Employer Security

[lexi]

I have an ER who contributed a promissory note to its retirement plan. The promissory note is now in default. The ER wants to terminate the plan and distribute to the participants a pro rata share of the (defaulted) promissory note.

1) Can an employer distribute, pro rata, a defualted note (let's assume the note qualifes as a "qualifying employer security" although I doubt it does); and

2) Could the participants roll that pro rata share into an IRA?

Thanks to anyone who can help in this matter. The porposed distribution of a defaulted note seems crazy. Any thoughts?

[Guest Pensions in Paradise]

Not so fast. IMHO this is a breach of fiduciary duty. The employer is wearing two hats here. In its role as the employer it has decided to default on its promissory note. But in its role as plan sponsor/administrator it has to act in the best interest of the participants. So what action has the plan sponsor taken to force the employer to repay the promissory note?

Unless the employer is in bankruptcy I'd say the employer is playing with fire by not repaying the promissory note.

And here's a question - since the employer defaulted on the promissory note what happens to the prior deduction they took?? I can't imagine they still get to claim the deduction for a defaulted note.

[Guest mjb]

No deduction is permitted for contribution of P note until the note is paid. Rev Rul 80-140. contribution of employer p note is PT under RR 80-140. Who advised the er to contribute the p note?

I dont think any IRA custodian will accept a pro rate share of a defaulted p note as an IRA asset because it cannot be valued.