Prohibited transaction

What a prohibited transaction is

The law bars sales, leases and loans between the plan and a party in interest, the use of plan assets for a party in interest’s benefit, and any act in which a fiduciary deals with plan assets in their own interest. Exemptions allow ordinary plan business, including participant loans and paying a service provider reasonable compensation for necessary services.

Why it matters to employers

In small plans the most common prohibited transaction is depositing employee deferrals late, which is treated as a loan from the plan to the employer. The tax is 15% of the amount involved for each year, reported on IRS Form 5330, and rises to 100% if the transaction is not corrected. Fiduciaries can also be personally liable for losses. The Department of Labor’s Voluntary Fiduciary Correction Program gives a path to fix many of these.

Example

An employer holds $20,000 of deferrals for 45 days longer than allowed. The amount involved is the interest on $20,000 for the late period, not the $20,000. The employer deposits the lost earnings and pays the 15% excise tax on the amount involved.

Common mistakes

• Using plan assets to pay for expenses that belong to the employer, such as the cost of designing the plan.

• Hiring a business owned by a fiduciary or a relative without checking for an exemption.

• Having the plan buy or lease property from the owner.

• Ignoring small late deposits.