Sheet Metal & Air Conditioning Contractors’ National Association

Trustee Advisor Blog

This blog educates industry trustees to aid them in better fund operations in order to control costs and provide quality benefits to fund participants.

Prohibited Transactions – A Trap for the Unwary

Aug 04, 2011

Trust Experts

We’ve all heard about “prohibited transactions” but do you really understand what that means for you and your trust fund? Have you thought about what this rule means when making decisions about collecting delinquent contributions and whether you can write-off a delinquency?

Over the next several blog posts, we’re taking a closer look at the rules related to prohibited transactions including specific examples of how trustees may, with the best of intentions, run afoul of the rules. We’ll also cover where exceptions exist and when to use them.

First we need look at the basic principles of prohibited transactions. There are two general categories:

  1. Transactions between the plan and a “party-in-interest”
  2. Transactions between the plan and a fiduciary

Prohibited transactions involving the plan and a party-in-interest include:

  1. Sale or exchange, or leasing, of any property between the plan and a party-in-interest
  2. Lending of money 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 to, or use by or for the benefit of, a party-in-interest of any plan assets
  5. Acquisition, on behalf of the plan, of any employer security or employer real property in violations of ERISA §407

The prohibited nature of these transactions do not depend on any harm resulting from the transaction – in lawyer speak they are “per se violations.” So not only doesn’t harm have to occur for a violation to exist but the trustees’ motivations in entering into the transaction as well as the prudence of that transaction are irrelevant in determining whether there has been a prohibited transaction. The U.S. Supreme Court has said that these prohibited transactions are designed to prevent a trustee from being put into a position of dual loyalty to the extent he/she cannot act exclusively for the benefit of a plan’s participants and beneficiaries.

So who is a “party-in-interest”? Parties-in-interest for purposes of the prohibited transaction rules are:

  1. Any fiduciary of the plan
  2. Any person providing services to the plan
  3. An employer whose employees are covered by the plan
  4. An employee organization whose members are covered by the plan (i.e. the union)
  5. Certain individuals who either own stock or capital in employer/corporations, partnerships employee organizations, or are relatives of those who own such interest

The transactions described here are fairly broad. And you may recognize that in fact some plans do engage in these transactions. This is because there are certain exemptions from prohibited transactions which are available that will allow the transaction to proceed. The exemptions are found (1) in the statute, (2) class exemptions provided by the Department of Labor, or (3) individual plans can apply for a specific exemption for a specific transaction. The discussions about these exemptions are left for later blog posts.

The second general class of prohibited transactions involves transactions between the plan and a fiduciary. ERISA §406(b) prohibits fiduciaries from engaging in various acts of self-dealing or conflicts of interest, as well as transactions involving the plan in which he/she personally profits. They are prohibited because they compromise the fiduciaries’ duty of loyalty to the plan. Generally there are not exemptions available for any of these transactions.

Specifically, trustees, and indeed any plan fiduciary, may not:

  1. Deal with assets of the plan in his own interest or for his own account
  2. Individually, or in any other capacity, act in any transaction involving the plan on behalf of a party whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries
  3. Receive any consideration for his own account from any party dealing with the plan in connection with a transaction involving the assets of the plan.

Now that you have the basic framework of what constitutes a prohibited transaction, next time, we’ll start applying your knowledge of prohibited transactions to decisions you face as a trustee. Plus, we’ll take a closer look at some of the exceptions to prohibited transactions.