- Prohibited Transaction Excise Taxes
Background: The Department has
requested comments on possible areas of coordination with the IRS that would facilitate
voluntary correction of fiduciary breaches. One area in which coordination would be
appropriate is that of prohibited transaction excise taxes under section 4975 of the
Internal Revenue Code of 1986, as amended (the "Code"). The first-tier excise
tax in section 4975(a), imposed on the disqualified person with respect to the prohibited
transaction, is equal to 15% of the amount involved in the transaction for each year until
the transaction is corrected. The excise tax is administered by the Internal Revenue
Service (the "IRS").
The form of the no action letter to be issued under the Program, in Appendix A to the
Program document, states that prohibited transaction matters will be referred to the IRS.
The accompanying release further states that full correction under the Program will not
preclude the IRS from exercising any rights it may have with respect to the transaction.
Consequently, it appears that the disclosure of any prohibited transaction in a Program
application will result in the IRS imposing prohibited transaction excise taxes on the
parties who engaged in the transaction with the plan.
Comment: The fact that an application to correct a prohibited transaction will
automatically lead to excise tax liability will discourage potential applicants from using
the Program.
Recommendation: We urge the Department to work with the IRS to remove this
impediment to using the Program. The simplest solution would be for the IRS to agree to
abate or otherwise waive excise taxes for applicants who submit an application that is
accepted under the Program, perhaps subject to a requirement that the application be filed
within a certain period of the original transaction.
If the statutory authority for such a waiver is lacking, another approach would be to
issue a class exemption modeled on PTE 96-63, the class exemption that was part of the
"pension payback" program and served as a precursor to the Program. PTE 96-63
provided relief from all of the prohibited transaction provisions of section 406 of ERISA
and section 4975 of the Code, except section 406(b)(3) and section 4975(c)(1)(F).
Similarly, a class exemption could provide the same section 406 and section 4975 relief
for transactions covered by applications submitted and accepted under the Program.