Loans from Profit Sharing Plan

[Chippy]

A physician practice would like to make a loan to a surgery center as an investment from the plan.   The loan will earn 10% interest and it'll be for 1 or 2 years.   He would like to loan them $100,000 out of $1.8 million assets.   This is a pooled profit sharing plan, 6 participants.  Is this investment allowed?   If so, anything that must be done to allow for it?  

[Lou S.]

If the Plan's Trust documents allow it it can be done.

It would be a non-qualifying asset so higher bonding might be need to avoid annual audit and you can't file SF

The biggest questions is would this be a prohibited transaction? I would at a minimum recommend they have an ERISA attorney review to make sure that the physician practice isn't a party in interest with respect to the surgery center.

[Mike Preston]

1 hour ago, Lou S. said:

If the Plan's Trust documents allow it it can be done.

It would be a non-qualifying asset so higher bonding might be need to avoid annual audit and you can't file SF

The biggest questions is would this be a prohibited transaction? I would at a minimum recommend they have an ERISA attorney review to make sure that the physician practice isn't a party in interest with respect to the surgery center.

I can't imagine the trust document not allowing it. Unless there are additional non qualifying assets an existing bond of 180,000 should stave off an audit. Don't you mean that the surgery center is not a party in interest with respect to the plan?

[Lou S.]

30 minutes ago, Mike Preston said:

I can't imagine the trust document not allowing it. Unless there are additional non qualifying assets an existing bond of 180,000 should stave off an audit. Don't you mean that the surgery center is not a party in interest with respect to the plan?

I agree it would be unusual to not allow it but thought it was worth mentioning.

Yes the $100,000 deal is currently less than 10% of assets if that is the only one and it remains under 10% you are correct the current bons would be sufficient, but it's something to at least look at and mention to client when there are non qualifying assets.

You're probably right on the direction of party in interest. In this scenario I'm envisioning one or more doctors of the physician practice probably being the trustee(s) of the PSP and quite possibly working out of the surgery center that they want the plan to loan money to. But maybe I'm just being cynical.

 

[Mike Preston]

58 minutes ago, Lou S. said:

I agree it would be unusual to not allow it but thought it was worth mentioning.

Yes the $100,000 deal is currently less than 10% of assets if that is the only one and it remains under 10% you are correct the current bons would be sufficient, but it's something to at least look at and mention to client when there are non qualifying assets.

You're probably right on the direction of party in interest. In this scenario I'm envisioning one or more doctors of the physician practice probably being the trustee(s) of the PSP and quite possibly working out of the surgery center that they want the plan to loan money to. But maybe I'm just being cynical.

 

But more likely than not correct.

[shERPA]

Or maybe the doc has an ownership interest in the surgery center too?  That NEVER happens, right?   And then you scratch the ASG scab...........  😱

[BG5150]

Side note:  they would have to file a Form 5500 instead of a 5500-SF

[Peter Gulia]

Would the plan would get no less interest than a bank would get for the same loan to that borrower?

Practically, the retirement plan would need to get more interest so the extra covers the plan’s expenses of doing the deal, including fees for a lawyer to render an opinion that the transaction meets the conditions of a prohibited-transaction exemption and fees for an independent fiduciary to find that the transaction is fair to, and prudent for, the plan.

And why would the borrower incur that extra if it can borrow from a bank (in a deal that would lack those incremental transaction expenses)?

[Luke Bailey]

Chippy, the key issue is whether anyone involved in the decision to make the investment at the "physician practice" has any ownership, business (e.g., referrals of patients), or personal (e.g., spouse) interest in the surgery center. If anyone does have such an interest, then you (or an attorney hired by the physician practice) need(s) to diligently review Section 406 of ERISA and Section 4975 of the Code for prohibited transaction issue.