Prohibited Transactions

Late in 2020, the DOL finalized a rule that would limit consideration of environmental, social and governance (ESG) factors when retirement plan fiduciaries are selecting plan investments without violating their fiduciary duties. Plan fiduciaries are obligated to act solely in the interest of plan participants and beneficiaries when making investment decisions. Under the final rule, the DOL said that plan fiduciaries must select investments based on pecuniary, financial factors and that it would apply an "all things being equal test"--meaning that fiduciaries were not prohibited from considering or selecting investments that promote or support non-pecuniary goals, provided that they satisfy their duties of prudence and loyalty in making the selection. This rule was seen as limiting fiduciaries' ability to consider ESG factors in investing. However, earlier in 2021, the EBSA announced that it would not enforce this Trump-era rule, so that plan fiduciaries may once again consider ESG factors in making investment decisions.<br /> <br /> On November 22, 2022, the DOL released a new final rule on ESG investing.  The rule retains many prior elements, yet is generally expected to make it easier for plan fiduciaries to consider ESG factors in determining investment strategy. According to the rule, a plan fiduciary's determination with respect to an investment or investment strategy must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis. The DOL further states that the analysis should use appropriate investment horizons consistent with the plan's investment objectives and should account for the funding policy of the plan established under ERISA. Under the final rule, however, fiduciaries will not be prohibited from considering collateral benefits aside from investment returns when there is an essential "tie" in the context of the investment analysis. Fiduciaries will also not violate their duty of loyalty merely because they take participant preferences into account when building their menu of otherwise prudent investment options.  The new rule does not contain any separate standard for QDIAs.<br /> <br /> This ESG investing rule continues to generate controversy, so practitioners should pay close attention to developments in this area.

<div class="Section1"><br /> <br /> A first tier tax equal to 15 percent of the amount involved is imposed on each prohibited transaction for each year or part thereof from the time the transaction occurs until the earliest of the date: (1) it is corrected, (2) a deficiency notice is mailed, or (3) the tax is assessed.<a href="#_ftn1" name="_ftnref1">¹</a> An employer fined under this provision for failing to make timely 401(k) transfer deferrals was assessed the 15 percent penalty only on the amount of interest the employer would have paid for a bank loan for the same amount, not 15 percent of the amount of the late deposit.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> All disqualified persons who participate in the prohibited transaction, other than a fiduciary acting only as a fiduciary, are jointly and severally liable for the full amount of the tax. A trustee was held liable for the tax even though the trustee did not vote to approve the payment that was determined to be a prohibited transaction; the Seventh Circuit Court of Appeals determined that the trustee had benefited from the payments and thus had participated in the transaction.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> An act of self-dealing involving the use of money or property (for example, the leasing of property) may be treated as giving rise to multiple transactions &ndash; one on the day the transaction occurs and separate ones on the first day of each taxable year within the above period &ndash; and, thus, may result in multiple penalties.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <p style="text-align: center;"><strong>Second Tier Tax</strong></p><br /> If a transaction is not corrected within the above period, there is a second tier tax of 100&nbsp;percent of the amount involved. This tax will be abated if the transaction is corrected within 90 days after the notice of deficiency with respect to the additional tax is mailed. This 90-day period may be extended in certain circumstances.<br /> <br /> To be corrected, the transaction must be undone to the extent possible, but, in any event, so as to place the plan in a financial position no worse than it would have been in had the disqualified person acted under the highest fiduciary standards.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> A prohibited transaction was held to be self-correcting, and thus not subject to the second tier tax (or to the first tier tax in subsequent tax years), where the extraordinary success of the investment was such that to undo the transaction would have put the plan in a worse position than if the disqualified persons had acted under the highest fiduciary standards. Essentially, the transaction involved a sale of mineral rights that were producing over a million dollars a year in royalties to an ESOP by the employees of the employer in return for a private annuity.<a href="#_ftn6" name="_ftnref6">⁶</a> The Tax Court considers this case to be an anomaly and has stated that, in general, prohibited transactions cannot be self-correcting.