To protect the interests of the participants of an employee benefit plan, ERISA established strict rules governing fiduciary behavior and responsibilities that prohibit fiduciaries and plans from engaging in certain transactions. Trustees of benefit plans are fiduciaries and have an obligation of prudence and undivided loyalty to the plan under ERISA. They must act solely in the interest of the plan and ensure that plan assets are used exclusively for the purpose of providing benefits to plan participants and defraying reasonable plan administrative expenses. ERISA prohibits all transactions between a plan and a party-in-interest unless specifically exempted. If a trustee allows the plan to engage in a prohibited transaction, the trustee has breached his or her fiduciary responsibility and is personally liable. Furthermore, if the plan incurs a loss as the result of a prohibited transaction, the plan must be made whole by the trustees. The trustee must restore the plan to where it was prior to the transaction even if there was no loss. In addition, civil penalties may be assessed against the trustee. Consequently, it is always in the best interest of the plan and its trustees to take every precaution to avoid engaging in a prohibited transaction.
There are two sections of ERISA that deal with prohibited transactions. ERISA §406(a) prohibits transactions between a plan and a party-in-interest. The types of transactions that are prohibited include the sale, exchange or leasing of property, loans, and furnishing of goods or services. ERISA §406(b) addresses the responsibility of plan fiduciaries. A fiduciary may not, in any transaction involving the plan, act on behalf of his or her interest or act on both sides of a transaction. With respect to multiemployer plans, trustees are typically affiliated with either the union or a contributing employer. Trustees are prohibited from exercising their authority with respect to a transaction between the plan and either the union or employer they are affiliated with because, under those circumstances, they are considered to have a divided interest.
Because an employee benefit plan would have difficulty operating effectively in accordance with the purpose for which it was established, ERISA offers some relief by providing statutory exemptions and allowing for administrative exemptions. These exemptions are for certain transactions beneficial to the plan that would otherwise be prohibited. Each exemption has specific conditions and requirements that must be complied with and, in many cases, more than one exemption applies to a single transaction. Furthermore, if none of the existing exemptions apply, the plan can request an individual exemption from the Department of Labor on the prohibited transaction.
In general, every exemption requires that the transaction is necessary to the operation of the plan and that the arrangement is reasonable. This means that the plan receives no less than or pays no more than adequate compensation and the terms of the arrangement are at least as favorable to the plan as an arm's length transaction with an unrelated party. In addition, trustees with a conflict of interest should recuse themselves from the decision-making process in order to avoid self-dealing issues. To prove it has complied with the applicable exemption requirements, the plan must maintain documentation of the decision-making process and compensation arrangements. This would include formal written agreements, appraisals, and, just as importantly, proper documentation in the minutes.
In summary, with respect to multiemployer employee benefit plans, all transactions between the plan and the union, trustee, contributing employer, service provider, or related benefit plan are potentially prohibited. The most common of these transactions include leasing of office space, sharing of expenses, and purchases of goods and services. While exemptions exist for these transactions, the transaction may be considered prohibited if not handled properly.
This is an overview of some of the provisions of ERISA regarding prohibited transactions. In general, the prohibited transaction rules are basic but very wide-ranging. Conversely, there are numerous exemptions, all of which are very specific. It is difficult to know how to handle every situation; however, once a plan engages in a prohibited transaction it must be corrected, and the correction is always at the personal expense of the trustees. Consequently, it is prudent to review any transaction that may potentially be prohibited with your attorney prior to entering into the transaction to ensure it is structured and documented properly.