Real Estate as Investment

[Stash026]

I have a Safe Harbor 401(k) Plan where the principals are looking to use their money for a real estate investment. Generally I would have no issue with this, but the plan for the property is to use it as a retreat to send clients.

Anyone have any experience with this type of thing? Would it be allowed, in theory?

Thanks in advance!

[jpod]

Seems like it would be, at a minimum, a 406(a)(1)(D)/4975©(1)(D) prohibited transaction to use the plan-owned real estate for that purpose.

[ESOP Guy]

Sounds like a PT to me also.

[masteff]

I would hope we can convince you that you should get cold chills when someone wants to put real estate into a retirement plan.

http://benefitslink.com/boards/index.php?/topic/53711-illiquid-asset/

How will you value the asset?

How will you handle a distribution?

What cash is available to pay the ongoing expenses of the property (taxes, insurance, etc)?

You say the "principals" want to the make the investment. Are other participants going to be permitted to invest? Have you evaluated if this creates discrimination (BRF test)?

In theory they could apply to the DOL for an administrative exemption to lease the property from the plan. No idea what that process entails.

http://www.irs.gov/irm/part4/irm_04-072-011.html

http://www.dol.gov/ebsa/publications/exemption_procedures.html

[shERPA]

Clearly a PT - using plan assets for benefit of a disqualified person, the plan sponsor (by using it to reward clients).

[401K_AZ]

EEK!

I was an investigator with the DOL/EBSA, and this exact situation was always used an example of PT in our training!

Also, the questions posed by Masteff are right on the money. Pooled Account of individual accounts?

They will need to plan on having an appraisal done annually. Where will the money from the property taxes, insurance, etc come from? The Plan?

Since this is a DC plan, then expect scrutiny from the DOL at some point. I am always weary when owners want to do some type of special investment within the confines of a 401(k) plan. There are so many ticking timebombs when real estate is a plan asset.