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> If the owner of an individual retirement account, or the owner&rsquo;s beneficiary, engages in a prohibited transaction and, as a result, the account ceases to be an individual retirement account, the tax does not apply ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3649">3649</a>). Similar rules apply to beneficiaries of health and Archer medical savings accounts ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="390">390</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="422">422</a>) and to beneficiaries of and contributors to education savings accounts.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> The IRS has the authority to impose tax penalties as a result of prohibited transactions, even when the Department of Labor has entered into a consent judgment concerning the plan.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <p style="text-align: center;"><strong>Other Consequences</strong></p><br /> In addition to the potential tax penalties discussed above, there can be other consequences to a prohibited transaction. IRAs cease to qualify as IRAs as of the first day of the taxable year in which the prohibited transaction occurs and the account is treated as distributing all of its assets on that date.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> A self-directed IRA purchased land and contributed it and cash to a partnership with an LLC solely owned by the IRA owner and his wife that owned the adjacent property. It allowed the IRA owner to use the IRA assets for his personal benefit. Because the IRA owner was a fiduciary with regard to the IRA, this was a prohibited transaction and immediately terminated the IRA&rsquo;s exempt status. As a result, the IRA assets were not protected when the IRA owner filed for bankruptcy.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;4975(a); IRC &sect;&nbsp;4975(f)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Rev. Rul. 2006-38, 2006-29 IRB 80.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em>O&rsquo;Malley v. Comm.</em>, 972 F.2d 150 (7th Cir. 1992).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Treas. Reg. &sect;&nbsp;141.4975-13. <em><em>See</em> Lambos v. Comm.</em>, 88 TC 1440 (1987).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&sect;&nbsp;4975(b), 4961.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; <em>Zabolotny v. Comm.</em>, 7 F.3d 774 (8th Cir. 1993), <em>nonacq</em>. 1994-1 CB 1.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; <em>Morrissey v. Comm.</em>, TC Memo 1998-443.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;4975(c)(3).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; <em>Baizer v. Comm.</em>, 204 F.3d 1231 (9th Cir. 2000).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; IRC &sect;&nbsp;408(e)(2).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; <em>In Re Kellerman</em>, 115 AFTR 2d 2015-1944 (Bktcy. Ct. AR 2015).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Any transaction, whether direct or indirect, between a plan and a disqualified person (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3981">3981</a>) constitutes a prohibited transaction under the IRC. These transactions include:<br /> <p style="padding-left: 40px;">(1)&nbsp; a sale, exchange, or lease of any property, including a transfer of property subject to a security interest assumed by the plan or placed on it within 10 years prior to the transfer;<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> <p style="padding-left: 40px;">(2)&nbsp; lending of money or other extension of credit;</p><br /> <p style="padding-left: 40px;">(3)&nbsp; furnishing of goods, services, or facilities; and</p><br /> <p style="padding-left: 40px;">(4)&nbsp; the transfer of plan assets or income to, or use of them by or for the benefit of, a disqualified person.</p><br /> Note, however, that there are statutory and regulatory exemptions from what would ordinarily be a prohibited transaction.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Before a plan enters any transaction, counsel should scrutinize the transaction to determine whether it is prohibited. If the transaction is prohibited, counsel should first determine whether a statutory exemption is available under ERISA Section&nbsp;408. If so, counsel should make sure that each requirement is met, that the trustees approve the transaction and document the decision-making process in the plan&rsquo;s minutes, and that the transaction is adequately documented in writing. If no statutory exemption is available, then counsel should check class action exemptions to determine if one applies. Finally, if no other exemptions are available, counsel can apply for an individual exemption.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr><br /> <br /> It is a prohibited transaction for a disqualified person who is a fiduciary to deal with income or assets of a plan in his or her own interest or to receive consideration for his or her own personal account from a party dealing with the plan in connection with a transaction involving plan income or assets.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Title I of ERISA prohibits a fiduciary from acting, in any transaction involving the plan, on behalf of anyone having interests adverse to those of the plan or plan participants or<br /> beneficiaries.