No PT, right?

[austin3515]

Friendly discussion in the office:

Owner takes a participant loan from the plan, under the plan's participant loan provisions. The loan proceeds get deposited directly to his personal chekcing account. The loan, so far, clearly qualifies for all of the PT exemtpion requirements.

The question is, does a participant loan that is otherwise ok, become a PT merely because after the money is in their PERSONAL account, they loan money or invest money into their business for cash flow purposes.

My opinion is that there is no PT, but my esteemed colleague disagrees...

[Kevin C]

As long he isn't pressuring himself to loan the loan proceeds to the company, I don't see a PT, either.

An example from the DOL regs may be helpful even though it isn't exactly this situation.

2550.408b-1(a)(4)

Example (6): F is a fiduciary with respect to Plan P. Z is a plan participant. Z and D are both parties in interest with respect to P. F approves a participant loan to Z in accordance with the conditions established under the participant loan program. Upon receipt of the loan, Z intends to lend the money to D. If F has approved this loan solely upon consideration of those factors which would be considered in a normal commercial setting by an entity in the business of making comparable loans, Z's subsequent use of the loan proceeds will not affect the determination of whether loans under P's program satisfy the conditions of section 408(b)(1).

There can be situations where the loan becomes part of a PT due to actions outside of the actual loan. From the same Reg.:

Example (3): Assume the same facts as in Example 2, above, except that F does not limit the use of loan funds. However, E pressures his employees to borrow funds under P's participant loan program and then reloans the loan proceeds to E. F, unaware of E's activities, arranges and approves the loans. If the loans meet all the conditions of section 408(b)(1), such loans will be exempt under that section. However, E's activities would cause the entire transaction to be viewed as an indirect transfer of plan assets between P and E, who is a party in interest with respect to P, but not the participant borrowing from P. By coercing the employee to engage in loan transactions for its benefit, E has engaged in separate transactions that are not exempt under section 408(b)(1). Accordingly, E would be liable for the payment of excise taxes under section 4975 of the Code.

[Bird]

I agree, absolutely not a PT.