Can Participants Use IDA to Purchase Company Headquarters?

[Übernerd]

Company, an S-Corp 100% owned by its ESOP, is looking for a new building for its headquarters. Company is considering adding an IDA feature to its 401(k) to allow investment in the "whole world," but most significantly in an LLC that would own the new building. The IDA would be open to all participants in the plan, but the result will certainly be that several HCEs, who also own significant percentages of the Company's stock under the ESOP, will end up using their 401(k) accounts to purchase most or all membership shares of the LLC, which would of course receive rent from Company.

This sounds like a nest of prohibited transactions to me, though I know that (1) individual account plans are exempt (under § 407(b)(1) of ERISA) from the employer real property restrictions of § 406(a)(2), and (2) the investors don't become fiduciaries when they direct the investment of plan assets (their accounts)--so there's no plan fiduciary directing plan assets to a party in interest/disqualified person.

Can they do it?

[QDROphile]

A participant is a fiduciary for purposes of section 4975 when the participant directs 401(k) account even though not a fiduciary under ERISA. Flaherty's Arden Bowl, Inc. v. Commissioner, 115 T.C. 269 (2000).

[Übernerd]

A participant is a fiduciary for purposes of section 4975 when the participant directs 401(k) account even though not a fiduciary under ERISA. Flaherty's Arden Bowl, Inc. v. Commissioner, 115 T.C. 269 (2000).

Thanks, QDROphile. So, as I suspected, there would be prohibited transactions galore?

[Guest b2kates]

Yes, there is significant risk for PT. But under the new pension act there may be some permitted relief.

[Übernerd]

Yes, there is significant risk for PT. But under the new pension act there may be some permitted relief.

Thanks, b2kates. What provisions of the PPA were you thinking of?

[QDROphile]

I did not respond directly to the question of prohibited transactions. I am not doing so now either.

If the plan owns the majority of the LLC interests, and the LLC is treated as a partnership, would not the real property owned by the LLC be treated as a plan asset under the ERISA plan asset rules? If the real property is a plan asset, the lease of the property to the plan sponsor would be a transaction between the plan and a disqualfied person.

You might not even get by the purchase of LLC interests by the plan, but I have not trudged through the analysis.

[Guest Stuartt]

You can file for a prohibited transaction exemption with the DOL. You will not get a favorable ruling if more than 25% of each participant's account balance is used for the investment. You will also need an independent fiduciary to make sure the lease agreement is fair. You may also need to get an annual appraisal of the building.

There are a lot of hoops to jump through and the costs may be high. It can be done. Give the DOL a call and talk with someone in the PTE area.