contributing stock to 401(k)

Sole proprietor wants to make contribution by contributing stock that he already owns to the retirement plan.  Without regard to the wisdom of doing so, is it even permissible?  

Thanks in advance for any guidance. 

Yes, if the property is unencumbered, and if the contribution is purely discretionary. If property is encumbered, then the IRS treats it as a sale, and therefore a PT.

You generally can't contribute property to satisfy a funding obligation (i.e. for a pension plan).

There are some exceptions under the PT rules that would allow non-cash contributions to a pension plan in certain circumstances, but I try to avoid looking at that stuff unless absolutely necessary...and would refer them to counsel anyway!

Thank you. 

Now as to the wisdom.  He has held the stock for several years.  It has no basis.  If he contributes the stock to the plan wouldn't he be exchanging the long term capital gains rates for ordinary income rates?

I am going to refer him to his CPA on this question, but when I refer I want to make sure he asking the CPA the right questions.

First, questions like this should always start out by asking: WHY does he want to do this?  We'll probably find out he thinks he's getting something by doing it this way the he won't get so the whole issue will be moot.

In addition (and without doing any research) the back of my brain tells me the contribution of property is considered a sale by the individual (so he would incur capital gain treatment currently) and then a contribution of that value to the plan.  And if it's not publicly traded, there are all the issues of valuation.

What does he think he is getting by doing this?  Why not just sell the stock and contribute the funds?  Is he thinking he's putting future growth of the stock into the plan?  Well, then if it's such a good investment, the plan can buy it back with the cash contributed.

Is it wise? Of course not, and we all know that's the right answer.  Don't do it!

If he is re-titling the property from personal to the plan's trust, there is an exchange of property between the plan and a party-in-interest.  When that box is checked 'yes' on the Form 5500, it's like saying "come audit me" in my opinion. 

I understand your position, Rosemary, but if I could play devil's advocate for a moment - it would seem that one would also would have to check the box 'yes' whenever a substantial owner takes a permitted participant loan to be consistent.  Likewise, wouldn't it be generally acceptable to answer 'no' regarding the OP's transaction, as it's ultimately a permissible transaction (or PT exemption)?  I don't think answering 'yes' is incorrect, but throwing up a red flag for the stock purchase (or for something as common as a participant loan) may be impractical compared to answering 'no' and then having to explain that the transaction was legal, should a random audit occur that questions the answer.  Wouldn't it be very likely that no action would be taken once the auditor understands that it was not a PT and not claim that the 5500 was incorrectly prepared?  What is the board's opinion on this?