Source: http://benefitplans.com/Retirement_Plans/rp_prhbtd_trnstn.asp
Timestamp: 2018-11-14 23:29:14
Document Index: 792697810

Matched Legal Cases: ['§ 404', '§407', '§2550', '§408', '§408', '§408']

BenefitPlans.com | 401k Pension Plans | Retirement Plans | Prohibitive Transactions
Qualified Plan Prohibitive Transactions
What is a disqualified person for purposes of the prohibited transaction rules?
How do the prohibited transactions rules apply to IRAs?
1. Are there special limits on the type of investments available to retirement plans?
Although there is no list of approved investments for retirement plans, there are special rules contained in the Employee Retirement Income Security Act of 1974 (ERISA) that apply to retirement plan investments. In general, a plan sponsor or plan administrator of a qualified plan who acts in a fiduciary capacity is required, in investing plan assets, to exercise the judgment that a prudent investor would use in investing for his or her own retirement. (ERISA § 404) In addition, certain rules apply to specific plan types. For example, there are different limits on the amount of employer stock and employer real property that a qualified plan can hold, depending on whether the plan is a defined benefit plan, a 401(k) plan, or another kind of qualified plan. (ERISA §407) Certain plans, such as 401(k) plans, that permit participant-directed investment can avoid some fiduciary responsibilities if participants are offered at least three diversified options for investment, each with different risk/return factors. (Labor Reg. §2550.404c-1)
In addition, under the Code, both participant-directed accounts and IRAs cannot invest in collectibles, such as art, antiques, gems, coins, or alcoholic beverages, and they can invest in certain precious metals only if they meet specific requirements. (Code §408(m))
Individual retirement accounts also are not permitted to invest in life insurance. (Code §408(a)(3))
Finally, certain transactions between a plan and a “disqualified person” are specifically prohibited by law; see Q&A-2. Similar rules apply to transactions between an IRA and its owner or beneficiary or between an IRA and a “disqualified person;” see Q&A-6.
2. What is a prohibited transaction?
3. What is a disqualified person for purposes of the prohibited transaction rules?
4. What are the consequences of participating in a prohibited transaction?
5. How is a prohibited transaction corrected?
6. How do the prohibited transactions rules apply to IRAs?
A prohibited transaction with respect to an IRA occurs if the owner or beneficiary of the IRA engages in any of the transactions described in Q&A-2. However, in this case, with an individual retirement account, instead of imposing an excise tax on the parties to the transaction, the Code provides that the account is no longer an individual retirement account, and it is treated as if the assets were distributed on the first day of the taxable year in which the prohibited transaction occurred. (Code §408(e)(2))
For additional information, see Publication 590, Individual Retirement Arrangements (IRAs).