Merging plans with prohibited loan

[Guest moosegirl]

Company has both MPPP and PSP. One of the assets of the MPPP is a loan to the company. Form 5330 is filed and the excise tax is paid each year, however, the loan is still outstanding. Can the MPPP be merged with the PSP and the PSP then assume the "prohibited loan"? The company is not in the financial position to repay the loan at this time and they would like to merge the plans.

[FundeK]

Forgive my ingorance, but how does a loan from a qualified plan get issued to a company? I am just thinking from a recordkeeper's point of view and we would only issue a loan to a specific individual. Would a check be issued payable to the company? Also, how long could the loan be outstanding before the plan is disqualified? (I know we are supposed to answer the post, not post additional questions, but this one is very interesting to me).

[Mike Preston]

In a way, FundeK, you did answer the question. At issue is when does the loan stop being a PT and start being something that the IRS views as an exclusive benefit violation? If the answer to that is "never", then there is no problem with merging the two plans. However, if the answer to that question is something less definite, the result of merging the two plans is that the potential for disqualification now rests on the combined plan, rather than merely on the MP plan.

Bottom line is that I would not recommend merging the plans as long as the loan remains outstanding.

I'll leave how it might happen to somebody else.

[Lynn Campbell]

I agree with Mike - I think the "tainted" MPPP assets would contaminate the PS Plan and better to keep them separate.

[Guest darburson]

I hope the plan is covered by fiduciary liability insurance because the members of the plans administrative committee or those responsible for making the loan to the plan sponsor can be required to repay the loan and possibly the 20 % penality. Also, there may be greater libility if the two plans do not have identical participants with identical account balances. If the loan is alloacted to the accounts of a select few participants, there risk exposure may be significantly reduced by the the merger of the two plans and thus further violate the exclusive benefit rule. Do not merge the two plans until this PT is cleared up.

By the way, self-trusteed plans are usually where these types of transactions are found. The company needed money couldn't get it any where else and the plan was a ready source. And after all its a good deal for the plan.