Prohibited Transaction?

[Lori H]

A small plan sponsor wants to sell a $40K note in a pension plan to its psp in order to have enough cash in the pension plan to pay a non-common law participant. I think this would be a prohibited transaction as the plan would be considered a party in interest. Ultimately both plans will be terminated. The pension plan is not liquid. Do you think approaching the IRS for approval would be an option?

[jpod]

How is either plan a party-in-interest?

[masteff]

Does the PSP has individually directed accounts or pooled investments? Does the note otherwise meet the PSP's investment policy?

And approaching the IRS for approval is always an option. Though that generally involves a fee and some delay.

[Lori H]

How is either plan a party-in-interest?

the plan sponsor would be a party in interest

a transfer or use of plan assets is considered a PT, but this 4 participant plan is trying to pay the one employee who is not related to the other family participants.

[ETA Consulting LLC]

Apparently, someone sold the plan an illiquid asset (i.e. annuity with huge surrender, limited partership) without properly anticipating the liquidity needs in the event of employee termination or retirement. Since it is a pension plan, isn't it being funded annually (is there funding currently due)? If so, fund the plan and use that cash funding. Just trying to throw ideas into the mix. Other than that, Lori, I appreciate the complexity of the situation here.

Good Luck!

[ESOP Guy]

This might be pushing it…..

Is the value of the note readily determinable?

If so, could the plan pay the benefit with the note as an in-kind distribution? Once the former employee is paid 100% of their benefit they are no longer a party in interest. This assumes the benefits is the same value or of greater value then the note in question. If the asset is worth more than the benefit this wouldn’t work.

After the distribution of the asset has been made, couldn’t the former employee then sell the asset to either the PS plan or if the employer has the money to the employer?

I know the PT rules tend to not only look at the form of the transaction, but the substance of the transaction so this could be risky.

[Lori H]

Apparently, someone sold the plan an illiquid asset (i.e. annuity with huge surrender, limited partership) without properly anticipating the liquidity needs in the event of employee termination or retirement. Since it is a pension plan, isn't it being funded annually (is there funding currently due)? If so, fund the plan and use that cash funding. Just trying to throw ideas into the mix. Other than that, Lori, I appreciate the complexity of the situation here.

Good Luck!

thanks for the input. the note would be on a piece of property the pension plan owns.

[jpod]

Now I am very confused. Who is the debtor and who is the note-holder?

[Kevin C]

The DOL's VFCP has a class exemption that can apply to the sale of an illiquid investment to a party-in-interest. I don't know that they would allow another plan to purchase the asset, though. To me, that would seem to be using plan assets to benefit the fiduciary who was responsible for the pension plan getting into this situation in the first place.

http://www.dol.gov/ebsa/compliance_assistance.html#section8

From the FAQs:

Which transactions are covered by the class exemption?

The class exemption only covers six of the prohibited transactions identified in the VFCP. The six transactions are:

The failure to transmit participant contributions to a pension plan within the time frames described in the Department’s regulations (29 C.F.R. section 2510.3-102) and/or the failure to transmit participant loan repayments to a pension plan within a reasonable time after withholding or receipt by the employer.

The making of a loan by a plan at a fair market interest rate to a party in interest with respect to the plan.

The purchase or sale of an asset (including real property) between a plan and a party in interest at fair market value.

The sale of real property to a plan by the employer and the leaseback of such property to the employer, at fair market value and fair market rental value, respectively.

Purchase of an asset (including real property) by a plan where the asset has later been determined to be illiquid as described under the Program in a transaction which was a prohibited transaction, and/or the subsequent sale of such asset to a party in interest.

Use of plan assets to pay expenses, including commissions or fees, to a service provider (e.g., attorney, accountant, recordkeeper, actuary, financial advisor, or insurance agent) for services provided in connection with the establishment, design or termination of the plan (settlor expenses), provided that the payment of the settlor expense was not expressly prohibited by a plan provision relating to the payment of expenses by the plan.

[masteff]

Looks like you could have a preliminary answer w/in 30 days: http://www.dol.gov/ebsa/regs/ind_exemptionsmain.html

Of course I'd start w/ a phone call to see if they agree an exemption is needed.

[Lori H]

thank you for your responses.