Party in Interest

[Randy Watson]

A participant in a self directed plan invests in Corporation A. After the purchase, the participant's account will hold less than 10% of Corporation A's stock. The participant later becomes a director of Corporation A and Corporation A subsequently purchases property directly from the participant. This transaction seems fishy. In a rather indirect way, it seems like the plan is purchasing the participant's property. The only way I can see this being a PT would be if the Corporation was considered to be the Plan. Can anyone make that connection? Is there a point at which the Corporation would be considered to be the Plan? 100% ownership of Coporation A through the Plan? Am I missing something?

[Guest JimChad]

The ERISA Outline includes in the definition of Party-in-interest, officers and directors of the employer who's employees are covered by the Plan. It references ERISA section 406.

This makes it a prohibited transaction.

[Locust]

The only transaction involving the plan is the purchase by plan of Corp A's stock.

This may not be a prohibited transaction - probably not.

However, prohibited transactions include transactions by the Plan directed by a "fiduciary" in which the fiduciary has a conflict of interest. An argument could be constructed that the participant had a conflict when he directed the purchase of Corp A's stock - he could expect to attain the director's position at Corp A as a result of the purchase, which presumably has some benefit to him (director's fees, influence over Corp A).

It is a somewhat attenuated argument though. The benefitm, though ultimately real because of the purchase by A of pt's property, is indirect. The larger fiduciary issue may be the pt as director involved in A's purchase of the pt's property.

There is also the issue of whether the participant is a fiduciary. Have to be a fiduciary to have a prohibited transaction for a conflict of interest. And the 404© rules say - if I remember correctly - that the participant in a self-directed plan that meets 404© is not a fiduciary.

[Randy Watson]

You are correct, Locust. Section 404© does provide that a participant in a self directed plan is not a fiduciary by reason of his control over assets.

Also, I don't believe the purchase of Corp A's stock would be a PT. That transaction took place prior to the participant becoming a director. There was no pre-arranged understanding or expectation that the participant would become a director after the purchase of the shares. Those shares were owned by the plan long before he became a director.

My question relates to the sale of the property. Does a PT exist if Corp A, which is partially owned by the plan, purchases the participant's property?

[Locust]

My question relates to the sale of the property. Does a PT exist if Corp A, which is partially owned by the plan, purchases the participant's property?

I can't see how this would be a prohibited transaction. The plan has nothing to do with the purchase. No fiduciary of the plan has any authority to direct Corp A.

The fiduciary isssue, if there is one, is the purchase of a director's property - but this is not a plan issue, but a corporate issue.

[Guest Deemed Distribution]

I think you might need som more facts...

You might want to check to see if there are any other "benefit plan investors" in the company. If so and the investment is over 25% of the company's stock and the company is not publicly traded, and is not a operating company REOC or VCOC then the underlying assets of the company woudl be considered assets of the plan. Then, the sale of those assets to the participant (who presumably is a party in interest with respect to the plan) could be a PT. You should look at the plan asset regs on this point.

Also remember that there is no 404© in the Code. The participant will be considered a fiduciary for purposes of a PT under 4975 of the Code but arguably not 406 of ERISA. (search the words Arden Bowl in the message boards) It doesn't sound like the current fact scenario, but to the extent that the investment was for the purpose of being able to exercise influence over the company in order that it would sell property to the participant, there is an arguable self-dealing PT with regard to the investment.

[Randy Watson]

How about using the plan assets to invest in a private company that is partially owned by the participant? It seems like that would constitute a PT unde 4975©(1)(D) or (E).

[Kirk Maldonado]

Randy Watson:

Where does it say that whether a person is a fiduciary for purposes of the prohibited transaction rules is determined using the rules of section 404©?

[QDROphile]

Don't forget to read Flaherty's Arden Bowl v. Commissioner (tax court case, affirmed by circuit court).

[Randy Watson]

Kirk, I was merely agreeing with Locust that an argument could be made that an individual in a 404© plan would not be considered a fiduciary for the PT rules. My guess is that the argument would be based on the fact that the PT rules and the 404© rules exist under the same part of ERISA (Part 4 "Fiduciary Responsibility") which perhaps suggests that this exception could be used in the PT rules. I honestly don't know the answer to that. Do you know if this argument has been made before?

[mbozek]

I dot see the relevance of 404© to the question of whether the transaction is subject to the 15% excise tax under 4975. If the purchase of the stock is a PT under 4975 the tax applies, even though the participant is not a fid under 404©.

However, the PT rules do not apply to a transaction between a corporation and a stock holder who participates in the corps pension plan because the transaction does not involve plan assets.

[Locust]

The 404© regs say that "the participant or beneficiary is not a fiduciary of the plan by reason of such exercise of control." But they also say: "The relief provided by section 404© of the Act and this section applies only to the provisions of part 4 of Title I of the Act. Therefore, nothing in this section relieves a disqualified person from the taxes imposed by sections 4975(a) etc."

I guess that means that a participant in a 404© plan could be considered a fiduciary of his account for 4975 excise tax purposes, and that to the extent he directs an investment that benefits himself (other than purely on an investment basis), he could be considered to have engaged in a prohibited transaction under 4975©(1)(E) - a fiduciary who "deals with the income or assets of a plan in his own interest or for his own account." Seems odd and overly technical.

[QDROphile]

Locust: Read Flaherty's Arden Bowl v. Commissioner. You may find its conclusion odd and overly technical.