ERISA.txt

Prohibited Transactions

Prohibited Transactions

Exemptions

Specific Prohibitions

Any fiduciary, (including, but not limited to, any administrator, officer, trustee or custodian), counsel, or employee of the plan

A person providing services to such plan

An employer of covered employees

• An employee organization (as defined in section 3(4)
• of ERISA) any of whose members are covered by such plan

An owner, direct or indirect, of 50 percent or more of- the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation, the capital interest or the profits interest of a partnership, or the beneficial interest of a trust or unincorporated enterprise, which is an employer or an employee organization described above in (C) or (D) (section 3(14)(E))

• A spouse, ancestor, lineal descendent or spouse of
• lineal descendent of any individual described in (A), (B), (C), or (E)

• A corporation, partnership, or trust or estate of which (or in which) 50 percent or more of-the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation, the capital interest or profits interest of such partnership, or the beneficial interest of such trust or estate, is owned directly or indirectly, or held by persons described above in (A), (B),
• (C), (D), or (E)

An employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors), or a 10 percent or more shareholder directly or indirectly, of a person described above in (B), (C), (D), (E), or (G), or of the employee benefit plan (section 3(14)(H)); or

A 10 percent or more (directly or indirectly in capital or profits) partner or joint venturer of a person described above in (B), (C), (D), (E), or (G) (section 3(14)(I)).

A fiduciary with respect to a plan shall not cause the plan to engage in a transaction if the fiduciary knows or should know that such transaction constitutes a direct or indirect- sale or exchange, or leasing, of any property between the plan and a party in interest; (section 406(a)(1)(A)); lending of money or other extension of credit between the plan and a party in interest (section 406(a)(1)(B)); furnishing of goods, services or facilities between the plan and a party in interest (section 406(a)(1)(C)); transfer to, or use by or for the benefit of a party in interest, of any assets of the plan (section 406(a)(1)(D)); or acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 407(a) (section 406(a)(1)(E)).

No fiduciary who has authority or discretion to control or manage the assets of a plan shall permit the plan to hold any employer security or employer real property if he knows or should know that holding such security or real property violates section 407(a).

A fiduciary shall not -- deal with plan assets in his own interest or for his own account (section 406(b)(1)); in his individual or any other capacity, act in any transaction involving a plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries (section 406(b)(2)); or receive any consideration for his own account from any party dealing with the plan in connection with a transaction involving assets of the plan (section 406(b)(3)).

Plan sponsors sometimes wish to fund their plans through contributions of assets other than cash. In 1994, following a Supreme Court decision in Commissioner of Revenue v. Keystone Consolidated Industries, the Department issued an interpretive bulletin (IB 94-3) setting forth its views concerning in-kind contributions. In general, it is the Department's position that if the employer has an enforceable obligation to make a contribution to a plan, satisfying that obligation with a contribution-inkind is a prohibited "sale or exchange" (of the obligation to contribute cash) under section 406(a)(1)(A), even if the plan purports to permit inkind contributions. If the employer has no obligation to contribute to the plan, however, such as where contributions are entirely discretionary and the employer has made no enforceable promise to make a plan contribution, a contribution-in-kind would not be prohibited. Test: facts and circumstances in each instance.

a. Section 406(c) of ERISA expands the prohibited transactions provisions by prohibiting fiduciaries from allowing parties in interest to mortgage property, and then transfer or contribute the property to a plan subject to the mortgage, thereby circumventing section 406(a)(1)(A).


b. The Conference Report explanation of section 406(c) indicates that a transfer to a plan by a party in interest of property encumbered by a mortgage or similar lien which the plan assumes--or a transfer by an unrelated party to a plan of property subject to a mortgage or similar lien which a party in interest placed on the property within the ten year period prior to the transfer--is treated as a sale or exchange for purposes of section 406(a)(1)(A).

A guarantee of a loan is treated as an extension of credit for purposes of section 406(a)(1)(B). Thus, a guarantee by a party in interest of a loan made by a plan to an unrelated party is a prohibited extension of credit under section 406(a)(1)(B), unless subject to an exemption under section 408 of ERISA.

This provision also prohibits the acquisition by a plan of debt instruments (such as bonds or notes) that are obligations of a party in interest. For example, it would be a violation of section 406(a (1)(B) for an employer to fund his contributions to a plan with its own debt instruments, since this is in effect a loan by the plan to the employer.

