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Prohibitted Transaction?


austin3515
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I agree with Belgarath re disqualified person/party in interest for PT purposes.

However, I'd be very concerned about possible fiduciary violations unless the owner can prove that using the brother as the plan's investment advisor can clearly be shown to be in the best interests of the employees and other beneficiaries.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Guest LLHarlow

It's not even a PT if it's a disqualified person unless the rate of compensation is unreasonable. My employer's partners are plan fiduciaries and they are compensated as the plan's financial advisor. We had to get an ERISA opinion to satisfy the broker/dealer and it's not a PT because we're paying the same rate to the partners that the prior advisor was charging. This wasn't my decision and I strongly urge against a disqualified person acting as the advisor unless he/she is acting as the advisor without compensation. That's fairly common - think of all the qualifed plans of investment advisors. They're not likely to appoint another advisor for their plan.

This is going to be scuritinized mightily by the IRS and/or DOL on examination or as the result of a participant complaint. The employer should be able to establish that the compensation rate is reasonable and the advisor is performing at least as well as others. If I were this employer, I would perform a due diligence search at least every three years as evidence that there isn't a fiduciary breach.

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In these situations where 'services' are provided to the plan by a relative of an owner, paid out of plan assets, there is almost never compliance with 29 CFR §2550.408b-2. And that will make reliance on the PT exemption of IRC §4975(d)(2) and ERISA §408(b)(2) difficult to establish.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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I didn't see any reference at all to the PT rules in 408b2 (aside from not providing the disclosure)? J Simmons, can you please explain?

The PT exemption of IRC §4975(d)(2) and ERISA §408(b)(2) only goes so far as "reasonable compensation" paid from plan assets for services. 29 CFR §2550.408b-2 requires all plan fiduciaries involved in deciding what services to purchase and pay for with plan assets do some investigation and essentially, 'comparison shop' for what is 'reasonable', to fulfill their general fiduciary duty to only discharge their duties defraying "reasonable expenses" of operating the plan (29 USC §1104(a)(1)(A)(ii), the payment from the plan must be reasonable for the services. If 29 CFR §2550.408b-2 procedures have not been observed, what evidence will the plan fiduciary have to establish that the compensation paid to the brother was reasonable?

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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I don't believe there is any problem with a brother being an investment advisor.

I agree, per se. But I think it will raise suspicions and cause closer scrutiny by DoL should it ever inquire into the matter.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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J Simmons, are you suggesting that the fiduciary of the plan is engaging in self-dealing by allowing his brother to receive compensation from the plan?

I think the sibling relationship raises more suspicions, will trigger closer scrutiny, and thus make more problematic any deficiencies there may be in the plan fidicuiary's duties imposed by 29 CFR §2550.408b-2.

I would recommend against a plan fiduciary giving that contract out to his or her brother, in order to keep a lower profile for employee and DoL questioning.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Hiring the brother - if he will be paid with plan assets - is the poster boy for a self-dealing PT under 406(b)(1). See the following example from the DOL regulations.

Example 6. F, a fiduciary of plan P with discretionary authority respecting the management of P, retains S, the son of F, to provide for a fee various kinds of administrative services necessary for the operation of the plan. F has engaged in an act described in section 406(b)(1) of the Act because S is a person in whom F has an interest which may affect the exercise of F's best judgment as a fiduciary. Such act is not exempt under section 408(b)(2) of the Act irrespective of whether the provision of the services by S is exempt.

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The difference between son and brother is the difference between son and complete stranger. So the example is not really spot-on because the son is within the definition of party-in-interest. The brother is not.

Not all brothers are complete strangers. We still play cards from time-to-time, just not as often anymore.

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It has nothing to do with the son being a party in interest or disqualified person. The rule illustrated by the example would be the same if it was the fiduciary's girlfriend rather than his son. I suppose if you could prove to the DOL or a court that the owner actually hated his brother's guts and only hired him because he was the most qualified you wouldn't have a 406(b)(1) PT, but how likely is that?

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Is there any way to determine which of any two investment advisors is better? That's a serious question.

What kinds of data are available to compare the results of the advice of the two very nice people you are considering as an advisor for your plan?

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To be clear, I think it is inadvisable. My point above is that one is a gray area (the brother) and the other is explicitly forbidden (the son). For whatever reason, neither a girlfriend nor a brother are considered a party-in-interest, so at least no one can point to a law and say, "Look here, you broke this law."

Austin Powers, CPA, QPA, ERPA

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I said it before and I'll say it again - there is nothing wrong with it. It's not gray, it's black and white. That's why we have these (incredibly) detailed laws and regs - to minimize gray areas. I'm not saying there aren't still gray areas, but this is not one.

Ed Snyder

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Bird, I think the gray area is that compensation must be reasonable. And the presumption might be that it is unreasonable based on the close relationship, with the fiduciary being obligated to prove it is reasonable. I think that is the issue most of us have. And as others have stated, how do you prove something is reasonable when that standard is by definition subjective.

Austin Powers, CPA, QPA, ERPA

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