Can IRA Receive Rollover of ESOP Shares Without Prohibited Transaction?

[Guest CMC]

A significant shareholder of a company wants to take an in-service distribution of his ESOP account and roll it to a self-directed IRA. Anyone think that that gives rise to a prohibited transaction with respect to the IRA? Possible issues flagged by others are:

(1) Because he is a fiduciary of the IRA, this could be construed as his using the assets of the IRA for his own benefit. (4975©(1)(E))

(2) To the extent he owns 50% or more of the company, the company is a disqualified person such that the rollover to the IRA could constitute a prohibited "sale or exchange ... between a plan and a disqualified person." (4975©(1)(A)).

I've reveiwed varous secondary materials on the IRA prohibited transaction rules and a number of DOL advisory opinions but haven't turned up anything squarely on point. (Most of the advisory opinions involve more affirmative "transactions" than a rollover -- having the IRA invest in, or make a loan to, an entity in which the IRA fiduciary has an interest, for example). Am I missing something?

[QDROphile]

It would be a very interesting legal conflict if the participant has a right to roll over a distribution but the rollover would be a prohibited transaction. The participant has a right to roll over the distribution. You can finish the logical progression. But you need to watch any transactions in connection with the distribution, such as sale of shares. BTW, most ESOPs do not provide for in-service distributions except to satisfy diversification requirements.

[KJohnson]

I discussed this at one point years ago with the head of fiduciary interpretations at DOL and he didn't see it as a PT. But of course that was just a brief discussion of some of the issues and he was very careful to say that the only real ay to get an answer was to request an advisory opinion. The point QDROphile was making on the right to rollover was part of the conversation.

[jpod]

I don't see how we have a 4975©(1)(A): The shares are already issued and outstanding, so where is the "sale or exchange"?

If it was cash in the IRA being used to buy shares of stock there could be a 4975©(1)(E) issue, and maybe a (D) issue. But, again, with shares already issued and outstanding, I just don't see how it even fits the language of the statute, unless you take the position that the continued holding of the shares after the rollover is an (E) or a (D).

[KJohnson]

jpod--I think that hits it on the head ---whether the rollover is a "transaction" in the first instance. Then the only question becomes possible (E) issues in voting the shares once they are in the IRA.