsibility for plan administration  (12-17-2015)
Examination Steps

  1. If a prohibited transaction has occurred, determine whether the transaction took place (directly or indirectly) between the plan and a person (entity) described in IRC 4975(e)(2). See Exhibit 4.72.11-2, Relationship Between Employer and Disqualified Person and Exhibit 4.72.11-3, Relationship Between Non-corporate Employer and Disqualified Person.  (12-17-2015)
Application of IRC 4975

  1. IRC 4975 excise tax provisions apply to the following plan types:

    1. A tax-exempt trust under IRC 401(a) (which is part of a plan).

    2. A tax-exempt plan under IRC 403(a).

    3. An IRC 408(a) Individual Retirement Account (IRA) or an IRC 408(b) Individual Retirement Annuity (IRA) (including Roth IRAs). However, if the individual for whom the IRA was established or the IRA’s beneficiary engages in a prohibited transaction with respect to the IRA, the sanction is the loss of the tax-exempt status of the IRA as of the first day of the taxable year in which the prohibited transaction occurs. See IRC 408(e)(2)(A).

    4. Any of the above, even after they cease to be qualified. See IRC 4975(e)(1)(G).


      Archer medical savings accounts described in IRC 220(d), Coverdell education savings accounts described in IRC 530 and Health Savings Accounts described in IRC 223 have been added to the plans described in IRC 4975(e)(1).

  2. The excise tax provisions of IRC 4975 don’t apply to:

    1. A governmental plan within the meaning of IRC 414(d)

    2. Those church plans that do not make an election under IRC 410(d) to be covered by ERISA

    3. A tax sheltered annuity under IRC 403(b)  (12-17-2015)
Examination Steps

  1. Due to the complexity of this area, use an analytical approach to determine whether a prohibited transaction has occurred for which the excise tax applies:

    1. Determine whether there has been a prohibited transaction per IRC 4975(c)(1).

    2. If a prohibited transaction has occurred, determine whether the trust or DP has received an IRC 4975(c)(2) administrative exemption.

    3. If a prohibited transaction has occurred and the IRC 4975(c)(2) exemption hasn’t been granted, determine whether the prohibited transaction meets any of the statutory exemptions of IRC 4975(d) or IRC 4975(f)(6)(B)(ii).

    4. If a prohibited transaction has occurred and any of the exemptions in IRC 4975(c)(2), IRC 4975(d) or IRC 4975(f)(6)(B)(ii) applies, don’t pursue the prohibited transaction because it’s exempt.


      However, determine whether the transaction complies with the:

      • Exclusive benefit requirements

      • Assignment and alienation requirements

      • IRC 72(p) loan provisions

    5. If a prohibited transaction has occurred and any of the exemptions in paragraph (d) don’t apply, pursue the issue with your group manager’s approval.  (12-17-2015)
Prohibited Transactions

  1. The following transactions (whether direct or indirect) between a plan and a DP result in a prohibited transaction subject to IRC 4975 excise tax unless there’s an applicable statutory or administrative exemption:

    1. Sale, exchange or lease of any property

    2. Loans or extensions of credit

    3. Furnishing of goods, services or facilities

    4. Transfer to, or use by or for the benefit of, a DP of any income or assets of a plan

    5. Dealings by a fiduciary with the income or assets of the plan for her/his own interest or account

    6. Receipt by a fiduciary of any consideration, from a party dealing with the plan in connection with a transaction involving income or assets of the plan  (12-17-2015)
Sale, Exchange or Leasing of Property

  1. The sale, exchange or leasing of property (directly or indirectly) between a DP and the plan constitutes a prohibited transaction whether the transaction was made from the DP to the plan or from the plan to the DP. See IRC 4975(c)(1)(A).

  2. If a DP transfers real or personal property to a plan, that transfer constitutes a sale or exchange such as to make the transfer a prohibited transaction if:

    1. The property is subject to a mortgage or lien which the plan assumes.

    2. The plan takes the property subject to a mortgage or similar lien which was placed on the property by a DP within 10 years prior to the transfer. See IRC 4975(f)(3).

