26 Usc 4975

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26 U.S. Code § 4975 - Tax on prohibited transactions | U.S. Code | US Law | LII / Legal Information Institute

26 U.S. Code § 4975 - Tax on prohibited transactions
U.S. Code

Notes

(a) I
There is hereby imposed a tax on each prohibited transaction. The rate of
tax shall be equal to 15 percent of the amount involved with respect to the
prohibited transaction for each year (or part thereof) in the taxable period.
The tax imposed by this subsection shall be paid by any disqualified person
who participates in the prohibited transaction (other than a fiduciary acting
only as such).
(b) A
In any case in which an initial tax is imposed by subsection (a) on a
prohibited transaction and the transaction is not corrected within the
taxable period, there is hereby imposed a tax equal to 100 percent of the
amount involved. The tax imposed by this subsection shall be paid by any
disqualified person who participated in the prohibited transaction (other
than a fiduciary acting only as such).
(c) P
(1) G
For purposes of this section, the term “prohibited
transaction” means any direct or indirect—
(A) sale or exchange, or leasing, of any property between a plan
and a disqualified person;
(B) lending of money or other extension of credit between a plan
and a disqualified person;
(C) furnishing of goods, services, or facilities between a plan and a
disqualified person;

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(D) transfer to, or use by or for the benefit of, a disqualified person
of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he deals
with the income or assets of a plan in his own interest or for his own
account; or
(F) receipt of any consideration for his own personal account by any
disqualified person who is a fiduciary from any party dealing with
the plan in connection with a transaction involving the income or
assets of the plan.
(2) S

The Secretary shall establish an exemption

procedure for purposes of this subsection. Pursuant to such procedure,
he may grant a conditional or unconditional exemption of any
disqualified person or transaction, orders of disqualified persons or
transactions, from all or part of the restrictions imposed by paragraph
(1) of this subsection. Action under this subparagraph may be taken
only after consultation and coordination with the Secretary of Labor.
The Secretary may not grant an exemption under this paragraph unless
he finds that such exemption is—
(A) administratively feasible,
(B) in the interests of the plan and of its participants and
beneficiaries, and
(C) protective of the rights of participants and beneficiaries of the
plan.
Before granting an exemption under this paragraph, the Secretary
shall require adequate notice to be given to interested persons and
shall publish notice in the Federal Register of the pendency of such
exemption and shall afford interested persons an opportunity to
present views. No exemption may be granted under this paragraph
with respect to a transaction described in subparagraph (E) or (F)
of paragraph (1) unless the Secretary affords an opportunity for a
hearing and makes a determination on the record with respect to
the findings required under subparagraphs (A), (B), and (C) of this
paragraph, except that in lieu of such hearing the Secretary may
accept any record made by the Secretary of Labor with respect to
an application for exemption under section 408(a) of title I of the
Employee Retirement Income Security Act of 1974.
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(3) S
An individual for whose benefit an individual retirement account is
established and his beneficiaries shall be exempt from the tax imposed
by this section with respect to any transaction concerning such account
(which would otherwise be taxable under this section) if, with respect to
such transaction, the account ceases to be an individual retirement
account by reason of the application of section 408(e)(2)(A) or if
section 408(e)(4) applies to such account.
(4) S
A
MSA
An individual for whose benefit an Archer MSA (within the meaning of
section 220(d)) is established shall be exempt from the tax imposed by
this section with respect to any transaction concerning such account
(which would otherwise be taxable under this section) if section 220(e)
(2) applies to such transaction.
(5) S
C
An individual for whose benefit a Coverdell education savings account is
established and any contributor to such account shall be exempt from
the tax imposed by this section with respect to any transaction
concerning such account (which would otherwise be taxable under this
section) if section 530(d) applies with respect to such transaction.
(6) S
An individual for whose benefit a health savings account (within the
meaning of section 223(d)) is established shall be exempt from the tax
imposed by this section with respect to any transaction concerning such
account (which would otherwise be taxable under this section) if, with
respect to such transaction, the account ceases to be a health savings
account by reason of the application of section 223(e)(2) to such
account.
(7) S
Any party to an arrangement which satisfies the requirements of
section 408(h) of the Employee Retirement Income Security Act of
1974 shall be exempt from the tax imposed by this section with respect
to such arrangement.
(d) E
Except as provided in subsection (f)(6), the prohibitions
provided in subsection (c) shall not apply to—
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(1) any loan made by the plan to a disqualified person who is a
participant or beneficiary of the plan if such loan—
(A) is available to all such participants or beneficiaries on a
reasonably equivalent basis,
(B) is not made available to highly compensated employees (within
the meaning of section 414(q)) in an amount greater than the
amount made available to other employees,
(C) is made in accordance with specific provisions regarding such
loans set forth in the plan,
(D) bears a reasonable rate of interest, and
(E) is adequately secured;
(2) any contract, or reasonable arrangement, made with a disqualified
person for office space, or legal, accounting, or other services
necessary for the establishment or operation of the plan, if no more
than reasonable compensation is paid therefor;
(3) any loan to a leveraged employee stock ownership plan (as defined
in subsection (e)(7)), if—
(A) such loan is primarily for the benefit of participants and
beneficiaries of the plan, and
(B) such loan is at a reasonable rate of interest, and any collateral
which is given to a disqualified person by the plan consists only of
qualifying employer securities (as defined in subsection (e)(8));
(4) the investment of all or part of a plan’s assets in deposits which
bear a reasonable interest rate in a bank or similar financial institution
supervised by the United States or a State, if such bank or other
institution is a fiduciary of such plan and if—
(A) the plan covers only employees of such bank or other institution
and employees of affiliates of such bank or other institution, or
(B) such investment is expressly authorized by a provision of the
plan or by a fiduciary (other than such bank or institution or
affiliates thereof) who is expressly empowered by the plan to so
instruct the trustee with respect to such investment;

