Source: https://sdcooper.com/thelaw/
Timestamp: 2019-07-15 22:11:24
Document Index: 63147118

Matched Legal Cases: ['§ 503', '§ 4975', '§ 4975', '§ 4975', '§ 406', '§406', '§ 408', '§ 408', '§1107', '§401', '§267', '§ 513', '§ 513', '§ 1954']

The Law | SDCooper Company - Legacy Website
The Internal Revenue Codes permitting these transactions go back prior to 1954. They were reorganized and expanded with the passage of the Employees Retirement Income Security Act (ERSIA) of 1974. 1978 saw the codification of Salary Deferrals [401(k) plans]. The growth of the stock market during the 1990s and the extension of individual participant investment control of 401(k) accounts led to a burgeoning desire for these plans.
The following links are to the pertinent parts of the Internal Revenue Code and ERISA. In 1974, Congress took the “prohibited transactions” sections from the 1954 Code and moved it to Section 4975. Congress wrote a parallel but not identical “prohibited transactions” section and placed it in the Labor Code, what we refer to as ERISA today, and they cross refer.
Internal Revenue CodE Prohibited Transactions
§ 503 pre-1974
Requirements for Exemption.
(a) Denial of Exemption to Organizations Engaged in Prohibited Transactions
(1) General Rule An organization described in section 501(c)(3) which is subject to the provisions of this section shall not be exempt from taxation under section 501 (a) if it has engaged in a prohibited transaction after July 1, 1950; and an organization described in section 401(a) which is subject to the provisions of this section shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after March 1, 1954
(2) Taxable Years affected . . .
(b) Organizations to Which Section Applies This section shall apply to an organization described in section 501(c)(3) or section 401(a) except
(c) Prohibited Transactions— For the purpose of this section, the term “prohibited Transaction” means any transaction in which an organization subject to the provisions of this section
(1) lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest, to;
(2) pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to;
(3) makes any part of its services available on a preferential basis to;
(4) makes any substantial purchase of securities or other property, for less than adequate consideration in money or money’s worth, from;
(5) sells any substantial part of its securities or other property, for less than adequate consideration in money or money’s worth, to; or
(6) engages in any other transaction which results in a substantial diversion of its income or corpus to; the creator of such organization (if a trust); a person who has made a substantial contribution to such organization; a member of the family (as defined in section 267(c)(4)) of an individual who is the creator of such trust or who has made a substantial contribution to such organization; or corporation controlled by such creator or person through the ownership, directly of indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote of 50 percent or more of the total value of shares of all classes of stock of the corporation.
(g) Special Rules for Loans . . .
§ 4975(d)(13) {1974-on}
Sec. 4975. Tax on Prohibited Transactions
(a) Initial Taxes on Disqualified Person— There is hereby imposed a tax on each prohibited transaction. The rate of tax shall be equal to 15 percent of the amount involved with respect to the prohibited transaction for each year (or part thereof) in the taxable period. The tax imposed by this subsection shall be paid by any disqualified person who participates in the prohibited transaction (other than a fiduciary acting only as such).
(b) Additional Taxes on Disqualified Person— In any case in which an initial tax is imposed by subsection (a) on a prohibited transaction and the transaction is not corrected within the taxable period, there is hereby imposed a tax equal to 100 percent of the amount involved. The tax imposed by this subsection shall be paid by any disqualified person who participated in the prohibited transaction (other than a fiduciary acting only as such).
(1) General rule. For purposes of this section , the term “prohibited transaction” means any direct or indirect—
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
(d) Exemptions— Except as provided in subsection (f)(6), the prohibitions provided in subsection (c) shall not apply to—
(13) any transaction which is exempt from section 406 of such Act* by reason of section 408(e) of such Act (or which would be so exempt if such section 406 applied to such transaction) or which is exempt from section 406 of such Act by reason of section 408(b)(12) of such Act;
* “such Act” here refers to the Employees Retirement Income Security Act (ERISA).
§ 4975(e)(2)(H)
(1) PLAN. For the purposes of this section, the term “plan” means—
(A) a trust described in section 401(a) which forms a part of a plan, or a plan described in section 403(a), which trust of plan is exempt from tax under section 501(a).
