Owner-only PS Plan

[SMB]

The owner of a 1-participant owner-only profit sharing plan wishes to terminate her plan (not making any further contributions) and roll over plan assets to an IRA.

Plan currenlty holds some precious metal and coins as investments, but not enough to warrant using one of the "self-directed IRA custodians" willing to hold such "non-traditional" items.

These assets could obviously be sold and cash proceeds rolled over. However, if the owner prefers to retain these items, would it be a "prohibited transaction" for her to sell the precious metals and coins from the plan to herself for (readily ascertainable) FMV?

The plan may end up simply distributing these assets next year as part of her RMD, but wanted to make sure we had considered all "viable" options.

Thanks!

[Guest Sieve]

I suggest that a one-person owner PSP is considered self-directed so that these investments were not permitted in the first place, unless excepted (IRC Section 408(m)).

In any event, it would be a PT to sell plan assets to the employee/ower/participant--unless you apply for & receive an exeption.

[mbozek]

I suggest that a one-person owner PSP is considered self-directed so that these investments were not permitted in the first place, unless excepted (IRC Section 408(m)).

In any event, it would be a PT to sell plan assets to the employee/ower/participant--unless you apply for & receive an exeption.

Prop reg 1.408-10© provides that an individually directed account is an account under a plan that has the effect of permitting the participant to invest or control the manner in which the account will be invested. This indicates that application of the rule depends on who directs the investment. If the plan is a generic PS plan where the employer/plan sponsor acting as the plan fiduciary directs the investment of the plan's assets then the collectible rules do not apply. If the plan is a solo 401k where the sole participant has an individual account which is self directed then collectibles are not allowed for either employer or employee contributions.

Best option is distribute the coins as an RMD before terminating plan and rolling over the balance in same year, because first asset distribution must be an RMD. Also the final 5500EZ is due 6 months after the last assets are distributed from the plan.

[Guest Sieve]

That's one way of looking at it, mb. I look at it differently. To me, if the only participant is also the trustee, and the sole participant uses his/her trustee "hat" to direct/make plan investments, then, to my mind, the sole participant has ". . . an account . . . that has the effect of permitting a plan participant to . . . control the manner in which the account will be invested . . ." (emphasis added). Form over substance. I would be hard-pressed to make your argument to the IRS with a straight face . . .

[mbozek]

That's one way of looking at it, mb. I look at it differently. To me, if the only participant is also the trustee, and the sole participant uses his/her trustee "hat" to direct/make plan investments, then, to my mind, the sole participant has ". . . an account . . . that has the effect of permitting a plan participant to . . . control the manner in which the account will be invested . . ." (emphasis added). Form over substance. I would be hard-pressed to make your argument to the IRS with a straight face . . .

Since all DC plans can permit self directed accounts the restriction will apply to any plan which permits participants to direct their accounts including a Roth account. Investement decisions by a trustee as fiduciary of the plan is a different category than investment decisions directed by a participant for his own account which is recognized by both ERISA and the IRC. Your interpretation of IRC 408(m) would create a violation for every plan participant who also acts a trustee of a DC plan including a plan that only covers both spouses where one spouse is the trustee/fiduciary for plan investments or the owner of a business with common law employees who acts a the fiduciary.

If the IRS believes that the self directed account rule of IRC 408(m) applies to an owner/trustee who sponsors a solo PS or other DC plan that does not permit self directed accounts then it can easily update the 27 year old proposed 408(m) reg as the service did when it applied the wash sale rule to IRAs a few years ago.