4129 / How can a covered service provider correct a prohibited transaction arising from a failure to timely disclose required information?

The answer to this question assumes that the service provider did not make the appropriate corrections within 30 days and that a prohibited transaction occurred. There are no IRS regulations that specify how to correct a prohibited transaction under IRC Section 4975. The IRS generally applies the prohibited transaction rules that apply to private foundations under IRC Section 4941 for which regulations have been issued. A correction under those rules generally requires that the transaction be undone to the fullest extent possible, and that the plan participants be restored to the position they would have been in had the prohibited transaction not occurred. Penalties typically apply to a prohibited transaction.¹

The 408(b)(2) regulations provide a process for a responsible plan fiduciary to request a correction of a deficient disclosure and a process for notifying the DOL if those deficiencies are not timely corrected. The regulations also state that a plan fiduciary should, on discovery of a disclosure failure, make a determination as to whether to terminate or continue the arrangement. The plan fiduciary should take into account the adverse consequences of a termination on the plan’s participants as part of that determination.

It is unclear at this point as to how much, if any, of the fees received by the service provider would need to be refunded to restore the participants’ accounts when the disclosures are not provided. Where payments are accelerated in the early months of the contract, it is likely that some repayment of that amount would be required if the contract is terminated. A refund of fees paid also may be required to correct the failure if the disclosure failure related directly to undisclosed fees.