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The Department of Labor has issued final regulations on ERISA Section&nbsp;408(b)(2) required fee disclosures by service providers to plan fiduciaries and participants ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4124">4124</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The definition of a plan for this purpose includes not only any qualified pension, profit sharing, stock bonus, or annuity plan, but also an individual retirement plan ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3641">3641</a>), health savings account (&ldquo;HSA&rdquo;) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="399">399</a>), Archer medical savings account (&ldquo;MSA&rdquo;) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="431">431</a>), or Coverdell education savings account. The term &ldquo;plan&rdquo; includes such plans even after they are no longer qualified. Government and church plans are excluded.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;4975(f)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Final Department of Regulations on Prohibited Transaction Exemption Procedures are available at 29 CFR &sect;&sect;&nbsp;2570.30 &ndash; 2570.52.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;4975(c)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; ERISA &sect;&nbsp;406(b)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; 29 CFR &sect;&nbsp;2550.408b-2(c).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;4975(e)(1).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The definition of investment advice fiduciary continues to change.&nbsp; Under the 2024 rule, a financial services professional is classified as an investment advice fiduciary if (1) the provider offers investment advice or makes investment recommendations to a retirement investor, (2) the advice or recommendation is made for a fee or other compensation and (3) the financial services provider either specifically states that they are acting as an investment advice fiduciary or makes the recommendation within a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in their best interest.&nbsp; <em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a detailed explanation.<br /> <br /> Historically, a fiduciary has been a person who has discretionary authority or control over plan management or administration or disposition of plan assets, or who renders investment advice for a fee or other compensation, direct or indirect, with respect to any money or other property of the plan.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A person renders investment advice if advising trustees as to the value of property or making recommendations about the advisability of buying or selling property and, directly or indirectly (1) has discretionary authority with respect to buying or selling property, or (2) renders advice on a regular basis to the plan, pursuant to a mutual understanding that (x) the services will be the primary basis for investment decisions, and (y) he or she will render individualized advice regarding investment policies.<a href="#_ftn2" name="_ftnref2">²</a> Whether advice and recommendations regarding plan purchases of insurance contracts and annuities constitute investment advice depends on the facts in each situation.<a href="#_ftn3" name="_ftnref3">³</a> A fee or other compensation can include insurance sales commissions.<br /> <br /> A final rule issued by the Department of Labor (DOL) in 2016 broadened the definition of fiduciary, effective April&nbsp;10, 2017<a href="#_ftn4" name="_ftnref4">⁴</a> to include a person who gives fiduciary investment advice to a plan, plan fiduciary, participant, beneficiary, or IRA owner. It was vacated on June&nbsp;21, 2018 after the Fifth Circuit Court of Appeals issued a mandate. The DOL did not appeal, and instead proposed a new class exemption which has again been modified as of 2024. <em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Under earlier DOL regulations, a person who develops a computer model or who markets a computer model or investment advice program used in an &lsquo;&lsquo;eligible investment advice arrangement&rsquo;&rsquo; is a fiduciary of a plan by reason of the provision of investment advice and is treated as a &lsquo;&lsquo;fiduciary advisor.&rsquo;&rsquo;<a href="#_ftn6" name="_ftnref6">⁶</a> The regulations specify the conditions that must be met for a fiduciary to elect to be the sole fiduciary advisor under the investment advice program.<br /> <br /> ERISA does not modify the definition of a fiduciary under IRC Section&nbsp;4975; consequently, an individual who is not a fiduciary under ERISA still can be a fiduciary for purposes of IRC Section&nbsp;4975.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;4975(e)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;54.4975-9(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Prohibited Transaction Exemption (PTE) 77-9 (Discussion of Major Comments).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; 29 C.F.R. &sect;&nbsp;2510.3-21(a).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; <em>Chamber of Commerce v. Acosta</em>, No.&nbsp;17-10238 (5th Cir. June&nbsp;21, 2018).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; DOL Reg. &sect;&nbsp;2550.408g&ndash;2; IRC &sect;&nbsp;4975(f)(8).