That's not cash, is it!

50,000 in a has-a-ticker-symbol MM fund transferred in kind to a owner-only DB plan last month as a calendar year plan's 2023 deposit.  Smells bad because it's not really cash.  Am I right? 

(And what's the way out of it?  I read a bunch of past threads here and it sounded like "sell it at arm's length" but who's gonna pay this guy's plan 50,000 in actual cash to buy his plan's mutual fund?)

Thanks!

--bri

Ticker symbol?  Could it be "money market"?

Right, (MM = money market) fund.  Not *actual* cash, correct?

Ignoring, for analysis, the transaction with a disqualified person:

Imagine:

(1) the individual redeemed her money-market fund shares for money;

(2) the individual paid money to the employer (a capital contribution, or a loan);

(3) the employer paid money into the pension plan’s trust; and

(4) the pension plan’s trust bought money-market fund shares as the plan’s investment.

Is the practical result of what happened similar to, or much different than, what would have resulted had the business owner done those four steps?

Does the pension plan allow a contribution by a delivery of property other than money?

If not, can the plan sponsor amend the plan to ratify a contribution by a delivery of property other than money?

Peter, the issue is that minimum required contributions to defined benefit plans must be satisfied by cash contributions. You cannot satisfy funding obligation by contributing property.

On 1/19/2024 at 2:53 PM, Bri said:

Right, (MM = money market) fund.  Not *actual* cash, correct?

Money Markets are considered cash equivalents. I doubt there is any IRS auditor who would raise even one eyebrow at the contribution being made in the form of a money market transfer to the Plan.

I really meant my three questions as questions. (I lack knowledge about tax-law rules for defined-benefit plans.)

If the answer to my question: “Does the pension plan allow a contribution by a delivery of property other than money?” is No, or that the employer prefers not to use such a provision (perhaps because the contribution would not meet a funding obligation, or it would fail to meet a condition for the plan’s tax-qualified treatment), here’s our next question:

Does the economic substance of what happened suggest an opportunity for a correction?

Could the plan’s trustee redeem the trust’s money-market fund shares for money?

Could the plan’s trustee return that money to the employer?

Then, could the employer pay, in money, a proper contribution to the plan’s trust?

(Or, could the trustee and the employer simplify transactions by treating the trust’s retention of the redemption’s money as an offset against the employer’s obligation for the contribution? With the employer paying, in money, the additional amount needed to make the sum correct?)

Is it feasible for the employer and the plan’s one participant to bear the consequences that result from the contribution being paid later than it ought to have been paid (or later than some related point treats the contribution as having been paid)?

I suppose in the big picture, the IRS would have to (a) choose the plan, (b) be aware of the rule, and (c) interpret the rule specifically to say a money market transfer would indeed not count. 

But as it does apply towards specifically the MRC, perhaps there's an "easy" out if the sponsor exceeds the MRC by 50,000 or more for the year. 

The plan document does specify employer contributions will be made in cash.

Anyway, Peter's comments are sort of my original thoughts - if this *is* a mild blip in terms of doing it perfectly, what's the proper fix?  Returned as a mistake of fact or based in nondeductibility, and then re-contributed as "actual" cash?  Sell it for cash (to whom) ASAP and then re-purchase it with that cash?  Is there a 15% penalty for the use of the money by the plan for a month? 

Seems like a molehill with mountainesque ambitions.

Bri, instead of “sell it to whom”, if the mutual fund is a registered-investment-company open-end fund (and most money-market mutual funds are an open-end fund), a shareholder likely has a right to redeem shares with the fund itself—no need to find a buyer. A redemption of shares of such a fund is based on a net asset value of the securities and other property the fund holds. A money-market fund typically adjusts its accounting every NYSE day so a share’s NAV and redemption price is $1.00 per share every day. If the shares were worth $50,000 when delivered to the plan’s trustee, the trust likely holds a smidge more than 50,000 shares now.

But “show your work” for the corrections, and see to it that the individual’s income tax return, the employer’s income tax return, and the pension plan’s information return all disclose what happened and how it is corrected.

And when the business owner pays extra for that incremental work (or sees his tax preparer and you graciously do it without seeking an extra fee), remind him how much easier it would be if he consults the professionals first.

Again I would be shocked beyond belief if the IRS took the position that a transfer of Money Market shares was not considered a contribution "in cash" as once again money markets are considered cash equivalents and designed to have a fixed 1.00 share equivalent.

I suppose if we get to a point where "breaking the buck" becomes somewhat commonplace, then money markets will no longer be considered cash equivalents, until that day comes though I personally would not give it a second thought.

Though if you are super concerned then I would recommend you advise your clients to sell money markets for cash, transfer the cash to the Plan, and then buy whatever investments they want in the Plan, including perhaps repurchasing the money market. It's not like they are transferring bitcion, bars of silver or some other form on floating value currency.

There is a difference between a money market account and a money market fund. 

A money market account is a liquid bank account that earns interest and is covered by FDIC. 

A money market fund is a liquid short term bond fund, earnings are considered dividends,  not covered by FDIC and has a ticker symbol.  The issuer generally guarantees a $1 NAV, however in 2008 some funds went below $1.

I think you need to consider the intent of the rule, which is to avoid issues relating to valuation and capital gains taxes. So I don't think it is a problem.

Frankly, it's probably harder to transfer shares than it is to redeem them and send a check, so it's a bit puzzling why someone would bother. It raises a small red flag about the titling. (I don't believe you can ACAT shares to and from accounts that are titled differently, at least not without a lot of paperwork.)

[edit for typo]

Yeah, but somebody's got to sign the SB.  I wouldn't do that without legal guidance.

Unless it gets reversed and redeposited - maybe that's the answer.

We cannot overlook the DOL.  Per the EOB:

"Contribution of property is generally a prohibited transaction. A contribution of property (rather than cash) to satisfy a funding obligation is treated as a sale of property to the plan and is a prohibited transaction. See Commissioner v. Keystone Consolidated Industries, Inc., 113 S. Ct. 2006 (1993). The DOL has provided guidance on the Keystone decision in Interpretive Bulletin 94-3, DOL Reg. §2509.94-3. According to the DOL, all in-kind contributions to a defined benefit plan are prohibited transactions, even if the value of the property exceeds the minimum funding obligation, because the contribution would result in a credit against funding obligations which might arise in the future. See DOL Reg. §2509.94-3(b)."

The interpretive bulletin found here https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-A/part-2509/section-2509.94-3#p-2509.94-3 provides more details on the DOL's viewpoint.