§4975(e)(2)(C)

[Dalai Pookah]

Aaron is an employee of Corporation X and a participant in X's DB plan. Corporation X is owned 100% by Zelmo, totally unrelated to Aaron.

Aaron also owns 100% of Company Y.

Assuming no ASG, would a loan from plan X to Company Y be a prohibited transaction under §4975(e)(2)(C)?

I think it is.

Would the answer be any different if Company Y were a limited partnership and Aaron 99% limited partner and an unrelated entity 1% GP?

[My 2 cents]

Through what sort of financial analysis was the decision made that the best possible investment for Plan X's assets is a loan to Company Y?  The decision would have been made by the Trustees of Plan X.  Not by Company X and not by Zelmo.  By the Trustees of Plan X, acting as fiduciaries, and not as people beholden to either Company X or Zelmo.

I suspect that a loan from Plan X to a company owned by a participant in Plan X is a prohibited transaction.  It being so easy to imagine conflicts of interest and self-dealing in the decision to make the loan, it seems as though it ought to be.  How would one distinguish between a loan to Company Y and a loan to Aaron?   Also, it could make a difference whether Aaron is a highly compensated employee with respect to Company X and/or Zelmo.

I am not a lawyer, and some of the issues here could require a close legal analysis to determine if Company Y would be treated as a disqualified person on account of it being owned by Aaron (who would, as a plan participant, be a disqualified person).