Under both ERISA and the Internal Revenue Code, certain transactions involving qualified retirement plans and “disqualified persons” or “parties in interest” (such as a plan trustees) are prohibited. One example of a “prohibited transaction” involves a plan fiduciary (e.g., plan trustee) using plan assets to purchase property for his own benefit or as an indirect loan because he cannot afford the purchase without the plan assets (ERISA § 406). Disqualified persons who engage in prohibited transactions may be subject to significant excise taxes under both ERISA and the Internal Revenue Code. Correction of a prohibited transaction requires, at a minimum, that the transaction be undone to the extent possible to put the plan in a financial position no worse than if the prohibited transaction had not occurred (IRC § 4975).
However, not all co-investments will run afoul of the Prohibited Transaction Rule. The DOL has informally opined that a co-investment by a disqualified person and a plan is not necessarily a prohibited transaction provided the disqualified person is “not relying or dependent upon the investment of plan assets, and that the arrangement is not part of some larger arrangement designed to somehow benefit the disqualified person.” (American Bar Association, DOL Final Report 2014, Questions and Proposed Answers for the Department of Labor Staff for the 2014 Joint Committee of Employee Benefits Technical Session, May 7, 2014 (last visited on September 17, 2015).)
This position reiterates previous DOL opinions, including DOL Advisory Opinion 2000-10A, which provided that “the mere equity co-investment by a plan and a plan fiduciary is not necessarily a prohibited transaction.”
DOL Prohibited Transaction Exemption 2003-07 went further, providing that an acquisition of real property through co-investment by a disqualified person and a plan was not a prohibited transaction requiring correction because: 1) the disqualified person was not dependent upon the plan to make the investment and 2) the terms of the transaction were identical for both the disqualified person and the plan.
To ensure compliance with the Prohibited Transaction Rule, a party in interest or disqualified person should not jointly invest in a property with a plan if he is relying upon the plan assets to complete the transaction.