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; <em>Flahertys Arden Bowl, Inc. v. Comm</em>., 115 TC 269 (2000), <em>aff&rsquo;d</em>, 262 F. 3d 1162, 88 AFTR 2d 2001-5547 (8th Cir. 2001).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Loans made to plan participants and beneficiaries generally are exempted from the prohibited transaction rules if the loans:<br /> <p style="padding-left: 40px;">(1)&nbsp; are made available to all participants and beneficiaries on a reasonably equivalent basis,</p><br /> <p style="padding-left: 40px;">(2)&nbsp; are not made available to highly compensated employees ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3930">3930</a>) in an amount greater than the amount made available to other employees,</p><br /> <p style="padding-left: 40px;">(3)&nbsp; are made in accordance with specific provisions regarding such loans set forth in the plan,</p><br /> <p style="padding-left: 40px;">(4)&nbsp; bear reasonable rates of interest, and</p><br /> <p style="padding-left: 40px;">(5)&nbsp; are adequately secured.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> A reasonable rate of interest is one that provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans made under similar circumstances.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Security for participant loans is considered adequate if it may reasonably be anticipated that loss of principal or interest will not result if default occurs.<a href="#_ftn3" name="_ftnref3">³</a> The effect of this no loss requirement varies depending on the type of plan; a plan in which the investment experience of the plan&rsquo;s assets is shared by all participants may require additional loan conditions, such as mandatory payroll deduction repayment on stated events or additional collateral.<br /> <br /> No more than 50 percent of the present value of a participant&rsquo;s vested accrued benefit under a plan generally may be considered as security for the outstanding balance of all plan loans made to the participant.<a href="#_ftn4" name="_ftnref4">⁴</a> Except in the case of directed investment loans, this loan exemption is not an exemption from the other fiduciary standards of ERISA. The prohibited transaction rules apply to a loan that does not meet the exemption requirements, even if it is treated and taxed as a distribution ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3953">3953</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Loans from a qualified plan to S corporation shareholders, partners, and sole proprietors generally are exempt from the prohibited transaction rules ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3953">3953</a>),<a href="#_ftn6" name="_ftnref6">⁶</a> although there are rules applying to certain S corporation ESOPs that the IRS views as abusive<br /> ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3825">3825</a>).<br /> <br /> The Tax Court determined that a loan between a plan and a corporation partially owned by a disqualified person did not constitute a prohibited transaction where the loan was approved by and made at the sole discretion of the plan&rsquo;s independent bank trustee.<a href="#_ftn7" name="_ftnref7">⁷</a> A transfer of property to a plan in satisfaction of a participant loan was treated as a prohibited transaction where the borrower was a disqualified person.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; ERISA &sect;&nbsp;408(b)(1); IRC &sect;&nbsp;4975(d)(1); Labor Reg. &sect;&nbsp;2550.408b-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Labor Reg. &sect;&nbsp;2550.408b-1(e).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Labor Reg. &sect;&nbsp;2550.408b-1(f)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Labor Reg. &sect;&nbsp;2550.408b-1(f)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; <em>Medina v. U.S.</em>, 112 TC 51 (1999).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;4975(f)(6)(B)(iii).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; <em>Greenlee v. Comm.</em>, TC Memo 1996-378.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; <em>Morrissey v. Comm</em>., TC Memo 1998-443.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A disqualified person is:<br /> <p style="padding-left: 40px;">(1)&nbsp; a fiduciary (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3982">3982</a>);</p><br /> <p style="padding-left: 40px;">(2)&nbsp; a person providing services to the plan;</p><br /> <p style="padding-left: 40px;">(3)&nbsp; an employer or employee organization, any of whose employees or members are covered by the plan;</p><br /> <p style="padding-left: 40px;">(4)&nbsp; a 50 percent owner, directly or indirectly, of an employer or employee organization described in (3);</p><br /> <p style="padding-left: 40px;">(5)&nbsp; a family member of any person described in (1) through (4);</p><br /> <p style="padding-left: 40px;">(6)&nbsp; a corporation, partnership, trust, or estate that is 50 percent or more owned by any person described in (1), (2), (3), or (5);</p><br /> <p style="padding-left: 40px;">(7)&nbsp; an officer, director, 10 percent or more shareholder, or highly compensated employee of a person described in (3), (4), or (6); or</p><br /> <p style="padding-left: 40px;">(8)&nbsp; a 10 percent or more (in capital or profits) partner or joint venturer of a person described in (3), (4), or (6).