Prohibited Transaction

[wsp]

A client is a two person 401(k) Profit Sharing Plan. The trustee of the plan (Owner and Participant #1) would like to use the assets of the plan to purchase a building. The owner would locate the corporate offices of his two companies in this building paying lease payments (market value equivalent) back to the plan. It is my understanding that this is self-dealing and impermissable under IRC 4975©. Am I correct in this assumption? Or is it permissable since there is no benefit to the employer other than finally receiving a reasonable return on his assets inside his 401(k) plan. Would the same ruling hold true if the assets of the owner's spouses IRA would also be used in the purchase of the asset thus making it a partnership interest in the real estate?

[R. Butler]

The plan can't lease property to a disqualified person. See §4975©(1)(A).

The employer is a disqualified person. See §4975(e)(2)©.

[Guest Steve McD]

Good question but as I understand the rules, this would amount to self-dealing (and thus be prohibited) unless your client obtained a prohibited transaction exemption (PTE) from the DOL. If the client is set on doing it, you might refer them to an ERISA attorney to explore the PTE process. I'm less clear about whether the same would hold true if the spouse's IRA were involved but I suspect that it would also be prohibited.

[Kirk Maldonado]

Look at ERISA Section 407.