  3. This type of transfer of real or personal property most often arises when the employer contributes property instead of cash.


    For contributions of unencumbered property, in Commissioner v. Keystone Consolidated Industries, Inc., 508 U.S. 152 (1993), the U.S. Supreme Court held that an employer’s contribution of unencumbered property to a defined benefit plan to satisfy the employer’s funding obligation to that plan is a sale or exchange within the meaning of IRC 4975(c)(1)(A) and, therefore, a prohibited transaction.

  4. An ordinary blind purchase or security sale doesn’t constitute a prohibited transaction when neither the buyer, seller nor the agent of either, knows the identity of the other parties.

  5. If a prohibited transaction falls within one of the following, the excise tax may not apply:

    1. If the plan holds securities subject to a privilege to convert those securities to other securities (e.g., from bonds to stock), the plan may exercise that privilege if it receives adequate consideration under the conversion. See IRC 4975(d)(7).

    2. Pooled Investments: A plan may purchase or sell an interest in a common or collective trust fund or a pooled investment fund maintained by a DP which is a bank or trust company supervised by a state or federal agency or between a plan and a pooled investment fund of an insurance company qualified to do business in a state if the bank or other entity receives no more than reasonable compensation for the purchase or sale or for the pooled fund’s investment management. Also, the transaction must be expressly permitted by the plan instrument or by a plan fiduciary, independent of the bank, trust company, or insurance company, who has authority to manage and control the plan assets.

    3. A plan may acquire, sell or lease qualifying employer securities or qualifying employer real property, under certain conditions. See IRC 4975(d)(13) and IRM, Acquisition of Employer Securities or Employer Real Property.  (12-17-2015)
Real Property

  1. The direct leasing of any property other than qualifying employer real property between a plan and a DP is prohibited.

  2. Any contract, or reasonable arrangement, made with a DP for office space which is deemed necessary for establishing or operating a plan may be statutorily exempt from the prohibited transaction excise taxes if no more than reasonable compensation is paid for such lease (IRC 4975(d)(2))  (12-17-2015)
Examination Steps

  1. Inspect the plan records to determine whether there have been any sales, exchanges or leases of property. If these transactions have occurred, request back-up documents to determine if the transaction is prohibited. Documents you may examine to determine whether a prohibited transaction has occurred include, but aren’t limited to:

    • Brokerage statements

    • Deeds

    • Land contracts

    • Lease and rental agreements

    • Liens

    • Mortgages

    • Purchase-sales agreements

  2. If equipment is used in the employer’s business, check to see whether the plan owns the equipment and leases it to the employer.

  3. A common transaction is a sale-leaseback. In this situation, the DP sells property to the plan, then the plan leases the property to the DP. If you discover an equipment lease to the employer, determine how the plan acquired the equipment. Generally, a sale (including a sale-leaseback) between the plan and a DP, in the absence of an administrative exemption, constitutes one or more prohibited transactions.

  4. If the plan leases office space from a DP, it must meet the conditions of IRC 4975(d)(2) for it to qualify for the statutory exemption.

    1. The terms of the lease must be as favorable to the plan as the plan might have obtained in an arm's-length transaction with an unrelated third person. Compare the leased space with any commercially leased space in the same building or obtain comparability data on similar office space from the local board of realtors.

    2. The length of the lease must be reasonable (especially in relationship to leases on similar property).

    3. The lease must be necessary for the plan’s establishment or operation.

  5. Check to see if an administrative exemption exists if you discover a prohibited lease. See Exhibit 4.72.11-1, List of Granted Class Exemptions.  (12-17-2015)
Loans Between Plan and Disqualified Person Who Is a Participant or Beneficiary

  1. A loan to a disqualified person is a prohibited transaction unless it is a loan to a participant or beneficiary that meets the conditions of the statutory exemption for loans or is a loan for which the DOL has granted an administrative exemption.

