Definition
ERISA section 406 bars a fiduciary from causing a plan to sell, exchange, or lease property, lend money or extend credit, furnish goods or services, or transfer plan assets with a party in interest, such as the employer, a fiduciary, or a service provider. Section 406(b) bars self-dealing by a fiduciary. IRC section 4975 imposes an excise tax on disqualified persons: 15% of the amount involved for each year in the taxable period, and a further 100% if the transaction is not corrected. Statutory and administrative exemptions can apply under ERISA section 408 and IRC section 4975(d).
Why it matters in an audit or review
Plan auditors inquire about party-in-interest transactions and review the plan's investments, loans, and expense payments for them. Late deposits of participant contributions are treated by the DOL as loans from the plan to the employer, and are reported as nonexempt transactions on Form 5500.
Example
Illustrative: an employer holds $8,000 of employee deferrals for 30 days beyond the date the funds could reasonably be segregated. The delay is a prohibited loan, and the employer deposits the $8,000 plus lost earnings, then reports it as a nonexempt transaction.
Common mistakes
- Treating small late deposits as immaterial instead of reporting them.
- Paying employer business expenses from plan assets.
Sources
- ERISA section 406, 29 U.S.C. 1106: https://www.law.cornell.edu/uscode/text/29/1106
- IRC section 4975, tax on prohibited transactions: https://www.law.cornell.edu/uscode/text/26/4975
- 29 CFR 2510.3-102, participant contributions as plan assets: https://www.ecfr.gov/current/title-29/section-2510.3-102
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error