"Creative financing" for your business
from your retirement accounts

Although transferring retirement funds into a trust is creative business financing, this tax-deferred transfer process is not a loophole in the law nor a way to circumvent the law. It is actually a part of codified law, written into The ERISA Act of 1974, with the creation of the 401(k).

The ERISA Act of 1974

The Pension Transfer Trust Plan has been designed in accordance with ERISA Sections 407(b)(1) and 409(e) as a statutory exemption to the prohibited transaction rules under IRS Code Section 4975. For over 30 years now, taxpayers have been allowed to transfer funds from a qualified plan into a tax-exempt trust. The trust is then allowed to purchase stock in a closely-held business under specific guidelines provided by the IRS and the Department of Labor. Proceeds from the sale of this stock can then be used for small business funding, franchise financing, to secure a SBA business loan, or for other business purposes.

Favorable Determination Letter
from the IRS

Recently, the IRS made a favorable determination of The Pension Transfer Trust Plan. A copy is available by clicking Favorable Determination Letter. The application of a determination letter is to ensure that the plan meets all requirements of applicable code statutes.

Department of Labor Letter Ruling

Referring to the department’s Opinion 96-08A issued on 6/26/96, The purchase of qualifying employer securities by an eligible individual account plan is exempt from prohibited transaction treatment if certain conditions are met.

STATUTORY AUTHORITY TO PURCHASE
"QUALIFYING EMPLOYER SECURITIES"

There has always been a way that allows taxpayers to roll money out of a qualified retirement plan for the purchase of stock in their own business, without incurring any early distribution taxes, penalties, and holdbacks. It is found in a statutory exemption in The ERISA Act of 1974. This exemption to the “prohibited transaction rules” is also under Internal Revenue Code 4975 and allows a replacement trust plan to purchase “qualifying employer securities”. (The other exception in this law allows taxpayers to borrow money from a 401k plan.) Your CPA or attorney can easily confirm IRC 4975(d)(13) and ERISA 408(e). They will confirm that this form of "creative financing" for your business is totally safe and provides a new way to use your existing retirement accounts to finance your business.

These laws mean a taxpayer can transfer qualified funds into a special trust plan to invest in a business, through the purchase of privately-held stock, without triggering early distribution taxes and penalties.*

STATUTORY AUTHORITIES:

(1) IRC 4975(d)(13) and ERISA 408(e): A profit sharing plan can purchase “Qualifying Employer Securities” without being in violation of the prohibited transaction rules.

(2) IRC 4975(e)(8): Definition of Qualifying Employer Securities includes stock of the Employer.

(3) ERISA 408(e): A plan’s acquisition of “Qualifying Employer Securities” which is otherwise a prohibited transaction is exempted from ERISA’s prohibited transaction rules and its limitations if certain conditions are met: the acquisition or sale is for “adequate consideration” (ERISA 408(e)(1)); the plan is an “eligible” defined contribution plan (ERISA 408(e)(3)(A).

(4) ERISA 407(b)(1): ERISA’s limitation on the acquisition and holding of Qualifying Employer Securities (normally 10% of plan assets) does not apply to “eligible individual account plans” (ERISA 407(b)(1)). In addition, these plans do not violate ERISA’s diversification and, to the extent it requires diversification, prudence requirements (ERISA 404(a)(2).

(5) ERISA 407(d)(3): As long as it includes appropriate plan language, a profit sharing plan is an “eligible individual account plan” for purposes of the exemption from the 10% limitation on acquiring and holding employer securities.

ADDITIONAL REQUIREMENTS / SUGGESTIONS TO SUPPORT THE ARRANGEMENT:

1. Prudence: Allow each individual to direct his or her own account and generally do not involve rank-in-file participants in the purchase of Qualifying Employer Securities within their individual accounts
2. Diversification: If at all possible, do not invest all of the funds into Qualifying Employer Securities. Invest a “significant portion” into other traditional investments. How ever, diversification may also be achieved through subsequent annual contributions.
3. Fair Market Value: You must have some method of reasonably ascertaining a Fair Market Value for the transaction and subsequent valuations for participant accounting purposes.
4. “Substantial and recurring” contributions: This means your new plan/trust will take the place of your old 401(k) or Rollover IRA and that you plan to put money away each year in the form of annual contributions, as much as you can afford to put into tax-free savings.
5. Sponsor must be a C-corporation: The stock must not be Subchapter-S stock because a retirement trust cannot be a shareholder of a Subchapter-S corporation. An LLC does not issue stock like a C-corporation does, so the plan cannot invest in and be a member of an LLC and still meet the requirements to qualify under the ERISA 408(e) exemption.

*Footnote:
Because the taxpayer is using direct rollover money to purchase shares of stock in his new business, there is no withdrawal; therefore there will never be a penalty tax or tax due on the transaction. Retirement plan assets are not being used to run the business, rather, cash proceeds from the sale of stock from the business to the plan are used. Therefore, the plan owns the “asset” (the shares in the business) and so long as the shares are not distributed or liquidated from the Trust, the rollover remains sheltered from taxes by the trust provisions of IRS section 501(a).

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