  2. A plan loan to a participant or beneficiary who is a DP is permissible if the loan:

    1. Is adequately secured

    2. Is available on a reasonably equivalent basis to all participants or beneficiaries in the plan

    3. Bears a reasonable rate of interest

    4. Is not made available to highly compensated employees (HCEs) (per IRC 414(q)) in greater amounts than to other employees

    5. Is made according to specific plan provisions


      See IRC 4975(d).

  3. The rules under IRC 72(p) and IRC 72(t) may also apply. For example:

    1. Plans which use the participant’s account balance as security for a loan may simply offset that amount if the participant defaults on the loan. This offset could result in an impermissible pension plan distribution.

    2. The participant’s account balance may not be adequate security if it’s less than the loan amount.

    3. Offsets in a profit-sharing plan or a stock bonus plan may be permissible if the plan permits early distribution. However, evaluate all distributions to make sure the total amount of the distribution and the taxable amount are correctly reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.


      See 26 CFR 1.72(p)-1, Q & A -11 and Notice 82–22.

  4. See IRM 4.72.4, Employee Stock Ownership Plans (ESOPs) for examination guidelines that cover ESOP loans.  (12-17-2015)
Loans from 401(k) Plan to Entities Partially Owned by the 401(k) Plan Sponsor

  1. If a disqualified person causes his/her wholly-owned company’s 401(k) plan, of which he/she is the sole trustee and administrator, to loan money to entities in which that individual owns minority interests, the loans may be prohibited transactions. See Joseph R. Rollins v. Commissioner, T.C. Memo 2004-260.  (12-17-2015)
Examination Steps

  1. Determine whether loans are made according to specific plan/trust provisions.

  2. Determine whether loans to participants are adequately secured. Usually, plans permit the participant’s vested accrued benefit to be used for the collateral.

  3. Verify that the interest rate is reasonable:

    1. Determine whether the plan loans’ interest rates and other conditions are comparable to the terms of similar commercial loans in the relevant community.

    2. Check the overall rate of return on the plan's investments. When a large percentage of the plan's assets are invested in participant loans, the overall rate of return may be unreasonable.

  4. To determine whether loans are available on a reasonably equivalent basis to all plan participants, determine whether the loan amount to one person is a substantial portion of plan assets. If so, there’s a potential that loans haven’t been made available on a reasonably equivalent basis to other employees. See Esfandiar Kadivar v. Commissioner, T.C. Memo. 1989-404.

  5. Verify that loans to highly compensated employees don’t exceed any plan limits on participant loans.

  6. Determine whether loans were made available to HCEs more frequently than to nonhighly compensated employees.

    1. Check whether loans to HCEs are made in amounts greater than the amounts made available to other employees. See Esfandiar Kadivar v. Commissioner, T.C. Memo. 1989-404.

    2. Ask about administrative practices for the loan program, including how participants are informed about the program and the history of loan applications and their disposition.


    E Company's defined contribution plan allows participant loans and uses an employee's vested accrued account balance as collateral. The plan's most recent Form 5500, Annual Return/Report of Employee Benefit Plan, reports loans totaling $125,000. During your audit, you discover the loans were made to HCEs. Because the loans were made only to HCEs, it appears that loans may be made available to highly compensated employees more frequently than to nonhighly compensated employees. Therefore, although these are participant loans, they are loans to disqualified persons that don't meet the requirement that loans must not be available to HCEs in amounts greater than to other employees. (See IRC 4975(d)(1)(B)). Therefore, they are prohibited transactions per IRC 4975(c)(1)(B).