The Conference Report mentions, as an example of a section 406(a)(1)(C) transaction, the furnishing by a plan of personal living quarters to a party in interest. In the absence of exemptive relief (discussed in Assignment 18), section 406(a)(1)(C) would also prohibit parties in interest from furnishing trust, brokerage or recordkeeping services to a plan. As a practical matter, the Department generally treats violations of section 406(a)(1)(C) as violations of section 406(a)(1)(D), which is more encompassing. Section 406(a)(1)(D) prohibits, among other things, the use of plan assets for the benefit of a party in interest.

It is interesting to note that because anyone who provides services to a plan is a party in interest, any subsequent arrangement by that party to provide an additional service to the plan will be a prohibited transaction. As you will learn in Assignment 21, a statutory exemption under section 408(b)(2) provides exemptive relief for that situation, provided certain conditions are satisfied.

• 1) exercised discretionary control or authority over management of the plan, it's assets or disposition of such assets;
• 2) receives direct or indirect compensation for rendering investment advice regarding plan assets or has authority/duty to render such advice; or
• 3) who has discretionary authority or duty in the administration of the plan.

a) Prudent man standard of care (1) Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III of this chapter.

a fiduciary shall discharge his duties with respect to a plan “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” Implicit in this provision are two tests, one relating to procedural prudence, the other to substantive prudence.

A fiduciary must act for the benefit of the plan participants and beneficiaries only.

Section 406(a)(1)(D) can be viewed as a "catch-all" prohibited transaction provision.

• a party in interest need not be a direct party to a plan transaction in order for a
• 406(a)(1)(D) prohibited transaction to occur.

Where a fiduciary knows or should know that a transaction constitutes a direct or indirect use of plan assets for the benefit of a party in interest, and causes the plan to engage in the transaction, a prohibited transaction under section 406(a)(1)(D) will occur--even if the plan transaction itself is with an unrelated party.

Section 406(a)(1)(E) prohibits a fiduciary from causing a plan to acquire any employer security or employer real property in violation of section 407(a).

Section 406(a)(2) prohibits a fiduciary from permitting a plan to hold any employer security or employer real property in violation of section 407(a).

Sections 406(a)(1)(E) and 406(a)(2) prohibit plans from acquiring or holding any employer security or employer real property unless the employer security or employer real property is "qualifying."

• Defined benefit plans may not have more than 10% of their assets invested in "qualifying employer securities" and "qualifying employer realproperty." These two categories are aggregated for purposes of determining whether the percentage of holdings is within the 10% limit.
• "Eligible individual account plans," (in general, defined contribution plans, including 401(k) plans) are also limited to 10%, except to the extent that the plan documents explicitly provide for such holdings in excess of that amount. "Eligible individual account plans" may provide for any percentage up to 100% of their assets to be invested in qualifying employer real property and/or qualifying employer securities. (section 407) Many eligible individual account plans include such provisions.

Section 406(b)(1) prohibits a fiduciary from dealing with plan assets in his own interest or for his own account. This provision is intended, among other things, to deter a plan fiduciary from using the authority, control or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary, or to an entity or person in which the fiduciary has an interest.

• Section 406(b)(2) prohibits a fiduciary from acting,
• in his individual or any other capacity, in any transaction involving a plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries. This provision is intended to avoid placing the fiduciary in a situation where he might have divided loyalties and not be able to act exclusively in the interest of the plan and its participants.

Section 406(b)(3) prohibits a fiduciary from receiving any consideration for his own account from any party dealing with the plan in connection with a transaction involving assets of the plan. This provision, known as the "anti-kickback rule," was enacted to prohibit fiduciaries from receiving kickbacks from third parties in connection with transactions involving assets of a plan.

A violation of section 406(b)(3) does not require that the fiduciary use its authority, control or responsibility to cause the plan to enter into the transaction, but occurs simply by virtue of the fiduciary receiving consideration for its own account from a party dealing with the plan.

Exemptions are frequently provided from sections 406(a), 406(b)(1), and/or 406(b)(2) of ERISA, but almost never from section 406(b)(3).

• Section 4975(c)(l) of the Code contains prohibited
• transactions provisions very similar to those of sections 406(a), 406(b)(1) and 406(b)(3) of ERISA. Instead of "party in interest," however, the Code uses the term "disqualified person." With minor exceptions, the definitions of the terms are the same. A violation of section 406(a), 406(b)(1)
• or 406(b)(3) of ERISA generally also violates section 4975(c)(1) of the Code and vice versa. One area where the rules do differ in significant ways relates to employer stock ownership plans or "ESOPs." The IRS rules regarding ESOPs tend, at least in theory, to be somewhat stricter and more protective of participants and beneficiaries. When dealing with ESOPs, review both the ERISA and the Code provisions carefully.