Possible Prohibited Transaction?

[mming]

The sole owner of a plan sponsor, who also participates in the plan and is the trustee, would like to lend her sister money from the plan. The sister is not involved at all with the sponsor or the plan, however, the concern is whether she would be considered a "joint venturer" under the party-in-interest/disqualified person definitions because she and the trustee are 50/50 owners of a rental property. The rental property has nothing to do with the sponsor or the plan. Is "joint venturer" meant to be only in relation to the company sponsoring the plan, or does it apply to anything they're both invested in? All help is greatly appreciated.

[Guest Catherine M. Peery]

I take it this is a pooled trust. Lending money to the sister would not affect the Plan at all if the owner took a loan from the Plan as a participant, and then lent that money to his sister, and set up a parallel amortization schedule, so she was basically paying him to pay off his loan. That would be a lot cleaner than letting the Plan lend money to the sister directly as a general asset of the trust. That becomes a red flag on the 5500, where you have to indicate that there is an Employer loan. I would just avoid that complication. Its not necessarily a prohibited transaction, but why create a problem when there's a clean way to do it.

[mming]

Thank you for your reply. I, too, would rather they not go through with this, at least until it's been established that it's not a PT. The problem is the owner has already lent herself $50K, so that's not an option. It seems that it all comes down to how "joint venturer" is interpreted.

[K2retire]

Has anyone explained to the owner/trustee that a qualified plan is not intended to function as a lending institution?

[jpod]

mming: I am not addressing the technical joint venture issues; I'll assume for the sake of argument that the sister is NOT a disqualified person or party in interest. Nevertheless I think the client should walk (run) away from this idea. It seems to me this has a very high degree of risk of being a self-dealing pt under Code Section 4975©(1)(E) and ERISA Section 406(b)(1), and this has nothing at all to do with the fact that they co-own a rental property. To the contrary, this is because the propsective borrower is the fiduciary's sister.