Can Plan Sponsor make a loan to a plan?

[TPApril]

One-person plan, invested in illiquid assets. There is no cash (annual contribution is paid out annually as RMD).  Some kind of payments were due on the real estate holdings (taxes maybe) so Plan Sponsor put money into plan, separate from annual contribution, and then paid the expenses out of the plan.  Owner has informed us of this and that she treats the money as a loan to the plan, although no loan documents were ever set up and no interest payments back to owner ever made.  Contemplating what to do now.

[Lou S.]

Sounds like a prohibited transaction.

[Mike Preston]

I think there may be a cash flow PTE. 

[QDROphile]

There is a "cash flow" PTE, but these facts do not appear to qualify.

[ESOP Guy]

I have to look up the PTE but if you Google 80-26 loans you can find the rules to see if it fits or not.  

Not that this helps but add this to the long line of threads on here about why you don't put illiquid investments into plans.  

[Below Ground]

You say they put money in separate from the contribution.  What does that mean?  Is it just another deposit?  Monies contributed to pay expenses are a portion of the employer contribution, and must be allocated as such.  Are you exceeding the maximum deduction or 415 limits?

[Luke Bailey]

80-26 says the employer can make a no-interest loan (has to be no interest) to pay "operating expenses," which include benefit payments (e.g., they might include the RMDs). I don't think 80-26 specifically addresses investments, but I know the IRS position is that making an investment is not an "operating expense." Maybe payment of taxes on an existing investment is arguably a gray area. I don't believe the loan is required per se to be in writing, but DOL says that an unwritten loan would generally be imprudent, because there would be no documentation for the plan's repayment obligation to the employer.

If a loan, then not a contribution, so 415 not an issue, and of course not deductible. I guess IRS could try to as a disguised contribution, since a one-person plan and the loan, even if repaid, benefitted the participant since did not need to liquidate illiquid investments.

Sounds like a facts and circumstances thing, but based on what you described you're not clearly dead in water. Best thing to do would be to repay it promptly.