Prohibited Transaction ?

[Guest AlyssaC]

401(k) PS plan with 1.7M in total plan assets made a loan to the owner of the brokerage firm that works with the plan and his wife for approximately $1.4M of the Profit Sharing plan assets. The loan is a mortgage on the brokerage firm offices.

1. Would he be considered a disqualified person and as such make this loan a prohibited transaction?

2. Does it matter if the firm has not received any commisions for working with the plan?

3. Assuming it is a prohibited transaction is there any alternative to having the loan repaid immediately?

4. Does the fact that there are sufficient non-loan assets to pay out all non-owners and required distributions make any difference.

Thanks!

[wsp]

401(k) PS plan with 1.7M in total plan assets made a loan to the owner of the brokerage firm that works with the plan and his wife for approximately $1.4M of the Profit Sharing plan assets. The loan is a mortgage on the brokerage firm offices.

1. Would he be considered a disqualified person and as such make this loan a prohibited transaction?

2. Does it matter if the firm has not received any commisions for working with the plan?

3. Assuming it is a prohibited transaction is there any alternative to having the loan repaid immediately?

4. Does the fact that there are sufficient non-loan assets to pay out all non-owners and required distributions make any difference.

Thanks!

Ok, I'll make a stab at this. If nothing else it will bump it to the top where I'm sure someone will not agree.

The loan is a prohibited transaction. The broker provides a service to the plan and thus is a disqualified person. Fact that he doesn't receive compensation doesn't mean anything. If the plan lends money to a disqualified person the correction includes termination of the loan. Repayment has to be immediate and also includes extra payments if an independent commercial lender decides that the loan wasn't made at fair market interest rate. And repayment can't be the signing over of the property to the plan it has to be in the form of cash to avoid another prohibited transaction. If the plan were to accept the property in lieu of the cash it would then be the sale of property by a disqualified person to the plan. This is true even if the value of the property exceeds the note because you would need to sell the property in order to generate the value.

I don't think it makes a difference if there are sufficient non-loan assets to pay out all non-owners. If the value of the property were to drop would the non-owners be shielded 100% from the losses? Don't think so. Besides it's the plan that is issuing the loan and not the individual participants. And to add to that if the loan wasn't to a party-in-interest then I would still think this would be an issue for the plan sponsor as I think you would be hard pressed to prove that 82% being invested in a single piece of real property is a diversified and responsible investment made by the trustee on behalf of the participants.