Are these qualifying assets?

[Guest MeToo]

My accountant says that I need an audit and I'm not seeing thinngs her way. My plan invests heavily in a limited partnership, 100% of the assets of the limited partnership are held by a bank, which is the general partner. The general partner hires an investment manager to decide how the pool of assets are invested and they invest in lots of things, mostly stocks, but maybe some other things. Since the assets are all held at a bank, doesn't that satisfy 2520.104-46biiC1?

At any given time there might be some investments, held by the Bank, which if I bought them on my own woulddefinitely not be qualifying assets. For my question please assume that if my plan owned these assets directly my plan would have more than 5% in assets other than qualifying assets.

TIA

Me2

[Archimage]

I believe you are correct. As long as the assets are being held by a regulated financial institution you should be okay regarding the issue with qualifying assets. I would ask the accountant to give you the exact reason why the plan needs an audit.

[E as in ERISA]

I think that it depends on what the bank's exact legal relationship with the partnership is. Just because the bank is the general partner and it is taking care of the partnership on a day to day basis that doesn't mean that "100% percent of the assets...are held by a bank" from a legal perspective. I'm guessing that for these purposes "held by a bank" will usually mean that the bank is the trustee over 100% of the assets (and the assets are therefore part of the regulators examinations of the bank).

[Archimage]

It always helps to go back and read the question again. I do agree with the prior post. I think the exact relationship needs to be disclosed before an answer can be made.

[E as in ERISA]

Nothing technically wrong with any of your statements, Archimage -- based on the fact that the poster said the "assets...are held by a bank." That's what the regulation says. I'm just worried that the poster's statement might not be completely accurate.... And your advice that the poster should go back to the accountant is still good.

[Mike Preston]

The way I read the question the assets are held by the Bank as general partner of the partnership, not as Trustee for a plan.

Does that change your response, Archimage?

[Guest james moyna]

I believe your accountant is correct, BUT, in lieu of an audit the plan can simply purchase a fidelity bond in an amount equal to the amount of non-qualifying assets and provide additional summary plan description information ( see below for a definition of qualifying plan assets and the additional SPD disclosures requried to preclude the audit ).

Qualifying assets are any asset held by: a bank or similar financial institution, an insurance company, an organization registered as a broker-dealer under the Securities and Exchange Act of 1934, or any other organization authorized to act as trustee for individual retirement accounts. Also includes assets that present little risk of loss to participants as a result of fraud. For example, participant loans and employer securities.

The summary annual report must disclose; a) the name of each institution holding qualifying plan assets and the amount of such assets, b) the name of the surety company issuing the bond if the plan has more than 5% of its assets in non-qualifying plan assets, c) a notice indicating that participants may examine, or receive copies, of evidence of the bond and statements received from each institution holding qualifying plan assets, and d) a notice stating that participants should contact the regional office of the DOL if they are unable to access this information.

[Archimage]

Yes, Mike. It does sound like that to me also. I don't know if I would change my answer because I can't tell either way if the bank actually "holds" the assets. Luckily, I am not the person determining that.

I would disagree about the audit piece of the last post though. If this is for a prior year and you did not have the fidelity bond in the prior year then you would need the audit, assuming these are non-qualifying assets.

[Mike Preston]

Sounds like you are saying that if the Bank holds true title to the assets of the partnership, that is good enough for the shares in the partnership to be considered qualifying assets. For example, if there is a piece of land owned by the Partnership, if the piece of land is recorded as owned by the Parnership, with "Bank" listed as the General Partner, you think that is a qualifying asset. I presume the same would apply to actual securities. If there is a trading account established with a brokerage firm, if the name on that account is "Bank, as General Partner for Partnership", then assets in that account are, in your opinion, qualifying assets.

Do I have that right?

[Guest james moyna]

Plans typically carry bond coverage on 10% of plan assets to comply with ERISA Sect. 412. If the non-qualifying assets of the plan are less than 10% of the total assets ( or less than or equal to the bond coverage in place during the period in question ) then the audit is not required ( assuming the additional SPD disclosures are also made ).

[E as in ERISA]

A don't think that the fact that the bank is the general partner means that the client's share of the assets are "held by the bank" unless there are additional facts present.

The interests of bank customers and insurance policy holders show up as liabilities and equity interests on the books of a bank or insurance company, and the bank, insurance and other regulators perform routine examinations of the banks and insurance companies to make sure that the clients are protected. The examinations are probably more extensive than that performed by an auditor during an examination of a plan. That is why auditors can accept certification of assets held by banks and insurance companies -- and why small plans don't have to be audited if they have assets held by them.

But in general only the bank's general partnership interest will be on its books subject to examination. And it won't owe any liabilities to the other partners. The general partnership interest will be held for the benefit of the bank's customers.

So unless there is some other legal relationship present that indicates that the bank is holding all the assets of the partnership, then I don't think that the exemption would typically apply.

[Guest MeToo]

Thank you all, so, so much for spending so much time on my question!

I don't like what appears to be Katherine's conclusion, though. :-(

Unfortunately in my case the number exceeds 10% of my plan's assets, not just 5%. I should have said that in the begininng.

If I need a bond to avoid a audit, when does the bond have to be in place? My plan year end is January 31. Can I get the bond tommorroww and avoid the audit for this year?

TIA

Me2