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  1. #1
    Join Date
    Feb 2005

    Default Disqualified Persons and Prohibited Transactions

    I'm looking to make a loan to a charity through my 401k. The charity is going to buy an investment and pay me a small portion of the proceeds as repayment of the loan.

    My father is the chairman of the charity, however he does not receive a salary, benefits, bonuses, and is not compensated in any way for being chairman. He also does not benefit from my transaction.

    Does this make my father a "disqualified person" and, thus, make this a prohibited transaction for me?

  2. #2
    Join Date
    Sep 2005
    Behind a Desk

    Default Re: Disqualified Persons and Prohibited Transactions

    You're asking about prohibited transactions in a qualified retirement plan? What's your father's relationship to the plan?
    Quote Quoting Disqualified Person
    1. Disqualified persons are those who, by virtue of their relationship to the plan, may be in a position to self-deal.

    2. The term "disqualified person" as defined in IRC 4975(e)(2) covers a range of people including employers, unions and their officials, fiduciaries, and persons providing services to a plan such as lawyers and accountants. Also included are persons whose relationship to the plan is not immediately apparent and who will require more diligent investigation to detect. This includes—
    • a service provider,

    • the employer or employee organization involved,

    • persons who have a 50% or more interest (see IRC 4975(e)(2)(E) and (G)),

    • a member of the family as defined in IRC 4975(e)(6) of a fiduciary of any of these persons, or individuals with a 10% or more interest (see IRC 4975(e)(2)(H) and (I)).
    3. For example, the sale, exchange or leasing of property, directly or indirectly, between a disqualified person and the plan constitutes a prohibited transaction whether the transaction was made from the disqualified person to the plan or from the plan to the disqualified person. If a disqualified person transfers real or personal property to a plan, that transfer constitutes a sale or exchange such as to make the transfer a prohibited transaction if:
    • the real or personal property transferred by a disqualified person to a plan is subject to a mortgage or lien which the plan assumes; or

    • the plan takes the property subject to a mortgage or similar lien which was placed on the property by a disqualified person within 10 years prior to the transfer. See IRC 4975(f)(3). Such a transfer of real or personal property will most often arise in the context of a contribution of property other than cash by the employer.

  3. #3
    Join Date
    Feb 2005

    Default Re: Disqualified Persons and Prohibited Transactions

    Hi, Mr. Knowitall.

    My father is the chairman of the charity. My interpretation of the IRS Code is that if my father owned, say, a corporation, that any loan made to that corporation from my 401k would be a prohibited transaction due to his being a "disqualified person" because he is a direct relative. However, since charities are technically publicly-owned entities, I'm not sure if the transaction would be prohibited.

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