<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> <p style="text-align: center;"><strong>Family Member</strong></p><br /> A family member is defined as a spouse, ancestor, lineal descendant, or any spouse of a lineal descendant.<a href="#_ftn2" name="_ftnref2">²</a><br /> <p style="text-align: center;"><strong>Highly Compensated Employee</strong></p><br /> A highly compensated employee is defined as any employee earning 10 percent or more of the yearly wages of an employer.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;4975(e)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;4975(e)(6).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;4975(e)(2)(H).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <p class="HD" style="text-align: center;"><strong>Administrative Exemption: 84-24</strong></p><br /> Prohibited Transaction Exemption 84-24<a href="#_ftn1" name="_ftnref1">¹</a> provides administrative relief in addition to the statutory provisions. It permits a life insurance agent, broker, or pension consultant and affiliates, including a fiduciary, who is a disqualified person (1) to receive sales commissions for certain insurance and annuity sales to a plan, or (2) to effect a transaction for the purchase of an insurance or annuity contract from an insurance company. The exemption also permits an investment company principal underwriter to effect a transaction for the purchase of an insurance or annuity contract. Furthermore, it allows the purchase of insurance or annuities from an insurance company that is a disqualified person. This class exemption is available only if certain conditions are met.<br /> <br /> Notably, advisors must adhere to the impartial conduct standards (Q 3986.1) and are subject to the duties of care and loyalty.&nbsp; In the 2024 amendment, the DOL added a new section to PTE 84-24 to provide relief for independent insurance agents receiving compensation that would otherwise be prohibited for investment advice transactions, subject to conditions similar to PTE 2020-02.&nbsp; Unlike PTE 2020-02, the insurance company selling its products through independent agents is not required to provide fiduciary acknowledgment and is not treated as a fiduciary solely because it exercised oversight over independent agents.&nbsp; Instead, the independent insurance agent is required to acknowledge fiduciary status, and the insurance company is required to exercise supervisory authority over the independent agent with regard to an agent's recommendation of the insurance company's own products.&nbsp; The remaining provisions of PTE 84-24 remain available for transactions that do not involve advice.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Note that the exemption was significantly changed by the Department of Labor Fiduciary Rule, which was scheduled to become effective January&nbsp;1, 2018 (although the impartial conduct standards were effective June&nbsp;9, 2017)).<a href="#_ftn3" name="_ftnref3">³</a> However, the rule was vacated in the courts in March, 2018, and the DOL has replaced it with a new standard and PTE (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> and Q 3986.1 for details).&nbsp; Under the 2024 DOL fiduciary rule, the impartial conduct standards now apply to advisors who take advantage of PTE 84-24 and PTE 2020-02.<br /> <br /> <hr><br /> <br /> Further, to qualify, the transaction must be effected in the ordinary course of business of the agent, broker, or consultant on terms at least as favorable to the plan as those that would be negotiated in an arm&rsquo;s length transaction with an unrelated party. The total fees and commissions also must not be in excess of reasonable compensation, determined on a facts and circumstances basis.<br /> <br /> Second, the agent, broker, consultant, or insurance company may not act as a plan trustee (other than a nondiscretionary trustee who does not render investment advice with respect to any assets of the plan), plan administrator, a fiduciary authorized to manage, acquire, or dispose of plan assets on a discretionary basis, or an employer, any of whose employees are covered by the plan. PTE 84-24, as amended, extends the same relief to situations where an affiliate of the insurance agent or broker, pension consultant, or investment company principal underwriter is a trustee with investment discretion over plan assets that are not involved in the transaction.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The term affiliates includes (1) any person controlled by or under common control with the agent, broker, consultant, or insurance company, (2) any officer, director, employee, or relative of or a partner in (but not of) the agent, broker, consultant, or insurance company, and (3) any corporation or partnership of which the agent, broker, consultant, or insurance company is an officer, director, or employee, or in which he or she is a partner.<br /> <br /> The transaction must be approved, in writing, by an independent fiduciary, who may be the employer. Prior to the sale, the agent, broker, or consultant must disclose to the independent fiduciary:<br /> <p style="padding-left: 40px;">(1)&nbsp; the nature of the affiliation between the agent and the insurer whose contract is being recommended;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; any limitations on the agent&rsquo;s ability to recommend insurance or annuity contracts;</p><br /> <p style="padding-left: 40px;">(3)&nbsp; the amount of sales commission, expressed as a percentage of gross annual premium payments for the first and renewal years; and</p><br /> <p style="padding-left: 40px;">(4)&nbsp; a description of any charges, fees, discounts, penalties, or adjustments that may be imposed in connection with the purchase, holding, exchange, termination, or sale of such contracts.