Prohibited Transaction?

[Randy Watson]

1. Company A sponsors Plan.

2. Father is 100% owner of Company A.

3. Son is member of LLC.

4. LLC and Plan become limited and general partners of Partnership.

Son is a disqualified person by virtue of his relationship to Father (who is the "fiduciary" and the "employer"), but is LLC a disqualified person? It doesn't appear to fall under any of the definitions. If LLC is not a disqualified person, how sound is the argument that this transaction was solely between LLC and Plan and Son was not part of that transaction (despite being a member of LLC)?

HELP!

[jpod]

Thoughts:

1. If it is a single member LLC owned by son, the LLC is ignored for tax purposes so, I would think, it is treated as a direct investment by the son for purposes of the PT rules of Section 4975 of he Code (if not also for Title I of ERISA but frankly what difference would that make anyway once you get him hooked by 4975).

2. Doesn't it smell like a "self-dealing" PT even if the LLC is not a DP or PII?

[Randy Watson]

Thoughts:

1. If it is a single member LLC owned by son, the LLC is ignored for tax purposes so, I would think, it is treated as a direct investment by the son for purposes of the PT rules of Section 4975 of he Code (if not also for Title I of ERISA but frankly what difference would that make anyway once you get him hooked by 4975).

2. Doesn't it smell like a "self-dealing" PT even if the LLC is not a DP or PII?

Nope, doesn't past the smell test at all...which is why I am here.

Which PT would you consider this to be? The use of plan assets to benefit the employer/fiduciary?

And how would we unwind this? Is it correct to assume that the Plan's interest or the LLC's interest in the partnership would have to be sold to a third party?

[jpod]

I assumed that the Father, or a person under the Father's thumb, is the fiduciary who made the investment decision for the plan, and therefore it is most likely an act by a fiduciary using plan assets for his own benefit (i.e., the motivation is to help the son).

Answer to your second question is trickier. Completely undoing it so Plan gets its money back (perhaps with interest) would do the trick, but there would still be a risk of excise taxes and DOL enforcement for the period of time prior to the transaction being undone. Lot's of luck finding a third party to buy this thing from the plan which wouldn't be another potential PT.