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elaws - employment laws assistance for workers and small businesses - ERISA Fiduciary Advisor

Are some transactions prohibited?
Is there a way to make them permissible?

Certain transactions are prohibited under the law to prevent dealings with parties who may be in a position to exercise improper influence over the plan. In addition, fiduciaries are prohibited from engaging in self-dealing and must avoid conflicts of interest that could harm the plan.

Prohibited transactions

Parties that are prohibited from doing business with the plan are also called parties-in-interest. They include the employer, the union, plan fiduciaries, service providers, and statutorily defined owners, officers, and relatives of parties-in-interest.

Some prohibited transactions include:

  • A sale, exchange, or lease between the plan and party-in-interest;
  • Lending money or other extension of credit between the plan and party-in-interest; and
  • Furnishing goods, services, or facilities between the plan and party-in-interest.

Fiduciaries are also prohibited from:

  • Using the plan’s assets in their own interest;
  • Acting on both sides of a transaction involving the plan; or
  • Receiving money or any other consideration for their personal account from any party doing business with the plan related to that business.

Exemptions

Under the law, there are a number of exemptions allowing plans to conduct transactions necessary for plan operation, but that are otherwise prohibited. The law provides exemptions for many plan dealings with banks, insurance companies, and other financial institutions that are essential to the on-going operations of the plan.

One exemption allows the plan to hire a service provider as long as the services are necessary to operate the plan, and the associated contract and compensation are reasonable. 

Another important exemption – and a popular feature of most plans – permits plans to offer loans to participants. The loans, which are considered investments of the plan, must be:

  • Available to all participants on a reasonably equivalent basis;
  • Made according to the provisions in the plan;
  • Charge a reasonable rate of interest; and
  • Be adequately secured.

The Labor Department also may grant additional exemptions.  The exemptions issued by the Department can involve transactions available to a class of plans or to one specific plan. Both class and individual exemptions are available on the EBSA Compliance Assistance Page.

For more information on applying for an exemption, see Exemption Procedures under Federal Pension Law.

Plans investing in employer stock

401(k) plans, profit-sharing plans, and employee stock ownership plans face no limit on the amount of employer securities they hold, as long as it is provided for in the plan documents.

Employers that make employer stock an investment option need to make certain that whoever is making the investment decisions - either the investment manager or participants – has the information needed about the company's financial condition to make informed decisions about whether to invest in that stock.

A plan can buy or sell employer securities from a party-in-interest, such as an employer, an employee, or other related entity as described above (which would otherwise be prohibited), if it is for fair market value and no sales commission is charged.

Traditional defined benefit pension plans have limits on the amount of stock and debt obligations that a plan can hold and the amount of the plan’s assets that can be invested in employer securities. If the plan is a defined benefit plan, the plan generally is not permitted to hold more than 10 percent of its assets in employer stock.

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