401k plan holds mortgage for owner residence

[TPApril]

I generally try to leave my emotions out of my postings, but this time I'm stunned.

Brand new client finally sends listing of plan investments (2 weeks before 5500 is due) and included is an apparent mortgage loan by the plan to his residence, with the assurance that the loan was made in spouse's name before they were married. That is all the info I have at this time, along with the balance of the loan (no loan docs, date of loan, etc.). Husband/wife are only employees/participants. Trying to figure out what to do.....

[QDROphile]

if the husband approved the loan it really does not matter if the transaction were before the marriage unless it was so far before the marriage that the individuals did not know each other. However, the description of the transaction and the roles of the individuals does not facilitate an understanding of the transaction. A prohibited loan is a continuing prohibited transaction, so the PT is required to be reported on the current Form 5500. The fiduciary should hasten to correct the PT and maybe should inquire of the person who advised about the proposed transaction.

[jpod]

Sounds like it is a one-person plan exempt from Title I of ERISA. Has that been the case since the loan was made? If so, at least you don't have any DOL PT sanctions to worry about.

[My 2 cents]

Just wondering - how willing would the 401(k) plan be to initiate foreclosure if the mortgage payments are not properly made? Or are owner-only 401(k) plans exempt from fiduciary rules?

[TPApril]

As a one-person (+ spouse) plan exempt from Title I, if there is no PT, could you point me in the direction of the regulations stating that this is prohibited nonetheless? Issues as I see it are loan to spouse and living in the residence that the loan is a mortgage for. I apologize but I've never had to deal with these two circumstances before.

[GBurns]

Being exempt from Title 1 has no relevance. The transaction is under IRC 4975 which would prohibit it. DOL Advisory Opinion 93-33A explains the logic etc:

http://www.dol.gov/ebsa/programs/ori/advisory93/93-33a.htm

http://www.irs.gov/Retirement-Plans/Retirement-Plan-Investments-FAQs

http://sdirahandbook.com/self-directed-ira-401k-prohibited-transaction-disqualified-person-diagram/

[jpod]

Agreed that the PT is subject to excise taxes and still needs to be corrected, but I was just making the point that you wouldn't have to worry also about DOL sanctions and/or correcting in accordance with the DOL's correction program. The thought occurs to me now, however, that the facts appear to be so bad and the amount may be so great that this may also raise qualification issues under 401(a)(2).

[GBurns]

While a Title 1 exempt plan does not have to worry about DOL sanctions and correction program, they still have to file Form 5500-SF and are subject to the IRS sanctions and corrections program, which seems like being between a rock and a hard place.

http://www.irs.gov/irb/2015-24_IRB/ar08.html#ftn.d0e528

[jpod]

they can file an EZ