Prohibited Transactions

[Guest Msawalski]

We took over a client that has a profit sharing and cash balance plan. The owner wanted to take an in-service withdrawal from the p/s plan, but there was not enough cash in the account, so he transferred securities to the cash balance plan (which as substantial cash) and had the value of the securities transferred back to the profit sharing plan in cash. He then took his in-service. My thoughts are that this is a prohibited transaction in that he did the transaction only to allow him to take the in-service without having to liquidate the securities. Thoughts?

[Lou S.]

Was it a prudent investment? I don't see why the CB plan can't purchase securities from the PS plan to save on transaction costs but maybe I'm missing something.

[Peter Gulia]

Msawalski, would an independent observer readily conclude that every transfer happened with obviously correct valuations?

Your description suggests a possibility that the profit-sharing plan might have had some difficulty selling some of its securities through a stock exchange or other regular means.

[jpod]

If the same fiduciary was approving the transaction from both sides why isn't it a slam dunk 406(b)(2) PT (assuming the plan is subject to Title I of ERISA)?

[Guest Msawalski]

Thanks for the responses. Yes, the plan is subject to Title I of ERISA. The plan's trustee (same trustee for both plans) could have sold the securities in the profit sharing plan to have the cash to pay the in-service withdrawal to himself, but he chose not to do this.

In our opinion this is an "indirect" prohibited transactions and that he needs to unwind it by transferring the securities back to the profit sharing plan and having the cash returned to the cash balance plan.