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(5) any contract for life insurance, health insurance, or annuities with
one or more insurers which are qualified to do business in a State if the
plan pays no more than adequate consideration, and if each such
insurer or insurers is—
(A) the employer maintaining the plan, or
(B) a disqualified person which is wholly owned (directly or
indirectly) by the employer establishing the plan, or by any person
which is a disqualified person with respect to the plan, but only if
the total premiums and annuity considerations written by such
insurers for life insurance, health insurance, or annuities for all plans
(and their employers) with respect to which such insurers are
disqualified persons (not including premiums or annuity
considerations written by the employer maintaining the plan) do not
exceed 5 percent of the total premiums and annuity considerations
written for all lines of insurance in that year by such insurers (not
including premiums or annuity considerations written by the
employer maintaining the plan);
(6) the provision of any ancillary service by a bank or similar financial
institution supervised by the United States or a State, if such service is
provided at not more than reasonable compensation, if such bank or
other institution is a fiduciary of such plan, and if—
(A) such bank or similar financial institution has adopted adequate
internal safeguards which assure that the provision of such ancillary
service is consistent with sound banking and financial practice, as
determined by Federal or State supervisory authority, and
(B) the extent to which such ancillary service is provided is subject
to specific guidelines issued by such bank or similar financial
institution (as determined by the Secretary after consultation with
Federal and State supervisory authority), and under such guidelines
the bank or similar financial institution does not provide such
ancillary service—
(i) in an excessive or unreasonable manner, and
(ii) in a manner that would be inconsistent with the best
interests of participants and beneficiaries of employee benefit
plans;

