COntribution to a DB Plan

[Gary]

An employer purchased a security for $100,000 with corporate money and now wants to transfer this security into their pension plan to meet the minimum funding requirement of $100,000.

My understanding is that cash must be used to meet the minimum funding and that the above is a prohibited transaction.

Does anyone have concrete evidence on the above issue?

Thanks.

GAry

[David MacLennan]

Supreme Court, Keystone vs Commissioner (1993).

DOL Interpretive Bulletin 94-3.

IRS Announcement 95-14.

I don't think the minimum funding is relevent, since any credit to the FSA could reduce future minimum funding requirements. Therefore any non-cash contribution to a pension plan is a prohibited transaction.

[mbozek]

Other than the cost of selling the asset why does it matter whether the sponsor gives the property or cash since there will be a capital gain/loss in either event?

[SoCalActuary]

Two issues are at stake here, IMO.

1. Does the employer pay the proper gain/loss on the change in market value?

2. Does the employer attempt to transfer the asset at true market value?

If the employer sells the asset in the open market to a willing buyer at market price, then there is no coersion on the trustee to accept assets that may be over-valued, nor is there an opportunity to hide the legitimate tax treatment of the asset's yield to the plan sponsor.

[mbozek]

One advantage to selling property on the open market is that the er can claim a tax loss. The er deduction for property contributed to a DC plan is the FMV of the property at the time of contribution. Rev. rul 73-583. If the FMV exceeds the cost the er has a taxable gain. RR 73-345. However, a loss is not deductible under IRC 267(b)(4). RR 61-163.

If the er deduction is limited to the FMV of the asset at the time of contribution it would be imprudent for the trustee to value the property as a plan asset at a higher amt. The trustee can decline the asset because of a lack of liquidity, volitility or failure to meet funding critieria for plan assets.