</p><br /> Finally, the agent, broker, or consultant must retain records relating to the transaction for six years, but no filing is required with either the IRS or the Department of Labor. The records must be available for examination by those two federal agencies, plan participants, beneficiaries, and any employer or employee organization whose employees or members are covered by the plan.<br /> <br /> An insurance company that is a service provider or fiduciary solely because it sponsors a master or prototype plan need satisfy only the first set of conditions. An agent, broker, or consultant who is a fiduciary and who sells insurance in connection with the master or prototype plan must meet both sets of conditions.<br /> <p style="text-align: left;"><em><em>See</em> </em>Q 3986.1 for a discussion of the new PTE 2020-02 and a detailed discussion of the impartial conduct standards that individuals must now comply with in order to take advantage of PTE 84-24 under the 2024 fiduciary rule.</p><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; 1984-2 CB 231 (formerly PTE 77-9, 1977-2 CB 428, as amended by 1979-1 CB 371).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; 29 CFR Part 2550.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; <em><em>See</em></em> Amendment to and Partial Revocation of PTE 84-24, 81 Fed. Reg. 21147 (Apr.&nbsp;8, 2016).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; <em><em>See</em></em> Amendment to PTE 84-24, 71 Fed. Reg. 5887 (Feb. 1, 2006).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The IRC lists specific exemptions from the broad prohibited transaction rules. These include:<br /> <p style="padding-left: 40px;">(1)&nbsp; the receipt of benefits under the terms of the plan;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; the distribution of the assets of the plan meeting allocation requirements;</p><br /> <p style="padding-left: 40px;">(3)&nbsp; loans available to all plan participants or beneficiaries under certain circumstances (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3984">3984</a>);</p><br /> <p style="padding-left: 40px;">(4)&nbsp; a loan to an employee stock ownership plan (ESOP, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3817">3817</a>); and</p><br /> <p style="padding-left: 40px;">(5)&nbsp; the acquisition or sale of qualifying employer securities by an individual account profit sharing, stock bonus, thrift, savings plan, or ESOP for adequate consideration and without commission.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> Another statutory exemption is for the provision of office space or services necessary for the establishment or operation of the plan under a reasonable arrangement for no more than reasonable compensation.<a href="#_ftn2" name="_ftnref2">²</a> This exemption shields only the provision of services that would be prohibited transactions under (1), (3), and (4) in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3980">3980</a>, not fiduciary self-dealing. Thus, if an insurance agent is not a fiduciary, the agent&rsquo;s sale of insurance to a plan and receipt of a commission is within this statutory exemption. If an agent is a fiduciary (for example, if the trustee relies on his or her investment advice) receipt of a commission for sale of insurance or annuities to a plan may be a prohibited transaction.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Certain administrative exemptions (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3985">3985</a>) permit receipt of fees or commissions by fiduciaries in connection with the sale of insurance and annuity contracts to plans and the transfer of insurance contracts between plan and plan participants or employers.<br /> <br /> Final DOL regulations provide that compensation paid to certain service providers will not be considered reasonable for purposes of the prohibited transaction exemption unless the covered service provider satisfies a fee disclosure mandate.<a href="#_ftn4" name="_ftnref4">⁴</a> Failure to comply with the disclosure mandate will mean that compensation paid to the covered service provider does not qualify for the statutory prohibited transaction exemption.<br /> <br /> The service providers covered by the mandate are fiduciaries, registered investment advisors, platform providers for participant directed defined contribution plans, and other indirectly compensated service providers who reasonably expect $1,000 or more in direct or indirect compensation in connection with providing covered services. Indirectly compensated services include accounting, auditing, actuarial, appraisal, banking, certain consulting related to the plan or plan investments, custodial, insurance, investment advisory, legal, recordkeeping, investment brokerage, third party administration, or valuation services provided to the plan for which the covered service provider, an affiliate, or subcontractor reasonably expects to receive indirect compensation.