Ineligible Assets - Audit Info

[RestAssured]

Hi All.  I have searched for my answer, to no 'recent' avail.

I have a small business owner (himself, his wife, and 3 employees) in a 401(k) plan who would like to invest his balance in a Limited Partnership (which holds real estate).  This group is already in segregated accounts, but the owner's investing of almost 100% of his own balance is still way more than 5% of plan assets.

The plan would still need an independent audit, correct??  Obvious answer, I think.

Besides this question, can someone please point me into some reliable source for learning more about question #6 a & b on the 5500SF - ineligible plan assets and the subsequent plan audit requirements?

I greatly appreciate it.

[Belgarath]

Re your first question only - not necessarily. If the bond is increased to at least the full amount of the non-qualifying assets, and you meet enhanced SAR requirements, you could still avoid the audit. Take a look at DOL regulation 2520.104-46 for detailed info on the subject.

[RestAssured]

Thank you!  Very helpful.... off to look at that now!

[RestAssured]

Can someone smarter than I explain the difference between "qualifying plan assets" and "eligible plan assets"??  I have highlighted until my pens are nubs, and I'm just going 'round and 'round with myself....

[Belgarath]

Without doing any research, and going from memory...

I think you are looking at the distinction to determine whether you are ELIGIBLE to even file a 5500-SF, regardless of the IQPA Audit waiver issue, or whether you must file a 5500 as a small plan with a Schedule I.

If you look at the definition of "eligible assets" in the SF instructions, I do seem to recall there are certain differences, such as Employer Securities. If there are employer securities, you can't file the SF. On the other hand, if you are looking at the 5500 Schedule I, you CAN have "qualifying employer securities" in the list of allowable assets when claiming the IQPA waiver, which you can do for a small plan 5500.

So I'd start with comparing those two "lists" in the instructions to the 5500-SF, and the 5500 Schedule I.

But check carefully, as I'm going from memory only. Caveat emptor!

[RestAssured]

I appreciate it, Belgarath.  You are right - I am trying to determine what situation constitutes having a IQPA in a small-plan.   I think I'm making more sense of it all now.... gone through the instructions for Schedule I, line 4k.

Please confirm that my understanding is correct (taken from Schedule I instructions for line 4k).

A small plan is eligible for the waiver of the IQPA audit if:

1) at least 95% of the assets are "qualifying plan assets" OR the person handling said assets is bonded for at least the value of the NQAssets.

and

2) The Summary Annual Report names the regulated financial institution(s) holding or issuing the qualifying plan assets & the value of those, names the surety company that issues the fidelity bond (if NQA are >5%), tells parts/benes they have the right to examine & receive copies of bond &/or statements (and that the parts/benes may contact EBSA if they aren't given access to those items).

and

3) A participant or beneficiary may examine & receive copies of evidence of surety bond and/or financial institution statements of assets.

 

My client's situation is that there are approximately 5 participants in the 401(k) PS Plan.  Owner, his wife, and 3 ees.  All segregated accounts with investment control.  The owner's balance is just over a million dollars.  He wishes to invest $1MM of his own balance in a real estate limited partnership.  This investment is over 5% of the plan's total assets.

According to my findings, if I'm correctly understanding them, my client can avoid a plan audit by increasing his fidelity bond to cover the $1mm non-qualifying plan asset.  The SAR will be up to snuff, obviously.

 

PLEASE tell me I'm right!  Thanks 🤪

[Belgarath]

I think you are correct, but depending upon the Trustee, you might not even need the increased bond. If the Trustee of the limited partnership asset is a "regulated financial institution" (and you can look up that term, but a bank, for example) then the limited partnership should be considered a "qualifying asset."

[Paul I]

The easiest place to look is in the instructions for Schedule I for the 2022 Form 5500 page 49 Line 4k.  The instructions include examples which use a limited partnership to illustrate how the rules apply.  The example also discuss how you may qualify for the audit waiver if the plan has an adequate amount of fidelity bond coverage.

2022-instructions.pdf

[RestAssured]

4 hours ago, Belgarath said:

I think you are correct, but depending upon the Trustee, you might not even need the increased bond. If the Trustee of the limited partnership asset is a "regulated financial institution" (and you can look up that term, but a bank, for example) then the limited partnership should be considered a "qualifying asset."

Thanks again.  The Trustee of the LP asset is not a regulated financial institution.  : /

 

2 hours ago, Paul I said:

The easiest place to look is in the instructions for Schedule I for the 2022 Form 5500 page 49 Line 4k.  The instructions include examples which use a limited partnership to illustrate how the rules apply.  The example also discuss how you may qualify for the audit waiver if the plan has an adequate amount of fidelity bond coverage.

2022-instructions.pdf

Thanks Paul I,

I spent hours scouring that instruction page this morning, along with the fed regulation involved.  It's a little clearer to me now, ha ha.  I think my client is able to waive the IQPA audit, if he increases his fidelity bond.  I reaalllly hope I'm thinking correctly - I can't see how I'm wrong but there's a first time for everything.  😅

[bito'money]

One thing you may want to warn your client about is that he may end up owing unrelated business income tax on the limited partnership interests (which can involve filing 990-T annually and paying the associated tax).