What is a Prohibited Transaction?

A lock and key showing prohibited transaction

As a fiduciary, you have probably heard a lot about prohibited transactions and know you need to avoid them, but seldom do we see a good definition about what they really are.

Consider the following a “working” definition: A prohibited transaction occurs if a plan fiduciary engages in a plan-related transaction that the fiduciary knows (or should know) constitutes a direct or indirect:

  1. Sale, exchange, or lease of any property between the plan and a party in interest;
  2. Loan or other extension of credit between the plan and a party in interest;
  3. Furnishing of goods, services, or facilities between the plan and a party in interest;
  4. Transfer of plan assets to a party in interest or the use of plan assets by or for the benefit of a party in interest; or
  5. Acquisition of employer securities or employer real estate property in excess of the limits set by law.

In addition, ERISA prohibits a fiduciary from dealing with plan assets in the fiduciary’s own interest or for the fiduciary’s own account; acting in a transaction involving the plan on behalf of a party whose interests are adverse to the interest of the plan or its participants or beneficiaries; and receiving any consideration for the fiduciary’s own personal account from any person dealing with the plan in connection with any transaction involving plan assets. Should you encounter a situation that creates any doubt as to whether a transaction may be considered a prohibited transaction, or a violation of its cousin the Exclusive Benefit Rule (any plan-level decision must be for the exclusive benefit of the participants), please contact your plan consultant for clarification and/or an ERISA attorney referral.

ACR#145370 06/15