Terminated Plan with an Illiquid Asset

[Scott]

A company terminated a DB plan a few years ago and filed with both the IRS and PBGC. The plan received a favorable determination letter and did not receive a notice of noncompliance from the PBGC. The plan had an asset that could not be liquidated at the time the final distributions were made, so the company loaned the plan an amount equal to the estimated market value of the asset, allowing the plan to distribute the benefits to participants. Whenever the asset can be liquidated, the plan will repay the company. The plan's trust continues to hold the asset but has a liability equal to the value of the asset, so the net value of the trust is zero.

I understand that if a terminated plan does not distribute all of its assets in a reasonable period of time (generally within a year), it is considered a frozen plan and must continue to be amended to comply with 401(a). Would that be the case here? Distributions have been made, but technically the plan continues to hold assets, although the net asset value is zero.

[namealreadyinuse]

The only place I remember seeing the one year rule is in the IRS exam guideline on plan terminations, but that is what it says. Your plan still needs compliance amendments, 5500s, etc. What happens if the asset appreciates fster than the interest on the note, or actually loses money?

[Blinky the 3-eyed Fish]

My recollection is a loan to the plan lasting over 3 days is a prohibited transaction. Whose idea was it to loan money to the plan?

[Guest mjb]

There is a rev rul from the 70s where the IRS said that a plan is not terminated until all assets are distributed which would include a loan from the plan to another party. By the way when the loan is paid back to the plan will the 50% excise tax on reversions be due?

[Peter Gulia]

PTE 80-26 (as thrice amended) permits an unsecured loan of money from a party-in-interest other than an employee-benefit plan to an employee-benefit plan, and the repayment of that loan according to its terms if, along with other conditions, the proceeds of the loan is used only for the plan to pay its ordinary operating expenses, including the payment of benefits (or for a purpose incidental to the ordinary operation of the plan) AND no interest or other fee is charged to the plan.

For transactions on and after December 15, 2004, the “three-business-days” limit that had applied to some of the loans that may be exempted no longer is a condition. But a loan that’s more than 59 days must be under a written agreement, and many practitioners advise that even a shorter loan must be written.

As with many exemptions, PTE 80-26 doesn’t exempt any ERISA § 406(b) self-dealing transaction.