PTE For Distribution Made From Business Account

[Connor]

Regarding the PTE that permits a plan benefit to be paid from the employer's corporate account due to the plan's illiquidity as long as there's an agreement in place for an interest-free, unsecured loan, does anyone know if there are any limitations for the term of the loan or repayment frequency?  For example, can the loan be for 18 months with the entire amount repaid with one payment at maturity or sooner?  Thanks in advance.

[Peter Gulia]

Yes, the key is that the terms be spelled out in the written obligation.

To see the current conditions, skip to the last page.

Amendment to Prohibited Transaction Exemption 80–26 (PTE 80–26) for Certain Interest Free Loans to Employee Benefit Plans, 71 Fed. Reg. 17917, 17920 (Apr. 7, 2006) https://www.govinfo.gov/content/pkg/FR-2006-04-07/pdf/E6-5075.pdf

Consider how the loan will be reported in the employer’s financial statements.

Consider how the obligation will be reported in the plan’s financial statements and Form 5500 report.

In both, it might be a related-party transaction (even if it is an exempt prohibited transaction).

{The underlining is not mine.}

[Peter Gulia]

If the loan is unsecured and at no interest, why would the plan repay sooner than its obligated due date?

Or would the terms include a discount on an early repayment?

[Connor]

Thank you for your response and for the cite.  A discount is being considered for a prepayment, but I wanted to start with the basics.  It also makes me think this type of relief could be abused by setting the maturity date many years into the future, even for small amounts. 

Regarding its reporting on the 5500, I imagine showing it as a payable would be the way to go.  Also, would you happen to know where a sample of such loan language may be available?  This a first for us and, though we could try to modify promissory notes for other types of loans, we want to make sure all of the appropriate terms are in order.        

[Luke Bailey]

35 minutes ago, Connor said:

this type of relief could be abused by setting the maturity date many years into the future, even for small amounts

Connor, what type of abuse do you have in mind? The only one I can think of is a disguised contribution in the case of a small DC plan, but Treas. Reb. 1.415(c)-1(b)(4) would in theory prevent that.