SwimmingInBowelsOfERISA

Interesting. I wonder if in my hypothetical situation that if that business account was titled very similar to the name of the plan per the docs (not exactly the same, but close enough), would that create a complication trying to disavow it as a qualified account???

Thank you all again. Considering this is all "hypothetical", we would have already consulted an ERISA attorney at a large law firm, especially IF numerous PTs were an issue. And if that attorney was somewhat befuddled by the situation regarding the trust vs custodial account, we would have consulted other ERISA attorneys and TPAs. And if they were likewise not entirely clear, we would have gone to a prominent blog for administrators, actuaries, and advisors to consult with others who may know. Sometimes, practical knowledge and experience trumps all else. Thanks to each and every one of you again for your contributions. It is GREATLY appreciated.

First of all, I want to thank you all for your responses, especially Mike for providing such a detailed response. When I spoke with a much larger "self-directed specialist" plan administrator, they told me that they specifically tell their clients to setup under a TIN and NOT to go to two certain large banks which do not want these solo-k accounts. Oddly enough, the administrator he went to told him to go to one of those two banks but to setup the account as a checking account. Seems strange to me. In any event, I have a "hypothetical" situation. Let's suppose that this particular individual would be FAR better off if we can take the position that the account is a taxable account and not a qualified plan account. Let's say we want to take this position because there were many PTs in the account (due to ignorance rather than malfeasance), AND in one year he's grown a small rollover and contribution to well above the 250k 5500 reporting threshold. If we take the position that the business account is just a taxable account that was improperly setup and thus never qualified as a tax-deferred account, it seems to me he would have four principal issues: will the bank report a 1099-R when he closes or distributes from the account thereby notifying the IRS that the bank considered this a tax-qualified account, in the absence of (1) has any other notification gone to the IRS that this account exists (like a determination letter), in the absence of the previous two but considering worst case scenario that this caught the IRS attention anyway, he is in better standing to argue that the account was improperly setup and since he, the bank, and his CPA considered it a taxable account, they treated the transactions as they would in any other taxable account and paid taxes due, and finally what to do with the existing plan, which has executed documents but was technically never funded? Any thoughts on this?

I just posted a question directly related to your response on another thread tonight, though before I read your comment...would you mind looking at "Confused Self-Directed Solo 401k Plan - Trust vs Custodial Account" and give me your thoughts???

Fidiciary Benchmarks (FBi) Pulse-Logic Plan Advisor Tools There is at least one or two more widely recognized, but their names are escaping me now. The first two on this list are more widely used to the best of my knowledge.

I was approached by a business owner (no other EEs) with a solo-k plan that he started about a year ago. The plan doc was setup by a plan administrator "specializing" in self-directed IRAs/solo-ks. The business owner was instructed by the admin official to go to his bank (he recommended a specific, large bank that I won't mention), and open up a checking account under the business's EIN, and make contributions, rollovers, and transactions through that account. He did as instructed, made an indirect rollover contribution via check, made a contribution for the year, and started purchasing non traditional assets (real estate to be specific). Am I mistaken in that this MUST be a trust account with a separate TIN? I have consulted many other experts and other banks, and the general concensus (with a couple exceptions, particularly the admin who told him to setup the account in this way) is that this cannot be a qualified account. Is there such a thing as a "custodial" account setup through a bank that can serve in this manner? I'm getting some contradictory information from different sources that this MAY be considered proper by the IRS. Any insight would be GREATLY appreciated.

Example: 4 family members own a s corp biz (mom, dad and adult children), no other EEs. They currently pay the same salaries for all 4 (~30k/yr). They sold the assets of the business (~1.5M) early this year but retain the entity, which is now flush with cash. Just over 1M is not basis so subject to form 1231 cap gains.In order to minimize cap gains, we are considering a combination of 1) reallocation of equity (gifting some by parents to children using small part of lifetime gift exemption before eoy to keep cap gain liability at 15% (they should have gifted the equity before the sale but besides the point), and 2) starting a k/ps/cb plan to reduce AGI from 1120s, but naturally considering adjusting comp before eoy to get to funding levels for the ps/cb that make sense. Since the income of the business was minimal (sold early in the year), they will show significant loss of income in the business due to ER contributions to owners for ps/cb plan. However, they own several other businesses (no EEs other than the same owners) that will pay a management fee to the original co or the original may just become a holding co for the rest, to be determined, but income will flow into the entity after this year. My question is: 1) is there a limit to deductibility for ps/cb plans for an all owner/family relation company w no other EEs? 2) can losses due to contributions be carried forward like other corporate losses? Thx!

Good point ESOP guy. The fact that these individuals already have RE businesses makes me think that part of their motivation is to use the plan to defray taxes on ordinary business activities. But at the same time they are averse to the markets (which seems to be very common based on my experience with people of the same ethnic background as them), so I don't want to jump to conclusions. However, looking from the outside in I could see how a regulator could view this arrangement dubiously. And if we move forward, we will certainly be paying attention to IRC 512. Thanks!