  7. Determine if the plan granted a disqualified person an extension of the loan’s term. If so, the loan extension is a separate transaction that, itself, must meet the criteria for an exemption. An extension on a loan which is not exempt is a second prohibited transaction occurring at the time the loan was due and the extension granted.  (12-17-2015)
Loans From Plan to Disqualified Person (Other than Participant Loans)

  1. Direct or indirect loans or other extensions of credit are prohibited between the plan and a disqualified person (IRC 4975(c)(1)(B)).  (12-17-2015)
Examination Steps

  1. Consider the potential for nonexempt prohibited loans for employers experiencing financial difficulties or in a recessionary industry or region. Review the answer to Form 5500-SF, Annual Return/Report of Small Employee Benefit Plan and Schedule I, Financial Information - Small Plan, that asks "Were there any non-exempt transactions with any party-in-interest?"

  2. When you discover a prohibited transaction, check the DOL annually granted individual administrative exemptions. Many of them are for loan transactions. If there’s an exemption, make sure it covers your plan’s specific transaction and that all of the conditions of the exemption are met.

  3. Inspect the plan’s records to determine whether it has direct or indirect loans between disqualified persons and the plan. If yes, review a copy of the loan agreement to identify the parties to the loan.  (12-17-2015)
Furnishing Goods or Services or Usage of Facilities

  1. Direct or indirect furnishing of goods, services, or facilities between a plan and a disqualified person is prohibited (IRC 4975(c)(1)(C)).

  2. Consider these prohibited transaction exemptions when you discover a plan and a DP are directly or indirectly furnishing goods, services or facilities:

    1. DOL may have granted an administrative exemption under IRC 4975(d)(2).

    2. If the plan enters into a contract or reasonable arrangement with a DP for office space or services needed to establish or operate the plan, such as legal or accounting, and the plan pays no more than reasonable compensation for the office space or service, the excise tax may not apply.


      See IRC 4975(d)(2) and 26 CFR 54.4975–6 for further guidance on issues on multiple services.


      See IRM, Department of Labor Service Provider Disclosures Under Section 408(b)(2), for covered service provider disclosure rules.

    3. A bank or other financial institution acting as a plan fiduciary may provide additional banking services to the plan if it charges no more than reasonable compensation for its additional services, and has adopted adequate internal safeguards to ensure the services are provided per sound banking practice. See IRC 4975(d)(6).

    4. A DP may serve as a plan fiduciary in addition to serving as an officer, employee, agent or other representative of a DP (e.g., the employer which sponsors the plan), without being liable for the excise tax. See IRC 4975(d)(11).

    5. The excise tax doesn’t apply when a fiduciary receives reasonable compensation for services rendered to the plan if the services are necessary to establish and/or operate the plan. See IRC 4975(d)(10).


      The fiduciary can’t receive double compensation, i.e., a fiduciary can’t receive full-time pay from the employer or union sponsoring the plan and also receive additional compensation from the plan for providing fiduciary services to the plan. A fiduciary may receive reasonable reimbursement for expenses actually incurred while he/she provides services to the plan.  (12-17-2015)
Department of Labor Service Provider Disclosures Under Section 408(b)(2)

  1. The DOL issued regulations under section ERISA 408(b)(2) that require certain service providers (CSPs) (primarily, those who provide financial services and bundled record keeping services) to furnish detailed disclosures on fees and certain other information to plan fiduciaries as a condition to satisfying the “reasonable contract or arrangement” requirement. If the CSP doesn’t comply with the disclosures, then the payment of fees in exchange for services between the plan and the service provider doesn’t qualify for the prohibited transaction exemption under IRC 4975(d)(2). See 29 CFR 2550.408b‐2(c).

  2. The DOL regulation requires CSPs to give the responsible fiduciaries information so they can:

    1. Assess reasonableness of total compensation, both direct and indirect, paid to the CSP, its affiliates and/or subcontractors.

    2. Identify potential conflicts of interest.

    3. Satisfy reporting and disclosure requirements under ERISA Title I.

  3. The DOL regulation applies to:

    • ERISA-covered defined benefit plans

    • Defined contribution plans

  4. The DOL regulation doesn’t apply to:

    • Simplified Employee Pensions

    • Savings Incentive Match Plan for Employees

    • IRAs

    • IRC 403(b) plans

  5. The disclosure requirements apply to service providers who expect to receive $1,000 or more of direct or indirect fees for services to the plan.

