Plan loans

[jkdoll2]

One participant (owner only) Defined Benefit plan. He wants to do a plan loan - give money to an outside investor. I know plan loans are allowed (not participnat loan). What are the requirements for a plan loan - is there a dollar limit and time limit (same as participant loan)? Does he need an ERISA bond since one of his assets is a plan loan?

Thanks

[ETA Consulting LLC]

It's not a participant loan, so section 72(p) doesn't apply; leaving you with the prohibited transaction rules. It's basically treated as an investment in the plan that should be for the primary purpose of providing the retirement benefits under the plan. If the investment return is worth it, and it doesn't constitute a prohibited transaction, then you're good to go; just have to watch out for the pitfalls.

Good Luck

[jkdoll2]

It's not a participant loan, so section 72(p) doesn't apply; leaving you with the prohibited transaction rules. It's basically treated as an investment in the plan that should be for the primary purpose of providing the retirement benefits under the plan. If the investment return is worth it, and it doesn't constitute a prohibited transaction, then you're good to go; just have to watch out for the pitfalls.

Good Luck

Thanks for your response Where can I look up the requirements and restrictions for a plan loan? Does he need a fidleity bond since it as an investment in the plan? Is there some kind of colateral needed?

[ETA Consulting LLC]

He shouldn't need a fidelity bond because the plan is not subject to ERISA (one-person plan). Also, it is not a "plan loan" in the sense we are accustomed to hearing, but instead a "note" received from the borrower. In this context, you are not treating it as if it were a bond that is purchased from a Fortune 500 company (the thinking here is that it is merely a plan investment). You must make sure that the investment return is aligned with the risk and collateral (from an investment standard and not a "plan loan" standard). This is "part of" what prevents it from becoming a prohibited transaction.

Maintaining the proper perspective is important.

Hope this helps.

[jkdoll2]

He shouldn't need a fidelity bond because the plan is not subject to ERISA (one-person plan). Also, it is not a "plan loan" in the sense we are accustomed to hearing, but instead a "note" received from the borrower. In this context, you are not treating it as if it were a bond that is purchased from a Fortune 500 company (the thinking here is that it is merely a plan investment). You must make sure that the investment return is aligned with the risk and collateral (from an investment standard and not a "plan loan" standard). This is "part of" what prevents it from becoming a prohibited transaction.

Maintaining the proper perspective is important.

Hope this helps.

Thanks - that helps

[QDROphile]

Private loans amount to paying with fire. You should not proceed unless you are confident that you understand the applicable rules and potential consequences. For example, what will happen loan payments are not made on time? Then what happens if loan payments are not made on time and there is a need to value the loan? Exotic investments need sophisticated technical support and you cannot rely on the internet promoters of exotic investments.

[ETA Consulting LLC]

Private loans amount to paying with fire. You should not proceed unless you are confident that you understand the applicable rules and potential consequences. For example, what will happen loan payments are not made on time? Then what happens if loan payments are not made on time and there is a need to value the loan? Exotic investments need sophisticated technical support and you cannot rely on the internet promoters of exotic investments.

You are 10000% correct. It's not a cake-walk. Tons of things can happen that create prohibited transactions and other violations. Typically, when these types of questions are asked from plan sponsors (especially one-person plans), the transactions ends of being for the primary purpose of benefiting the individual receiving the loan as opposed to providing a better investment return at a given risk level; which often leads to the problems. Sophisticated technical support is usually undervalued until the IRS comes in with a big charge; then you need someone to explain to you everything that went wrong :-)