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(7) the exercise of a privilege to convert securities, to the extent
provided in regulations of the Secretary, but only if the plan receives no
less than adequate consideration pursuant to such conversion;
(8) any transaction between a plan and a common or collective trust
fund or pooled investment fund maintained by a disqualified person
which is a bank or trust company supervised by a State or Federal
agency or between a plan and a pooled investment fund of an
insurance company qualified to do business in a State if—
(A) the transaction is a sale or purchase of an interest in the fund,
(B) the bank, trust company, or insurance company receives not
more than a reasonable compensation, and
(C) such transaction is expressly permitted by the instrument under
which the plan is maintained, or by a fiduciary (other than the bank,
trust company, or insurance company, or an affiliate thereof) who
has authority to manage and control the assets of the plan;
(9) receipt by a disqualified person of any benefit to which he may be
entitled as a participant or beneficiary in the plan, so long as the
benefit is computed and paid on a basis which is consistent with the
terms of the plan as applied to all other participants and beneficiaries;
(10) receipt by a disqualified person of any reasonable compensation
for services rendered, or for the reimbursement of expenses properly
and actually incurred, in the performance of his duties with the plan,
but no person so serving who already receives full-time pay from an
employer or an association of employers, whose employees are
participants in the plan or from an employee organization whose
members are participants in such plan shall receive compensation from
such fund, except for reimbursement of expenses properly and actually
incurred;
(11) service by a disqualified person as a fiduciary in addition to being
an officer, employee, agent, or other representative of a disqualified
person;
(12) the making by a fiduciary of a distribution of the assets of the
trust in accordance with the terms of the plan if such assets are
distributed in the same manner as provided under section 4044 of title
IV of the Employee Retirement Income Security Act of 1974 (relating to
allocation of assets);
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(13) any transaction which is exempt from section 406 of such Act by
reason of section 408(e) of such Act (or which would be so exempt if
such section 406 applied to such transaction) or which is exempt from
section 406 of such Act by reason of section 408(b)(12) of such Act;
(14) any transaction required or permitted under part 1 of subtitle E of
title IV or section 4223 of the Employee Retirement Income Security
Act of 1974, but this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F);
(15) a merger of multiemployer plans, or the transfer of assets or
liabilities between multiemployer plans, determined by the Pension
Benefit Guaranty Corporation to meet the requirements of section 4231
of such Act, but this paragraph shall not apply with respect to the
application of subsection (c)(1)(E) or (F);
(16) a sale of stock held by a trust which constitutes an individual
retirement account under section 408(a) to the individual for whose
benefit such account is established if—
(A) such stock is in a bank (as defined in section 581) or a
depository institution holding company (as defined in section 3(w)
(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))),
(B) such stock is held by such trust as of the date of the enactment
of this paragraph,
(C) such sale is pursuant to an election under section 1362(a) by
such bank or company,
(D) such sale is for fair market value at the time of sale (as
established by an independent appraiser) and the terms of the sale
are otherwise at least as favorable to such trust as the terms that
would apply on a sale to an unrelated party,
(E) such trust does not pay any commissions, costs, or other
expenses in connection with the sale, and
(F) the stock is sold in a single transaction for cash not later than
120 days after the S corporation election is made;
(17) any transaction in connection with the provision of investment
advice described in subsection (e)(3)(B) to a participant or beneficiary
in a plan that permits such participant or beneficiary to direct the
investment of plan assets in an individual account, if—
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(A) the transaction is—
(i) the provision of the investment advice to the participant or
beneficiary of the plan with respect to a security or other
property available as an investment under the plan,
(ii) the acquisition, holding, or sale of a security or other
property available as an investment under the plan pursuant to
the investment advice, or
(iii) the direct or indirect receipt of fees or other compensation
by the fiduciary adviser or an affiliate thereof (or any employee,
agent, or registered representative of the fiduciary adviser or
affiliate) in connection with the provision of the advice or in
connection with an acquisition, holding, or sale of a security or
other property available as an investment under the plan
pursuant to the investment advice; and
(B) the requirements of subsection (f)(8) are met,[1]
(18) any transaction involving the purchase or sale of securities, or
other property (as determined by the Secretary of Labor), between a
plan and a disqualified person (other than a fiduciary described in
subsection (e)(3)) with respect to a plan if—
(A) the transaction involves a block trade,
(B) at the time of the transaction, the interest of the plan (together
with the interests of any other plans maintained by the same plan
sponsor), does not exceed 10 percent of the aggregate size of the
block trade,
(C) the terms of the transaction, including the price, are at least as
favorable to the plan as an arm’s length [2] transaction, and
(D) the compensation associated with the purchase and sale is not
greater than the compensation associated with an arm’s length 2
transaction with an unrelated party,1
(19) any transaction involving the purchase or sale of securities, or
other property (as determined by the Secretary of Labor), between a
plan and a disqualified person if—
(A) the transaction is executed through an electronic
communication network, alternative trading system, or similar
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execution system or trading venue subject to regulation and
oversight by—
(i) the applicable Federal regulating entity, or
(ii) such foreign regulatory entity as the Secretary of Labor may
determine by regulation,
(B) either—
(i) the transaction is effected pursuant to rules designed to
match purchases and sales at the best price available through
the execution system in accordance with applicable rules of the
Securities and Exchange Commission or other relevant
governmental authority, or
(ii) neither the execution system nor the parties to the
transaction take into account the identity of the parties in the
execution of trades,
(C) the price and compensation associated with the purchase and
sale are not greater than the price and compensation associated
with an arm’s length 2 transaction with an unrelated party,
(D) if [3] the disqualified person has an ownership interest in the
system or venue described in subparagraph (A), the system or
venue has been authorized by the plan sponsor or other
independent fiduciary for transactions described in this paragraph,
and
(E) not less than 30 days prior to the initial transaction described in
this paragraph executed through any system or venue described in
subparagraph (A), a plan fiduciary is provided written or electronic
notice of the execution of such transaction through such system or
venue,1
(20) transactions described in subparagraphs (A), (B), and (D) of
subsection (c)(1) between a plan and a person that is a disqualified
person other than a fiduciary (or an affiliate) who has or exercises any
discretionary authority or control with respect to the investment of the
plan assets involved in the transaction or renders investment advice
(within the meaning of subsection (e)(3)(B)) with respect to those
assets, solely by reason of providing services to the plan or solely by
reason of a relationship to such a service provider described in
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subparagraph (F), (G), (H), or (I) of subsection (e)(2), or both, but
only if in connection with such transaction the plan receives no less, nor
pays no more, than adequate consideration,1
(21) any foreign exchange transactions, between a bank or brokerdealer (or any affiliate of either) and a plan (as defined in this section)
with respect to which such bank or broker-dealer (or affiliate) is a
trustee, custodian, fiduciary, or other disqualified person, if—
(A) the transaction is in connection with the purchase, holding, or
sale of securities or other investment assets (other than a foreign
exchange transaction unrelated to any other investment in securities
or other investment assets),
(B) at the time the foreign exchange transaction is entered into, the
terms of the transaction are not less favorable to the plan than the
terms generally available in comparable arm’s length 2 foreign
exchange transactions between unrelated parties, or the terms
afforded by the bank or broker-dealer (or any affiliate of either) in
comparable arm’s-length foreign exchange transactions involving
unrelated parties,
(C) the exchange rate used by such bank or broker-dealer (or
affiliate) for a particular foreign exchange transaction does not
deviate by more than 3 percent from the interbank bid and asked
rates for transactions of comparable size and maturity at the time of
the transaction as displayed on an independent service that reports
rates of exchange in the foreign currency market for such currency,
and
(D) the bank or broker-dealer (or any affiliate of either) does not
have investment discretion, or provide investment advice, with
respect to the transaction,1
(22) any transaction described in subsection (c)(1)(A) involving the
purchase and sale of a security between a plan and any other account
managed by the same investment manager, if—
(A) the transaction is a purchase or sale, for no consideration other
than cash payment against prompt delivery of a security for which
market quotations are readily available,
(B) the transaction is effected at the independent current market
price of the security (within the meaning of section 270.17a–7(b) of
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title 17, Code of Federal Regulations),
(C) no brokerage commission, fee (except for customary transfer
fees, the fact of which is disclosed pursuant to subparagraph (D)),
or other remuneration is paid in connection with the transaction,
(D) a fiduciary (other than the investment manager engaging in the
cross-trades or any affiliate) for each plan participating in the
transaction authorizes in advance of any cross-trades (in a
document that is separate from any other written agreement of the
parties) the investment manager to engage in cross trades at the
investment manager’s discretion, after such fiduciary has received
disclosure regarding the conditions under which cross trades may
take place (but only if such disclosure is separate from any other
agreement or disclosure involving the asset management
relationship), including the written policies and procedures of the
investment manager described in subparagraph (H),
(E) each plan participating in the transaction has assets of at least
$100,000,000, except that if the assets of a plan are invested in a
master trust containing the assets of plans maintained by employers
in the same controlled group (as defined in section 407(d)(7) of the
Employee Retirement Income Security Act of 1974), the master
trust has assets of at least $100,000,000,
(F) the investment manager provides to the plan fiduciary who
authorized cross trading under subparagraph (D) a quarterly report
detailing all cross trades executed by the investment manager in
which the plan participated during such quarter, including the
following information, as applicable: (i) the identity of each security
bought or sold; (ii) the number of shares or units traded; (iii) the
parties involved in the cross-trade; and (iv) trade price and the
method used to establish the trade price,
(G) the investment manager does not base its fee schedule on the
plan’s consent to cross trading, and no other service (other than the
investment opportunities and cost savings available through a cross
trade) is conditioned on the plan’s consent to cross trading,
(H) the investment manager has adopted, and cross-trades are
effected in accordance with, written cross-trading policies and
procedures that are fair and equitable to all accounts participating in
the cross-trading program, and that include a description of the
manager’s pricing policies and procedures, and the manager’s
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policies and procedures for allocating cross trades in an objective
manner among accounts participating in the cross-trading program,
and
(I) the investment manager has designated an individual
responsible for periodically reviewing such purchases and sales to
ensure compliance with the written policies and procedures
described in subparagraph (H), and following such review, the
individual shall issue an annual written report no later than 90 days
following the period to which it relates signed under penalty of
perjury to the plan fiduciary who authorized cross trading under
subparagraph (D) describing the steps performed during the course
of the review, the level of compliance, and any specific instances of
non-compliance.
The written report shall also notify the plan fiduciary of the plan’s
right to terminate participation in the investment manager’s crosstrading program at any time,1 or
(23) except as provided in subsection (f)(11), a transaction described
in subparagraph (A), (B), (C), or (D) of subsection (c)(1) in connection
with the acquisition, holding, or disposition of any security or
commodity, if the transaction is corrected before the end of the
correction period.
(e) D
(1) P

