Employer Contribution in Cash

[Dougsbpc]

I believe employer contributions to a profit sharing or 401(k) plan must be funded in cash correct?

In other words, if a company has non-related stock (basically an investment), they cannot use that investment to fund the plan correct?

Thanks

[MoJo]

I believe employer contributions to a profit sharing or 401(k) plan must be funded in cash correct?

In other words, if a company has non-related stock (basically an investment), they cannot use that investment to fund the plan correct?

Thanks

I'm not aware of any restrictions on in-kind contributions to a plan. In fact, I just had the same question arise concerning the use of gold (the actual physical commodity) as a contribution to a plan and found nothing to prohibit it. There are, however, potential valuation issues, deductibilty and income recognition issues on the part of the plan sponsor, and potential prohibited transaction issues (depending on the property, and a variety of other factors not relevant here).

In addition, there is the question of whether it is prudent to continue to hold the asset once it becomes a part of the trust, but that is a separate issue.

[Belgarath]

Contributions to a PENSION plan have to be in cash - can't contribute property. I think I recall this was Keystone but you wouldn't want to quote me on that. As MJ says, contributions of unencumbered property to a PS plan are generally ok, subject to all the other requirements...and of course, the plan document must permit it!

[ESOP Guy]

Don't under estimate the practical problems. You have to be able to document the value you use for gain/loss every year. If you don't get it appraised you have to mark a box on the 5500 saying so. If you value it too high or too low when putting it in or when a distribution is made you have a problem. When it is time to terminate the plan you will have issues getting it out if one can't sell it.

I am not an expert on small plans and the audit exception. But I seem to recall if you have too much of certain types of assets in the plan you can end up needing an increase bonding or an audit. What happens if the sponsor says it is worth X and the DOL say Y where X <Y and you don't have enough bond to cover the DOL value. You could be required to get an audit for that year. That would be expensive.

In short I agree it is legal. The reason you don't see it happen is it is a pain in the rear to have in the plan.

[masteff]

What is the employer's intention once the stock/gold/etc is inside the plan? Will it be held as an investment fund? Will it go into employee directed brokerage accounts? Will it be immediately liquidated and treated as cash?

If it's not immediately liquidated, then you have the same fiduciary responsibilities as with any other plan investment option.

And why does the employer not want to liquidate the investment into cash before putting it into the plan? Is it to avoid transaction fees? Is it an appropriate fiduciary action to shift the burden of those transaction fees from the employer to the plan participants? If the stock is illiquid, what makes it even remotely appropriate as a plan investment?

[shERPA]

In my experience when clients have asked me about making contributions in kind, they are often under the mistaken impression that they will get a tax deduction for the FMV of the contribution without recognizing any gain due to appreciation of the asset. Once I explain that the contribution is treated like a sale for tax purposes they usually lose interest in this.

The other reason they often want to contribute an asset is because they have a required contribution and not enough cash. As noted above however, PENSION plan contributions must be in cash, otherwise it is a PT.