Property in Earmarked Account

[Guest notapensiongeek]

We have a participant (HCE / owner) in a 401(k) Plan that has attained NRA. The plan allows for in-service distributions upon attainment of NRA. One of the investments in his earmarked account is a piece of undeveloped land. The property is (and has always been) appraised annually by an independent third-party appraiser. The participant would like to purchase the land (personally) at the current fair market / appraised value so he can develop the land and eventually live on it.

Can he do the following:

1. Take a distribution of the property from the plan @ FMV (taxed as ordinary income on a Form 1099-R).

OR

2. Apply for a prohibited transaction exemption, and if approved, he can purchase the land outright from personal funds.

Are there any other options? Comments? Thoughts? Red flags?

Any input would be greatly appreciated.

Thanks!

[imchipbrown]

I don't know what "no tax implications related to the plan" means.

[Guest notapensiongeek]

Typo...my bad.

[Bird]

I think you can do either of your two options, and I don't know of any other options, except to just sell it outright to a third party. But I try like heck to avoid these situations so have no direct experience. I'm just commenting because there were no other responses; I hope someone more experienced chimes in.

(And I understood your remark about "no tax implications to the plan" fwiw.)