Pension Plan Investments

[Gary]

A client is the only participant of his pension plan.

He wants to take $70,000 in plan assets and invest in a condo.

He believes that he can get net proceeds in a couple of years of say $200,000 from this investment.

He then asks if he can pay the $70,000 back to the plan plus say another $30,000 of investment return and keep the remaining $100,000.

Without going into much detail he claims he would structure it as an investment in a company of $70,000, where the company purchases the real estate and then sells it and gives him thenet proceeds. I don't see this altering what wa stated above, just his attempt at making the transaction seem legitimate.

My question is to determine the damages of this clearly PT transaction.

For example, I see it as a situation where he in effect takes $100,000 from the plan at the time of the sale of the condo. And therefore, it is conceivable that the PT excise tax could start at 15% of the use of the money. So if the use of the money were estimated at 10%, that would amount to $10,000 in the first year and the first year excise tax would be 15% of $10,000 or $1,500. Of course this would then compound every subsequent year that such transaction is not corrected. And the excise tax wopuld be increased from 15% to 100% if the transaction is not corrected and a DOL letter is received on account of this PT.

The above seems like one potential consequence. Curious to hear of other outcomes that people believe would occur. For example, perhaps the entire plan and all prior plan contributions would be disqualified, resulting in corporate taxes for all prior contributions, taxable compensation to the employee and maybe penalties, interest, excise taxes, etc.

Or alternatively, what would be the damages if right after the transaction the plan were immediately terminated? Would the $100,000 simply be a part of the accrued benefit that is taxable, end of story?

Thanks.

[Guest Pensions in Paradise]

My impression from your post is that you're gonna let the client do this no matter what we say.

[Gary]

I am not going to let the client do anything, but I do want to make sure that I have interpreted the damages of such an action correctly.

[Guest Pensions in Paradise]

In addition to the obvious PT, how is this not theft of assets? Which would be subject to criminal charges.

[FAPInJax]

Please provide name, address and phone number so I can collect the 10% finders fee from the IRS when the nail the client.

Seriously, IF this is that good a deal - have the client take a loan for 50,000 from the plan and cough up 20,000 of his own money. The only monies that need to be paid back to the trust is the loan plus interest. He can keep all the monies made in the transaction.

[Ron Snyder]

Good suggestion, Frank.

Of course the transaction proposed is a PT. The problem in voluntarily entering into a PT is that the excise tax is not only the annual excise tax payable with the 5330 based on 15% of the amount involved in the transaction (the greater of the amount of cash or the value of the property) each year. The bigger problem is the need to "correct" the transaction with the potential 100% excise tax penalty. Your concerns, therefore, are well founded.

I typically refuse to continue to provide services for clients who ignore my advise in this area, because they are a disaster waiting to happen.

[Gary]

This guy has already taken his $50,000 loan on another investment and says he cannot raise the capital any other way. Somehow, I'm not surprised.

Thanks.