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QPAM Primer

Prohibited and Exempted Transactions

The prohibited transaction provisions of ERISA are broad and preclude numerous types of transactions between "parties in interest" and the pension plan. Section 406 of ERISA prohibits fiduciaries, the definition of which includes trustees and investment managers, from entering into certain transactions if they know or should know that any such transactions are with a party in interest, unless a statutory or administrative exemption is available under Section 408 of ERISA. Transactions that would constitute a prohibited transaction, absent an exemption, include:

  • The sale, exchange or leasing of property between a pension plan and a party in interest;
  • The lending of money or other extension of credit between a pension plan and a party in interest;
  • The furnishing of goods, services or facilities between a pension plan and a party in interest;
  • The transfer to, or use by or for the benefit of, a party in interest, of any assets of a pension plan; and
  • The acquisition on behalf of a pension plan of any employer security or employer real property unless the requirements of Section 407(a) of ERISA are met.

For example, absent an exemption, a pension plan may not acquire or sell real property and/or lease a portion of it to a trustee of that plan or from or to a contributing employer. In addition, a pension plan may not enter into a lease with an employer, union or health and welfare plan that has certain trustees in common with the plan that acquired the property without an exemption from the prohibited transaction provisions. The list of potential party in interest transactions is very broad. Pension funds cannot buy or sell property to or from any family member of any trustee or anyone else who is a party in interest.

A pension plan may own property and lease it to a contributing employer to the pension plan if the requirements of Section 407 of ERISA, which imposes a 10% limitation on the acquisition of so-called "employer real property", are satisifed. Employer real property means real property that is leased to an employer of employees covered by the pension plan, or to an affiliate of such an employer.

Trustees should be aware of the fact that there are certain prohibited transaction provisions under ERISA that are absolute and for which no exemption is available. For example, Section 406(b) provides that a fiduciary with respect to a plan shall not:

  • deal with the assets of the plan in its own interest or for its own account;
  • in its individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries; or
  • receive any consideration for its own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.

Prohibited transactions are not always immediately or easily recognizable. For example, ERISA dictates that a pension plan that owns an office, industrial, apartment, or retail property cannot lease to anyone affiliated, directly or indirectly, with the pension plan. Thus, entering into a lease with a tenant who happens to be a family member of someone providing services to the pension plan, or who falls within the broad party in interest definition in ERISA, may be a prohibited transaction, absent an appropriate exemption. Due to the breadth of the definition of a party in interest and the risk that the trustees will have no easy manner to determine whether a potential real estate transaction will fall within the definition of a prohibited transaction, the trustees should make every effort to take advantage of the QPAM exemption to prohibited transactions.

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