Non-Cash deposit of 401k?

austin3515 · July 8, 2010

Client has no liquid assets and wants to make back 401k contributions in a non-cash asset that he has. We understand that this could give rise (or probably does give rise) to a PT, but I'm wondering if there is a broader prohibition on funding 401k with non-cash. In this case, it is a mortgage. We're trying to tell the client all of the reasons not to do this. It's a pooled acccount.

Belgarath · July 8, 2010

I'm not quite sure I understand the question. Are you talking about participant deferrals that were not timely submitted (which in and of itself is a PT) that the employer now proposes to correct through the DOL's VFC program? Or are these discretionary PS contributions? If the latter, it would generally be allowable, within all the required parameters.

However, assuming the former, (which I suspect to be the case) or at least assuming that this is the attempted correction not necessarily through VFC, then I'ds say no, this is a PT. I doubt the DOL would give VFC approval. This is NOT a purely discretionary contribution on the part of the employer - it is an enforceable obligation. I've pasted in the DOL interpretive bulletin below, but see particularly the following excerpt:

"For example, where a profit sharing or stock bonus plan, by

its terms, is funded solely at the discretion of the sponsoring

employer, and the employer is not otherwise obligated to make a

contribution measured in terms of cash amounts, a contribution of

unencumbered real property would not be a prohibited sale or exchange

between the plan and the employer. If, however, the same employer had

made an enforceable promise to make a contribution measured in terms of

cash amounts to the plan, a subsequent contribution of unencumbered real

property made to offset such an obligation would be a prohibited sale or

exchange."

29 CFR 2509.94-3 - Interpretive bulletin relating to in-kind contributions to employee benefit plans.

Section Number: 2509.94-3

Section Name: Interpretive bulletin relating to in-kind contributions to employee benefit plans.

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(a) General. This bulletin sets forth the views of the Department of

Labor (the Department) concerning in-kind contributions (i.e.,

contributions of property other than cash) in satisfaction of an

obligation to contribute to an employee benefit plan to which part 4 of

title I of the Employee Retirement Income Security Act of 1974 (ERISA)

or a plan to which section 4975 of the Internal Revenue Code (the Code)

applies. (For purposes of this document the term ``plan'' shall refer to

either or both types of such entities as appropriate). Section

406(a)(1)(A) of ERISA provides that a fiduciary with respect to a plan

shall not cause the plan to engage in a transaction if the fiduciary

knows or should know that the transaction constitutes a direct or

indirect sale or exchange of any property between a plan and a ``party

in interest'' as defined in section 3(14) of ERISA. The Code imposes a

two-tier excise tax under section 4975©(1)(A) an any direct or

indirect sale or exchange of any property between a plan and a

``disqualified person'' as defined in section 4975(e)(2) of the Code. An

employer or employee organization that maintains a plan is included

within the definitions of ``party in interest'' and ``disqualified

person.'' \1\

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\1\ Under Reorganization Plan No. 4 of 1978 (43 FR 47713, October

17, 1978), the authority of the Secretary of the Treasury to issue

rulings under the prohibited transactions provisions of section 4975 of

the Code has been transferred, with certain exceptions not here

relevant, to the Secretary of Labor. Except with respect to the types of

plans covered, the prohibited transaction provisions of section 406 of

ERISA generally parallel the prohibited transaction of provisions of

section 4975 of the Code.

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In Commissioner of Internal Revenue v. Keystone Consolidated

Industries, Inc., ---- U.S. ----, 113 S. Ct. 2006 (1993), the Supreme

Court held that an employer's contribution of unencumbered real property

to a tax-qualified defined benefit pension plan was a sale or exchange

prohibited under section 4975 of the Code where the stated fair market

value of the property was credited against the employer's obligation to

the defined benefit pension plan. The parties stipulated that the

property was contributed to the plan free of encumbrances and the stated

fair market value of the property was not challenged. 113 S. Ct. at

2009. In reaching its holding the Court construed section 4975(f)(3) of

the Code (and therefore section 406© of ERISA), regarding transfers of

encumbered property, not as a limitation but rather as extending the

reach of section 4975©(1)(A) of the Code (and thus section

406(a)(1)(A) of ERISA) to include contributions of encumbered property

that do not satisfy funding obligations. Id. at 2013. Accordingly, the

Court concluded that the contribution of unencumbered property was

prohibited under section 4975©(1)(A) of the Code (and thus section

406(a)(1)(A) of ERISA) as ``at least both an indirect type of sale and a

form of exchange, since the property is exchanged for diminution of the

employer's funding obligation.'' 113 S. Ct. at 2012.

(b) Defined benefit plans. Consistent with the reasoning of the

Supreme Court in Keystone, because an employer's or plan sponsor's in-

kind contribution to a defined benefit pension plan is credited to the

plan's

[[Page 370]]

funding standard account it would constitute a transfer to reduce an

obligation of the sponsor or employer to the plan. Therefore, in the

absence of an applicable exemption, such a contribution would be

prohibited under section 406(a)(1)(A) of ERISA and section 4975©(1)(A)

of the Code. Such an in-kind contribution would constitute a prohibited

transaction even if the value of the contribution is in excess of the

sponsor's or employer's funding obligation for the plan year in which

the contribution is made and thus is not used to reduce the plan's

accumulated funding deficiency for that plan year because the

contribution would result in a credit against funding obligations which

might arise in the future.

defined contribution pension plans and welfare plans, it is the view of

the Department that an in-kind contribution to a plan that reduces an

obligation of a plan sponsor or employer to make a contribution measured

in terms of cash amounts would constitute a prohibited transaction under

section 406(a)(1)(A) of ERISA (and section 4975©(1)(A) of the Code)

unless a statutory or administrative exemption under section 408 of

ERISA (or sections 4975©(2) or (d) of the Code) applies. For example,

if a profit sharing plan required the employer to make annual

contributions ``in cash or in kind'' equal to a given percentage of the

employer's net profits for the year, an in-kind contribution used to

reduce this obligation would constitute a prohibited transaction in the

absence of an exemption because the amount of the contribution

obligation is measured in terms of cash amounts (a percentage of

profits) even though the terms of the plan purport to permit in-kind

contributions.

Conversely, a transfer of unencumbered property to a welfare benefit

plan that does not relieve the sponsor or employer of any present or

future obligation to make a contribution that is measured in terms of

cash amounts would not constitute a prohibited transaction under section

principles apply to defined contribution plans that are not subject to

the minimum funding requirements of section 302 of ERISA or section 412

of the Code. For example, where a profit sharing or stock bonus plan, by