Is this a prohibited transaction? Is there an exemption?

[Guest Iwonder]

This is a small town. The town bank serves as a trustee to a company's pension plan. The company is borrowing money from the bank/trustee and will be paying no more than a commercially reasonable rate on the loan.

Is this a prohibited transaction because both entities are plan fiduciaries? If so, is there an exemption?

Will the answer change if the bank knows that the company is going to use the loan to fund the plan, even though the plan sponsor, not the plan, is taking the loan? We are all very confused!

Thank you very much!

[Guest Mickey Maier]

A prohibited transaction is a direct or indirect transaction involving plan assets between the plan and a party-in-interest. Such transactions are prohibited unless specifically exempt.

The bank serving as trustee for pay is an exempt prohibited transaction so long as no more than reasonable fees are paid.

A loan from the bank to the company is not a prohibited transaction unless the plan were somehow to guarantee the note.

These types of relationships have been common for a long time without raising PT issues.

[Ron Snyder]

I wonder if your are trying to justify something beyond a simple bank loan. For example, large bank loans sometimes have participation by others behind the scenes. If that happens and the other party is a party in interest, IRS will argue that it is a circuitous PT.

[Guest Iwonder]

I wonder if your are trying to justify something beyond a simple bank loan. For example, large bank loans sometimes have participation by others behind the scenes. If that happens and the other party is a party in interest, IRS will argue that it is a circuitous PT.

It is understandable that you may wonder if the situation is more than described, but no, this is a straightforward loan from a bank to a long-established client. The loan is not secured or in any way guaranteed by a plan, and the plan is not taking the loan.

But, thank you for the words of both wisdom and warning.