Straight profit sharing plan wants to buy a house

[Lori H]

The trustee of a plain psp wants to take appx $240,000 of the plans assets to buy a house so that his daughter can live in and pay rent. I am not quite sure if this would be considered a prohibited transaction. I know plans can own real estate and they need annual appraisals, but this does not sound sound.

[QDROphile]

The IRS will treat this as a prohibited transaction even if the DOL does not. If this person is the fiduciary with investment control over plan assets other than those in the person's own account, the fiduciary with responsibility for apponting the person as a fiduciary should reconsider whether or not the person is fit to be a fiduciary. The suggestion of the transaction shows that the person's instincts are all wrong. I retract my statement if the person proposed the transaction by saying, "it seems like this would not be allowed, but I wonder...."

[Lori H]

Well, its a small orthopaedic practice and the doctor in this case is the sole trustee, so there are really no other fiduciaries outside him and his financial advisor.

[Lori H]

I don't think this plan should allow this transaction either. But just for the sake of arguement, let's say the trustee purchased the house with plan assets and then rented it to someone other than a family member. Would it make any difference?

[Guest Pensions in Paradise]

Sure, as long as its rented to an unrelated third-party. And that means the daughter can't live there either. So for example, the doctor can't rent the house to the daughter's boyfriend so she can live there.

[Guest mjb]

PP: what provision in 4975 prohibits use by daughter if boyfriend if he is the only tennant on the lease? I dont think living in sin qualifies as a PT.

[Guest WWPDRC]

PP: what provision in 4975 prohibits use by daughter if boyfriend if he is the only tennant on the lease? I dont think living in sin qualifies as a PT.

You answered your own question. "use by daughter" represents a PT

[Guest Pensions in Paradise]

OK, let's examine this one step at a time. We've already been informed that the doctor (i.e., owner of the company) is the sole trustee of the plan. So that makes the doctor a Disqualified Person under two categories - (1) fiduciary (as trustee of the plan) (4975(e)(2)(A)) and (2) substantial owner of the employer (4975(e)(2)(E)). Since the doctor is a Disqualified Person, that also makes the daughter a Disqualified Person under 4975(e)(2)(F).

Now that we have determined that the daughter is a Disqualified Person, we can see that this would be a PT under 4975(c )(1)(d) - use of plan assets by a Disqualified Person. So it doesn't matter whether the daugther is on the lease. If she uses the property, its a PT. If she benefits in any way from the property, its a PT. Its a PT.

[RCK]

Let's say that somehow we can get around the fact that this is a PT. I don't think it can, but just for argument sake . . . .

What are the plan assets, and how does this fit into the fiduciary's prudent person responsibilities? Unless the plan assets are well over a million dollars, possibly even $2 million, this does not look like adequate diversification.