Plan Investments

[Gary]

A one-participant plan's one participant (owner) wants to buy a home using pension assets. I am not sure if for the down payment only or to make the entire purchase. Then the owner wants to have the home leased with rent payments going into the plan.

I believe the plan can invest in the home, but I am not sure they can do so if they are to live in the home as primary residence (although I see nothing prohibiting such).

However, I don't believe the rental payments can go the plan unless it is used strictly to meet the plan's funding requirements.

Anyone have any thoughts or experience on this sort of thing?

Thank you.

[mbozek]

Under the PT rules of IRC 4975©(1)(E) a fiduciary cannot use plan assets for the benefit of the fids personal account such as living in the home and a fid cannot lease assets from a plan-©(1)(A). A third party not related to the fid could lease the residence from the plan.

[WDIK]

In addition to the prohibited transaction rules, you should also note that debt-financed property within a qualified retirement plan trust can generate unrelated business income which is taxable.

[AndyH]

Thank the client for asking you before he proceeded with this deal.

[Gary]

In addition, my understanding is that since it is a one participant/owner db plan, the plan is not subject to the ERISA PTs, but is subject to the PTs of the IRC. And that if the client made this transaction the consequences are the 15% penalty tax imposed on the disqualified person, but this penalty tax keeps on compounding each and every year, thus it is a big mess.

And lastly couldn't the person request an exemption from the PT from the DOL and then proceed with the transaction?

Look forward to additional input.

Thank you.

[mbozek]

Why would the DOL grant an exemption to such an obviously illegal transaction?

[MGB]

Isn't that what all exemptions are?

[mwyatt]

I know it might be falling on deaf ears with your client, but you might want to have him think about the poor economics involved in this transaction. If he buys the house after-tax by himself, he can deduct expenses from his income and the ultimate cost basis of the house when sold. If held by the plan, a tax-exempt entity, these expenses (and there will be expenses, ie maintanence, repairs, property taxes, utilities, etc.) are just paid. Second, when sold after-tax, you pay capital gains instead of ordinary income rates on your gain. In essence, most of the factors that make real estate a viable investment on your own are eliminated when you try to do it in a qualified plan or IRA. Finally, how will this be financed? I would think it would be difficult to get a mortgage by the Plan; your sponsor sure couldn't go into the investment personally along with the Plan (PT), so you're also eliminating leverage from your equation.

Good luck...

[Gary]

My understanding regarding the exemption rules are that the DOL may grant an exemption from the PT rules if the exemption is a) administratively feasible, b) in the interests of the plan and of its participants and beneficiaries, and c) protective of the rights of the plan's praticipants and bennys ERISA 408(a), IRC4975©(2).

So perhaps our one participant/owner plan could qualify and get an exemption?