When Does This Become A Prohibited Transaction? Options

[mming]

A qualified plan directly purchases an interest in a small start-up business. After this occurs it's discovered that the 100% owner of the plan sponsor is a partial owner in this new company, so it appears the purchase is a prohibited transaction based on these circumstances. My question is at what level of ownership does this become a PT? For example, if the plan were to buy shares of stock in Microsoft and the sponsoring employer also owns Microsoft stock personally, both the plan and the employer would technically be partial owners in Microsoft but the plan wouldn't be considered a party to a PT. Is there an aspect that's being overlooked here or is there just simply a threshold for substantial ownership that must be exceeded before a transaction is deemed a PT? All help is greatly appreciated.

[Mickey Maier]

A prohibited transaction is a direct or indirect transaction between the plan and a party in interest (disqualified person) involving plan assets. There is no threshold or deminimis amount of a transaction that is exempt. The questions here is whether the start-up business is a party in interest. For a direct transaction (assuming the stock was bought from the business and not from an individual shareholder), the business would have to be 50% or more owned by the owner of the plan sponsor IRC 4975(e)(2)(G). The indirect transaction is much trickier to evaluate and would depend on the owner of the plan sponsor receiving any benefit from the investment (very facts and circumstances).

On the other hand is the stock in the start up was bought from the 100% owner of the plan sponsor, it is a clear prohibited transaction. This would include an outside seller who was related to the 100% owner under the IRC 267© attribution rules.

[Jim Norman]

See DOL ERISA Opinion Letter 89-03A. This letter dealt with an IRA investing in a company where the IRA owner owned less than 2% of the company. The DOL determined that the company was not a disqualified person, but raised (and did not rule on) the possible prohibited transaction under IRC 4975©(1)(D) or (E) as follows:

"We note, however, that this conclusion does not preclude the existence of other prohibited transactions under section 4975 of the Code. Section 4975©(1)(D) of the Code prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. Section 4975©(1)(E) of the Code prohibits a fiduciary from dealing with the income or assets of a plan in his own interest or for his own account. The Department will generally not issue advisory opinions with respect to inherently factual matters. We note, however, that Mr. and Mrs. Brown are fiduciaries with respect to their IRAs. In addition, Mr. Brown is an officer of Rock-Tenn and the Browns have stock ownership interests in Rock-Tenn. Accordingly, you may wish to consider whether the purchases of stock involve violations of section 4975©(1)(D) or (E) of the Code."