401(k) Plan with 20 participants wants to purchase Private Investment

[Dougsbpc]

We administer a self-trusteed 401(k) plan that offers self-directed investment accounts to all participants. I believe each can purchase mutual funds through their American Funds account. The plan does not restrict each of these participant to just mutual funds but also allows for private investments.

One of the participants wants to purchase a small Almond Ranch. He would like to personally invest $400,000 and invest $600,000 from his plan account. There would be strict accounting splitting the income and expenses each year for both the individual portion (40%) and the plan portion (60%). If this is followed we do not think there would be a prohibited transaction.

We know somebody needs to run the Almond Growing entity. They could get 3 leased employees from a PEO. Correct me if I am wrong here (I very well could be). I believe that after this potential transaction, they would need to cover these leased employees in their plan if the leased employees are substantially full time. I believe substantially full time is 1,500 hours or more per year. What if they had 3 Leased employees who would be restricted to only 1,200 hours per year? I would think the leased employees would ever become eligible for the plan.

Another Issue might be UBTI. Does anyone think UBTI would apply in this case?

Thanks!

[QDROphile]

Why is the individual involving the plan in the purchase rather than buying the ranch entirely with personal (non-plan) funds? In these types of propositions I am concerned that the individual is using plan funds to serve personal (non-plan) interests, such as enabling the purchase when the participant does not have enough money outside the plan to cover the purchase price. That fits my understanding of a prohibited transaction.  I also think it is a set-up for future PTs and other problems as the ranch is operated. Is the plan capable of covering its share of potentially unlimited demands for more capital? Qualified plans are not meant to operate businesses.