  6. The DOL regulation applies to covered service providers including:

    • ERISA fiduciary service providers to a covered plan or to a "plan asset" vehicle in which such plan invests

    • Investment advisers registered under federal or state law

    • Record-keepers or brokers who make designated investment alternatives available to the covered plan (e.g., a "platform provider" )


      See ERISA section 408(b)(2) and 29 CFR 2550.408b-2(c).  (12-17-2015)
Examination Steps

  1. Inspect plan records to determine whether there has been any direct or indirect furnishing of goods or services or using facilities between the plan and a disqualified person. Inspect plan receipts and disbursements because it doesn’t matter in which direction the goods, services or use of facility takes place.

  2. Inspect the trust’s balance sheet to see if the plan owns any property which might be involved in this type of prohibited transaction. If the plan owns real or personal property, verify that a DP doesn’t occupy or use this property.  (12-17-2015)
Direct or Indirect Transfer of Income or Assets

  1. A disqualified person is prohibited from, directly or indirectly, transferring or using for his/her benefit, the income or assets of a plan (IRC 4975(c)(1)(D)).


    An indirect benefit which constitutes a prohibited transaction is a plan’s purchase or sale of securities to manipulate the security’s price in a way that is advantageous to a DP.

  2. However, IRC 4975(d) grants certain statutory exemptions for a DP transferring to, or using plan income or assets. The excise tax doesn’t apply if a prohibited transaction falls within one of the following:

    1. If a DP is a participant in the plan, he/she may receive plan benefits as long as the benefits are computed and paid in a manner consistent with the plan provisions as applied to all other participants and beneficiaries. See IRC 4975(d)(9).

    2. If a plan terminates, it may make distributions to all plan participants (some of whom may be DPs) without there being a prohibited transaction if distributions are made per plan provisions and don’t violate the asset allocation rules in ERISA 4044. Also, excess assets caused by actuarial surplus may revert to the employer if the conditions in ERISA 4044(b) aren’t violated. See IRC 4975(d)(12).  (12-17-2015)
Employer Failure to Pay 401(k) Contributions

  1. If the employer doesn’t timely pay the 401(k) employee’s elective deferrals to a qualified plan, then a prohibited transaction has taken place and the employer is subject to excise taxes under IRC 4975. See Rev. Rul. 2006-38 for a detailed explanation.

  2. The DOL has advised the IRS that the failure to remit employee contributions to an employee benefit plan may constitute a crime under 18 U.S.C. 664 which provides, in relevant part, that anyone who unlawfully and willfully converts any of an employee benefit plan’s moneys, funds, or other assets to her/his own use or to the use of another, is subject to the fines and/or imprisonment as provided for under the provisions of Title 18.


    Rev. Rul. 2006-38 doesn’t express any opinion concerning the application of Title 18 to the facts listed in it.  (12-17-2015)
Examination Steps

  1. Inspect the plan receipts and disbursements journal to determine whether any plan income or assets have been transferred to, or used by or for the benefit of, a DP.

  2. If the result is yes, examine source documents (checks, loan agreements, security buy-sell statements, stock quotations, etc.) to verify the nature, circumstances and ultimate effect of the transaction.

  3. Inspect the employer’s disbursements journal to determine whether the IRC 401(k) elective deferrals were segregated and transmitted timely to the plan.

  4. If the IRC 401(k) elective deferrals weren’t timely transmitted to the plan, a prohibited transaction has occurred.

  5. See Rev. Rul. 2006-38 for an example and full description of how to calculate the amount involved for a prohibited transaction excise tax for not timely paying elective deferrals to a qualified plan.

  6. See IRM 4.71.5, Employee Plans Examination of Returns - Form 5330 Examinations.  (12-17-2015)
Fiduciary Self Dealing

  1. A fiduciary may not act by dealing with the income or assets of the plan in her/his own interest or for her/his own account (IRC 4975(c)(1)(E)).

