Correcting a prohibited transaction
Under Internal Revenue Code a penalty tax is assessed equal to 15 percent of the amount involved in the prohibited transaction. After the prohibited transaction has been identified, it must be corrected immediately - certainly within the taxable year. However, if the prohibited transaction is not corrected during the taxable year, then an additional penalty tax in the amount of 100 percent of the prohibited transaction amount will apply.
Correcting the prohibited transaction means to undo the transaction to the extent possible and in any case to make good to the plan or affected account any loss resulting in the transaction, by restoring to the plan or affected account any profits made through the use of the plan assets. The plan must be placed in a financial position no worse than if the disqualified person had acted under the highest fiduciary standards (IRC Sec. 4975(f)(5) and ERISA Sec. 502(i)).