For purposes of this section, the term “plan” means—

(A) a trust described in section 401(a) which forms a part of a plan,
or a plan described in section 403(a), which trust or plan is exempt
from tax under section 501(a),
(B) an individual retirement account described in section 408(a),
(C) an individual retirement annuity described in section 408(b),
(D) an Archer MSA described in section 220(d),
(E) a health savings account described in section 223(d),
(F) a Coverdell education savings account described in section 530,
or
(G) a trust, plan, account, or annuity which, at any time, has been
determined by the Secretary to be described in any preceding
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subparagraph of this paragraph.
(2) D

For purposes of this section, the term

“disqualified person” means a person who is—
(A) a fiduciary;
(B) a person providing services to the plan;
(C) an employer any of whose employees are covered by the plan;
(D) an employee organization any of whose members are covered
by the plan;
(E) an owner, direct or indirect, of 50 percent or more of—
(i) the combined voting power of all classes of stock entitled to
vote or the total value of shares of all classes of stock of a
corporation,
(ii) the capital interest or the profits interest of a partnership, or
(iii) the beneficial interest of a trust or unincorporated
enterprise,
which is an employer or an employee organization described in
subparagraph (C) or (D);
(F) a member of the family (as defined in paragraph (6)) of any
individual described in subparagraph (A), (B), (C), or (E);
(G) a corporation, partnership, or trust or estate of which (or in
which) 50 percent or more of—
(i) the combined voting power of all classes of stock entitled to
vote or the total value of shares of all classes of stock of such
corporation,
(ii) the capital interest or profits interest of such partnership, or
(iii) the beneficial interest of such trust or estate,
is owned directly or indirectly, or held by persons described in
subparagraph (A), (B), (C), (D), or (E);
(H) an officer, director (or an individual having powers or
responsibilities similar to those of officers or directors), a 10 percent
or more shareholder, or a highly compensated employee (earning 10
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percent or more of the yearly wages of an employer) of a person
described in subparagraph (C), (D), (E), or (G); or
(I) a 10 percent or more (in capital or profits) partner or joint
venturer of a person described in subparagraph (C), (D), (E), or (G).
The Secretary, after consultation and coordination with the
Secretary of Labor or his delegate, may by regulation prescribe a
percentage lower than 50 percent for subparagraphs (E) and (G)
and lower than 10 percent for subparagraphs (H) and (I).
(3) F

For purposes of this section, the term “fiduciary” means

any person who—
(A) exercises any discretionary authority or discretionary control
respecting management of such plan or exercises any authority or
control respecting management or disposition of its assets,
(B) renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of
such plan, or has any authority or responsibility to do so, or
(C) has any discretionary authority or discretionary responsibility in
the administration of such plan.
Such term includes any person designated under section 405(c)(1)
(B) of the Employee Retirement Income Security Act of 1974.
(4) S
For purposes of paragraphs (2)(E)(i) and (G)(i) there shall be taken
into account indirect stockholdings which would be taken into account
under section 267(c), except that, for purposes of this paragraph,
section 267(c)(4) shall be treated as providing that the members of the
family of an individual are the members within the meaning of
paragraph (6).
(5) P
;
For purposes of paragraphs (2)(E)(ii) and (iii), (G)(ii) and (iii), and (I)
the ownership of profits or beneficial interests shall be determined in
accordance with the rules for constructive ownership of stock provided
in section 267(c) (other than paragraph (3) thereof), except that
section 267(c)(4) shall be treated as providing that the members of the
family of an individual are the members within the meaning of
paragraph (6).
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(6) M
For purposes of paragraph (2)(F), the family of any individual shall
include his spouse, ancestor, lineal descendant, and any spouse of a
lineal descendant.
(7) E

The term “employee stock

ownership plan” means a defined contribution plan—
(A) which is a stock bonus plan which is qualified, or a stock bonus
and a money purchase plan both of which are qualified under
section 401(a), and which are designed to invest primarily in
qualifying employer securities; and
(B) which is otherwise defined in regulations prescribed by the
Secretary.
A plan shall not be treated as an employee stock ownership plan
unless it meets the requirements of section 409(h), section 409(o),
and, if applicable, section 409(n), section 409(p), and section
664(g) and, if the employer has a registration-type class of
securities (as defined in section 409(e)(4)), it meets the
requirements of section 409(e).
(8) Q
The term “qualifying employer security” means any employer security
within the meaning of section 409(l). If any moneys or other property
of a plan are invested in shares of an investment company registered
under the Investment Company Act of 1940, the investment shall not
cause that investment company or that investment company’s
investment adviser or principal underwriter to be treated as a fiduciary
or a disqualified person for purposes of this section, except when an
investment company or its investment adviser or principal underwriter
acts in connection with a plan covering employees of the investment
company, its investment adviser, or its principal underwriter.
(9) S
For purposes of this section—
(A) In general
The term “plan” includes a trust described in section 501(c)(22).
(B) Disqualified person

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In the case of any trust to which this section applies by reason of
subparagraph (A), the term “disqualified person” includes any
person who is a disqualified person with respect to any plan to
which such trust is permitted to make payments under section 4223
of the Employee Retirement Income Security Act of 1974.

