plan loan to family member as indirect loan

[Guest kurt johansen]

72(p)applies to direct and indirect loans to participants. If a participant in a wide open participant directed plan wants to make a loan to a family member, say an adult child, would that be considered an indirect loan to the participant subject to 72(p)? Assume that the loan is made at commercial rates such that it is not a below-market gift loan. I have not been able to find any rulings on this issue, although my feeling is that the IRS would treat such a participant investment as an indirect loan to the participant and a deemed distribution.

any thoughts or comments would be welcome

Kurt

Kurt

[KIP KRAUS]

Why get envolved with the IRS? Have the participant take out the loan, pay it back via payroll deductions, and then lend it the other person for whatever intrest rate he wants to charge? Why would the IRS need to be envolved?

I may be trying to over simplify the problem, but wouldn't this work?

I don't see how an outsider could be eligible to obtain a loan from another person's plan any other way????

[Guest kurt johansen]

the idea would be to allow the participants to exceed the $50,000/ 5 year limits of 72(p). The plan allows participants to invest in anything, so what's to prevent them from lending money at a commercial rate to an individual who is a family member?

Kurt

[KIP KRAUS]

Kurt:

Now that I think about it, such a transaction may a "Prhibited Transaction" as defined in ERISA Sec. 406, because it would be a "party in Intrest" transaction if the money goes to a relative.

If all else fails, pose the question to the IRS.

[Guest kurt johansen]

Kip, thanks for the reply. Is a participant a party in interest? I don't think so based on the definition of party in interest in ERISA Section 3 and the definition of a disqualified person in Code Section 4975. The ERISA definition does include an employee of an employee benefit plan. I interpret that to mean someone employed by an employee benefit plan and not a participant. Furthermore, a participant is not a fiduciary just because the participant can direct his or her account under ERISA 404©. Thus, I don't think a participant directed loan to a family member would be a prohibited transaction unless the participant happened to be a party in interest based on other criteria such as being a 10% owner or trustee. I do suspect that it might be an indirect loan subject to 72(p). Does anyone know of any authority to suggest that a participant is always a party in interest?

Kurt

[Guest kurt johansen]

sorry about the double post. I'm answering my own question - ERISA(3)(14)(H) makes an employee of an employer a party-in-interest. Thus, a participant is a party-in-interest but is not a disqualified person. A loan to a participant's family member would be a prohibited transaction under ERISA but not necessarily subject to the excise tax under the Code.

Kurt

[Dave Baker]

What if the plan does not meet the ERISA 404© rules? It then would seem that the ability of the participant to direct the making of the loan to a relative would be the kind of "self-dealing" that a "fiduciary" cannot engage in.

[Guest kurt johansen]

if the plan does not meet the 404© requirements for participant direction then would the participants be considered a fiduciaries because they have discretion over plan assets?

let's assume that the plan does meet 404©.

employees of the employer are parties-in-interest but are not disqualified persons.

relatives of employees are not parties-in-interest because the family attribution rule under ERISA Sec. 3(14)(F) does not apply to an employee.

even if a loan to a family member was somehow a prohibited transaction, the participant is not a fiduciary under 404© and the trustee is insulated from liability under 404©.

Thus, participants can make loans to a family member without it being a prohibited transaction subjecting the fiduciaries to liability.

72(p) however applies to all loans to participants, direct or indirect, regardless of whether the loans would be a prohibited transaction. The question is whether the loan made by the participant from its own self-directed account to an adult family member would be considered an indirect loan subject to the limitations of 72(p).

does anyone see any holes in my argument or know of any guidance out there saying a loan to a participant's family member is an indirect loan?

Kurt