In-kind contribution and minimum funding

[Guest Nineteen]

I'm reviewing assets for an end-of-year valuation and have discovered that part of last year's contribution was made by transferring shares of stock (nothing privately held-all on the market) into the plan. The funding deadline was several months ago.

This is of course a prohibited transaction, but does this also constitute an invalid contribution? In other words, can the contribution of the stock count toward satisfying the minimum funding, or is there a funding deficiency because of the fact that it's a prohibited transaction?

[No Name]

The Schedule I in front of me asks for the value of non-cash contributions on Line 2B. Would seem to imply that they're OK. Instructions only ask for the fair market value when contributed.

Employer contributing said non-cash contributions would incur tax on the difference between its basis and the deduction taken.

Just my two cents (and worth every penny).

[AndyH]

The Schedule I in front of me asks for the value of non-cash contributions on Line 2B. Would seem to imply that they're OK.

Nineteen already noted that this is a PT. How can it be "OK"? Maybe it is OK in some types of plans, but not plans subject to minimum funding.

Nineteen, I cannot answer your question directly other than to note that a PT must be undone. I don't see how a reasonable argument could be made that something that must be undone satisfies an obligation. But, that's what lawyers are for.

[mbozek]

The PT only applies to the extent the contribution is necessary to satisfy a funding obligation of the plan. A contribution of property in excess of amounts needed to meet the funding requirements is permissible if the general standards of fiduciary conduct are met. See Dol Interpretive Bulletin 94-3

[Guest Nineteen]

Thanks for your responses.

In this case, my client "made" the desposit necessary to satisfy minimum funding, and no more than that. They also deducted the full amount on their tax return.

[David MacLennan]

It's a PT regardless of whether the contribution of property is over and above the 412 minimum (at least if it's an ERISA plan).

"Such an in-kind contribution would constitute a prohibited

transaction even if the value of the contribution is in excess of the

sponsor's or employer's funding obligation for the plan year in which

the contribution is made and thus is not used to reduce the plan's

accumulated funding deficiency for that plan year because the

contribution would result in a credit against funding obligations which

might arise in the future." - DOL Interpretive Bulletin 94-3

[SoCalActuary]

We faced a plan audit for a non-Title 1 plan on this issue. We argued successfully that the instructions to the broker were mis-understood, and that the plan sponsor instructed the broker to sell the security, transfer the funds to the plan, and buy the security within the plan. We also went back to the tax return and showed the effect of the stock sale on the income tax of the sponsor.

Take it for what it's worth.