(f) O

For purposes of this section—

(1) J
If more than one person is liable under subsection (a) or (b) with
respect to any one prohibited transaction, all such persons shall be
jointly and severally liable under such subsection with respect to such
transaction.
(2) T

The term “taxable period” means, with respect to

any prohibited transaction, the period beginning with the date on which
the prohibited transaction occurs and ending on the earliest of—
(A) the date of mailing a notice of deficiency with respect to the tax
imposed by subsection (a) under section 6212,
(B) the date on which the tax imposed by subsection (a) is
assessed, or
(C) the date on which correction of the prohibited transaction is
completed.
(3) S

;

A transfer or real or personal property by a disqualified person to a plan
shall be treated as a sale or exchange if the property is subject to a
mortgage or similar lien which the plan assumes or if it is subject to a
mortgage or similar lien which a disqualified person placed on the
property within the 10-year period ending on the date of the transfer.
(4) A

The term “amount involved” means, with

respect to a prohibited transaction, the greater of the amount of money
and the fair market value of the other property given or the amount of
money and the fair market value of the other property received; except
that, in the case of services described in paragraphs (2) and (10) of
subsection (d) the amount involved shall be only the excess
compensation. For purposes of the preceding sentence, the fair market
value—
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(A) in the case of the tax imposed by subsection (a), shall be
determined as of the date on which the prohibited transaction
occurs; and
(B) in the case of the tax imposed by subsection (b), shall be the
highest fair market value during the taxable period.
(5) C
The terms “correction” and “correct” mean, with respect to a prohibited
transaction, undoing the transaction to the extent possible, but in any
case placing the plan in a financial position not worse than that in which
it would be if the disqualified person were acting under the highest
fiduciary standards.
(6) E
(A) In general In the case of a trust described in section 401(a)
which is part of a plan providing contributions or benefits for
employees some or all of whom are owner-employees (as defined in
section 401(c)(3)), the exemptions provided by subsection (d)
(other than paragraphs (9) and (12)) shall not apply to a
transaction in which the plan directly or indirectly—
(i) lends any part of the corpus or income of the plan to,
(ii) pays any compensation for personal services rendered to the
plan to, or
(iii) acquires for the plan any property from, or sells any
property to,
any such owner-employee, a member of the family (as defined
in section 267(c)(4)) of any such owner-employee, or any
corporation in which any such owner-employee owns, directly or
indirectly, 50 percent or more of the total combined voting
power of all classes of stock entitled to vote or 50 percent or
more of the total value of shares of all classes of stock of the
corporation.
(B) Special rules for shareholder-employees, etc.
(i) In general For purposes of subparagraph (A), the following
shall be treated as owner-employees:
(I) A shareholder-employee.
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(II) A participant or beneficiary of an individual retirement
plan (as defined in section 7701(a)(37)).
(III) An employer or association of employees which
establishes such an individual retirement plan under section
408(c).
(ii) Exception for certain transactions involving
shareholder-employees
Subparagraph (A)(iii) shall not apply to a transaction which
consists of a sale of employer securities to an employee stock
ownership plan (as defined in subsection (e)(7)) by a
shareholder-employee, a member of the family (as defined in
section 267(c)(4)) of such shareholder-employee, or a
corporation in which such a shareholder-employee owns stock
representing a 50 percent or greater interest described in
subparagraph (A).
(iii) Loan exception
For purposes of subparagraph (A)(i), the term “owner-employee”
shall only include a person described in subclause (II) or (III) of
clause (i).
(C) Shareholder-employee
For purposes of subparagraph (B), the term “shareholder-employee”
means an employee or officer of an S corporation who owns (or is
considered as owning within the meaning of section 318(a)(1))
more than 5 percent of the outstanding stock of the corporation on
any day during the taxable year of such corporation.
(7) S
A plan shall not be treated as violating the requirements of section 401
or 409 or subsection (e)(7), or as engaging in a prohibited transaction
for purposes of subsection (d)(3), merely by reason of any distribution
(as described in section 1368(a)) with respect to S corporation stock
that constitutes qualifying employer securities, which in accordance
with the plan provisions is used to make payments on a loan described
in subsection (d)(3) the proceeds of which were used to acquire such
qualifying employer securities (whether or not allocated to
participants). The preceding sentence shall not apply in the case of a
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distribution which is paid with respect to any employer security which is
allocated to a participant unless the plan provides that employer
securities with a fair market value of not less than the amount of such
distribution are allocated to such participant for the year which (but for
the preceding sentence) such distribution would have been allocated to
such participant.
(8) P
(A) In general
The prohibitions provided in subsection (c) shall not apply to
transactions described in subsection (d)(17) if the investment advice
provided by a fiduciary adviser is provided under an eligible
investment advice arrangement.
(B) Eligible investment advice arrangement For purposes of
this paragraph, the term “eligible investment advice arrangement”
means an arrangement—
(i) which either—
(I) provides that any fees (including any commission or other
compensation) received by the fiduciary adviser for
investment advice or with respect to the sale, holding, or
acquisition of any security or other property for purposes of
investment of plan assets do not vary depending on the basis
of any investment option selected, or
(II) uses a computer model under an investment advice
program meeting the requirements of subparagraph (C) in
connection with the provision of investment advice by a
fiduciary adviser to a participant or beneficiary, and
(ii) with respect to which the requirements of subparagraphs
(D), (E), (F), (G), (H), and (I) are met.
(C) Investment advice program using computer model
(i) In general
An investment advice program meets the requirements of this
subparagraph if the requirements of clauses (ii), (iii), and (iv)
are met.

