MR Posted August 24, 2001 Posted August 24, 2001 lets say a construction company has a profit sharing plan. lets also say that this plan loans money to the clients of the construction company. the company insists that its clients COULD borrow from banks, but lending from the plan saves the client money by cutting out the middle man. i don't think the clients are parties in interest, but i am concerned that these transactions are prohibited anyway. any thoughts or suggestions?
Kirk Maldonado Posted August 24, 2001 Posted August 24, 2001 There was an IRS ruling involving almost identical facts a number of years ago, except it involved a law firm. My recollection was that the IRS concluded it was a prohibited transaction. Kirk Maldonado
david rigby Posted August 24, 2001 Posted August 24, 2001 Does the plan have a provision that permits loans to participants? I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.
Appleby Posted August 24, 2001 Posted August 24, 2001 ... and if it does, were the loan provisions followed, for example, loaning no more than $50,000 or 50% of vested balance? Life and Death Planning for Retirement Benefits by Natalie B. Choatehttps://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/ www.DeniseAppleby.com
MR Posted August 27, 2001 Author Posted August 27, 2001 the loans are not being made to participants.
Guest MTransue Posted August 27, 2001 Posted August 27, 2001 A plan maintained by an employer is subject to the "exclusive benefit rule," for their employees or beneficiaries. For the employer loaning money from the plan is violating this rule, thus compromising its qualified status. ERISA has a similar rule for fiduciary duty to a plan in Section 404(a)(1)(A). It's known as the "exclusive purpose" rule. I hope this is only a "what if" scenerio, and not really happening...
R. Butler Posted August 27, 2001 Posted August 27, 2001 It is a prohibited transaction for a party in interest to deal with income or assets of a plan in his/her own interest (IRC 4975 ©(1)). Loaning money to clients would seem to be a prohibited transaction. I agree with the last post. If this actaully occurring, it is a very serious problem.
Jim Chad Posted August 29, 2001 Posted August 29, 2001 If the customers are good credit risks and the terms are reasonable based on market conditions, these loans may be prudent investments. But if any of these loans default, the owners could be in deep trouble and need to prove these loans were "arms length" transactions. They have the appearance of benefiting the company in a customer relations sort of way.
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