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Real Estate Investment (under construction) in company plan

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Partner in a firm is asking to invest part of his retirement plan balance in real estate.

I've never been a fan of this, nor have I seen it in a non-owner only plan.

Participant is not eligible for an in-service distribution so is unable to move balance to an IRA to do this.

They understand it cannot be their primary residence, nor used for the company and plan to use it for rental income. They understand it must be fairly valued every year.

The real estate in question may or may not actually exist yet, as it may be at this time a down payment on a unit in a new development.

Plan already allows for self directed/brokerage accounts for all participants.

I feel like I'm just not thinking of relevant issues, I just have a queasy feeling about this.

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If it is a plan required to have an ERISA bond, I would see if they have priced that coverage. It depends on how the real estate investment is structured, but it can be expensive. 
I once had a small plan sell their real estate when they realized they were paying several thousand a year for their bond to cover it properly. 

I would also see if there is a benefits, rights, and features issue. Will other participants, particularly NHCE, have the ability to invest their plan assets in this (or a comparable) investment? Have they been informed so in writing, including who to contact at the plan to do so? 

Will the partner also be investing non-plan assets in this development? Such as personal money? Is there a conflict or prohibited transaction there to consider? 

If using it for rental income, is there UBTI to consider and report? 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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1 hour ago, justanotheradmin said:

Will the partner also be investing non-plan assets in this development? Such as personal money? Is there a conflict or prohibited transaction there to consider?

I don't have that much information, but they are contemplating whether it will be more effective in the form of a limited partnership that the partner has a partial ownership in.


42 minutes ago, Bill Presson said:

Any chance the investment is less than $50,000 and they could borrow the money to fund the investment personally?

If that was the case, this question wouldn't have been asked :).

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  • 1 month later...

I have a bunch of questions related to this as well. I have a client that has a 401k plan with father/son partners and 3 other NHCEs. They want to ALLOW everyone to invest in a private real estate fund (for investment purposes, so no PT) as a choice amongst other traditional mutual funds in the menu.

1) It was mentioned above that you could do this in an IRA. Is that really possible? Which vendors could handle that? That is definitely better than my client demanding to allow it in their 401k plan.

2) Since it is a participant-directed plan, must the RE fund provide a valuation every quarter? Or is annually enough?

3) What is the requirement for a 5500 long-form vs. short-form?

4) What is the requirement for an annual independent audit?

Besides this being "messy”, is there anything else to be concerned about? Thanks in advance.


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Remember that I am not an investment person, but a few thoughts:


1. doing something "for investment purposes" doesn't determine whether it's a PT or not. Might impact whether there is UBTI, but not PT.

2. I think allowing this investment as you describe it is a very, very bad idea.

3. Perhaps they could find a good REIT or ETF that would scratch this itch.

William C. Presson, ERPA, QPA, QKA
C 205.994.4070


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They "know someone". Basically a small group of investors who buy properties for income. If they are not receiving any personal benefit from the real estate and offering the option to invest to ALL of their participants, what other concerns about a PT would there be?

And I would still be interested in hearing more thoughts on my other questions if possible. 


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