Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE


According to the Tax Exempt and Government Entities Division of the Internal Revenue Service (IRS), one out of every four (25%) of 401(k) plans surveyed in a recent study had engaged in prohibited transactions as a result of non-compliant participant plan loans and/or real estate investments that were not valued properly.  http://www.irs.gov/pub/irs-tege/epn_2012_1.pdf

 The problems noted by the IRS with respect to participant loans included:

        1.   not following the plan loan provisions, 

        2.   not having a bona fide loan (no loan document and/or payments),

        3.   not having a provision for loans in the plan document, but allowing

              participant loans, and

        4.   not prohibiting loans to the employer and/or related entities.

Plan loan violations can result in immediate taxation to the participant, excise tax penalties and possible plan disqualification.   Failure to properly value non-publicly traded assets can lead to top heavy violations, prohibited transactions and distribution reporting errors.  Retirement plans that permit participant loans should have a written loan policy and formal loan documents.

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