(2) DISQUALIFIED PERSON— For purposes of this section, the term “disqualified person” means a person who is—
(D) an employee organization any of whose members are covered by the plan
(H) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10 percent or more of the yearly wages of an employer) of a person described in subparagraph (C), (D), (E), or (G), or
(I) a 10 percent or more (in capital or profits) partner or joint venturer of a person described in subparagraph (C), (D), (E), or (G). . . .
(6) MEMBER OF FAMILY. For the purposes of paragraph (2)(F), the family of any individual shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant.
§ 4975(f)(6)
(f) Other Definitions and Special Rules— for purposes of this section—
(A) In General— In the case of a trust described in section 401(a) which is part of a plan providing contributions or benefits for employees some or all of whom are owner-employees (as defined in section 401(c)(3)), the exemptions provided by subsection (d) (other than paragraphs (9) and (12)) shall not apply to a transaction in which the plan directly or indirectly—
(B) Special Rules for Shareholder-employees, Etc.—
(i) In General— For purposes of subparagraph (A), the following shall be treated as owner-employees:
(ii) Exception for Certain Transactions Involving Shareholder-employees— Subparagraph (A)(iii) shall not apply to a transaction which consists of a sale of employer securities to an employee stock ownership plan (as defined in subsection (e)(7)) by a shareholder-employee, a member of the family (as defined in section 267(c)(4)) of such shareholder-employee, or a corporation in which such a shareholder-employee owns stock representing a 50 percent or greater interest described in subparagraph (A).
(C) Shareholder-employee— For purposes of subparagraph (B), the term ‘’shareholder-employee’’ means an employee or officer of an S corporation who owns (or is considered as owning within the meaning of section 318(a)(1)) more than 5 percent of the outstanding stock of the corporation on any day during the taxable year of such corporation.
ERISA Prohibited Transactions
§ 406, 407 & 408 {1974-on}
ERISA §406 Prohibited transactions.
Except as provided in section 408:
(E) acquisition, on behalf of the plan, of any employer security or employer real property in violation of section 407(a).
(2) No fiduciary who has authority or discretion to control or manage the assets of a plan shall permit the plan to hold any employer security or employer real property if he knows or should know that holding such security or real property violates section 407(a).
A fiduciary with respect to a plan shall not—
(c) Transfer of real or personal property to plan by party in interest. A transfer of real or personal property by a party in interest to a plan shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the plan assumes or if it is subject to a mortgage or similar lien which a party-in-interest placed on the property within the 10-year period ending on the date of the transfer.
Limitation with Respect to Acquisition and Holding of Employer Securities and Employer Real Property by Certain Plans
ERISA Section 407
(a) Percentage Limitation Except as otherwise provided in this section and section 414 of this title:
(1) A plan may not acquire or hold –
(A) any employer security which is not a qualifying employer security, or
(B) any employer real property which is not qualifying employer real property.
(2) A plan may not acquire any qualifying employer security or qualifying employer real property, if immediately after such acquisition the aggregate fair market value of employer securities and employer real property held by the plan exceeds 10 percent of the fair market value of the assets of the plan.
(1) Subsection (a) of this section shall not apply to any acquisition or holding of qualifying employer securities or qualifying employer real property by an eligible individual account plan.
(A) If this paragraph applies to an eligible individual account plan, the portion of such plan which consists of applicable elective deferrals (and earnings allocable thereto) shall be treated as a separate plan – (i) which is not an eligible individual account plan, and (ii) to which the requirements of this section apply. . . .
(C) For purposes of this paragraph, the term “applicable elective deferral” means any elective deferral (as defined in section 402(g)(3)(A) of the Internal Revenue Code of 1986) which is made pursuant to a qualified cash or deferred arrangement as defined in section 401(k) of the Internal Revenue Code of 1986.
(3) Cross References. –
(A) For exemption from diversification requirements for holding of qualifying employer securities and qualifying employer real property by eligible individual account plans, see section 404(a)(2) of this title.
(B) For exemption from prohibited transactions for certain acquisitions of qualifying employer securities and qualifying employer real property which are not in violation of 10 percent limitation, see section 408(e) of this title.
(d) Definitions – For purposes of this section –
(1) The term ”employer security” means a security issued by an employer of employees covered by the plan, or by an affiliate of such employer. . .
