Prohibited Transaction Rules Applicable to Solo 401k

The prohibited transaction rules are found under IRC Sec. 4975 and ERISA Sec. 406. Both sections take on prohibited transactions mirror each other. However, the tax consequences and penalties for running afoul with the IRC 4975 PT rules are vastly harsher than breaking the rules applicable to ERISA Sec. 406. 

The reason for the prohibited transaction rules is to protect the assets of the Solo 401k participant(s) by disallowing dealings between the Solo 401k and persons who may have conflicts of interest with the Solo 401k. ERISA Sec. 408 lists statutory exemptions to the prohibited transaction rules which parallel those found in IRC 4975(d).

Certain transactions that would normally be considered prohibited have been exempt from the ERISA Sec. 406 prohibited transaction rules and are known as statutory exemption provisions. They are:

1. Exemption for participant loans (that is, taking a participant loan from your Solo 401k). See Reg. 2550.408b-1
2.Exemption for services or office space--see 2550.408b-2

Additional regulations relating to the acquisition and holding of employer securities and employer real property are in DOL Reg. 2550.407a-1 through 2550.407a-4, 2550.407c-3, 2550.407d-5 and 2550.407d-6.

As you can see, when determining whether a particular Solo 401k transaction is prohibited, you should ascertain if any applicable exemptions apply, such as the ones listed above.

In upcoming blog posts, we will discuss and provide examples of the various types of transactions that are prohibited under ERISA Sec. 406.

 Upcoming Blog Titles Pertaining To Prohibited Transactions Relating to Solo 401k

--The 1st blog will be labeled Sales, Exchanges and Leases;

--The 2nd blog will be labeled Loans;

--The 3rd blog will be labeled Goods and Services;

--The 4th blog will be labeled Use of Assets;

--The 5th blog will be labeled Self-Dealing; and

--The 6th blog will be labeled Investments in Qualifying Employer Securities and Qualifying Employer Real Property.