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Bill
Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 34 years experience providing financial advice
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can a pension plan invest in the sponsoring companys bond

Customer Question

can a pension plan invest in the sponsoring company's bonds
Submitted: 3 years ago.
Category: Tax
Expert:  Tax.appeal.168 replied 3 years ago.

Hello, welcome, and thank you for choosing Just Answer.

 

Yes a pension plan can invest in sponsoring company's bonds. The vast majority of bonds are held by large institutions such as banks, pension plans and insurance companies. However, as all pension plans are not the same, you may want to check with pension plan administrator to see if this is something they will/can do.

Customer: replied 3 years ago.
Do you have an ERISA code section or case you could site to support your answer. I am still concerned about a conflict of interest.
Expert:  Tax.appeal.168 replied 3 years ago.
My apologies for the delay in responding, I've been away from the computer. Can you tell me what type of pension plan you are referring to and what type of bonds. Thank you.
Customer: replied 3 years ago.
SIMPLE IRA and privately issued corporate bonds. The company that issues the bonds is also the employer who withholds the SIMPLE IRA from its employees and remits to a third party fiduciary such as Merrill Lynch. Each employees then directs his own IRA's investments. Can he choose to invest his IRA funds in his own employer's corporate bonds without a conflict of interest? I would like to see an ERISA code section or a related court case to support your answer.
Expert:  Bill replied 3 years ago.

It may be possible as long as it is not considered a prohibited transaction. Since the SIMPLE IRA participant is a disqualified person/fiduciary of the account, it may not be an issue as long as the SIMPLE IRA participant does not benefit outside of the account by purchasing the bonds. For example, if the participant benefits by obtaining certain benefits from the company (title, ownership, compensation) by purchasing the bonds, then it may be considered a prohibited transaction. Another issue that could cause the transaction to be a prohibited transaction is if the SIMPLE IRA participant is considered a disqualified person with respect to the company (such as having a controlling ownership interest in the company).

 

A prohibited transaction is a transaction between a plan and a disqualified person that is prohibited by law.

Prohibited transactions generally include the following transactions:

  • a transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person;
  • any act of a fiduciary by which plan income or assets are used for his or her own interest;
  • the receipt of consideration by a fiduciary for his or her own account from any party dealing with the plan in a transaction that involves plan income or assets;
  • the sale, exchange, or lease of property between a plan and a disqualified person;
  • lending money or extending credit between a plan and a disqualified person; and
  • furnishing goods, services, or facilities between a plan and a disqualified person.

Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction does not take place if a disqualified person receives a benefit to which he or she is entitled as a plan participant or beneficiary. However, the benefit must be figured and paid under the same terms as for all other participants and beneficiaries.

 

http://www.irs.gov/retirement/article/0,,id=163722,00.html

 

http://www.trustetc.com/new/rules-and-regulations/plain-english/self-dealing.html

 

http://www.dol.gov/ebsa/regs/aos/ao2011-04a.html

 

http://www.checkbookira.net/Father_Kids.pdf

 

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