Prohibited transactions for qualified employee benefits plans.
The Tax Adviser › Vol. 25 Nbr. 7, July 1994
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Summary
Excise taxes
Qualified employee benefit plan administrators must be aware that certain transactions, including loans, sales and exchanges of property and leases, can subject the plan to prohibited transactions excise taxes if the plan enters into these transactions with disqualified persons. Disqualified persons include employers, owners and fiduciaries. The excise taxes are particularly burdensome, totalling as much as 100% of the value of the property involved. Correction of the prohibited transaction is possible, and exemptions can be requested from the US Dept of Labor.See the full content of this document
Extract
Prohibited transactions for qualified employee benefits plans.
While determining if a person is disqualified from participating in a transaction with an employee benefit plan is usually quite straightforward, classifying which transactions are prohibited can be extremely complex. Practitioners who are not aware of the rules in this area may discover that their clients are subject to very large excise taxes, with little recourse, since the prohibited transaction rules are strictly enforced. In turn, they may face a malpractice claim.
This article will analyze the various legislative and judicial directives concerning the excise taxes imposed on prohibited transactions; explain the computation of the taxes; define who is subject to the taxes and the types of transactions that may be prohibited; focus on three of the more common types of prohibited transactions between disqualified persons and qualified plans: (1) sales and exchanges of property (including a recent Supreme Court decision and its implications), (2) leasing of property and (3) loans; and provide planning opportunities for avoiding the prohibited transaction excise taxes. Legislative Background of Excise Taxes Before the Employee Retirement Income Security Act of 1974 (ERISA) was enacted, when a disqualified person engaged in a prohibited transaction with a qualified employee benefits plan (hereinafter, "qualified plan"), the penalty under Sec. 503 was to disqualify the plan. Since this was considered to be a rather harsh consequence for the plan's participants (who usually had no involvement in the prohibited transaction), these rules were amended. A dual enforcement procedure was established to provide retirement security for plan par...See the full content of this document
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