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(ii) Computer model The requirements of this clause are met if
the investment advice provided under the investment advice
program is provided pursuant to a computer model that—
(I) applies generally accepted investment theories that take
into account the historic returns of different asset classes
over defined periods of time,
(II) utilizes relevant information about the participant, which
may include age, life expectancy, retirement age, risk
tolerance, other assets or sources of income, and preferences
as to certain types of investments,
(III) utilizes prescribed objective criteria to provide asset
allocation portfolios comprised of investment options available
under the plan,
(IV) operates in a manner that is not biased in favor of
investments offered by the fiduciary adviser or a person with
a material affiliation or contractual relationship with the
fiduciary adviser, and
(V) takes into account all investment options under the plan
in specifying how a participant’s account balance should be
invested and is not inappropriately weighted with respect to
any investment option.
(iii) Certification
(I) In general
The requirements of this clause are met with respect to any
investment advice program if an eligible investment expert
certifies, prior to the utilization of the computer model and in
accordance with rules prescribed by the Secretary of Labor,
that the computer model meets the requirements of clause
(ii).
(II) Renewal of certifications
If, as determined under regulations prescribed by the
Secretary of Labor, there are material modifications to a
computer model, the requirements of this clause are met only
if a certification described in subclause (I) is obtained with
respect to the computer model as so modified.

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(III) Eligible investment expert
The term “eligible investment expert” means any person
which meets such requirements as the Secretary of Labor
may provide and which does not bear any material affiliation
or contractual relationship with any investment adviser or a
related person thereof (or any employee, agent, or registered
representative of the investment adviser or related person).
(iv) Exclusivity of recommendation The requirements of this
clause are met with respect to any investment advice program if
—
(I) the only investment advice provided under the program is
the advice generated by the computer model described in
clause (ii), and
(II) any transaction described in subsection (d)(17)(A)(ii)
occurs solely at the direction of the participant or beneficiary.
Nothing in the preceding sentence shall preclude the
participant or beneficiary from requesting investment advice
other than that described in clause (i), but only if such request
has not been solicited by any person connected with carrying
out the arrangement.
(D) Express authorization by separate fiduciary
The requirements of this subparagraph are met with respect to an
arrangement if the arrangement is expressly authorized by a plan
fiduciary other than the person offering the investment advice
program, any person providing investment options under the plan,
or any affiliate of either.
(E) Audits
(i) In general The requirements of this subparagraph are met if
an independent auditor, who has appropriate technical training or
experience and proficiency and so represents in writing—
(I) conducts an annual audit of the arrangement for
compliance with the requirements of this paragraph, and
(II) following completion of the annual audit, issues a written
report to the fiduciary who authorized use of the arrangement
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which presents its specific findings regarding compliance of
the arrangement with the requirements of this paragraph.
(ii) Special rule for individual retirement and similar plans
In the case of a plan described in subparagraphs (B) through (F)
(and so much of subparagraph (G) as relates to such
subparagraphs) of subsection (e)(1), in lieu of the requirements
of clause (i), audits of the arrangement shall be conducted at
such times and in such manner as the Secretary of Labor may
prescribe.
(iii) Independent auditor
For purposes of this subparagraph, an auditor is considered
independent if it is not related to the person offering the
arrangement to the plan and is not related to any person
providing investment options under the plan.
(F) Disclosure The requirements of this subparagraph are met if—
(i) the fiduciary adviser provides to a participant or a beneficiary
before the initial provision of the investment advice with regard
to any security or other property offered as an investment
option, a written notification (which may consist of notification by
means of electronic communication)—
(I) of the role of any party that has a material affiliation or
contractual relationship with the fiduciary adviser in the
development of the investment advice program and in the
selection of investment options available under the plan,
(II) of the past performance and historical rates of return of
the investment options available under the plan,
(III) of all fees or other compensation relating to the advice
that the fiduciary adviser or any affiliate thereof is to receive
(including compensation provided by any third party) in
connection with the provision of the advice or in connection
with the sale, acquisition, or holding of the security or other
property,
(IV) of any material affiliation or contractual relationship of
the fiduciary adviser or affiliates thereof in the security or
other property,
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(V) of the manner, and under what circumstances, any
participant or beneficiary information provided under the
arrangement will be used or disclosed,
(VI) of the types of services provided by the fiduciary adviser
in connection with the provision of investment advice by the
fiduciary adviser,
(VII) that the adviser is acting as a fiduciary of the plan in
connection with the provision of the advice, and
(VIII) that a recipient of the advice may separately arrange
for the provision of advice by another adviser, that could have
no material affiliation with and receive no fees or other
compensation in connection with the security or other
property, and
(ii) at all times during the provision of advisory services to the
participant or beneficiary, the fiduciary adviser—
(I) maintains the information described in clause (i) in
accurate form and in the manner described in subparagraph
(H),
(II) provides, without charge, accurate information to the
recipient of the advice no less frequently than annually,
(III) provides, without charge, accurate information to the
recipient of the advice upon request of the recipient, and
(IV) provides, without charge, accurate information to the
recipient of the advice concerning any material change to the
information required to be provided to the recipient of the
advice at a time reasonably contemporaneous to the change
in information.
(G) Other conditions The requirements of this subparagraph are
met if—
(i) the fiduciary adviser provides appropriate disclosure, in
connection with the sale, acquisition, or holding of the security or
other property, in accordance with all applicable securities laws,
(ii) the sale, acquisition, or holding occurs solely at the direction
of the recipient of the advice,
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(iii) the compensation received by the fiduciary adviser and
affiliates thereof in connection with the sale, acquisition, or
holding of the security or other property is reasonable, and
(iv) the terms of the sale, acquisition, or holding of the security
or other property are at least as favorable to the plan as an
arm’s length 2 transaction would be.
(H) Standards for presentation of information
(i) In general
The requirements of this subparagraph are met if the notification
required to be provided to participants and beneficiaries under
subparagraph (F)(i) is written in a clear and conspicuous manner
and in a manner calculated to be understood by the average plan
participant and is sufficiently accurate and comprehensive to
reasonably apprise such participants and beneficiaries of the
information required to be provided in the notification.
(ii) Model form for disclosure of fees and other
compensation
The Secretary of Labor shall issue a model form for the
disclosure of fees and other compensation required in
subparagraph (F)(i)(III) which meets the requirements of clause
(i).
(I) Maintenance for 6 years of evidence of compliance
The requirements of this subparagraph are met if a fiduciary adviser
who has provided advice referred to in subparagraph (A) maintains,
for a period of not less than 6 years after the provision of the
advice, any records necessary for determining whether the
requirements of the preceding provisions of this paragraph and of
subsection (d)(17) have been met. A transaction prohibited under
subsection (c) shall not be considered to have occurred solely
because the records are lost or destroyed prior to the end of the 6year period due to circumstances beyond the control of the fiduciary
adviser.
(J) Definitions For purposes of this paragraph and subsection (d)
(17)—