(A) The term ”eligible individual account plan” means an individual account plan which is (i) a profit-sharing, stock bonus, thrift, or savings plan; (ii) an employee stock ownership plan; or (iii) a money purchase plan which was in existence on September 2, 1974, and which on such date invested primarily in qualifying employer securities. Such term excludes an individual retirement account or annuity described in section 408 of title 26.
(B) Notwithstanding subparagraph (A), a plan shall be treated as an eligible individual account plan with respect to the acquisition or holding of qualifying employer real property or qualifying employer securities only if such plan explicitly provides for acquisition and holding of qualifying employer securities or qualifying employer real property (as the case may be). In the case of a plan in existence on September 2, 1974, this subparagraph shall not take effect until January 1, 1976.
(C) The term ”eligible individual account plan” does not include any individual account plan the benefits of which are taken into account in determining the benefits payable to a participant under any defined benefit plan.
(4) The term ”qualifying employer real property” means parcels of employer real property –
(A) if a substantial number of the parcels are dispersed geographically;
(B) if each parcel of real property and the improvements thereon are suitable (or adaptable without excessive cost) for more than one use;
(C) even if all of such real property is leased to one lessee (which may be an employer, or an affiliate of an employer); and
(D) if the acquisition and retention of such property comply with the provisions of this part (other than section 404(a)(1)(B) of this title to the extent it requires diversification, and sections 404(a)(1)(C), 406 of this title, and subsection (a) of this section).
(5) The term ”qualifying employer security” means an employer security which is –
(A) stock,
(B) a marketable obligation (as defined in subsection (e) of this section), or
(C) an interest in a publicly traded partnership (as defined in section 7704(b) of title 26), but only if such partnership is an existing partnership as defined in section 10211(c)(2)(A) of the Revenue Act of 1987 (Public Law 100-203).
ERISA Section 408
(e) Acquisition or Sale by Plan of Qualifying Employer Securities; Acquisition, Sale, or Lease by Plan of Qualifying Employer Real Property Sections 406 and 407 of this title shall not apply to the acquisition or sale by a plan of qualifying employer securities (as defined in section 407(d)(5) of this title) or acquisition, sale or lease by a plan of qualifying employer real property (as defined in section 407(d)(4) of this title)
(1) if such acquisition, sale, or lease is for adequate consideration (or in the case of a marketable obligation, at a price not less favorable to the plan than the price determined under section 407(e)(1) of this title),
(2) if no commission is charged with respect thereto, and
(A) the plan is an eligible individual account plan (as defined in section 407(d)(3) of this title), or . . .
§ 408(d)
ERISA§ 408(d)
(1) Section 407(b) [29 USC §1107] and subsections (b), (c), and (e) of this section shall not apply to a transaction in which a plan directly or indirectly—
(A) lends any part of the corpus or income of the plan to,
(B) pays any compensation for personal services rendered to the plan to, or
(C) acquires for the plan any property from, or sells any property to, any person who is with respect to the plan an owner-employee (as defined in section 401(c)(3) of the Internal Revenue Code of 1986 [26 USC §401(c)(3)]), a member of the family (as defined in section 267(c)(4) of such Code [26 USC §267(c)(4)]) of any such owner-employee, or any corporation in which any such owner-employee owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation.
(A) For purposes of paragraph (1), the following shall be treated as owner-employees:
(ii) A participant or beneficiary of an individual retirement plan (as defined in section 7701(a)(37) of the Internal Revenue Code of 1986).
(iii) An employer or association of employees which establishes such an individual retirement plan under section 408(c) of such Code.
(B) Paragraph (1)(C) shall not apply to a transaction which consists of a sale of employer securities to an employee stock ownership plan (as defined in section 407(d)(6)) by a shareholder-employee, a member of the family (as defined in section 267(c)(4) of such Code) of any such owner-employee, or a corporation in which such a shareholder-employee owns stock representing a 50 percent or greater interest described in paragraph (1).
(C) For purposes of paragraph (1)(A), the term “owner-employee” shall only include a person described in clause (ii) or (iii) of subparagraph (A).
(3) For purposes of paragraph (2), the term “shareholder-employee” means an employee or officer of an S corporation (as defined in section 1361(a)(1) of such Code) who owns (or is considered as owning within the meaning of section 318(a)(1) of such Code) more than 5 percent of the outstanding stock of the corporation on any day during the taxable year of such corporation.
§ 513(b)
§ 513 Unrelated trade or business.
