DOL challenging valuation of assets, etc.

[J Simmons]

New client has a PSP that does not permit participant direction of investment. It's self-trusteed. The trustee caused the plan to invest in a closely-held LLC that owns undeveloped land held for speculation purposes. Rather than have an independent appraisal of the value of the LLC interest, the trustee and financial officers, with the assistance of a CPA, set the value each year, and that value was reported on the Forms 5500.

The DoL has audited, and the regional investigator in the post-audit report finds the steps taken in that valuation process were not adequate (didn't take the steps an appraiser would, so what was done was imprudent). That is cited as a violation of ERISA's requirement to follow the plan document (which specifies that the trustee will value the assets).

The DoL investigator has also notified the Office of Chief Accountant at EBSA, for its consideration of whether the Forms 5500 for the last 4 or 5 years reporting the 'inadequate' values rendered those annual reports materially inadequate and thus exposed to the $1,100/day penalty.

Also cited post-audit by the DoL investigator is that the mandatory distributions to former employees (those whose benefits are $1,000 or less since 3/28/05, or are $5,000 or less before that) were not being made. This threshold, and a listing of participating, related employers, in the SPD are outdated--now, erroneous.

The DoL is pressing the employer for a corrective action plan and timeline, but offering no suggestions for correction. That's when I'm hired.

I'm considering proposing (a) conforming amendment that would provide for no mandatory contributions, regardless of how de minimis, (b) amendment to stop all further contributions, rollovers into the plan and acceptance of plan-to-plan transfers--and thus vest everyone--© an SMM describing these two amendments and naming the sponsoring employer, but instead of naming the current participating employers, including the statement that upon request about an employer, the PA will indicate if then participating and provide address if so, (d) to keep the costs to the plan (and thus the adverse impact on the employees' benefits) to a minimum, just doing a current valuation through independent appraisal or have other vendor follow that methodology, and (e) asking that the Office of Chief Accountant agree not to impose penalties on already filed annual reports, explaining that requiring retro valuations would just run up the cost to the plan, which specifies it pays for the trustee's costs (and imposes the valuation chore on the trustee).

I don't like 'bidding against myself' but that's the posture the DoL's request for a corrective action plan without offering any corrective steps puts me in. I don't want to offer more by way of the corrective steps I propose than would be necessary. But I also don't want to be so far afield that we don't move this matter along to resolution.

All constructive input will be greatly appreciated.

[david rigby]

(f) liquidate that particular asset and invest in something whose value is never in doubt?

[Guest mjb]

(f) is probably not a viable option b/c there is no market for selling a minority stake in a privately held interst in a corp that owns raw RE without paying a steep discount from the book value because of all the conditions that are attached to such interest unlike ownership in RE that can be deeded to a willing buyer. Unsophisticated plan trustees should not invest in RE because of lack of liquidity and valuation issues issues that cause regulatory problems.

Q Isnt the LLC supposed to conduct periodic appraisal of the property under the terms of the LLC?

[J Simmons]

Thank you, pax and mjb.

It is anticipated that once the issues with the DoL are resolved, the plan will be terminated. Actually, plan termination might be considered a part of DoL resolution process, adding a Form 5310 application to the IRS as part of that overall process.

I've not seen the LLC's operating agreement yet--too new into this situation. Because of the liquidation problem, if the deeply discounted interest cannot be sold then there would be the possibility of distributing to the employees--as part of the plan termination--participation certificates representing their respective subinterests in the LLC. Except for those that rollover to an IRA or another QRP, this would be a taxable event on the value. My understanding is that each would also receive enough cash in the termination distributions to cover the income taxes on the entire distribution.

Another urgency suggesting the interest in the LLC now held by the Plan be liquidated as soon as possible, even at the deep discount, is the potential of UBTI to the Plan should the LLC realize income from development activities on the R/E held by the LLC. One more reason to

invest in something whose value is never in doubt

.