Name of the Investor on K-1

I have a dental practice (PA, in the State of New Jersey) that sponsors three profit sharing plans, each with individual accounts. One for each dentist (Dentist #1 profit sharing plan; Dentist #2 profit sharing plan).  The third plan is Plan #3 is for the employees of the PA.

Keeping in mind, the plans are all sponsored by XYZ, DDS, PA.

One of the dentists (Dentist #1) had decided to invest a portion of his account in a limited partnership and I've been on his case to see the original paperwork to determine if the registration was done correctly. 

I have a copy of the K-1, apparently the account is registered under the name of the Sponsor, but there is nothing n the paperwork that mentions this as an investment of "Dentist #1 Profit Sharing Plan".

They way this account is registered, this is NOT a plan investment, the Entity should be "Dentist #1 Profit Sharing Plan and I think must be re-registered correctly.

You may to look at the Dentist #1 Profit Sharing Plan financials to see if in fact the payment that was made to buy the asset came from that trust account.  If it did not, then the LP is not an asset of the plan that was registered incorrectly, but is an asset of whoever paid for it.

Just curious, how are assets in the employee plan #3 invested? Do they have individual brokerage accounts? If not is there a BRF issue?

Dentist #1, the one I'm questioning, I got the name changed to the correct plan.  He took 50% of individual account and gave it to his son to invest in an LP, which of course is a PT.  We told him, he does not care.

The balance of his account is an individual account with Nationwide.

Dentist #2, account with all in an individual account at Nationwide

Plan #2 invested all participants with Nationwide and a broker sat with them to determine risk tolerance.

Still, if employees are not given same general investment opportunity as owners, isn't that discrimination in BRFs? 

23 hours ago, thepensionmaven said:

Dentist #1, the one I'm questioning, I got the name changed to the correct plan.  He took 50% of individual account and gave it to his son to invest in an LP, which of course is a PT.  We told him, he does not care.

 

Who owns this asset?  Is it the plan?  Is it the son?  Is the son a partner in the LP?  This sounds like there is a lot more to the story.

If you are confident that this is a PT, I suggest that you point out to Dentist#1 the taxes and penalties associated with PTs.  Further, since the dental practice sponsors each of the plans, point out to all of the other dentist(s) that they each of them also are plan fiduciaries and are exposed to consequences of this transaction. 

They may also like to know that their ERISA fidelity bond likely does not cover this situation.

If they are not there already, it's time for them to start a conversation with an ERISA attorney.

Why is no one responding to CuseFan's concern--if the plan 3 participants are not being given the right to also invest in the LPs, you will need to show that the BRF is non-discriminatory. The right to make an investment decision is a "right or feature" under the 1.401(a)(4)-4 Regs.

7 minutes ago, FORMER ESQ. said:

Why is no one responding to CuseFan's concern--if the plan 3 participants are not being given the right to also invest in the LPs, you will need to show that the BRF is non-discriminatory. The right to make an investment decision is a "right or feature" under the 1.401(a)(4)-4 Regs.

I am guessing that all three plans are trustee directed, so on its face the arrangement is not discriminatory. It just so happens that the two docs are trustees and effectively self-direct their own accounts. I've seen it touted fairly often as being clean, but I'm not a fan and have never tried it.

On 6/7/2023 at 11:53 AM, thepensionmaven said:

Plan #2 invested all participants with Nationwide and a broker sat with them to determine risk tolerance.

Does this sound like its trustee directed?

What we don't know is whether an employee can request to invest in a brokerage account or other asset outside of a fund menu.  If they can but choose not to is different from they are not allowed to do.  The answer could be in the plan document, the SPD, or the 404(a)(5) disclosure.  It is a valid concern, but there is insufficient information here to know conclusively.

Determining if BRFs in small plans are non-discriminatory can be challenging.

First off, an attorney was the one who advised three separate plans, basically so they dentist whose son is an "investment guru" can do his own thing with his own plan and not jeopardize the other plans.

Originally one plan with pooled accounts, now segregated out into individual accounts, employees' portion into one plan, each dentists into their own.  These are rollover contributions

The 2022 contribution has not yet been made; the only money in these plans is the rollover money from the previous plan. I was reading a thread that mentioned there would not be any BRF issues as far as rollovers.

The funds are participant directed with about 10-15 funds Nationwide has available. 

As far as what the plan says regarding investments, 

Investments

L4. Participant Direction

Participants may direct the investment of their following Accounts (select one):

a. [ ] None

b. [X ] All Accounts

When you say "Trustee Directed", if the individual participant has discretion within a certain family of funds, how is that "trustee directed"

Or, as an example, are you saying that in a plan with 30 participants, in order for a plan not to be "trustee directed" each each participant could theoretically go to a different investment house and pick his own investments?  

I can just imagine the nightmare here, with participants that do not know how to invest, just doesn't make sense.

The dentist with the plan investments he gave his son to invest, is obviously the problem, but that should not effect the other two plans which are invested properly.

As far as CuseFan comment, we/re not exactly speaking of investment savvy employee participants, I would seriously doubt they have even heard of a limited partnership.

Back in the 80s, we were told to stay away from limited partnerships as a bad investment.  One of the trustees is making that choice with his own money, the minimum investment I understand is $500,000.  He's most probably going to loe it all nyway, so how prudent is the investment??

