participants investing in company projects

[maverick]

Real estate management company wants to allow participants to invest in one of its projects. The project involves a single purpose llc that would engage in the following activities: own, hold, sell, assign, transfer, operate, lease, mortgage, pledge, and otherwise deal with an office building. Notwithstanding a potential problem with current and effective availabity (price of one "unit" may be higher then most nhc's account balances), I want to focus the prohibited transaction issue. Searching the investment issues forum back to the beginning did not reveal a similar thread. I believe there will be a 4975 p.t. for self-dealing. If someone has encountered a similar situation I'd like to hear his/her thoughts. Thanks

Maverick

[J Simmons]

Focusing on the PT, the question is whether the llc is/is not a disqualified person under IRC sec 4975 and/or party in interest under ERISA secs 406 and 3(14). One avenue for that is whether the employer owns 50% or more of capital or profits interest in the llc. IRC sec 4975(e)(2)(G)(ii) and ERISA 3(14)(E)(ii). If so, the investments would be PTs as the interests to be invested in by the plan are not stock of the employer itself, but a subsidiary. If the employer owns less than 50% of the llc (directly and through any possible attribution), then you'd need to eliminate the possibilities that the other definitional provisions do not apply before concluding the investments would not be prohibited transactions.

I think you'd have a UBTI problem (IRC sec 512-514) as well because the llc is actively conducting real estate management activities. You'd also need to have the interests in the llc owned by the plan be valued annually, unless the price of the 'units' is otherwise readily ascertainable, such as closing prices if traded on a public exchange. You'd also need to vet out the federal and state securities issues that would go along with the sale of the units in the llc.

[Peter Gulia]

Even if all other securities, tax Code, and ERISA issues are solved, there still can be a prohibited transaction if a transaction or series of transactions has the effect, even indirectly, of creating or supporting a situation for the management company to manage (for compensation or another benefit) if the situation would not have been subscribed without the plan's investment.

However, there are right ways to do this kind of retirement plan investment.

[masteff]

Just thinking out loud.... does anyone think this would fall under the ERISA 407 restrictions?

[J Simmons]

ERISA sec 407(d)(1) provides the definition of employer security for the 10% limitation purposes: "The term 'employer security' means a security issued by an employer of employees covered by the plan, or by an affiliate of such employer."

Sec 407(d)(7) provides that a "corporation is an affiliate of an employer if it is a member of any controlled group of corporations (as defined in section 1563(a) of the Internal Revenue Code of 1986, except that 'applicable percentage' shall be substituted for '80 percent' wherever the latter percentage appears in such section) of which the employer who maintains the plan is a member. For purposes of the preceding sentence, the term 'applicable percentage' means 50 percent, or such lower percentage as the Secretary may prescribe by regulation. A person other than a corporation shall be treated as an affiliate of an employer to the extent provided in regulations of the Secretary. An employer which is a person other than a corporation shall be treated as affiliated with another person to the extent provided by regulations of the Secretary. Regulations under this paragraph shall be prescribed only after consultation and coordination with the Secretary of the Treasury."

No regulations treating 'a person other than a corporation as an affiliate' appear to have yet been promulgated.

Consequently, there would be no provision for treating the llc as an affiliate of the employer for purposes of ERISA sec 407.