A prohibited transaction is a transaction between a plan and a disqualified person that is prohibited by law. Sale or exchange, or lease, of property between the plan and an interested party; Uncorrected prohibited transactions may result in separate liability under both the ERISA and the Code, together with the imposition of monetary sanctions in the form of special taxes. See the 401 (k) DOL Correction Program (VFCP) for more information. In accordance with this special class exemption, certain prohibited transactions that are corrected by VFCP are exempt from provisions of the Code on Prohibited Transactions that would otherwise be applicable.
Finally, the plan sponsor can apply to the DOL for an administrative exemption (“individual exemption”) covering a particular proposed transaction or situation that would otherwise constitute a prohibited transaction. Another legal exemption allows a plan to hire service providers whenever the services are necessary to operate the plan and the agreement under which the services provided and the compensation paid are reasonable. Prohibited transactions that are fully and appropriately corrected by the VFCP are not considered prohibited transactions under the Code and are therefore not subject to Code penalties for prohibited transactions. The reason why these particular transactions are prohibited is due to the perceived danger of a conflict of interest between a plan and a financially interested party in the plan.
The DOL may also issue exemptions on an individual basis, granted and applicable only to the person or company requesting the exemption. Section 406 (a) of the ERISA states that a trustee with respect to a plan will not cause the plan to enter into a transaction if he knows or should know that the transaction constitutes a direct or indirect transaction. Statutory exemptions are created by Congress and apply to anyone who meets the requirements of the law. In any capacity, act in any transaction involving the plan on behalf of a party (or represents a party) whose interests are contrary to the interests of the plan or to the interests of its participants or beneficiaries; or Examples of transactions prohibited under ERISA are similar to those that would occur under the Internal Revenue Code.
If more than one person participates in the transaction, each of them may be jointly and severally liable for the entire tax. However, if the prohibited transaction is not corrected during the correction period, the civil penalty will be 100 percent of the amount in question, unless the DOL and the individuals being charged agree on a smaller amount. From time to time, class exemptions are often proposed that are in the process of being approved and finalized. In addition to statutory exemptions, the Department of Labor (“DOL), under the authority granted by ERISA, has granted a number of “collective” exemptions covering a variety of investment types and circumstances.