A prohibited transaction can cost a fiduciary personally, and fixing it early matters.
Personal liability, Department of Labor penalties, the Code excise tax question and the correction routes, each tied to the statute so you can see what applies to a group health plan and what we could not confirm.
Start With The Overview.
General information, not legal or tax advice. Check the cited sources before you act.
ERISA Prohibited Transactions Overview
Start here for the whole picture: the rule, who it reaches, the exemptions, the consequences and the coverage questions.
What ERISA Section 406 Prohibits
The two lists in the statute: transactions with parties in interest, and fiduciary self-dealing.
Prohibited Transaction Exemptions
The reasonable arrangements exemption, the new group health text and the exemption authority.
Personal Liability To Restore The Plan.
ERISA section 409(a), 29 U.S.C. 1109(a), makes a fiduciary who breaches the fiduciary duties personally liable to make good to the plan any losses resulting from each breach, and to restore any profits the fiduciary made through use of plan assets. A court may also order other equitable or remedial relief, including removal of the fiduciary. Section 409(b) generally limits liability to the period when the person was a fiduciary.
The point for a business owner is the word personally. The obligation is not limited to the company’s or the plan’s funds.
Who Can Bring A Claim.
Under 29 U.S.C. 1132(a)(2), the Secretary of Labor, a participant, a beneficiary or a fiduciary may sue for relief under section 409. Under (a)(3), a participant, beneficiary or fiduciary may seek an injunction against a violation and other appropriate equitable relief, and under (a)(5) the Secretary may do the same. Which claim fits a particular plan and facts is a matter for counsel.
Two Penalties With Different Triggers.
Section 502(i) lets the Secretary assess a civil penalty against a party in interest who engages in a section 406 transaction. The penalty may not exceed 5 percent of the amount involved for each year or part of a year the transaction continues, and it can reach 100 percent of the amount involved if the transaction is not corrected within 90 days after the Secretary’s notice, or a longer period the Secretary allows. The subsection does not apply to transactions involving plans described in Code section 4975(e)(1).
Section 502(l) is separate. It requires the Secretary to assess a penalty of 20 percent of the applicable recovery amount, meaning the amount recovered under a settlement agreement with the Secretary or by court order in a suit the Secretary brings, against a fiduciary who breaches a duty and any other person who knowingly participates. The Secretary may waive or reduce it if the person acted reasonably and in good faith, or could not restore the losses without severe financial hardship.
The Excise Tax Question For Health Plans.
Code section 4975 imposes a first-tier tax of 15 percent of the amount involved for each year or part of a year in the taxable period, and a second-tier tax of 100 percent if the transaction is not corrected within the taxable period. It is paid by each disqualified person who participates, other than a fiduciary acting only as a fiduciary. Correction means undoing the transaction to the extent possible and leaving the plan in a financial position no worse than if the person had acted under the highest fiduciary standards.
The tax applies to a “plan” as section 4975(e)(1) defines it. That list names qualified retirement trusts and plans, individual retirement accounts and annuities, Archer MSAs, health savings accounts and Coverdell education savings accounts, and any arrangement the Secretary of the Treasury determines is described in those categories. It does not expressly name group health plans. Our reading is that the excise tax is aimed at the listed plan types, and that section 502(i) excludes those same plans, so the two operate on different plan types. We could not confirm IRS guidance on how section 4975 treats a particular group health arrangement, so ask a tax adviser.
The Voluntary Fiduciary Correction Program.
The Department of Labor’s Voluntary Fiduciary Correction Program, as amended effective March 17, 2025, lets plan officials, defined to include fiduciaries, plan sponsors and parties in interest, apply to correct certain breaches. The eligible transaction groups in the notice include delinquent participant contributions to insured welfare plans and welfare plan trusts, loans, purchases, sales and exchanges involving parties in interest, and plan expense problems such as excessive or duplicative compensation and dual compensation to a fiduciary.
An eligible applicant that meets the terms receives a no-action letter and is not subject to civil monetary penalties for the corrected transactions. Conditional excise tax relief for six specified transactions is available under amended PTE 2002-51. Plans and applicants that are under investigation are not eligible. The self-correction component applies to pension plans and certain participant loan failures, so a health plan correction goes through a standard application. We have not confirmed that the program covers every type of health plan transaction, so check the notice and the Department’s page.
What To Do If You Think One Occurred.
This is general information. Stop any repeat of the transaction, keep every related record, and speak with ERISA counsel before contacting anyone else. Ask counsel early whether the program fits, because eligibility ends once a plan is under investigation. Our correction program page walks through the application steps.
Related Rules And Tools.
Voluntary Fiduciary Correction Program for Employer Health Plans
How the Department of Labor correction program works for employers.
ERISA Fiduciary Duties for Employer Health Plans
A practical guide to the duties of the people who run an employer health plan.
Participant Contribution Timing for Group Health Plans
When payroll deductions for health coverage become plan money.
Laws And Sources
ERISA section 409, 29 U.S.C. 1109: Section 409(a) and (b), personal liability and its time limit.
ERISA section 502, 29 U.S.C. 1132: Section 502(a), (i) and (l), who may sue and the civil penalties.
Internal Revenue Code section 4975, 26 U.S.C. 4975: Section 4975(a), (b), (e)(1) and (f)(5), the tax rates, the plan definition and the definition of correction.
Federal Register, Voluntary Fiduciary Correction Program (January 15, 2025): The 2025 amendments to the Voluntary Fiduciary Correction Program, effective March 17, 2025.
Department of Labor, Voluntary Fiduciary Correction Program: Department of Labor program page, including how to apply.
Department of Labor, VFCP fact sheet: Department of Labor fact sheet on eligibility and relief.
General information, not legal or tax advice.
Quick Answers.
Short replies on this page’s topic, each tied to a fuller guide.
Can a business owner be personally liable for a prohibited transaction?
A fiduciary who breaches the duties is personally liable under section 409 to restore plan losses and profits. Whether an owner is a fiduciary depends on what the owner actually does, so ask counsel about a specific case.
Does the section 4975 excise tax apply to a group health plan?
Section 4975(e)(1) lists the plan types the tax covers and does not expressly name group health plans. That is our reading of the text, and we could not confirm IRS guidance, so ask a tax adviser.
Can a prohibited transaction be corrected voluntarily?
The Department of Labor’s Voluntary Fiduciary Correction Program lets eligible plan officials apply, with conditions. A plan or applicant under investigation is not eligible.
The Rest Of This Series.
What ERISA Section 406 Prohibits
The two lists in the statute: transactions with parties in interest, and fiduciary self-dealing.
Who Is a Party in Interest
The statutory list of people and businesses around a plan, with plain examples labeled as our reading.
Prohibited Transaction Exemptions
The reasonable arrangements exemption, the new group health text and the exemption authority.
Fiduciary Liability Insurance vs. the Fidelity Bond
What each one covers and does not cover, checked against ERISA section 410 and Department of Labor material.
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