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(i) Fiduciary adviser The term “fiduciary adviser” means, with
respect to a plan, a person who is a fiduciary of the plan by
reason of the provision of investment advice referred to in
subsection (e)(3)(B) by the person to a participant or beneficiary
of the plan and who is—
(I) registered as an investment adviser under the Investment
Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) or under the
laws of the State in which the fiduciary maintains its principal
office and place of business,
(II) a bank or similar financial institution referred to in
subsection (d)(4) or a savings association (as defined in
section 3(b)(1) of the Federal Deposit Insurance Act (12
U.S.C. 1813(b)(1)), but only if the advice is provided through
a trust department of the bank or similar financial institution
or savings association which is subject to periodic
examination and review by Federal or State banking
authorities,
(III) an insurance company qualified to do business under
the laws of a State,
(IV) a person registered as a broker or dealer under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.),
(V) an affiliate of a person described in any of subclauses (I)
through (IV), or
(VI) an employee, agent, or registered representative of a
person described in subclauses (I) through (V) who satisfies
the requirements of applicable insurance, banking, and
securities laws relating to the provision of the advice.
For purposes of this title, a person who develops the computer
model described in subparagraph (C)(ii) or markets the
investment advice program or computer model shall be treated
as a person who is a fiduciary of the plan by reason of the
provision of investment advice referred to in subsection (e)(3)
(B) to a participant or beneficiary and shall be treated as a
fiduciary adviser for purposes of this paragraph and subsection
(d)(17), except that the Secretary of Labor may prescribe rules
under which only 1 fiduciary adviser may elect to be treated as
a fiduciary with respect to the plan.
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(ii) Affiliate
The term “affiliate” of another entity means an affiliated person
of the entity (as defined in section 2(a)(3) of the Investment
Company Act of 1940 (15 U.S.C. 80a–2(a)(3))).
(iii) Registered representative
The term “registered representative” of another entity means a
person described in section 3(a)(18) of the Securities Exchange
Act of 1934 (15 U.S.C. 78c(a)(18)) (substituting the entity for
the broker or dealer referred to in such section) or a person
described in section 202(a)(17) of the Investment Advisers Act
of 1940 (15 U.S.C. 80b–2(a)(17)) (substituting the entity for the
investment adviser referred to in such section).

(9) B
The term “block trade” means any trade of at least 10,000 shares or
with a market value of at least $200,000 which will be allocated across
two or more unrelated client accounts of a fiduciary.
(10) A

The term “adequate consideration”

means—
(A) in the case of a security for which there is a generally
recognized market—
(i) the price of the security prevailing on a national securities
exchange which is registered under section 6 of the Securities
Exchange Act of 1934, taking into account factors such as the
size of the transaction and marketability of the security, or
(ii) if the security is not traded on such a national securities
exchange, a price not less favorable to the plan than the offering
price for the security as established by the current bid and asked
prices quoted by persons independent of the issuer and of the
party in interest, taking into account factors such as the size of
the transaction and marketability of the security, and
(B) in the case of an asset other than a security for which there is a
generally recognized market, the fair market value of the asset as
determined in good faith by a fiduciary or fiduciaries in accordance
with regulations prescribed by the Secretary of Labor.
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(11) C
(A) In general
For purposes of subsection (d)(23), the term “correction period”
means the 14-day period beginning on the date on which the
disqualified person discovers, or reasonably should have discovered,
that the transaction would (without regard to this paragraph and
subsection (d)(23)) constitute a prohibited transaction.
(B) Exceptions
(i) Employer securities
Subsection (d)(23) does not apply to any transaction between a
plan and a plan sponsor or its affiliates that involves the
acquisition or sale of an employer security (as defined in section
407(d)(1) of the Employee Retirement Income Security Act of
1974) or the acquisition, sale, or lease of employer real property
(as defined in section 407(d)(2) of such Act).
(ii) Knowing prohibited transaction
In the case of any disqualified person, subsection (d)(23) does
not apply to a transaction if, at the time the transaction is
entered into, the disqualified person knew (or reasonably should
have known) that the transaction would (without regard to this
paragraph) constitute a prohibited transaction.
(C) Abatement of tax where there is a correction
If a transaction is not treated as a prohibited transaction by reason
of subsection (d)(23), then no tax under subsections (a) and (b)
shall be assessed with respect to such transaction, and if assessed
the assessment shall be abated, and if collected shall be credited or
refunded as an overpayment.
(D) Definitions For purposes of this paragraph and subsection (d)
(23)—
(i) Security
The term “security” has the meaning given such term by section
475(c)(2) (without regard to subparagraph (F)(iii) and the last
sentence thereof).
(ii) Commodity
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The term “commodity” has the meaning given such term by
section 475(e)(2) (without regard to subparagraph (D)(iii)
thereof).
(iii) Correct The term “correct” means, with respect to a
transaction—
(I) to undo the transaction to the extent possible and in any
case to make good to the plan or affected account any losses
resulting from the transaction, and
(II) to restore to the plan or affected account any profits
made through the use of assets of the plan.

