Prohibited transactions

IRC 4975 restricts direct and indirect transactions between a qualified plan and certain disqualified persons, including fiduciaries, the sponsoring employer, certain owners and family members, and some service providers.

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Core categories

Transactions can be prohibited when they involve:

• A sale, exchange, or lease of property between the plan and a disqualified person
• A loan or extension of credit between them
• Furnishing goods, services, or facilities between them
• A transfer or use of plan income or assets for a disqualified person’s benefit
• Fiduciary self-dealing or acting for a party with interests adverse to the plan
• Personal consideration or kickbacks connected to plan transactions

Indirect arrangements count. Routing a transaction through the corporation or another entity does not automatically remove the risk.

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Normal ROBS activity

The central ROBS transaction is the plan trust’s purchase of qualifying employer securities from the sponsoring C-Corporation. That transaction depends on applicable statutory exemptions, adequate consideration, proper plan terms, and prudent fiduciary conduct. Once the stock purchase is complete, the sale proceeds are corporate assets. The company may use them for legitimate business purposes. They are not personal funds, and company spending can still create plan, corporate, tax, or fiduciary issues when it benefits insiders improperly.

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Situations requiring review

• Personal guarantees or insider credit support for business financing
• Compensation, bonuses, reimbursements, leases, or purchases involving a founder or family member
• Loans between the plan, company, founder, or related parties
• Company use of personal property or personal use of company or plan property
• Stock purchases or issuances without adequate valuation support
• Changes that limit employee participation or access to employer stock
• Related-party acquisitions, sales, or service arrangements
• Commingling personal, corporate, and plan assets

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Compensation

The founder must actively work in the business under the Nexus eligibility standard. Compensation should reflect services actually performed, be reasonable, and be properly documented. The correct timing, amount, approval process, and fiduciary analysis depend on the facts; Nexus does not prescribe a universal “salary from day one” rule.

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Potential consequences

IRC 4975 can impose an initial excise tax of 15% of the amount involved for each year or part of a year in the taxable period, with an additional 100% tax if the transaction is not corrected within that period. Other tax, plan-correction, fiduciary, or disqualification consequences may also apply depending on the plan and facts.