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Direct compensation is compensation received directly from the plan. Indirect compensation is compensation received from any source other than the plan, the plan sponsor, the covered service provider, or an affiliate. Compensation received from a subcontractor is generally indirect compensation.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> The disclosure must include the following information:<br /> <p style="padding-left: 40px;">(1)&nbsp; A description of the services to be provided;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; If applicable, a statement that the services will be provider as a fiduciary, as a registered investment advisor, or both;</p><br /> <p style="padding-left: 40px;">(3)&nbsp; A description of all direct and indirect compensation expected to be received;</p><br /> <p style="padding-left: 40px;">(4)&nbsp; If recordkeeping services will be provided to the plan, a description of the compensation expected to be received for the services and information about any arrangement where the recordkeeping services will be provided without explicit compensation;</p><br /> <p style="padding-left: 40px;">(5)&nbsp; Information about fiduciary services provided to investment products that the plan has a direct equity investment in;</p><br /> <p style="padding-left: 40px;">(6)&nbsp; Information about investment products made available through a platform in connection with recordkeeping and brokerage services; and</p><br /> <p style="padding-left: 40px;">(7)&nbsp; A description of the manner in which the compensation will be received, such as whether the plan will be billed or the compensation will be deducted directly from the plan&rsquo;s accounts or investments.<a href="#_ftn7" name="_ftnref7">⁷</a></p><br /> Except for the first two exemptions listed above, these statutory exemptions do not apply where a plan that covers owner-employees (1) lends assets or income, (2) pays any compensation for personal services rendered to the plan, or (3) except as described in the following paragraph, acquires property from or sells property to (x) an owner-employee ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3932">3932</a>) or an employee who owns more than 5 percent of the outstanding shares of an S corporation, an individual retirement plan participant, beneficiary, or sponsoring employer or association, as the case may be, (y) a family member of a person described in (x), or (z) a corporation controlled by a person described in (x) through ownership of 50 percent or more of total combined voting power of all classes of stock or 50 percent or more of total shares of all classes of stock of the corporation.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> A transaction consisting of a sale of employer securities to an ESOP ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3819">3819</a>) by a shareholder-employee, a member of his or her family, or a corporation in which he or she owns 50 percent or more of the stock generally will be exempt from the prohibited transaction rules. For this purpose, a shareholder-employee is an employee or officer of an S corporation who owns or is deemed to own, under the constructive ownership rules of IRC Section 318(a)(1), more than 5 percent of the outstanding stock of the corporation on any day during the corporation&rsquo;s taxable year.<a href="#_ftn9" name="_ftnref9">⁹</a> For special rules applying to S corporation ESOPs that the IRS views as abusive, <em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3825">3825</a>.<br /> <br /> The Pension Protection Act of 2006 created an exemption from the prohibited transaction rules for certain fiduciary advisors who provide investment advice under an eligible investment advice arrangement ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3793">3793</a>).<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;4975(d).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;4975(d)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; PTE 77-9 (Discussion of Major Comments); <em><em>see</em> </em>Treas. Reg. &sect;&nbsp;54.4975-6(a)(5).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Labor Reg. &sect;&nbsp;2550.408b-2.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Labor Reg. &sect;&nbsp;2550.408b-2(c)(1)(iii).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Labor Reg. &sect;&nbsp;2550.408b-2(c)(1)(viii)(B).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Labor Reg. &sect;&nbsp;2550.408b-2(c)(1)(iv).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;4975(f)(6)(A).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; IRC &sect;&sect;&nbsp;4975(f)(6)(B)(ii), 4975(f)(6)(C).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; IRC &sect;&sect;&nbsp;4975(d)(17), 4975(f)(8), ERISA &sect;&nbsp;408(g).<br /> <br /> </div></div><br />

