Exclusive Benefit Rule a Prohibited Transaction?

[Dennis G.]

I'm a TPA working with a self Trusteed Money Purchase Pension Plan plan that made a "donation" to a church from plan assets. The plan is currently a one-man plan.

Does this violate the Exclusive Benefit Rule? Is it a Prohibited Transaction reportable on Form 5330?

Any help is appreciated.

[QDROphile]

The "contribution" should probably be treated as (a) a distribution to the participant, and (b) a contribution by the participant to the church. The plan does not care about part (b). The distribution is improper under plan terms (at least with repect to the distribution procedures) and is subject to correction or plan disqualification. Correction should be under VCP because the actions were egregious.

[Dennis G.]

The "contribution" should probably be treated as (a) a distribution to the participant, and (b) a contribution by the participant to the church. The plan does not care about part (b). The distribution is improper under plan terms (at least with repect to the distribution procedures) and is subject to correction or plan disqualification. Correction should be under VCP because the actions were egregious.

I agree that the distribution (from plan assets, not a contribution to the plan) should have been made to the participant (who had reached normal retirement age) and then on to the church as his personal deduction.

But my question remains, does this meet the definition of a prohibited transaction and therefore subject to filing form 5330 with related excise taxes?

Thanks again.

[QDROphile]

If one accepts that the payment is treated, as a first step, as a distribution to the participant, I don't see any violation of the exclusive benefit rule and I don't see any transaction or self-dealing that would be a prohibited transaction. A participant can do whatever the participant desires with a distribution as far as those rules are concerned. So much the better that the participant was eligible for distribution. That may counter the statemnt about the error being egregious. I still expect that the distribution procedures were not properly followed.

[Peter Gulia]

Under ERISA 408©(1), it is not a prohibited transaction for a fiduciary to receive a benefit that is due to him or her according to the plan's terms. But if the payment described in the originating post was not a proper distribution (for example, because the participant had not retired or severed from employment, and that was the triggering condition under the plan's terms), consider that such a payment might be a prohibited transaction if ERISA governs the plan.

The rules and consequences under Internal Revenue Code 4975 are somewhat different.

Consider whether the plan's sponsor might have amended the plan before the questioned payment was made.

[david rigby]

This may be a symptom of a larger problem: the participant cannot distinguish between plan assets and any other assets. Consider whether further controls are needed to make sure it doesn't happen again.

[QDROphile]

It probably is the larger conceptual problem. But if you analyze transactions from the larger conceptual problem perspective, then you may have prohibited trasactions. That is the genesis of the question. If one wants to get at the root of the problem, then the direction by the participant to have the plan "contribute" to the church is a prohibited transaction (at least for tax code purposes) rather than misguided navigation of plan terms and procedures. I am not so sure about exclusive benefit violations.

[jpod]

While people can engage in a fascinating intellectual discussion of this situation, the fact remains that the only position to take to squirm out of it is that it was a constructive distribution. If it was an impermissible (constructive) distribution, then it is repairable through EPCRS.

If one takes the position that it truly was a plan-level contribution, then it certainly was a PT and almost certainly an exclusive benefit violation, and you've burnt the house down to the ground.