IRC § 4975 prohibits certain transactions between a qualified retirement plan and a "disqualified person" — which includes the employer, plan fiduciaries, and their family members. Violations trigger a 15% excise tax on the "amount involved" and must be reported on Form 5330.
Who Is a Disqualified Person?
Under § 4975(e)(2), disqualified persons include: the employer and any entity with 50%+ ownership by the employer; plan fiduciaries; service providers to the plan; and family members (spouse, ancestors, lineal descendants) of the above.
The 7 Most Common Violations
1. Late Deposits of Participant Contributions
The most common violation. When participant deferrals are not deposited as soon as reasonably segregable from general assets, the employer has used plan assets — a § 4975(c)(1)(B) prohibited transaction. The amount involved is the lost earnings (not the principal), calculated using the § 6621 rate.
2. Loans to Disqualified Persons
Under § 4975(c)(1)(B), a loan from the plan to a disqualified person (other than a participant loan meeting the § 72(p) exemption) is prohibited. The amount involved is the fair market value of the use of the money (imputed interest) for each month of the loan's existence.
3. Sale or Lease of Property Between Plan and Disqualified Person
Selling or leasing property between the plan and a disqualified person at any price — even fair market value — is a per se prohibited transaction under § 4975(c)(1)(A). Corrective sale at FMV does not eliminate the excise tax; it only stops future accrual.
4. Use of Plan Income or Assets by a Disqualified Person
Any use of plan income, assets, or credit by or for the benefit of a disqualified person (§ 4975(c)(1)(D)) is prohibited. This includes using plan funds to pay for services the plan is not contractually obligated to purchase.
5. Excessive Compensation to Service Providers
Paying more than reasonable compensation to a disqualified person for services rendered (§ 4975(c)(1)(C)) is prohibited. The amount involved is the excess over reasonable compensation.
6. Fiduciary Self-Dealing
Under § 4975(c)(1)(E), a fiduciary acting on behalf of the plan in a transaction that also benefits the fiduciary personally is prohibited. This is one of the most serious categories and can result in both excise taxes and DOL enforcement action.
7. Kickbacks and Improper Payments
Under § 4975(c)(1)(F), a disqualified person who receives any consideration from a party dealing with the plan in connection with a plan transaction is engaging in a prohibited transaction. This includes undisclosed revenue sharing arrangements and referral fees paid to plan advisors.
Correction and Excise Tax
The 15% initial excise tax is assessed for each year (or part of a year) the prohibited transaction remains uncorrected. An additional 100% tax can be assessed if the IRS issues a notice of deficiency and the transaction is still not corrected. Prompt correction is essential.