Again, since the dental practice sponsors all three plans, the other dentist(s) are co-fiduciaries of all of the plans.  One would think they would not want to be exposed to having a PT in one of the plans.

18 hours ago, FORMER ESQ. said:

Does this sound like its trustee directed?

I guess I mis-spoke or mis-read. But the argument (not mine) would be that since the two owners have trustee-directed plans, they as participants do not have special BRFs that create discrimination. Surely I'm not the only one who has heard this argument?

11 hours ago, thepensionmaven said:

Originally one plan with pooled accounts, now segregated out into individual accounts, employees' portion into one plan, each dentists into their own.  These are rollover contributions

The 2022 contribution has not yet been made; the only money in these plans is the rollover money from the previous plan. I was reading a thread that mentioned there would not be any BRF issues as far as rollovers.

Was the original plan terminated and then three new plans created, or was the original plan spun-off into 3 plans? If the latter then these are not rollovers, although I don't believe it matters. But it does concern me that the distinction is being made.

Three separate plans, not a spin off.  Attorney wanted it that way.

In any event, who would be "reamed" (pardon my frankness), the trustee who did this within his own plan or the plan sponsor, who sponsors all 3 plans.

The original opinion was the plan and trustee of his plan, not including the other two plans.

When talking about co-fiduciaries in this case, it is the plan sponsor (owners of the dental practice) AND the trustee of the plan with the PT.  The son as investment guru almost certainly has skin in the game, particularly if he is making investment decisions independent from the plan fiduciaries and even more so if he is receiving compensation related to those investments.

I wasn't so much concerned with NHCE access to the same specific investment (LP), but having a similar investment environment, whether trustee directed or participant directed with or without a brokerage window. One plan or three plans, that is a BRF that must be nondiscriminatory.

Owners get to individually invest in nearly anything they want (forget about the questionable investment) and employees all get to choose among Nationwide funds? And that isn't discriminatory? Are you saying because these owner plans only have rollovers that BRF is not an issue? 

If they have qualified ERISA counsel telling them this is all OK, then so be it - just doesn't pass the smell test for me that's all.

All three plans, at the moment, hold only the rollovers from the original plan.  Contributions for 2022 will be made to these accounts when the account gives me the W-2s and added to the participant accounts as "employer PS"; rollovers from prior plan are noted as "participant rollover".

On 6/9/2023 at 9:15 AM, thepensionmaven said:

Three separate plans, not a spin off.

But what you describe below is a spinoff. I think you are using the term "rollovers" incorrectly. Unless the original plan was terminated and everyone elected to roll over money into the new respective plans. I'm not sure it matters in the context of your question but precision matters.

On 6/9/2023 at 8:36 PM, thepensionmaven said:

All three plans, at the moment, hold only the rollovers from the original plan.

The original plan was terminated.

The original plan was terminated and each participant rolled over his share of the plan into the new plans

Lastly, all current accounts in 3 plans are classified as "rollovers/transfers from prior plan"; so this was actually done correctly.

The LP was purchased by Dentist #1 as part of his rollover from the prior plan. The minimum investment in the LP is $500,000.  Since he is the only participant, and since no other participant has more than $150,000 in transfers/rollover from prior plan,  none of the other participants would have enough money to invest in this asset.

Based on this information, and this is a stretch,  an investment by one of the dentist/trustees in the LP would not be a BRF.  This investment is solely his, owned by his plan.

Is this off-base?

4 hours ago, thepensionmaven said:

an investment by one of the dentist/trustees in the LP would not be a BRF.

That is indeed the theory. Again, I am not an advocate of it.

And then a rank and file guy says, hey, use 5,000 of my account balance towards your 500,000 investment.

Having an investment that requires a $500,000 minimum is discriminatory. 

Consider self-directed brokerage accounts.  If a plan only allows SDBAs with a high minimum investment requirement, it is discriminatory.

In this instance, it is apparent that a lot of time and effort has been expended to construct a scenario for the sole purpose allowing one owner/trustee/HCE to make an investment not available on a nondiscriminatory basis across the controlled group.

You may or may not want to work with the client who stretches the rules to that extent.  If you work with them, you may want to make it clear that your services do not encompass commenting on the investments or on nondiscrimination of BRFs.  You may want to keep whatever documentation is available that indicates the attorney advised the client and the attorney directed or actually constructed the arrangement.  You may even want to disclose the circumstances to your E&O provider.

And may luck be with you.

On 6/16/2023 at 6:43 PM, Paul I said:

Having an investment that requires a $500,000 minimum is discriminatory.

I might be mis-remembering but I'm pretty sure the IRS has said that an investment that has a minimum is ok. It's a plan feature, such as a self directed brokerage account, with a minimum, that is not ok.

Back to the general arrangement here, I don't want to be the one defending the it but as I said earlier, it's not a novel concept dreamed up for this one plan(s). The idea is that you have plan 1 with an HCE(s), trustee directed, plan 2 with an HCE(s), trustee directed, and plan 3 with NHCEs, participant directed. There is no discrimination on the setup. The fact that the trustee(s) decide to invest in certain assets is, in theory, not relevant.

Lots of people here talk of involving an ERISA attorney for any perceived problem, and here you have an attorney, presumably versed in ERISA, who has blessed the arrangement. I'm not sure what else can be done besides saying to the client that it is aggressive but you are deferring to the attorney. Going to your E&O carrier is only going to give you a headache.