Hedge Funds, UBTI and Profit Sharing Plans

[Guest NeophiteTPA]

Can a Profit Sharing plan that has money invested in a hedge fund incur UBTI? The hedge fund has sent a letter to the effect that the hedge fund has operated in a way that creates Unrelated business taxable income. Does this require the plan to file a 990-T? What other repercussions could there be from this investment?

[Guest mjb]

UBTI tax will be due if the amount of UBTI exceeds $1000. There is no effect on plan qualification. However, the plan, not the employer must pay the tax.

[Kirk Maldonado]

mjb:

I've always wondered (by never researched) whether the employer could pay the tax on behalf of the plan. Of course, I assume that the payment would be treated as a contribution to the plan unless the payment was made to rectify a breach of fiduciary responsibility. That might occur, for example, in an extreme example where the fiduciaries wouldn't have made the investment if they knew it would be subject to UBTI.

Do you have further thoughts on this issue?

[Guest mjb]

IRC 511(b)(2) imposes the tax on the UBTI of a tax exempt trust as if the trust was subject to taxation under IRC 641. The more interesting question is whether the employer could write the check to pay the tax on the 990 form filed by the trust. I dont think a tax deduction could be claimed since the tax is not a liability of the employer.