10% limit

[Guest JM123]

Are IRAs subject to 10% limit on employer stock under 407(a)?

[Guest Sieve]

No. IRAs are not subject to ERISA (unless they are part of certain employer-sponsored arrangements). (See DOL Reg. Section 2510.3-2(d).)

[Guest JM123]

The fact that IRAs are expressly excluded from the definition of "eligible individual account plans" in 407(d), which are exempt from 407(a) pursuant to 407(b), implies that they are subject to the 10% limit.

But isn't it common for self-directed IRAs to own businesses that employ the IRA owner?

[Guest JM123]

No. IRAs are not subject to ERISA (unless they are part of certain employer-sponsored arrangements). (See DOL Reg. Section 2510.3-2(d).)

Sieve - perhaps the exclusion of IRAs from the definition of "eligible individual account plans" refers to employer-sponsored arrangements described in the regulation, rather than IRAs maintained solely by the employee.

Does anyone disagree or have any thoughts?

[Guest Sieve]

An "eligible individual account plan" has to be an "individual account plan", which is defined in ERISA Section 3(34) to be a "pension plan . . .", and pension plan is defined to exclude IRAs (except in the limited situation discussed in the regs). So, the intial premise is that IRAs are excluded form ERISA, no matter what ERISA Section 407 may say in its definitional section.

Therefore, I think the conclusion in your last post is correct--i.e., that a traditional IRA is not impacted by ERISA Section 407--although I have no idea why IRAs which are part of an employer-sponsored retirement arrangement should be treated differently from a traditional IRA.

[Guest JM123]

An "eligible individual account plan" has to be an "individual account plan", which is defined in ERISA Section 3(34) to be a "pension plan . . .", and pension plan is defined to exclude IRAs (except in the limited situation discussed in the regs). So, the intial premise is that IRAs are excluded form ERISA, no matter what ERISA Section 407 may say in its definitional section.

Therefore, I think the conclusion in your last post is correct--i.e., that a traditional IRA is not impacted by ERISA Section 407--although I have no idea why IRAs which are part of an employer-sponsored retirement arrangement should be treated differently from a traditional IRA.

Thanks. I also can't think of a rationale behind such a distinction, but I can't think of any other reasonable interpretation of 407's express exclusion of IRAs from the definition of "eligible individual account plan." The complicating factor is that the owners of self-directed IRAs are fiduciaries subject to ERISA's PT rules.

So you look at 406(a) and its says you can't violate 407. 407 says 10% with an exception for certain plans, including "eligible individual account plans." That term is defined in 407(d) in a way that expressly excludes IRAs described in Code 408. That suggests that IRAs are subject to 407(a), but because a traditional IRA is not an "individual account plan" to begin with, the reference in 407(d) to IRAs really refers only to those arrangements that fail to meet the definition of IRA in 2510.3-2(d).

Sound right?

The situation I am dealing with involves a termination of an ESOP where the to-be IRA owners are employees (and shareholders) of the ESOP's sponsor, and I want to avoid a PT arising from a 407 violation.

[Guest Sieve]

FWIW, an IRA cannot be a shareholder of an S corp. (if you have an S corp ESOP). Also, If the corp is not publicly traded, the employer may have the ability to pay ESOp distributions in cash only, over time--and, you may need to shop around for a custodian/trustee who will hold that stock in an IRA.

Otherwise, everything you say sounds right to me, except that traditional IRAs (except as indicated in -3(2)(d) regs) are not subject to ERISA's PT rules. They are subject to the Code's PT rules as a reuslt of its definition of "plan" (see IRC Section 4975(e)(1)(B)).

[Guest JM123]

FWIW, an IRA cannot be a shareholder of an S corp. (if you have an S corp ESOP). Also, If the corp is not publicly traded, the employer may have the ability to pay ESOp distributions in cash only, over time--and, you may need to shop around for a custodian/trustee who will hold that stock in an IRA.

Otherwise, everything you say sounds right to me, except that traditional IRAs (except as indicated in -3(2)(d) regs) are not subject to ERISA's PT rules. They are subject to the Code's PT rules as a reuslt of its definition of "plan" (see IRC Section 4975(e)(1)(B)).

Thank you. Company is privately held C corp. and is an operating company. I think we're saying the same thing re the traditional IRAs; thanks for directing me to the reg and distinction.

As long as the IRA-owner does not allow the IRA to enter into any transactions with a disqualified person, no PT should occur simply on account of a rollover.