k man Posted January 17, 2002 Posted January 17, 2002 Is there anything wrong with the following transaction? Trustee and participant in a small non-participant directed plan wants to make a loan to his brother (not a participant). The loan amounts to 70% of the total assets in the plan. Is this a prohibited transaction? My thought it is not because the brother is not a party in interest as defined by the statutute. However, my thought is that it violates some the prudent investment standard, even if the loan is made at a reasonable interest rate and with other acceptable terms.
Guest IWIS Posted January 17, 2002 Posted January 17, 2002 It sounds like an incredibly bad idea, and I think the DOL would take issue with it if they found out. In my opinion, it violates ERISA's diversification provisions and is clearly imprudent. The trustee has an obligation to act with "an eye single" to the interests of participants and beneficiaries and, somehow, I don't think he can fulfill that responsibility by investing 70% of plan assets in a loan to his brother. Just out of curiosity, would the loan be secured or unsecured? Has the brother's creditworthiness been objectively evaluated? And has the loan been determined to be the best investment option when compared to other possible investments with similiar risk and return characteristics? In any event, I think it violates 404 and, even though the brother isn't a PII, I think the DOL could call the loan an indirect PT under 406(a)(1)(D) or the self-dealing provisions of 406(B)(1). I believe there's case law on that, but I'm not sure. P.S. How many participants are in this plan? In other words, why is it relevant that one participant agreed to the loan? And why did he agree???
Archimage Posted January 17, 2002 Posted January 17, 2002 I agree with IWIS. If I was a participant in that plan and found out about this, I would be furious and the DOL would be the first place I called. You defiinitely don't want those guys around.
Guest IWIS Posted January 17, 2002 Posted January 17, 2002 Archimage wrote: > ... If I was a participant in that plan and found out about this, I > would be furious and the DOL would be the first place I called. > You defiinitely don't want those guys around. Interesting. Did you have a particularly bad experience?
Archimage Posted January 17, 2002 Posted January 17, 2002 No, I didn't have a personal experience. I just think that is a very imprudent investment decision.
Guest IWIS Posted January 17, 2002 Posted January 17, 2002 I meant your reference to "you don't want those guys around." I thought that DOL investigators had a reputation for being professional and reasonable, for the most part. I was just wondering whether you had a different experience in that regard.
k man Posted January 17, 2002 Author Posted January 17, 2002 Well everyone is a bit scared of having the DOL around these days. The actual investigators might be reasonable but the supervisors and the regional offices do not share this reputation.
Guest IWIS Posted January 17, 2002 Posted January 17, 2002 k man wrote: > Well everyone is a bit scared of having the DOL around these > days. The actual investigators might be reasonable but the > supervisors and the regional offices do not share this > reputation. In what regard? I'm very interested in that. And, if you give me a few details, maybe I can offer a little insight into what's going on.
Guest IWIS Posted January 17, 2002 Posted January 17, 2002 Are you talking about holding employers to an unreasonably strict timeliness standard, calling it a PT, making them deposit immaterial amounts of money to the plan to compensate it for "lost earnings," and having them file a Form 5330 and pay excise tax? If so, what do you think would happen if you respectfully disagreed with the DOL's interpretation of the "earliest date on which such contributions can reasonably be segregated from the employer's general assets," disagreed with its characterization of the situation as a PT, and politely declined to take the requested "corrective" action?
IRC401 Posted January 18, 2002 Posted January 18, 2002 In response to the original question, I assume that by "prohibited transaction", the author was referring to an ERISA 406(a) violation. I recommend looking at ERISA 404(a) and 406(B). A fiduciary making a loan to a family member is probably dealing with plan assets for his own benefit.
Guest ebpcpa Posted January 22, 2002 Posted January 22, 2002 ERISA Section 3(14) "The term 'party in interest' means as to an employee benefit plan--" Subparagrpah (F), "...a relative (as defined in paragraph (15) of any individual described in subparagraph (A), (B), ©, or (E)" Subparagraph (A), "...any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such employee benefit plan;..." ERISA Section 3(15) "The term 'relative' means a spouse, ancestor, lineal descendent, or spouse of a lineal descendent." The brother is clearly a party in interest. As for whether the transaction is prohibited or not, ERISA Section 406(a)(1), "A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect--- Subparagraph (B), "...lending of money or other extension of credit between the plan and a party in interest;..." This loan would clearly constitute a prohibited transaction under ERISA.
Kirk Maldonado Posted January 23, 2002 Posted January 23, 2002 Before you spend any more time debating this issue, you may want to look at DOL Reg. 2550.408b-2(e). Kirk Maldonado
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