(g) A

This section shall not apply—

(1) in the case of a plan to which a guaranteed benefit policy (as
defined in section 401(b)(2)(B) of the Employee Retirement Income
Security Act of 1974) is issued, to any assets of the insurance company,
insurance service, or insurance organization merely because of its
issuance of such policy;
(2) to a governmental plan (within the meaning of section 414(d)); or
(3) to a church plan (within the meaning of section 414(e)) with
respect to which the election provided by section 410(d) has not been
made.
In the case of a plan which invests in any security issued by an
investment company registered under the Investment Company Act of
1940, the assets of such plan shall be deemed to include such security
but shall not, by reason of such investment, be deemed to include any
assets of such company.
(h) N

S

L

Before sending a notice of deficiency with respect to the tax imposed by
subsection (a) or (b), the Secretary shall notify the Secretary of Labor and
provide him a reasonable opportunity to obtain a correction of the
prohibited transaction or to comment on the imposition of such tax.
(i) C

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For provisions concerning coordination procedures between Secretary of
Labor and Secretary of the Treasury with respect to application of tax
imposed by this section and for authority to waive imposition of the tax
imposed by subsection (b), see section 3003 of the Employee Retirement
Income Security Act of 1974.
(Added Pub. L. 93–406, title II, § 2003(a), Sept. 2, 1974, 88 Stat. 971;
amended Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat.
1834; Pub. L. 95–600, title I, § 141(f)(5), (6), Nov. 6, 1978, 92 Stat. 2795;
Pub. L. 96–222, title I, § 101(a)(7)(C), (K), (L)(iv)(III), (v)(XI), Apr. 1, 1980,
94 Stat. 198–201; Pub. L. 96–364, title II, §§ 208(b), 209(b), Sept. 26, 1980,
94 Stat. 1289, 1290; Pub. L. 96–596, § 2(a)(1)(K),(L), (2)(I), (3)(F), Dec. 24,
1980, 94 Stat. 3469, 3471; Pub. L. 97–448, title III, § 305(d)(5), Jan. 12,
1983, 96 Stat. 2400; Pub. L. 98–369, div. A, title IV, § 491(d)(45), (46), (e)
(7), (8), July 18, 1984, 98 Stat. 851–853; Pub. L. 99–514, title XI, § 1114(b)
(15)(A), title XVIII, §§ 1854(f)(3)(A), 1899A(51), Oct. 22, 1986, 100 Stat.
2452, 2882, 2961; Pub. L. 101–508, title XI, § 11701(m), Nov. 5, 1990, 104
Stat. 1388–513; Pub. L. 104–188, title I, §§ 1453(a), 1702(g)(3), Aug. 20,
1996, 110 Stat. 1817, 1873; Pub. L. 104–191, title III, § 301(f), Aug. 21,
1996, 110 Stat. 2051; Pub. L. 105–34, title II, § 213(b), title X, § 1074(a),
title XV, §§ 1506(b)(1), 1530(c)(10), title XVI, § 1602(a)(5), Aug. 5, 1997,
111 Stat. 816, 949, 1065, 1079, 1094; Pub. L. 105–206, title VI, § 6023(19),
July 22, 1998, 112 Stat. 825; Pub. L. 106–554, § 1(a)(7) [title II, § 202(a)(7),
(b)(7), (10)], Dec. 21, 2000, 114 Stat. 2763, 2763A–628, 2763A–629; Pub.
L. 107–16, title VI, §§ 612(a), 656(b), June 7, 2001, 115 Stat. 100, 134; Pub.
L. 107–22, § 1(b)(1)(D), (3)(D), July 26, 2001, 115 Stat. 197; Pub. L. 108–
173, title XII, § 1201(f), Dec. 8, 2003, 117 Stat. 2479; Pub. L. 108–357, title
II, §§ 233(c), 240(a), Oct. 22, 2004, 118 Stat. 1434, 1437; Pub. L. 109–135,
title IV, § 413(a)(2), Dec. 21, 2005, 119 Stat. 2641; Pub. L. 109–280, title VI,
§§ 601(b)(1), (2), 611(a)(2), (c)(2), (d)(2), (e)(2), (g)(2), 612(b), Aug. 17,
2006, 120 Stat. 958, 959, 967, 969–971, 974, 976; Pub. L. 110–458, title I,
§ 106(a)(2), (b)(2), (c), Dec. 23, 2008, 122 Stat. 5106; Pub. L. 115–141, div.
U, title IV, § 401(a)(190), (229)–(234), Mar. 23, 2018, 132 Stat. 1193, 1195;
Pub. L. 116–94, div. P, title XIII, § 1302(b), Dec. 20, 2019, 133 Stat. 3205.)

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