Prohibited Transaction??

[Guest PLHart]

The two owners of a real estate investment banking firm have been investing their self-directed plan assets in real estate limited partnerships underwritten by their company. The investment opportunity is not available to other participants as they are not yet "accredited investors".

1. In this case it it OK for them to do this given that other employees do not currently have access? and

2. Are their any other issues of which the plan sponsor should be aware?

Thanks.

[R. Butler]

1. No it is not O.K.

2. Two issues jump out. Prohibited Transaction possibilities & Discrimination issues since NHCE's don't have the same opportunity to invest.

[Guest jashendo]

I agree with R Butler. Multiple prohibited transaction possibilities , and maybe other fiduciary problems (depending upon the specific facts). Discrimination is certainly an issue. Also, depending upon the facts, there could be UBTI to the plan.

[actuarysmith]

I whole-heartidly agree with the last two posts - PT's and Beneftis Availability Rights and Features violations galore..........

Run, don't walk to your nearest ERISA attorney and tell your client to bring their wallet.........

[Belgarath]

Agree that this should definitely be referred to an attorney. Just for purposes of discussion, I'm not so certain that there is necessarily a discrimination issue here. If you have a plan that has self directed investments, there may be some investments that are not available (not by decree of the plan language or choice of the plan administrator, but at the investment level) to those with smaller account balances. This does not automatically cause any discrimination, because all participants will have the same opportunity to purchase the same investments if and when their account balances reach the requisite level.

[actuarysmith]

Belgarath - technically true, but the service has stated that if the investment opportunity (for example) requires a minimum investment that exceeds a nominal amount, then it is effectively not available on a non-discriminatory basis.

Same issue then..........

[Guest Moe Howard2]

Plans that invest in limited partnerships must file IRS Form 990-T. The plan will be taxed (via 990-T) on pass-through income appearing on the Sch K-1 issued to the plan by the limited partnership.

[Alf]

990T? Tax? Can somebody clarify or do I have to go hit the books?

[Belgarath]

Actuarysmith - yes, you are correct, and I agree. As I read this over, I'm not really sure what was running through my head, but it was wrong. I suspect I was thinking more along the general lines of someone with a 125.00 account balance not being able to purchase a specific mutual fund that has, say, a 250.00 minimum, rather than the specific question. But the situation described in this question certainly seems to me to be a BRF problem.

[Guest hyper]

Belgrath and actuarysmith: I agree there are many issues here and not many facts but I am not sure discimination is one of them. I agree the service has said the investment options offered by a plan may not require more than a "nominal investment".

In this case, the investment option provided by the plan is the self directed account itself, not the underlying investment choice made by the participant.

In the example, only "accredited investors" (whatever that is) may invest in the limited partnership. That is not a requirement of the investment option offered by the plan, it is a requirement of the underlying investment.

Example - I want to invest in the Brandywine group of mutual funds using my self-directed brokerage account. The minimum investment in these funds is $10,000. I don't believe the intention of the Service is to restrict me from investing in this group of mutual funds because of the rather large initial investment required.

On the other hand, it would be a problem if these funds were offered by the plan as one of the core investment options and the $10,000 requirement was in place.