<p> In the finalized fiduciary release, the DOL was clear that one-time recommendations (including rollovers and annuity sales) can create fiduciary liability under the 2024 definition of investment advice fiduciary. The DOL has stated that under the old five-part test, investment advice "provided on a "one-time" basis, like many recommendations to roll retirement savings out of a workplace retirement plan and into an IRA, was typically not treated as fiduciary advice and therefore was not protected by ERISA's fiduciary safeguards. Yet, one-time advice is often the most important advice the retirement investor will ever receive…. The new rule and exemptions close the loopholes that defeat legitimate investor expectations by holding trusted advisers to a fiduciary standard. When an individualized recommendation comes from an investment professional holding themselves out as someone who is acting in the investor's best interest, it is only right that the advice meet a fiduciary standard." </p><p> The DOL exemption for fiduciary advice specifically applies to rollover advice, assuming the circumstances qualify under the test for determining whether the advisor is an investment advice fiduciary (<em>&lt;em&gt;see &lt;/em&gt;</em>Q 3986). Rollovers from a 401(k) to an IRA, IRA to IRA, or one type of account to another (i.e., from a fee-based account to a commission-based account) are all potentially covered by the exemption. </p><p> Under the 1975 five-part test, which now no longer applies, the DOL commentary included with the exemption stated that not every rollover triggered investment advice fiduciary status. A facts-and-circumstances analysis was required in every case to determine whether the transaction was subject to the new standard. Specifically, the DOL noted that it did not intend to apply the guidance in DOL Advisory Opinion 2005-23A (the &lt;em&gt;Deseret&lt;/em&gt; Letter), which would have found that rollover advice generally does not constitute investment advice. </p><p> Under the 2024 rule, if the one-time recommendation otherwise causes the advisor or firm to obtain fiduciary status, PTE 2020-02 may be available. Rollovers, annuity sales and other one-time transactions can now all create fiduciary status that requires compliance with one of the PTEs and the impartial conduct standards. <br><strong>Text for Rollover Status Under the Old Five-Part Test</strong></p><p> Under the now-void five-part test, all five prongs of the test must be satisfied for the advisor to be an investment advice fiduciary under the DOL definition. Advice to execute a rollover transaction can potentially be an isolated event that would not satisfy the "regular basis" component of the five-prong approach. On the other hand, rollover advice can be given as a part of an ongoing relationship between client and advisor, or an anticipated future ongoing relationship between the parties. </p><p> Further, determining whether there is a "mutual understanding" between the parties is based upon the reasonable understanding of both parties—even if no formal agreement is found. In fact, the DOL notes that advice to roll over plan assets is often given for the purpose of establishing an ongoing relationship where advice is provided on a regular basis outside of the plan (in return for a fee/commission). In other words, the rollover advice can be the first step in an investment advisory relationship that continues on a regular basis. </p><p> The exemption requires financial firms and advisors to document the reasons for recommending the rollover, including why the rollover is in the client's best interests. </p>

<p><strong>Administrative Exemption: 93-33 and 97-11</strong></p><p> Prohibited Transaction Exemption 93-33<a href="#_ftn1">¹</a> and Prohibited Transaction Exemption 97-11<a href="#_ftn2">²</a> allow banks and brokerages, respectively, to offer no or low cost services based on account balances in IRAs and Keogh plans, if certain requirements are met: <br>(1) the services offered must be those that could be offered under applicable state and federal law and that are available in the ordinary course of business to other customers who do not maintain an IRA or Keogh plan;</p><p>(2) the eligibility requirements, based on the account value or the amount of fees incurred, must be as favorable as any such requirements imposed on any other account included in determining eligibility to receive such services;</p><p>(3) the IRA or Keogh plan must be established for the exclusive benefit of the participant, his or her spouse, or their beneficiaries;</p><p>(4) the investment performance of the IRA or Keogh plan must equal or exceed that of a like investment made at the same time by a customer ineligible to receive such low or no cost services.</p><p> In addition, PTE 97-11 requires that the services offered by brokerages be the same as those offered to non-IRA or non-Keogh plan customers with like account values or like fees generated and that the combined total of all fees for the provision of services to the IRA or Keogh plan may not exceed reasonable compensation within the meaning of IRC Section 4975(d)(2). </p><p> The Department of Labor subsequently adopted amendments expanding these exemptions to Coverdell education savings accounts and SIMPLE IRAs ( Q <a href="javascript:void(0)">3706</a>).<a href="#_ftn3">³</a> PTE 97-11 was similarly amended to extend its provisions to Roth IRAs, assuming they are not part of an employee benefit plan covered by Title I of ERISA, other than an SEP or a SIMPLE IRA.<a href="#_ftn4">⁴</a></p><p><hr align="left" size="1" width="33%"></p><p><a href="#_ftnref1">1</a>. 58 Fed. Reg. 31053. </p><p><a href="#_ftnref2">2</a>. 62 Fed. Reg. 5855. </p><p><a href="#_ftnref3">3</a>. 64 Fed. Reg. 11042 and 64 Fed. Reg. 11044 (Mar. 8, 1999). </p><p><a href="#_ftnref4">4</a>. 67 Fed. Reg. 76425 (Dec. 12, 2002). </p>