Prohibited Transaction

[Gary]

ERISA Section 3(14)(F) and 3(15) provide that a party in interest includes:

"a relative of any individual described in subparagraph (A), (B), ©, or (E)"

where relative is defined as spouse, ancestor, lineal descendant, or spouse of lineal descendant.

There is a corporation with two 50% shareholders.

So the question pertains to the scope of who falls under party in interest.

The definition of relative does not explicitly provide for lineal descendant of spouse. It does address spouse of lineal descendant which is not the same.

So for argument's sake that might exclude an owner's father in law, since he is the lineal descendant of his spouse.

That is, the father in law might not be considered a party in interest.

However, after further review, 3(14)(E) provides that a 50% owner (3(14)(E)) is a party in interest and thus the spouse would also be a 50% owner due to attribution rules and therefore party in interest would include lineal descendants of spouse (i.e. father of spouse).

Does that make sense?

Finally, what if the owner was a 49% owner, than it would seem that spouse would not be a party in interest under 3(15)(E) and thus lineal descendants of the spouse would also not be a party in interest.

Does that make sense?

So in conclusion if the 50% owner is willing to be a 49% owner than the spouse's father would not be a party in interest. Which means that the plan could invest plan assets in the father in laws business without causing a PT.

Make sense?

I'm just trying to verify my interpretation.

Thanks.

[J Simmons]

ERISA Section 3(14)(F) and 3(15) provide that a party in interest includes:

"a relative of any individual described in subparagraph (A), (B), ©, or (E)"

where relative is defined as spouse, ancestor, lineal descendant, or spouse of lineal descendant.

There is a corporation with two 50% shareholders.

So the question pertains to the scope of who falls under party in interest.

The definition of relative does not explicitly provide for lineal descendant of spouse. It does address spouse of lineal descendant which is not the same.

So for argument's sake that might exclude an owner's father in law, since he is the lineal descendant of his spouse.

That is, the father in law might not be considered a party in interest.

Agreed that the father in law of an owner--without another connection--would not be a party in interest, but due to a bit different analysis. The owner's father in law would actually be an ancestor of the owner's spouse rather than a lineal descendant. But the statute does not snag into the definition of party in interest ancestors of the owner's spouse.

However, after further review, 3(14)(E) provides that a 50% owner (3(14)(E)) is a party in interest and thus the spouse would also be a 50% owner due to attribution rules and therefore party in interest would include lineal descendants of spouse (i.e. father of spouse).

Does that make sense?

Which attribution rules are you using to stain the spouse with the 50% ownership nominally in the name of the owner?

The Department of Labor has not issued regulations defining the circumstances under which a person will be considered the “direct or indirect” owner of stock for purposes of 29 U.S.C. §1002(14)(E). Regulations under a comparable provision of the tax code state that stock ownership will be attributed from an adult child to the child’s parent only if the parent and spouse, when considered as a unit, own more than 50 percent of the stock. See Treas.Reg. §1.414©-4(b)(6)(ii), 26 C.F.R. §1.414©-4(b)(6)(ii). A comparable reading of ERISA would indicate that neither John Evins nor Elizabeth Evins is a party-in-interest.

Scott v Evins, #91-G-1929-S (ND Alabama August 14, 1992).

However, since the authors of ERISA § 3(15) specified that spouse's of lineal descendants are to be considered, they did broach the 'in-law' group, but then did not specify that the spouse's ancestors should be included. So the 'indirect' route through the spouse to her father would, arguably, write more into the statute than its authors and enactors (Congress and the President) chose to put there.

Finally, what if the owner was a 49% owner, than it would seem that spouse would not be a party in interest under 3(15)(E) and thus lineal descendants of the spouse would also not be a party in interest.

Does that make sense?

It makes sense, but watch out when trying to determine if someone is/is not a party in interest or disqualified person. The father in law might have some other connection to the plan that would render him to be a party in interest, irrespective of whether he can be so tagged by virtue of being the father in law of an owner.

[Gary]

Ok first I better make sure I am clear on the matter of lineal descendant and ancestor.

Based on your comments, I stand to be corrected.

Ancestors are parents and grandparents, etc. and descendants are children, grand children, etc.

A father in law is an ancestor of the owner's spouse and as we say not mentioned in the party in interest definition.

I was thinking under 1563(e)(5) that the spouse was also an owner through attribution, but since the spouse is not an employee (or serve the company in any manner) of corp and does not directly own any stock (not sure exactly how 1563(e)(5)(D) is applied) then perhaps the spouse should not be considered a 50% owner and once again making the spouse's father not a party in interest.

Yes, it is essential that the faterh-in-law not be a party in interest in some other fashion; like if he provided services to the plan or something.

Can't think of too many ways the father in law could be a party in interest though.

Thank you.

[J Simmons]

For purposes of IRC § 4975 prohibited transactions and determining who is a 'disqualified person', stock ownership is determined by applying IRC § 267© attributions, except that for IRC § 267©(4), family is 'spouse, ancestor, lineal descendant and any spouse of a lineal descendant'. IRC § 4975(e)(4). One is considered as owning stock owned, even indirectly, by his family. No percentage threshold for that attribution. IRC § 267©(2).

So I'm not sure how IRC § 1563(e) comes into play (nor for that matter why the Alabama federal court in 1992 applies the regs under IRC § 414©).

But your question relates to ERISA § 3(14) definition of a party in interest (very similar but not exactly the same as a 'disqualified person' under IRC § 4975). In this context, as was pointed out by that Alabama federal court, the DoL has not issued any regulations.