Third Party Loan to a Solo 401K Plan

Is it possible for a third party to loan to a solo 401K plan?  

I have been researching and have seen some references that an arm's length third party loan to a Solo 401K Plan would represent an exemption from a prohibited transaction as long as the following conditions are met.  It must be non-recourse, pay a reasonable interest rate, and be for the benefit of the participants of the plan.

I would greatly appreciate it if someone could confirm (or refute) my assumptions.

Thanks in advance.

Do you have a real world proposal, or are you writing a treatise?  It is easier to evaluate a concrete transaction.

The plan is borrowing money from a third party?  And doing what with it?  There could be Unrelated Business Taxable Income ramifications for the plan.  Suggest you review those UBTI rules to see if it makes sense.

10 hours ago, QDROphile said:

Do you have a real world proposal, or are you writing a treatise?  It is easier to evaluate a concrete transaction.

Sure.  Solo plan is a limited partner in a private equity investment.  Capital call has been issued, but the plan does not have additional assets to make the call (also, can't sell other investments, no rollover available, and additional contributions would not be sufficient).  Offer has been made by a friend to lend @3% for 3 years.  Would this be permissible?

Thanks again.

1 hour ago, Bird said:

The plan is borrowing money from a third party?  And doing what with it?  There could be Unrelated Business Taxable Income ramifications for the plan.  Suggest you review those UBTI rules to see if it makes sense.

Solo plan is a limited partner in a private equity investment.  Capital call has been issued, but the plan does not have additional assets to make the call (also, can't sell other investments, no rollover available, and additional contributions would not be sufficient).  Offer has been made by a friend to lend @3% for 3 years.  Would this be permissible?  Would there be UBTI if it were?

Thanks again.

2 hours ago, retirementplanning said:

Would there be UBTI if it were?

Well, if you are borrowing to make an investment then it would appear so.  I know the red flag but not the details of the rules.

1 hour ago, Bird said:

Well, if you are borrowing to make an investment then it would appear so.  I know the red flag but not the details of the rules.

Bird,

Thanks for the reply.  Are you saying that the UBTI would likely be calculated on the profit generated by the loan amount?  Outside of the UBTI, is that a workable solution?

Thanks.

Outside of real estate, where the financed property serves as the security, a non recourse loan is unusual, and an unsecured non recourse loan is so strange that is raises the question about ancillary benefit (intangible though it may be) that may violate the prohibited transaction rules.  It depends on how deep you want to go and how seriously you believe the DOL position and how far the DOL would really go.  A lot of people find it hard to believe that the DOL would take it as far as the DOL says. How do you evaluate the commercial reasonableness (e.g. interest rate) of the strange loan? It would be worse with a family member than friend.

1 hour ago, QDROphile said:

Outside of real estate, where the financed property serves as the security, a non recourse loan is unusual, and an unsecured non recourse loan is so strange that is raises the question about ancillary benefit (intangible though it may be) that may violate the prohibited transaction rules.  It depends on how deep you want to go and how seriously you believe the DOL position and how far the DOL would really go.  A lot of people find it hard to believe that the DOL would take it as far as the DOL says. How do you evaluate the commercial reasonableness (e.g. interest rate) of the strange loan? It would be worse with a family member than friend.

QDROphile,

My bad, I should have included that piece, the investment is in real estate.

Thanks.

Is the investment real estate or a limited partnership that invests in real estate?  Either way the lender cannot get a security interest in the investment that the lender can look to (instead of the borrower) to cover the debt in event of default.  The lender can only get a security interest in part of the investment (if at all) and would not be able to foreclose to satisfy the obligation.  That is not classic nonrecourse debt.  A tested model is a plan buys a building with nonrecourse debt, and the lender has a mortgage on the building.  In the event of default, the lender gets the building in foreclosure (any liquidation surplus goes to the plan as legal owner).  No comment on UBIT.

18 hours ago, retirementplanning said:

Are you saying that the UBTI would likely be calculated on the profit generated by the loan amount?  Outside of the UBTI, is that a workable solution?

As I said, I know the red flag but not the details of the rules.  My advice to my client would be words to the effect of "based on what you told me this is not a prohibited transaction, but that doesn't mean it doesn't have a lot of downsides that make it not doable for practical purposes.  If you want me to research it further and provide more details, I can do that, and charge you, or you can go straight to an ERISA attorney who would charge you more, and either way you're going to get an answer that says you almost certainly shouldn't do it."

QDROphile raises different but valid issues.

When I get something this tangentially weird, I have always said "it looks like it might be able to be done. But I'm not an attorney. If you want to do this, you need an ERISA attorney's blessing and guidance. If you won't do that, then we will have to resign."

If I don't do that, then I've allowed the client's problem to become my problem.

1 hour ago, Bill Presson said:

If I don't do that, then I've allowed the client's problem to become my problem.

this 100%!  

On 6/22/2020 at 2:25 PM, retirementplanning said:

Is it possible for a third party to loan to a solo 401K plan?  

I have been researching and have seen some references that an arm's length third party loan to a Solo 401K Plan would represent an exemption from a prohibited transaction as long as the following conditions are met.  It must be non-recourse, pay a reasonable interest rate, and be for the benefit of the participants of the plan.

I would greatly appreciate it if someone could confirm (or refute) my assumptions.

Thanks in advance.

Are you trying to use PTE 80-26?  Because if you are going to use that exemption, the loan has to 0% and no fees associated with the loan and you mentioned the friend was going to offer a 3% rate?

Thanks for everyone's insights here, I really appreciate the help.