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Prohibited Transactions: Retirement Plans for Business Owners (2025 IRS Guide)

This guide covers “Prohibited Transactions” within retirement plans for business owners. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 560 (2025), Retirement Plans for Small Business, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

  • Kinds of plans

  • Qualification rules

  • Setting up a qualified plan

  • Minimum funding requirement

  • Contributions

  • Employer deduction

  • Elective deferrals (401(k) plans)

  • Qualified Roth contribution program

  • Distributions

  • Prohibited transactions

  • Reporting requirements

Publications

  • 575 Pension and Annuity Income

  • 590-A Contributions to Individual Retirement Arrangements (IRAs)

  • 590-B Distributions from Individual Retirement Arrangements (IRAs)

  • 3066 Have you had your check-up this year? for Retirement Plans

  • 3998 Choosing a Retirement Solution for Your Small Business

  • 4222 401(k) Plans for Small Businesses

  • 4530 Designated Roth Accounts under a 401(k), 403(b) or governmental 457(b) plan

  • 4531 401(k) Plan Checklist

  • 4674 Automatic Enrollment 401(k) Plans for Small Businesses

  • 4806 Profit Sharing Plans for Small Businesses

Forms (and Instructions)

  • W-2 Wage and Tax Statement

  • Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc.

  • 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

  • 1040 U.S. Individual Income Tax Return

  • 1040-SR U.S. Tax Return for Seniors

  • Schedule C (Form 1040) Profit or Loss From Business

  • Schedule F (Form 1040) Profit or Loss From Farming

  • 5300 Application for Determination for Employee Benefit Plan

  • 5310 Application for Determination for Terminating Plan

  • 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

  • 5330 Return of Excise Taxes Related to Employee Benefit Plans

  • 5500 Annual Return/Report of Employee Benefit Plan

  • 5500-EZ Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan

  • 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan

  • 8717 User Fee for Employee Plan Determination Letter Request

  • 8880 Credit for Qualified Retirement Savings Contributions

  • 8881 Credit for Small Employer Pension Plan Startup Costs

  • 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits

These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H.R. 10 plans. A sole proprietor or a partnership can set up one of these plans. A common-law employee or a partner can't set up one of these plans. The plans described here can also be set up and maintained by employers that are corporations. All of the rules discussed here apply to corporations except where specifically limited to the self-employed.

The plan must be for the exclusive benefit of employees or their beneficiaries. These qualified plans can include coverage for a self-employed individual.

As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Prohibited Transactions

Prohibited transactions are transactions between the plan and a disqualified person that are prohibited by law. (However, see Exemption, later.) If you are a disqualified person who takes part in a prohibited transaction, you must pay a tax (discussed later).

Prohibited transactions generally include the following transactions.

  1. A transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person.

  2. Any act of a fiduciary by which they deal with plan income or assets in the fiduciary’s own interest.

  3. The receipt of consideration by a fiduciary for their own account from any party dealing with the plan in a transaction that involves plan income or assets.

  4. Any of the following acts between the plan and a disqualified person.

    1. Selling, exchanging, or leasing property.

    2. Lending money or extending credit.

    3. Furnishing goods, services, or facilities.

Exemption.

Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction doesn't take place if you are a disqualified person and receive any benefit to which you are entitled as a plan participant or beneficiary. However, the benefit must be figured and paid under the same terms as for all other participants and beneficiaries. For other transactions that are exempt, see section 4975 and the related regulations.

Disqualified person.

You are a disqualified person if you are any of the following.

  1. A fiduciary of the plan.

  2. A person providing services to the plan.

  3. An employer, any of whose employees are covered by the plan.

  4. An employee organization, any of whose members are covered by the plan.

  5. Any direct or indirect owner of 50% or more of any of the following.

    1. The combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of a corporation that is an employer or employee organization described in (3) or (4).

    2. The capital interest or profits interest of a partnership that is an employer or employee organization described in (3) or (4).

    3. The beneficial interest of a trust or unincorporated enterprise that is an employer or an employee organization described in (3) or (4).

  6. A member of the family of any individual described in (1), (2), (3), or (5). (A member of a family is the spouse, ancestor, or lineal descendant, or any spouse of a lineal descendant.)

  7. A corporation, partnership, trust, or estate of which (or in which) any direct or indirect owner described in (1) through (5) holds 50% or more of any of the following.

    1. The combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation.

    2. The capital interest or profits interest of a partnership.

    3. The beneficial interest of a trust or estate.

  8. An officer, a director (or an individual having powers or responsibilities similar to those of officers or directors), a 10%-or-more shareholder, or a highly compensated employee (earning 10% or more of the yearly wages of an employer) of a person described in (3), (4), (5), or (7).

  9. A 10%-or-more (in capital or profits) partner or joint venturer of a person described in (3), (4), (5), or (7).

  10. Any disqualified person, as described in (1) through (9) above, who is a disqualified person with respect to any plan to which a section 501(c)(22) trust is permitted to make payments under section 4223 of ERISA.

Tax on Prohibited Transactions

The initial tax on a prohibited transaction is 15% of the amount involved for each year (or part of a year) in the tax period. If the transaction isn't corrected within the tax period, an additional tax of 100% of the amount involved is imposed. For information on correcting the transaction, see Correcting a prohibited transaction, later.

Both taxes are payable by any disqualified person who participated in the transaction (other than a fiduciary acting only as such). If more than one person takes part in the transaction, each person can be jointly and severally liable for the entire tax.

Amount involved.

The amount involved in a prohibited transaction is the greater of the following amounts.

  • The money and fair market value of any property given.

  • The money and fair market value of any property received.

If services are performed, the amount involved is any excess compensation given or received.

Tax period.

The tax period starts on the transaction date and ends on the earliest of the following days.

  • The day the IRS mails a notice of deficiency for the tax.

  • The day the IRS assesses the tax.

  • The day the correction of the transaction is completed.

Payment of the 15% tax.

Pay the 15% tax with Form 5330.

Correcting a prohibited transaction.

If you are a disqualified person who participated in a prohibited transaction, you can avoid the 100% tax by correcting the transaction as soon as possible. Correcting the transaction means undoing it as much as you can without putting the plan in a worse financial position than if you had acted under the highest fiduciary standards.

Correction period.

If the prohibited transaction isn't corrected during the tax period, you usually have an additional 90 days after the day the IRS mails a notice of deficiency for the 100% tax to correct the transaction. This correction period (the tax period plus the 90 days) can be extended if either of the following occurs.

  • The IRS grants reasonable time needed to correct the transaction.

  • You petition the Tax Court.

If you correct the transaction within this period, the IRS will abate, credit, or refund the 100% tax.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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