Equipment Lease

[Guest Sayles]

I have a client that sponsors a 401(k) PSP with segregated investment accounts. The trustee wants to use funds from his own 401(k) account to invest in an LLC which would lease equipment to the company sponsoring the plan in an arms-length transaction.

I see an exception in the prohibited transaction rules for a lease transaction which is for 1) adequate consideration, 2) does not pay a commission, and 3) does not violate ERISA 407.

I wondered if anyone else had seen a similiar transaction. Thanks!

[austin3515]

Does that exception involve the plan sponsor??? I doubt it... I can't see why they carve out an exception to the pt rules for this. This is exactly what they want to avoid

[Guest Sayles]

Thanks for the reply - the rule reads "A plan may transact with a party in interest to acquire or sell qualifiying employer securities, or may acquire, sell or lease quaifiying employer real property if two conditions are met. The conditions are:(1) (i) the transaction is for adequate consideration; and (ii) the plan does not pay any commission, and (2) the 10% limitation of ERISA 407 is not violated as it applies."

A party-in-interest includes disqualified persons whch includes the plan sponsor as well as 50% or more owned entities.

Thanks again-

[jpod]

What have you found that could treat "equipment" as "real property"?

In all likelihood there is no statutory or class exempton that would permit the transaction you described. Even the new PPA statutory exemption that permits (A), (B) and (D) transactions doesn't seem to fit, and if there is any (E) or (F) self-dealing involved, you have no chance.

[Guest Sieve]

Sayles -- The transaction you suggest does not involve qualifying employer securities or qualifying employer real property. Those provisions apply to real property or stock of the employer sponsoring the plan.

Austin -- What is it that you see the PT rules "want to avoid" that is being violated here? Why is the LLC--which is leasing equipment to the employer sponsoring the Plan-- a party in interest? What is the PT in this transaction? I'm not seeing it.

[jpod]

Sieve, you raised a good point: not enough facts to identify a pt. I assumed that the OP already identified a pt and was searching for an exemption, but you know what they say about people who make assumptions. Anyway, it is just giving off the scent of self-dealing, but maybe I've been at this too long.

[Guest Sieve]

jpod --

I might see it as self-dealing, too, but here the self-dealing appears to be using corporate assets (assuming the plan's trustee has that level of corporate discretion) for the individual's own interest, not using plan assets for the individual's own interest.

Perhaps you're right, and there might be a PT which the OP simply did not throughly describe but which would be obvious to us if we had all the facts. But, unless we understand what the PT is and why it's a PT, it's impossible to determine which exemptions might or might not apply.

[austin3515]

You don't think the plan buying a mahcine to lease it back to the company is a PT? I'm no PT expert, but that doesn't smell right to me...

[jpod]

Sieve, I'll bet you a nickle that the trustee is the owner of the company or at least a significant owner of the company or someone who has a relationship to the company or an owner of the company that clouds his judgment and raises self dealing issues as desribed in the reg under the service-provider exemption.

[Guest Sieve]

austin --

According to the OP, the individual participant is investing his account in an LLC, and the LLC is leasing equipment to the employer sponsoring the plan. I don't see where the plan is going to own the equipment.

In addition, a plan's ownership of an equity interest in another entity (the LLC) does not mean that the underlying assets of the other entity (the LLC) are considered plan assets, if, e.g., the equity participation of benefit plan investors is not significant (i.e., at least 25%). (DOL Reg. Sections 2510.3-101(a)(2) & -101(f)(1).) If the LLC's assets are considered plan assets then, yes, you're correct, there would be a PT--plan assets leased to the employer sponsoring the plan.

On its face--without more--we can't be sure if there's a PT, or if what you describe is, in fact, the PT that exists. Kind of hard to fish for exemptions, in that case. But, I think it's pretty clear that the exemption mentioned in the OP--i.e., qualifying employer securities and real property--is inapplicable. And, if the PT is because the LLC's assets are consideered Plan assets, then I do not see another exemption that applies.

[GBurns]

Sayles

What is this Trustee's relationship to the LLC ? Does he/she have equity etc ?

[austin3515]

So I set up an LLC, and I invest 100% of my account in said LLC. I use the all the money now in the LLC to loan money to the plan sponsor (which by the way, I own 100% of). No PT???? Where is the difference in these examples?

[Guest Sieve]

Austin --

You're making some major assumptions of fact.

If I own 100% of the LLC, then the LLC is a party-in-interest if I also own 100% of the Plan sponsor. We have a PT.

If I own 2% of the LLC and 100% of the plan sponsor, the LLC is not a party-in interest. Probably not a PT.

I see a difference. So does the statute.

And, if I own just 2% of the plan sponsor, there's also a difference.

Not all these transactions stink--just most of them!! . . .

[austin3515]

I guess I am making assumptions, but I read the OP to suggest that he owns 100% of the LLC through his 401k, and 100% of the plan sponsor. Based on these assumptions, PT, or no PT?

[Guest Sieve]

I read in the OP only that the trustee wanted to invest (some of) his account in the LLC, with no mention of ownership of either LLC or plan sponsor. I made no assumptions beyond that.

But, if Trustee's individual account is 100% owner of LLC, that means that the Plan/Trust is 100% owner of the LLC. So, a transaction by the LLC is really a transaction by the Trust. In that circumstance, Yes, I believe that there's a PT (leasing of property between a party-in-interest--the plan sponsor--& the Trust).

I think you would also agree, however, that there is no PT if the trust holds 10 shares of Ford Motor Co. & the sponsoring employer leases 100 Ford trucks directly from Ford's corporate headquarters (or comparable facts).

[austin3515]

We do agree! I wish the OP would write back and tell us what he/she meant!!!