The term “unrelated trade or business” means, in the case of any organization subject to the tax imposed by section 511 , any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B) , to the exercise or performance of any purpose or function described in section 501(c)(3) ), except that such term does not include any trade or business—
(1) in which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or
(2) which is carried on, in the case of an organization described in section 501(c)(3) or in the case of a college or university described in section 511(a)(2)(B) , by the organization primarily for the convenience of its members, students, patients, officers, or employees, or, in the case of a local association of employees described in section 501(c)(4) organized before May 27, 1969, which is the selling by the organization of items of work-related clothes and equipment and items normally sold through vending machines, through food dispensing facilities, or by snack bars, for the convenience of its members at their usual places of employment; or
(3) which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.
(b) Special rule for trusts.
(1) a trust computing its unrelated business taxable income under section 512 for purposes of section 681 ; or
(2) a trust described in section 401(a) , or section 501(c)(17) , which is exempt from tax under section 501(a) ;
Trustees And Valuations
DONOVON V. CUNNINGHAM
No Commissions, Kickbacks, Or Fees
Title 18 USC 1954
Title 18 United States Code § 1954: Offer, acceptance, or solicitation to influence operations of employee benefit plan
(4) a person who, or an officer, counsel, agent, or employee of an organization which, provides benefit plan services to such plan receives or agrees to
receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both: Provided, That this section shall not prohibit the payment to or acceptance by any person of bona fide salary, compensation, or other payments made for goods or facilities actually furnished or for services actually performed in the regular course of his duties as such person, administrator, officer, trustee, custodian, counsel, agent, or employee of such plan, employer, employee organization, or organization providing benefit plan services to such plan.
As used in this section, the term
(a) “any employee welfare benefit plan” or “employee pension benefit plan” means any employee welfare benefit plan or employee pension benefit plan, respectively, subject to any provision of title I of the Employee Retirement Income Security Act of 1974, and
(b) “employee organization” and “administrator” as defined respectively in sections 3(4) and (3)(16) of the Employee Retirement Income Security Act of 1974.
The IRS publishes its thinking on various topics on its website, usually in .pdf or .html form. We have in the past provided IRS’s links to these pertinent documents, but the IRS keeps moving them. These links are to copies of the original IRS files on our site, but we encourage you to search for them on the IRS.gov site if you wish.
IRM VALUATIONS
OCTOBER 1, 2008 MEMO
IRS FALL 2011 ROBS NEWSLETTER (APR/2013 VERSION)
IRS Fall 2011 Robs Newsletter (Annotated by ERSOP.com)
from IRS.gov [with ERSOP® Plan annotations] Retirement News for Employers – Fall 2010 Edition – Rollovers as Business Start-Ups Compliance Project
What is a ROBS? [the IRS term for an ERSOP® Plan]
ROBS is an arrangement in which prospective business owners use their retirement funds to pay for new business start-up costs. ROBS plans, while not considered an abusive tax avoidance transaction, are questionable because they may solely benefit one individual – the individual who rolls over his or her existing retirement funds to the ROBS plan in a tax-free transaction. [ERSOP® Plans do not “benefit one individual” as they are used to start a business, which will in turn hire employees and provide a great retirement plan for them — thus benefiting many people.] The ROBS plan then uses the rollover assets to purchase the stock of the new business. [ERSOP® Plans are often used to fund expansion of existing business, professional corporations and real estate.]
Promoters aggressively market ROBS arrangements to prospective business owners [many of these “promoters” are paid or pay promoter fees, which at the end of this article you can see clearly violates the IRS Code]. In many cases, the company will apply to IRS for a favorable determination letter [DL] as a way to assure their clients that IRS approves the ROBS arrangement. The IRS issues a DL based on the plan’s terms meeting Internal Revenue Code requirements. DL’s do not give plan sponsors protection from incorrectly applying the plan’s terms or from operating the plan in a discriminatory manner. When a plan sponsor administers a plan in a way that results in prohibited discrimination or engages in prohibited transactions, it can result in plan disqualification and adverse tax consequences to the plan’s sponsor and its participants [SDCC works directly with the clients to ensure they are operating the Plan in full compliance with the IRS Code. Any deviation from that will be corrected immediately so as to ensure your plan remains in compliance. All this done with no added ‘consultation’ fees or any other hidden fees].
