Prohibited Transaction

[chris]

Should've posted here first......

Plan participant has purchased beach property through his directed investment account in PSP. He does not personally use it or otherwise benefit from it. Plan allows for in-kind distributions. Would IRC §4975(d)(9) exempt the distribution of the beach property to him assuming there is an otherwise distributable event (ie, termination of employment, retirement....)? He has been told that to receive the real estate even as part of his distribution would be a prohibited transaction..... Thanks.

[Peter Gulia]

If the participant is a party-in-interest (or a disqualified person) regarding the plan, a plan distribution to him that delivers the property involves a prohibited “sale” or exchange of the plan’s property to a party-in-interest or disqualified person. If the only prohibited transaction is the fact of the distribution and its delivery of the property, it might – by meeting several conditions - be exempted as an ordinary-course distribution made according to uniform plan terms.

Even if exempted, a plan administrator still must correctly tax-report a distribution.

• The plan administrator or other “payor” might require a lawyer’s opinion on the prohibited-transaction exemption to satisfy itself that it need not report distribution code 5 on Form 1099-R.

• The amount reported in box 1 of Form 1099-R must be no less than the fair market value of the property (with a little “give” concerning the valuation date).

• If the distribution of the property is not directly rolled over into another eligible retirement plan, the payor will need to compute and collect the withholding taxes on the distribution.

All of these steps turn on getting a correct valuation of the property. To do so, a plan fiduciary who’s independent of the participant and anyone else who’s conflicted should evaluate the appraisal of an independent valuation expert.