  2. A statutory exemption exempts self dealing from being a prohibited transaction for any contract or reasonable arrangement the plan makes with a DP for office space, or legal, accounting, or other services necessary for the plan’s establishment or operation, if no more than reasonable compensation is paid (IRC 4975(d)(2)).

    1. Fiduciaries and other DPs may provide services to the plan if the arrangement meets the requirements of the exemption (26 CFR 54.4975-6).


      The exemption doesn’t apply to exempt a fiduciary’s exercise of authority, control or responsibility to cause the plan to pay the fiduciary additional fees for services. See IRM, Examination Steps

    2. The statutory exemption is limited by IRC 4975(f)(6).

  3. Under ERISA, the definition of fiduciary goes beyond those persons traditionally recognized as plan fiduciaries, such as plan trustees. The term "fiduciary" includes any person who:

    1. Exercises any authority or control on managing or disposing plan assets.

    2. Has or exercises discretionary authority, control or responsibility for plan administration.

    3. Renders investment advice to the plan for a fee or any other direct or indirect compensation.

  4. Under ERISA, persons who give advisory or consulting services to the plan, such as insurance agents or stockbrokers, may be fiduciaries to the plan although not formally named as one.

  5. An indirect benefit to a fiduciary includes a benefit to someone in whom that fiduciary has an interest that would affect her/his fiduciary judgment.


    A fiduciary hires her/his son to provide administrative services to the plan for a fee. Although the son’s providing services to the plan is a prohibited transaction in and of itself, it may be exempt from excise tax if it meets the conditions of IRC 4975(d)(2). However, the fiduciary’s action in causing the plan to pay a fee to her/his son is a separate prohibited transaction under IRC 4975(c)(1)(E) which is not exempt under IRC 4975(d)(2). Both this prohibited transaction and the one discussed in IRM, Third Party Dealing by Fiduciary, apply only to fiduciaries. ERISA’s parallel provisions to IRC 4975(c)(1)(E) and (F) are ERISA Title I sections 406(b)(1) and (3) respectively.  (12-17-2015)
Investments of Plan Assets in Account

  1. A bank or similar financial institution supervised by the United States or a state may, as the plan fiduciary, invest plan assets in its own depository accounts which bear a reasonable rate of interest if the:

    1. Plan covers only employees of the financial institution, its affiliates or both.

    2. Investments are expressly allowed by plan provisions or by a fiduciary (other than the financial institution) expressly empowered by the plan to instruct the trustee to make these investments. See IRC 4975(d)(4).  (12-17-2015)
Insurance Purchase From Related Companies

  1. A plan may purchase life or health insurance or annuities from an insurance company, or companies, if each company is the employer maintaining the plan, or wholly owned by the employer or by another DP, but only if:

    1. The total consideration the wholly-owned insurer receives from all plans for which it’s a DP is five percent or less of the total premiums and annuity considerations not including premiums of annuity considerations written by the employer maintaining the plan written by such insurers that year.

    2. Each insurer is qualified to do business in the state.

    3. The plan pays no more than adequate consideration for the insurance or annuities. See IRC 4975(d)(5).  (12-17-2015)
Examination Steps

  1. Examine the receipts and disbursements journal and related source documents for any transaction involving income or assets which might (directly or indirectly) benefit a fiduciary who used any of her/his fiduciary authority, control or responsibility to cause the plan to enter into the transaction.

  2. Look for a prohibited transaction when an investment manager can generate additional fees on her/his own authority. If an investment management fee structure is based on managing a certain portion of the plan’s assets and the investment manager can charge additional fees for those same assets for additional services, there may be a prohibited transaction.


    "Sweep fees" : An investment manager’s fee may be a certain percentage of the value of assets he manages. If the investment manager provides a service and all uninvested assets as of the close of business are "swept" into an overnight money fund, there may be a prohibited transaction if his fee includes any additional fee for this service based on the value of the funds swept. This arrangement, of course, motivates the investment manager to maximize the funds available for the sweep fee rather than making longer term investments.

