solo 401k uses plan assets to purchase stock

[cpc0506]

A solo 401(k) plan had some creative accounting within the plan. Can you determine if indeed it is a prohibited transaction?

facts....principal took money out of the plan to buy non-publicly traded securities as an investment within the plan. The stock certificates are titled in the name of the plan. (not so much an issue, I think) BUT, he purchased stock in the company (bank) that he works for as Vice President. The principal does not own any stock in the company (bank) himself. Is this ok?

[masteff]

Bumping this so minds more knowledgable than mine will notice your question.

My opinion is that unless a) the bank is a trustee for any other assets of the plan (making the bank disqualified as well as the person in question) or b) the person was already a significant stockholder of the bank, then you're okay because the investment isn't "for the benefit" of himself as an individual.

But I'll defer to others opinions should anyone find fault in my thinking.

[A Shot in the Dark]

Kathy:

I think more detail is needed before some one can offer advice on this issue:

Is the following sets of facts correct:

An individual works for a bank.

This same individual owns another business and that businss sponors a plan. The plan is a solo 401(k) Plan.

As Trustee of that solo 401(k) Plan, the indivdual decides to purchase stock of the bank for which he is employed.

Was the stock purichased at the asking or bid price (i.e.) there was no special deal given to the individual?

I doubt there is a problem.

[ERISAatty]

I'm working on an issue that's somewhat similar and any insights/thoughts are welcome. I'm trying to determine if there is a prohibited transaction applicable exemption to an unusual situation I've been presented with. Here are the facts, starting with why I believe it's prohibited absent an exemption:

-Bank-employer sponsors a 401(k) plan.

-100% of Bank's stock is owned by a Holding Company (which is not an S Corporation - so there's no potential 'second class of stock concern, just fyi).

-Holding Corporation has an amount of debt that needs to be paid off in order to grant the Bank more lenience by federal banking regulators so that Bank can again begin issuing dividends.

- (The same regulator prohibits the Bank from outright transfering extra cash to the Holding Company to pay the debt, on the theory that such transfer would constitute a 'dividend,' and that Bank is not allowed to issue dividends until it eliminates this debt.)

-Holding company, itself, has no income with which to pay the debt (it just holds the bank's stock).

-Since Holding Company owns 100% of Bank shares, this exceeds the 50% amount in the defintions of 'interested party' and 'disqualified person,' I am assuming that Holding Company is an interested party/disqualified person with respect to Bank's Plan.

-Bank-employer proposes the following:

-Have the Holding Company issue a "debt instrument," a.k.a. "Note" with a 2-3 year maturity that would pay 7% interest. I beleive this would be a *non*-marketable obligation under the ERISA 408 definition of 'qualifying employer securities.' It therefore does NOT qualify as a "marketable obligation" and therefore can't be a qualifying employer security for purposes of qualifying for that statutory PTE.

- Add a brokerage account to the plan.

- Allow those participants who wish to do so to invest in the Note as an investment under the 401(k) Plan.

I understand that the Bank-employer can't be fully protected from potential claims of fiduciary breach/imprudence for offering this investment in the event that the promised return fails to materialize. But I believe it could be a permissible brokerage window investment IF I can find a PTE.

So far, I'm stumped in coming up with a class or individual PTE that is similar.

So I am thinking that I'll have to recommend to Bank that they apply for their own individual exemption.

Does anyone out there know of any existing PTE that might apply to this situation?

Thank you!!

[Peter Gulia]

ERISAatty, if you'd like my help in thinking through your situation, please feel free to call me.

I'm reluctant to discuss my observations on this practitioenrs' bulletin board because EBSA staff lawyers are among the readers.

[QDROphile]

We don't want EBSA to know what the law is.