Officer makes an improper investment of his self directed account

[katieinny]

An officer of Company A, and a plan trustee, uses his self directed account to make an improper investment in a limited partnership in which he has ownership. (He is no longer employed by Company A.) The investment has been carried at cost on Company A's 5500 for several years. The most recent K-1 is blank where there should be a dollar amount, but the LLC went bankrupt a couple of years ago, so the investment is probably worth little or nothing. The participant has attempted to roll the asset into an IRA without success.

Can the employer force a distribution, issue a 1099R (once they get the K-1 preparer to provide a dollar amount) and get rid of this thing?

[Ron Snyder]

You are asking questions about getting rid of an asset that was improperly obtained? Violation of the prohibited transaction rules not only REQUIRES undoing the transaction, it requires that form 5330 be filed each year until corrected and an excise tax be paid. Has the plan been doing this? I'm afraid the remaining trustees may well have screwed up and subjected themselves to liability and excise taxes needlessly.

[E as in ERISA]

Look at the voluntary fiduciary correction program for ideas.

[Guest mjb]

Why is the plan liable for the participant's engagement in a PT in a self directed account since under ERISA 404c neither the participant nor any person who is a fid shall be liable for such loss which results from the participant's exercise of control? The only liability is that of the participant for engaging in a PT under IRC 4975 and payment of the excise tax. See Flahertys Arden Bowl Inc. V. Comm 115 TC 269.

What is the liability of the plan fids in this transaction under ERISA since the officer made this investment in his capacity as a participant and not as a trustee of the plan?

What excise tax applies to the plan fids????

[katieinny]

I was looking at it the same way mjb was. Why are the other trustees in trouble over something one guy did with his own account. He's the only who was harmed by the investment. He did it to himself.

[QDROphile]

The plan will have to report a known prohibited transaction on Form 5300, which raises odds of audit. See ERISA reg. section 2550.404©-1(d)(2)(ii) for the exceptions to the 404© protection for fiduciaries. The exceptions include transactions not in accordance with plan documents and transactions with affiliates.

[Guest mjb]

This is not a PT under ERISA, only under the IRC. Your Reg requires that instructions be in accordance with instruments/documents insofar as such materials are consistent with the Provisions of Title I of ERISA, (Note:not Title II.) 404c-1 (d)(3) notes that relief under 404c only applies to Fid provisions of ERISA. Participant is not relieved form PT tax under IRC 4975. Reporting is is complied with by participant filing 5329. Why would plan file PT form when there is no excise tax to be paid by plan?

[QDROphile]

1. The plan may have provisions that are violated by the transaction. Whether or not those provisions are grounded in ERISA, you lose 404© protection if you let a participant violate a plan provision. It is fundamental to ERISA that the plan be administered in accordance with its terms. The phrase "consistent with ERISA" does not mean required by ERISA.

2. Sorry about the mistyped reference to Form 5300, I meant Form 5500. Form 5500 is a report to both the Department of Labor and the IRS. Non-exempt party-in-interest transactions are required to be reported on Schedule G. I am not offering whether or not the transaction fits within the exclusions from reporting, but someone needs to determine if reporting is required. If required, I think it is an audit risk.