Owner of company wants to invest his plan assets in the company.

[katieinny]

The owner of a company is planning on rolling his IRA assets into his 401(k) plan. Then he wants to amend the plan to permit investment in the employer. Then he will use the cash to buy employer shares.

When I read the prohibited transaction rules, it seems that the above transaction meets one of the exceptions, but I would like to get opinions from other more knowledgeable practitioners.

[E as in ERISA]

Are there other participants and are they going to be permitted to invest and are they going to comply with any applicable federal or state securities laws, etc? You can obviously have employer stock in a plan, but then it generally subjects the plan to more legal requirements.

[Alf]

Let me guess . . . an S Corp?

How much stock is being purchased?

The facts and circumstances of the "indirect" prohibited transaction rules are going to be murder here where he is an outside shareholder, trustee, participant, and executive/employee.

[katieinny]

It's a closely held corporation, so the stock is not publicly traded. The owner plans to purchase a substantial amount of stock.

Since he's amending the plan to allow investment in the employer, the other participants would have the same option.

[Guest Pensions in Paradise]

The owner understands that he has to obtain an annual third-party appraisal? As well as provide copies of the appraisal to any participants who are interested in purchasing shares.

[katieinny]

Yes, he will get (or maybe already got) a third party appraisal.

I'm just trying to make sure that he's not running headlong into the prohibited transaction rules. He's trying to raise cash for the company. I don't want there to be any self dealing issues.

[Alf]

The facts and circumstances of the "indirect" prohibited transaction rules are going to be murder here where he is an outside shareholder, trustee, participant, and executive/employee.

[Guest PORTE]

This is called an ERSOP. there are other posts here on this topic. I believe the IRS has a few White Papers out specifically prohibiting this. However, some very smart people have found a loophole in the law to allow you to take your money out of your IRA tax free, and invest it in your small business. This does make your plan individually designed and requires a determination, but they are getting under the IRS radar. I would hate to be the first to get stomped. Search the web for more info. Any other comments?

MM

[Kirk Maldonado]

PORTE:

I think that a more proper characterization of those people who are peddling these arrangements is that they are "very aggressive" rather than "very smart."

How they get around the discrimination issue that only the owner is allowed to invest in company stock?

If, to solve that problem, they open that investment choice to all employees, then they have horrendous secrurities laws issues.

[QDROphile]

I understand that the focus is on prohibited transaction rules, but don't overlook the post about securities law compliance. If the plan is required to register, that will involve not only expense, but disclosure that few small businesses want to give to employees.