Employee Plans ROBS Project
EP initiated a ROBS project last year to:
Define traits of compliant versus non-compliant ROBS plans;
Identify ROBS plans that are non-compliant and take action to correct them; and
Use results to design compliance strategies focusing on identified issues and trends [for example, Employee Plans Compliance Resolution System, Fix-It Guides, Web-based information, newsletters, and speeches].
Using compliance checks, we initially focused on companies that sponsored a plan and received a DL but didn’t file a Form 5500, Annual Return/Report of Employee Benefit Plan, or Form 5500-EZ, Annual Return of One-Participant [Owners and Their Spouses] Retirement Plan, and/or Form 1120, U.S. Corporation Income Tax Return.
Our contact letter to plan sponsors asked questions about the ROBS plan’s record-keeping and information reporting requirements, including:
the plan’s current status
plan contribution history
information on the rollover or direct transfer of the assets into the ROBS plan
stock valuation and stock purchases
general information about the business itself
why no Form 5500 or 5500-EZ and/or Form 1120 were filed [typically because the Plan has just started, and has not reached it’s first year-end]
We always invite a plan sponsor to furnish any other documents or materials that they believe will be helpful for us to review as part of the compliance check. [SDCC handles these Compliance Checks for our clients free of charge, we stand behind our clients every step of the way to ensure the Plan is in good standing with the IRS].
ROBS Project Findings
Preliminary results from the ROBS Project indicate that, although there were a few success stories, most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy [business and personal], liens [business and personal], and corporate dissolution’s by individual Secretaries of State [business failures have nothing to do with the funding of the business through retirement money, the business failure is due to poor economic conditions and the difficulty of starting a small business]. Some of the individuals who started ROBS plans lost not only the retirement assets they accumulated over many years, but also their dream of owning a business [Most entrepreneurs never lose the dream of owning a business, they simply shift their focus to a more viable business]. As a result, much of the retirement savings invested in their unsuccessful ROBS plan was depleted or ‘lost,’ in many cases even before they had begun to offer their product or service to the public [Using your retirement money is a risk, but no riskier than leaving it in the stock market. At least with SDCooper’s ERSOP Plan you are taking that risk on yourself, putting the money in YOUR hands so you can own and operate your own business, rather than letting someone else do whatever they want with it].
Not Filing Form 5500 or Form 1120
Many ROBS sponsors did not understand that a qualified plan is a separate entity with its own set of requirements. Promoters incorrectly advised some sponsors they did not have an annual filing requirement because of a special exception in the Form 5500-EZ instructions [SDCC ALWAYS informs clients of their responsibility to file a tax return for the ERSOP Plan every year. This tax filing can be completed with SDCC, we handle all the tax return/reporting information for the ERSOP Plan every year]. The exception applies when plan assets are less than a specified dollar amount and the plan covers only an individual, or an individual and his or her spouse, who wholly own a trade or business, whether incorporated or unincorporated. In a ROBS arrangement, however, the plan, through its company stock investments, rather than the individual, owns the trade or business. Therefore, this filing exception does not apply to a ROBS plan and the annual Form 5500 or 5500-EZ [5500-SF for filing electronically] is still required.
Specific Problems with ROBS
Some other areas the ROBS plan could run into trouble:
After the ROBS plan sponsor purchases the new company’s employer stock with the rollover funds, the sponsor amends the plan to prevent other participants from purchasing stock. [SDCC NEVER amends the Plan to discriminate against other employees, our Plan remains fully qualified with the IRS for as long as you are a client].
If the sponsor amends the plan to prevent other employees from participating after the DL is issued, this may violate the Code qualification requirements. These types of amendments tend to result in problems with coverage, discrimination and potentially result in violations of benefits, rights and features requirements.
Promoter fees [SDCC is one of the only providers of these Plans that refuses to pay a promoter fee, thereby insuring that the client’s Plan never becomes disqualified and subject to taxes and penalties].
Valuation of assets [SDCC works with several Business Appraisal professionals to offer you a wide selection of Valuation experts to help].
Failure to issue a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., when the assets are rolled over into the ROBS plan [SDCC always issues the appropriate 1099-R when required].
E-mail us and we will answer your questions about the Project and how it relates to your situation. Include the words “ROBS Project” in the subject line. Additionally, we encourage you to e-mail any comment for the ROBS Project or any other EPCU project, especially if these suggestions focus on areas of potential noncompliance.