  3. Another type of fiduciary self-dealing is when the employer has an arrangement with a plan service provider and the employer receives certain benefits from the service provider as a result of the plan’s business.


    If the employer, for its business use, receives computer equipment from a financial institution for maintaining a minimum balance of plan assets in the institution’s money market account, the employer has engaged in a prohibited use of plan assets for its own account.

  4. The Form 5500 asks for information about the plan’s payments to service providers, plan administrative expenses and terminated service providers. If administrative expenses seem unusually high in relation to plan assets, or if it appears that the plan administrator has been dissatisfied with the service provider, investigate further for the problems described above.

  5. Fiduciary self-dealing transactions doesn’t necessarily involve the employer or plan administrator in a prohibited transaction.


    If during a plan audit, you discover the investment management contract shows that the investment manager is charging multiple fees, the investment manager may have engaged in a prohibited transaction. Scrutinize the investment manager’s charges to determine if the multiple fees are reasonable. If they are unreasonable, examine the investment manager’s contracts with other plans in an attempt to discover other prohibited transactions that he/she engaged in. To do this, request the service provider’s client list. If necessary, issue a summons to obtain that list.  (12-17-2015)
Third Party Dealing by Fiduciary

  1. If a fiduciary who is a DP receives any consideration for her/his own personal account from any party dealing with the plan in connection with a transaction involving the income or assets of the plan, it is a prohibited transaction. See IRC 4975(c)(1)(F).

  2. The general area addressed by this prohibited transaction is "kickbacks."


    A fiduciary hiring a person to provide services to a plan or investing plan assets in a specified investment media in return for a sum of money or other consideration.

  3. There are no statutory exemptions for "kickbacks." Very common payments not normally considered a "kickback," such as commissions on the purchase/sale of insurance/securities are considered prohibited transactions.


    The IRS and the DOL issued administrative class exemptions to cover many common business practices which would otherwise be prohibited transactions subject to excise tax. See Exhibit 4.72.11-1, List of Granted Class Exemptions for the DOL websites.  (12-17-2015)
Examination Step

  1. This type of transaction is very difficult to uncover in a routine exam of plan records. Be on the look-out for this situation, and if you discover it, pursue it.  (12-17-2015)
Acquisition of Employer Securities or Employer Real Property

  1. A plan and a DP are prohibited from directly or indirectly selling, exchanging or leasing property(IRC 4975(c)(1)(A)). Therefore, these transactions are prohibited:

    • Sale of securities or real property between an employer and a plan

    • Leasing of property to the employer by the plan

  2. See IRM, Sale, Exchange or Leasing of Property.

  3. A statutory exemption exists for plans to acquire, sell or lease certain employer securities or real property (IRC 4975(d)(13)). See ERISA 408(e).

    1. A plan’s acquisition or holding of employer securities or employer real property isn’t a prohibited transaction, but if the plan acquires property from, or sells it to a DP, it is a prohibited transaction.

    2. ERISA 407(a), administered by the DOL, generally prohibits plans from acquiring or holding employer securities or employer real property (defined in ERISA 407(d)(1) and (2)) but does permit plans to acquire or hold 10 percent or less of its assets in qualifying employer securities or qualifying employer real property (as defined in ERISA 407(d)(4) and (5)) or in any combination of these types of property. Generally, eligible individual account plans are exempt from this limitation. See IRM, Eligible Plans, and ERISA 407(d).

  4. To meet the requirements of ERISA 408(e), four requirements must be met:

    • Plan must be an eligible individual account plan

    • Securities or real property must be qualifying

    • Acquisition must be for adequate consideration

    • No commission may be charged for the acquisition

  5. Remember that not all of the statutory exemptions in IRC 4975(d) may apply to a given transaction because IRC 4975(f)(6) notes that some exemptions don’t apply to owner-employees.

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