In-Kind Contribution

[Guest merlin]

A new client just informed us that he made part of his 2006 contribution in stock, a prohibited trnsaction. Does it still count toward the MFSA fro 2006? I think so, but I'd like to get a confirmation from the other inhabitants of these boards.

Also, how do you correct the PT? Is it just a matter of paying the excise tax? What is the "amount involved"?

[david rigby]

I'm no expert on PT's, but if you cannot contribute stock, how can you count it in the Funding Standard Account? Looks like a zero contribution for that purpose. Likely, this sponsor needs ERISA counsel, fast.

[Belgarath]

I also will claim no expertise in PT's, but FWIW...

This would be treated as a "sale" transaction for PT purposes. This means that the "amount involved" is the greater of the FMV of the stock, or the amount paid. Since nothing was actually paid, then I think you'd use FMV of the stock.

As for correcting, I would say that the stock must be distributed back out of the plan, and the appropriate amount contributed. I don't think that merely paying the excise tax does the trick.

And as Pax suggests, ERISA counsel!

[AndyH]

dittos to these replies. Merlin, you might have one mad client, but I would not credit it for minimum funding.

[Guest merlin]

Sometimes the brain does work. Q&A 46 from the 2002 ASPPA (only one "P" then) Conference:

"A funding deficiency does not exist; a prohibited transaction still counts for 412 purposes (ignoring the issue of determining value). It's still just a PT!" (their exclamation point, not mine)

The preceding part of the question dealt with the correction of the PT.

[tymesup]

You might want to check whether the new client did the same thing in the past. Then again, you might not want to.

[david rigby]

And check to see if the terms of the plan might automatically reject the "contribution". It's a long shot, but easy to check.

[Calavera]

So, let me get it straight. If one person sole proprietor has a DB plan, he can sell some stocks, wire the proceed of this sale as his contribution to a DB plan, and buy the same number of shares as part of his investment (assuming the price of the share didn't change). But he cannot save a couple steps by making his contribution in stocks, which essentially will produce the same result.

Is my understanding correct?

Merlin, could you post the whole Q&A 46 from the 2002 ASPPA Conference?

[Guest merlin]

Calavera, here you go:

Q&A 46: The contribution of property to a plan subject to IRC 412 is a prohibited transaction. How is it to be corrected?

The trustee must sell the property to an independent third party.

Can the property simply be withdrawn from the plan and replaced by cash? At what value?

Written response: Only with the permission of the DOL, and in that process the value will need to be determined under DOL rules and supervision.

Correction from the podium:Yes, the property can be returned w/o DOL supervision. The value must be determined per DOL regulations

If the prohibited transaction is not corrected within 8-1/2 months after the end of the plan year does the plan now have a funding deficiency?

A funding deficiency does NOT exist; a prohibited transaction still counts for 412 purposes (ignoring the issue of determining value). It's just still a PT!

[Calavera]

I still can not see why contribution in stock to a pension plan would be considered a prohibited transaction. Everything I read is referring to either the Keystone case that was about truck terminals or the first definition under prohibited transaction regulations as “sale or exchange, or leasing, of any property between a plan and a party in interest/disqualified person”. Q&A46 is also about contribution of property to a plan.

But, by regulations, a transfer of real or personal property by a party in interest to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes. So, again we are talking about real property and not stocks.

Then we have Section 4975 talking about tax on prohibited transactions and it seems that one of the exemptions from 4975(d)(18) through 4975(d)(22) would apply.

Furthermore, if it is a prohibited transaction and you need to correct it by selling stocks to a third party, it really means that you call your financial institution and ask them to sell the stock. Then you ask them to buy it back and you end up in the same position you were before the “correction” (assuming the same stock price and no fee for transactions), but now it is suddenly “corrected”. It seems ridiculous to me.

Merlin or somebody else, please enlighten me why you think that contribution in stock is prohibited.

Thanks in advance.

[AndyH]

Because the DOL has taken that position and many of us choose not to fight "The Man" in this battle.

29 CFR 2509.94-3 - Interpretive bulletin relating to in-kind contributions to employee benefit plans.

That is easy to Google.

[Belgarath]

You may find this link helpful as to the discussion of the DOL reasoning.

http://www.dol.gov/dol/allcfr/ebsa/Title_2...FR2509.94-3.htm

As to the IRS, and the new provisions of 4975(d) that you mention, you might find it helpful to read the JCT explanation of PPA sections 601 and 611. (I don't have a link, offhand, for this, although I seem to recall I might have archived one somewhere) This gives a more detailed explanation than you will find in the bare bones statutory language. I do not believe that you will find much agreement with your assertion that the transaction would fall within these exemptions.

As to whether it all makes sense, that is an entirely separate issue. My mentor, when I started in this business, instructed me not to get hung up on whether it makes sense, or is "right" according to common sense - but to concentrate on the Code, ERISA, and the accompanying regulations. Sometimes it saves a lot of stress not to make yourself nuts because a provision is stupid - just accept that you have to live with it!

If you aren't convinced, then I encourage you to contact an experienced ERISA attorney, who can undoubtedly give a more detailed explanation than many of us can provide.

Hope this is of some use to you.

Ok, I see Andy beat me to it while I was typing. Andy, hope we get better run support than Dice-K. 12 out of the last 16 with 2 runs or less!