Prohibited Transaction?

[mming]

An employee was given a loan from his employer's qualified plan before he became a participant. The Pension Answer Book specifies this scenario as a prohibited transaction since the employee would be considered a party in interest. However, the instructions on Form 5330, though they list most of the definitions of parties in interest, do not reference this situation. I'm thinking this is just an oversight and the loan should still be considered a PT. Would that be the correct approach? BTW, the employee eventually became a participant in the plan from which he borrowed from but I have to think the loan still remains a PT.

[Guest Sieve]

An employee of the employer sponsoring the plan is a party in interest under ERISA, but is not a disqualified person under the IRC. Under ERISA (& for DQs under the Code) there is a PT exemption for proper participant loans, but here the loan was prior to participation (& I am assuming that the loan was NOT from a rollover account, because that would make the individual a participant to the extent of the rollover account, and he/she ought to be able to borrow from it). Thus, yes, a PT.

An earlier post bemoaned the fact that the Form 5330 does not discuss this kind of PT (i.e., a PT under ERISA which is not also a PT under the Code), and wondered how and to whom the excise tax should be paid. No one really knew.

http://benefitslink.com/boards/index.php?showtopic=39366