Would an employer be considered a party in interest to a plan if one of its employees is a participant in a plan but the employer is not the sponsor? For example, Corporation X sponsors a profit sharing plan (Plan X) which has two members A and B. Corporation Y employs A and B. For purposes of the prohibited transaction rules, would Corporation Y be a party in interest to Plan X by virtue of being the employer of A and B (who are covered by Plan X) - or does this rule only apply to employers of employees who covered by a plan because of their status as employees of such employer.

I have checked the guidance and commentary that I have available and can't find the answer. It would seem to me that it would only apply in the case of employers who sponsor the plan, but, read literally, the alternative argument could be made. Any guidance you may have would be much appreciated.

Is this a controlled group or affiliated service group? What are you trying to do that you have concerns about a prohibited transaction? Knowing what you want to do might help someone (me) understand your question better.

The quick, easy answer is that there's no PT--the ERISA rule you refer to prohibits certain transactions between the Plan and the Plan's sponsor or employees of the Plan's sponsor. That answer assumes, however, that there are no other undescribed facts which potentially might cause there to be a PT, such as controlled group status between X & Y, ownership of X & Y by A and/or B, family relationship between A & B and owners of X & Y, the nature of the transacation, etc. The PT rules cast a very broad shadow. You may want to look at Code Section 4975(e)(2) and ERISA Section 3(14) to see the range of people/entities who cause a transaction to be a PT and to make a prelimiary determination of whether there might be a problem.

ERISA section 3(14)© states: "The term 'party in interest' means, as to an employee benefit plan - an employer any of whose [sic] employees are covered by [the] plan[.]"

Thanks for the response. Some additional facts may be helpful. Plan X owns certain real property that it is leasing to Corporation Y and Plan X has made regular loans to Corporation Y. A and B are husband and wife. A is President of Corporation Y. A and B are on the Board of Directors of Corporation Y. A and B own Corporation X 50/50. A owns 30% Corporation Y.

I appreciate your thoughts.

Since the lease and loans are to Corporation Y (I assume directly) I think you are OK under 3(14)(G). Since there is not 50% ownership based on your facts.

But I'll be the first to admit this is not my area of expertise. If someone has something clearer, I would go with that.

Just a wild guess, but is A the Trustee of Plan X? And why is it that there is this "affection" by Plan X for corporation Y?

Yes A is the trustee of Plan X. A was the original sole shareholder of Corporation Y over twenty years ago and he built the company. Over time, he sold off most of his shares to a key employee with whom he has a close relationship. This key employee is now the 70% shareholder and runs the company. Plan X purchased some land adjacent to Corporation Y a number of years ago that Corporation Y ended up needing for expansion purposes.

Hey, Buzz, this sounds very much like the Plan you & I are discussing in another string. Coincidence, ehh?

In any event, since A is a fiduciary with respect to Plan X, this additional fact brings a PT into focus. A, as trustee (& a fiduciary) of the Plan X, is using plan assets for his benefit (i.e., loaning money and leasing property held by Plan X to Corp. Y where A is president, 30% owner and on the board). Plan fiduciary (A, as Trustee of Plan X) cannot "deal with the assets of the plan in his own interest . . ." (ERISA Section 406(b)(1)). Also, a fiducary cannot use assets of the plan for his benefit or in his interest (IRC Section 4975©(1)(D) and ERISA Section 406(a)(1)(D)).

Hey Sieve - thanks for this input, very helpful. Actually, these are two different companies (yikes!), though fact patterns are similar.

I have a similar situation, and rather than start a new thread, I thought I'd just add on to this one.

In my case, Corporation A is owned by X, who is not an employee. The sole employee, and coincidentally the trustee of the Corporation X Profit Sharing Plan, is Y. No relationship between X and Y.

Y happens to own 30% of Corporation B, which is unrelated to Corporation A.

The Corporation X Profit Sharing Plan enters into two transactions that are questionable. First, it buys some Corporation B stock. Secondly, it extends a series of loans to Corporation B.

Do you think that either or both of these transactions is prohibited? I'm inclined to think both. Does the 50% ownership standard mentioned in Lou's post have any bearing here? I'm not sure that it does.

Med

Med, the answer is the same: the trustee, a fiduciary, is using plan assets for his/her benefit by lending money to a company in which the trustee has a 30% ownership interest and purchasing stock in the same company. Thus, there's a PT. The 50% rule in Lou's post was not dispositive of the earlier fact pattern, just as it is not dispositive of your issue, either--this PT exists in spite of the fact that there is less than a 50% ownership interet involved.

Thanks Larry - I had a bad feeling that was going to be the answer.

Med

Here is one from a while back that discusses transactions with individuals who are not parties in interest/disqualified persons and the existence of a PT.


http://benefitslink.com/boards/index.php?showtopic=32806