Good points David. I've only met with them once, and likewise I am also somewhat skeptical of what they think they can accomplish. They have been a client of the CPA for over twenty years, and the CPA at least is solid and ethical but not a retirement plan expert by any means. And his clients do care about taxes and audits; it's my understanding that the CPA's first engagement with them was dealing with an audit because they were going through a tax "preparer", and I definitely got the impression that they wanted to make sure it is done right or not at all. I fully plan on doing some serious prying for more information about what their goals and expectations are before I entertain moving forward. Needless to say it sure wasn't a run of the mill conversation with a potential plan sponsor. Thanks for the response!

Thank you for your response! To answer your questions: First, I am an FA but I am not a Registered Rep. I am an independent Investment Advisor Rep (IAR-RIA) with no B/D affiliation, very distinct from a RR, and thus only Frost model compensation here (no rev share/commissions). Second, typically I act as a 3(21)(A)(ii) IA fiduciary and as an SEC (but not ERISA) fiduciary to plans for the purpose of many services outside the scope of investment advise or management. And in a few cases our firm acts as a 3(38) IM. So I don't have any issues with my compliance dept per se because I have ample experience in the same capacity. For this plan, I have no interest in advising in the capacity of an erisa fiduciary on the real estate investments, not because I can't but because it's outside the scope of my expertise. My services to the clients will include business and estate planning (on a personal level), but services related to the plan will be limited to a scope of services similar to other contracts with existing plan clients (vendor and professional aggregation/search and monitoring assistance, oversight, compliance assistance, etc), but nothing that would otherwise qualify me as an erisa fiduciary with respect to administration, management or control of assets, or investment advice or management. With respect to hiring the actuary, that is part of the conversations I am having this week with other local colleagues. And your questions about cash required to pay expenses, distributions, etc. are all valid, which I am very much aware of and are part of my reasoning why I am unsure whether this is a good idea to begin with. It will certainly require an individually designed plan, and since the IRS has changed the determination letter rules it makes the consideration of an individually designed plan and the subsequent IRS view on tax qualification all the more important. Your question about the "end game" I found insightful because I need to investigate that more fully. I know the "older" owners want to fund it for about ten years before retiring, but I'm sure they don't fully realize how the income will be generated, and as a matter of fact I had not even begun to consider that, but an excellent point in any event. Thank you for your advice!

I am a FA and I was referred to clients of a CPA. These individuals own multiple business entities, primarily in real estate. The only EEs of all companies are the owners (parents, 60's) and their two children (30's), also owners. Ignoring control group/affiliate service for the purpose of this thread, they are interested in starting a CB or Combo plan for the purpose of defraying taxes and purchasing Real Estate. They have no interest in investing in "traditional" securities or any other assets other than RE. Aside from the the usual issues related to owning RE in a retirment plan (PTs related to income/expense flow, management, can't "contribute" RE assets, etc etc) I have a few concerns because I have never had a client with an interest in investing solely in RE in a QRP. First, I am concerned that it would, at a minimum, violate ERISA's "duty to diversify". Second, I am concerned that the IRS will view this unfavorably by default. Third, I believe that legal issues, valuation issues and related expenses may outweigh the benefits. Fourth, I am not aware of any trustees and/or custodians, apart from SD-IRA's and some uni-k's, that work with this. Has anyone else had or heard of a situation like this? Is there something else that I should also be concerned with? I will undoubtedly be reaching out this week to local TPAs and ERISA attorneys I have worked with in the past, but I am interested in some feedback from the community. Thank in advance for your responses.

Thank you for your input Kevin! When it came to the discussion about 408b2, I was informing the exec of the responsibility of the fiduciary to collect the disclosures from the providers, and corresponding responsibility to analyze and and benchmark the plan, to which he responded they did not have to comply with - I don't think he was under any illusion that he had to create or share that information with anyone outside of the decision structure. I explained to him about the prohibited transaction rules for transactions with CSPs using plan assets, and requiring "reasonableness and necessity" be determined through collection, analysis and benchmarking plan fees and expenses. He was generally uninterested and reiterated that he was sure it didn't apply to them. Thus my conclusion that the plan was likely being poorly managed.

I ran into a friend of mine recently who was frustrated with her ER over the 401(k). Apparently the ER customarily announces a discretionary match to the 401(k) - (no P/S component) - at the beginning of the year, and discloses it to the EEs in writing. However she was just informed here in April of 2014 by the HR manager that the company has decided not to make the previous year's match already declared (2013) due to profitability issues. I understand that there can be a lot of leeway with what an ER can do if it is in the plan docs and doesn't violate ERISA, so I asked her to get a copy of her SPD/SMM, which will give me a starting point. I'm an Investment Adviser and not entirely familiar with plan design issues, but I would think that if they are disclosing in writing the the EEs at the beginning of the plan year what the matching contribution is, they couldn't rescind that declaration after the plan's year end. Does anyone have any thought on this? FYI - I prospected this ER last year and spoke with one of the execs, who in conversation told me he had heard of 408(b)2 but they didn't have to comply with it...so obviously this is a plan with suspect management to begin with.