Prohibited Transactions

[Guest num1sherm]

Can a 401(k) plan participant who has properly enrolled in the plan's self-directed investment program purchase stock for his 401(k) self-directed account from his own after-tax account if the purchase is made at the fair market value of the shares on the date of the purchase or does it violate IRC sec. 4975? In other words, he holds shares of a thinly traded company in an after-tax brokerage account and would like to invest part of his 401(k) money in that stock - so can his 401(k) account buy those shares from him? I didn't think that there was a Title I of ERISA problem inasmuch as I didn't think one could be a fiduciary to him or herself with respect to self-directed retirement monies - but I also know that the IRC does not always parrot Title I.

[four01kman]

I think the quick answer is whether or not the plan document allows such transactions. Generally, a self-directed account is specifically allowed to do or not do certain transactions; for example, no options transactions are allowed.

[mbozek]

Under IRC 4975 the employee is the fiduciary of the account in the plan because he has discretion to invest the funds and any transactions between the employee's directed brokerage account and his own personal account is a PT because it would benefit his personal account. The PT rules prevent a fid from using the plan account to benefit his personal account, e.g., by selling stock in his personal account to the plan.

[E as in ERISA]

Actually ERISA Section 404© says: "such participant or beneficiary shall not be deemed to be a fiduciary by reason of such exercise."

[KJohnson]

Katherine,

I think that you are right from the Act side but not the Code side. There is no 404© in the Code and I think the IRS took the position (and won) that PT's can still arise and the 4975 excise tax can still apply by treating the participant as the "fiduciary" with regard to a participant directed account. I think the case was called Arden Bowl. I don't have a cite handy.

num1sherm--Are you referring to an "after-tax account" inside the plan our outside the plan?

[mbozek]

Under IRC 4975 the employee in a self directed account is a the fiduciary the same as the IRA owner is a fid for the IRA under 4975 and the IRA owner could not sell an asset in his personal account to the IRA.

[R. Butler]

KJohnson is correct. The case is Flahertys Arden Bowl, Inc. v Commissioner.

[Guest alawyerinblack]

What is the scope of the determination that a participant is a "fiduciary" for purposes of the PT rules?

For example, assume an employee is a "fiduciary" of her self-directed 401(k) plan, and applies for benefits. She is 50 years old and disabled. The plan does not permit distributions on account of disability, but through an administrative error pays the money anyway.

I would conclude that this payment is an plan qualification issue that should be corrected under the Self Correction terms of Rev. Proc. 2002-47 (EPCRS).

If it is in fact a distribution that does not comply with the terms of the plan (and is therefore not exempt under 4975(d)(9)), would this erroneous distribution be considered a prohibited transaction under 4975 as well?

Befuddled,

ALIB