Parties in interest, prohibited transactions and the schedule of nonexempt transactions

• Identify common parties in interest to an ERISA plan
• Recognize transactions prohibited by ERISA section 406(a) and (b)
• Design procedures to identify nonexempt party-in-interest transactions
• Report nonexempt transactions and the related excise tax consequences

Who is a party in interest

ERISA section 3(14) defines parties in interest broadly. The ones auditors meet most are the plan's fiduciaries (trustees, the administrative committee, investment managers), its service providers (recordkeeper, custodian, third-party administrator, the auditor itself), the sponsoring employer, owners of 50 percent or more of the employer, and relatives of those individuals. Employees, officers and directors of the employer are parties in interest too (section 3(14)(H)), which is why participant loans need an exemption. The Internal Revenue Code uses the parallel term "disqualified person" in section 4975.

What is prohibited

Except as exempted by ERISA section 408, section 406(a) prohibits a fiduciary from causing the plan to engage in a direct or indirect:

• sale, exchange or lease of property between the plan and a party in interest;
• lending of money or other extension of credit between the plan and a party in interest;
• furnishing of goods, services or facilities between the plan and a party in interest;
• transfer to, or use by or for the benefit of, a party in interest of plan assets; or
• acquisition of employer securities or real property in violation of section 407(a).

Section 406(b) adds fiduciary self-dealing prohibitions: a fiduciary may not deal with plan assets in its own interest, act for a party adverse to the plan, or receive personal consideration from a party dealing with the plan in connection with a plan transaction.

Common exemptions and common violations

Statutory exemptions in section 408 cover, among others, participant loans meeting 408(b)(1) and reasonable arrangements for necessary services with reasonable compensation (408(b)(2)). Class exemptions issued by the DOL cover other routine transactions.

Violations auditors find most often:

• Late deferral deposits. The employer's use of participant contributions before deposit is a prohibited use of plan assets.
• Plan expenses paid to the sponsor, for example reimbursing the employer for staff time with no exemption analysis.
• Sponsor-related investments such as a loan to, or real estate leased to, the employer or an owner.
• Excess compensation to a service provider that is a party in interest, failing the 408(b)(2) reasonableness test.

Audit procedures

Prohibited transactions are a laws-and-regulations risk in every plan audit (AU-C 250), and the parties involved are often related parties (AU-C 550). In practice:

1. Obtain management's list of parties in interest and update it from the plan document, trust agreement, Schedule C and board minutes.
2. Inquire of management and the plan committee about transactions with those parties.
3. Read minutes, the trust statements and expense detail for transactions with listed parties.
4. Test plan expenses paid from plan assets for allowability under the plan document and payee identity.
5. Link the late-deferral test results to this area.

Reporting

Nonexempt party-in-interest transactions are reported on Schedule G Part III, with Schedule H line 4d answered "Yes." Late deferrals are reported on line 4a instead. Under Code section 4975 the disqualified person owes a first-tier excise tax of 15 percent of the amount involved for each year in the taxable period, filed on Form 5330, with a second-tier tax if not corrected. Identified violations are reportable findings and are disclosed in the financial statements as appropriate. The prohibited transactions guide has a procedures checklist.

Common file mistakes

• No party-in-interest list, or one never updated.
• Plan expense testing that checks amounts but not payees.
• Line 4d answered "No" while the file documents a loan to the sponsor.

Harborview Marine Retirement Plan: is the lease prohibited?