Transaction between plans of same employer

Employer has 2 plans.  Can one plan lend the other money for an investment?

I don't think a plan fits into the Disqualified Persons list but doesn't seem like it should be ok.

(DB Plan to lend to PS Plan for a non-publicly traded investment in land.  Trying to keep DB out of the investment due to annual valuation issues.)

Thank you

Things to watch out for:

• Prohibited transactions
• Choosing investments to benefit the sponsor rather than the participants
• Issues with fair valuation of the investment
• Issues with illiquidity
• Just guessing here, but is one plan mainly benefiting the owner and the other plan mainly benefiting young, rank-and-file employees?  Does this investment at least work neutrally with respect to its possible adverse impact on the latter group? 

Out of all the normal, liquid investment vehicles out there, is this the best they can do when they are wearing their "fiduciary" hats?  If the owner wants to invest in a non-publicly traded real estate investment, let them do so without involving either plan, especially if the owner has any further interest in it.

Don't PS plans have to also deal with annual valuation issues?

it is a one person company.  Yes, PS Plans have valuation issues but at least they don't impact minimum funding requirements.

The Prohibited Transaction issue is what I am worried about.  I don't see how plans fit into the Disqualified Persons/Party In Interest lists so maybe it is ok?

Possible debt-financed income and UBTI for the PS plan? (I've done no research whatsoever to see what parameters/exceptions apply, so this is purely a random thought.)

Whenever a plan sponsor wants to do something like this that might be a PT I always refer them to qualified legal counsel for an opinion.

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You may get around 406(a) issues but watch out for 406(b).  The plans are naturally adverse in any loan transaction and if the trustee/plan fiduciary is the same you could have a 406(b)(2) problem.  This really needs help from counsel.  Below is in a multiemployer context...

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/faq-leasingarrangements.pdf

Multiemployer Pension Plan A leases office space in a building it owns to

Multiemployer Health Plan B. The plans are not parties in interest with respect to

each other but they share common trustees, and as lessor and lessee, the interests of

the plans are adverse to each other. The common trustees of the plans would be

acting on behalf of both plans in violation of section 406(b)(2) of ERISA. However,

based on these facts alone, there is no violation of section 406(b)(1) of ERISA

because the trustees would not be acting in their own interests

Also on 406(a)

http://www.benefitscollective.com/wiki/EBSA_Advisory_Opinion_1993-18A

With regard to your first question, the Department has addressed the issue of whether related plans are parties in interest with respect to one another in Prohibited Transaction Exemption 76-1 (41 Fed. Reg. 12740, 12744, March 26, 1976). As explained in the preamble to that exemption, two or more plans are not parties in interest with respect to each other merely because they are maintained by the same plan sponsors or have trustees or fiduciaries who are common to the plans. A plan may be a party in interest with respect to another plan, however, if it has a relationship to the plan as defined in section 3(14) of ERISA. For example, a plan may be a party in interest with respect to another plan under section 3(14)(B) of ERISA if it provides services to such plan.<

Thank you.  I think the answer is that the problem lies in setting the interest rate on the loan since "the interests of the plans are adverse to each other."

Thank you, again.  Great knowledge!

I continue to be concerned - it would certainly be unacceptable if the sponsor or its owner stood to benefit from the non-publicly traded investment.  The selection of the investment is not to be made with the owner's interests in mind!

If these are both one-person plans exempt from Title I of ERISA then neither the general fiduciary rules of ERISA nor the PT rules of Section 406 of ERISA applies.  The IRC Section 4975 PT rules still may be a concern, but note that whereas this would probably be a per se PT under 406(b)(2) of ERISA there is no provision like 406(b)(2) in IRC Section 4975.  However, there still could be another self-dealing type of PT under 4975, even if neither plan is a disqualified person with respect to the other plan.     

I think one needs to think through the practical issues that can come up.  What happens if the investment goes bad and value goes to zero?  Will the PS plan have enough funds to pay back the other plan?  if not, will that cause issues?  I realize since it is a one person plan it isn't like employees are out money but I would at least ask the questions what if things don't work as planned. 

Cuaiar v. Marshall, 590 F.2d 523 (1979).

That case is not relevant to a non-ERISA plan.

I thought that any borrowing by a qualified plan (other than an ESOP) was not allowed.  I worked on a small DB plan where the owners held the money in a brokerage account and bought shares using margin.  That was a no no and generated some kind of excise tax penalty.  I can't cite the chapter and verse right now, though.

18 minutes ago, acm_acm said:

I thought that any borrowing by a qualified plan (other than an ESOP) was not allowed.  I worked on a small DB plan where the owners held the money in a brokerage account and bought shares using margin.  That was a no no and generated some kind of excise tax penalty.  I can't cite the chapter and verse right now, though.

That was noted above when someone talked about the UBIT. 

Borrowing is perfectly fine as long as it is isn't a PT or part of a PT.  There's nothing impermissible about UBIT.