Client's home was contributed to his DB plan

[katieinny]

A client has a one-man DB plan. He decided a few years ago to contribute his home to the plan. Now he wants to sell it. Can his adult child purchase the house from the plan, or would that be a prohibited transaction?

[Andy the Actuary]

The prohibited transaction may have occurred a few years ago when the client contributed his house to a DB plan. Best to consult an attorney.

[masteff]

I agree w/ Andy and would add for clarification that absolutely can't be sold now to the adult child.

http://www.irs.gov/retirement/article/0,,id=163722,00.html

"the sale, exchange, or lease of property between a plan and a disqualified person"

"A disqualified person is any of the following:

(1) a fiduciary of the plan;

...

(3) an employer, any of whose employees are covered by the plan;

...

(6) a member of the family of any individual described in (1), (2), (3), or

(4) (i.e., the individual’s spouse, ancestor, lineal descendant, or any

spouse of a lineal descendant);

..."

[Andy the Actuary]

Question is more interesting now about selling since plan qualification might already have been compromised a few years ago. Best to consult an attorney.

[QDROphile]

A prohibited transaction has probably occurred every year since the contribution, too. It will indeed be "interesting" to resolve.

[masteff]

Ooh, good point, if it wasn't a qualified transaction to begin w/, might not matter who it's sold to now. Yuck. Reinforces the good ol' "cash only" point of view.

[AndyH]

How'd it get valued for minimum funding purposes? How'd the purchase price get determined?

Who paid the mortgage? Taxes?

Could be very interesting.

[katieinny]

At this point I don't have all the details regarding who paid what. As often happens, we were simply asked the first question -- can I sell my house that's in my DB plan to my child? You know how it goes -- suddenly you're faced with Pandora's Box.

[SoCalActuary]

My guess is that the 5500 EZ did not disclose the transaction.

Can the IRS argue this is a fraudulent return? I think so. So that would invalidate the past 5500s.

I would also ask if the participant was a resident of the house during the time the plan owned the property.

Or, just maybe, you are better off to know nothing about this if you have provided services to this client in the past.

[jpod]

If you are a professional in some capacity that can be sued for malpractice, the question should not be answered unless you happen to be an ERISA attorney, in which case the answer is a very long answer that begins at the beginning and ends with "no, unless you get an exemption from the DOL, which is possible but not likely." If you are not an ERISA attorney, I think the best answer would be to send a confidential letter explaining that there appear to be PT problems here at a minimum and recommending that he engage ERISA counsel. As indicated in previous responses, the complete answer will walk the client through all the problems he has created for himself starting with the contribution of the house, the fact that he has continued to live in the house (I am making that assumption), or at least use the house if it is a vacation home, and that he now proposes to sell it to his son. An ERISA attorney would/should discuss all the tax risks this fellow faces, and the procedures to apply for and the likelihood of receiving a retroactive PT exemption on the original sale and the continued use of the house up to the present, and a prospective exemption for the sale of the house to the son. As noted, Form 5500 reporting, personal tax (Form 1040) and minimum funding issues may also be present.

[QDROphile]

If you are not a lawyer and are not in the confessional, then do not send anything in writing that suggests or descibes a compliance problem unless the client asks for a writing. Your characterization of the letter as confidential does not make it privileged and does not prevent the IRS or DOL from access to the letter in an audit or investigation.

[jpod]

QDRO: I respectfully disagree. If the poster is not a lawyer, I was suggesting something to protect him/her from a malpractice claim down the road. The client came to the poster for help, so why should the poster place the client's potential discovery problems over his/her own self-preservation? Also, I think you overstate the significance of a letter vs. no letter. If the poster is not a lawyer, the client's strategic mistake was in talking to the poster about the situation rather than a lawyer. Even without a CYA letter, the poster could still be called to testify to the fact that a conversation took place and that the client was aware of the compliance problems.

[QDROphile]

An audit request will pick up the letter, but will not pick up conversations.

By the time the adviser is asked to testify, the agency will already be deep into the issues. The concern is ease of discovery, not stonewalling.

Being professional has risks. You are correct that a written response is more protective of the adviser. Is a memo to the file an adequate balance between protecting the adviser and not putting the advisee in a worse position? All actions depend on circumstances, but I have advised a client to fire a consultant who wrote "the sky is falling" letters as a way of communicating observations. Nobody needs to be handed a smoking gun.

It is especially touchy when the advisor does not have enough information to fully evaluate the situation.

[Andy the Actuary]

Since the advisor is not an knowledgeable in the area -- save for bulletin board comments (and these have as much weight as my morning conversations at Starbucks) -- the advisor truly does not know whether there is or is not a problem and it is just as bad for someone unqualified to say there may be a potential problem as to say there isn't. It seems that the appropriate response is for the advisor is to tell the client nothing other than this question is outside the advisor's scope of expertise and the client should consult a benefits attorney. In short, the advisor should not be involved in this because the advisor brings nothing to the table.