ERISA Advisory Opinion Letter 89-03
In this opinion a husband and wife, Mr. and Mrs. Bowns, Frances, owned a small amount of shares in a corporation personally. Mr. Bowns was also an officer of the corporation and general manager of one of its business divisions. In addition, Mr. and Mrs. Bowns established IRAs. They were the only participants in their respective IRAs and had reserved the right to direct their IRA investments. Mr. and Mrs. Bowns proposed to direct their respective IRA trustees to purchase shares of the corporation on behalf of each of their IRAs for no more than adequate compensation.
The issue before the DOL was whether this proposed investment by each of the IRAs constitute a prohibited transaction under 4975(c)(1)(A). Mr. and Mrs. Bowns were fiduciaries and, thus, disqualified persons with respect to their IRAs because of their authority under the IRAs to direct investments. At issue was whether the corporation was also a disqualified person. The DOL concluded it was not. Section 4975(e)(2)(C) provides that a disqualified person includes an employer any of whose employees are covered by the plan. The DOL noted that although Section 4975 does not define the term employer, Section 3(5) of ERISA provides, in part, that an employer is any person acting as an employer in relation to an employee benefit plan. Because it was represented that the corporation had no involvement with the establishment or maintenance of the IRAs, the DOL concluded that the corporation was not a disqualified person with respect to the Bowns’ IRAs under Section 4975(e)(2)(C). In addition, the corporation was not a disqualified person under Section 4975(e)(2)(G) because the aggregate stock ownership by the Bowns in the corporation was well less than 50% (their direct ownership, taking into account the exercise of various stock options, amounted to about 1.2%). Therefore, the purchase of stock by the IRAs in the corporation would not violate 4975(c)(1)(A).
However, the Court noted that the conclusion does not preclude the existence of other prohibited transactions under IRC Code Section 4975(c)(1)(D) or (E) under the self-dealing and conflict prohibited transaction rules. IRC Section 4975(c)(1)(D) prohibits any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. IRC Section 4975(c)(1)(E) prohibits a fiduciary from dealing with the income or assets of a plan in his own interest or for his own account.
This Private Letter Ruling is very similar to the Bowns opinion above (89-03). Much like that opinion, here Individual N proposed to have his/her IRA to purchase shares in a corporation in which Individual N was employed as its accounting manager and was a member of its board of directors. Individual N also owned less than 1% of the common stock of the Company and after the proposed purchase by the IRA Individual N’s total investment would still be less than 1%. The IRS ruled that the investment was not a prohibited transaction under 4975(c)(1)(A). Even though Individual N was clearly a fiduciary and disqualified person, the corporation was not disqualified because it was not an employer in relation to the IRA itself and thus did not fall under 4975(e)(2)(C). The IRS considered an employer to be acting in relation to an IRA “only when it is involved in maintaining, sponsoring, or contributing directly to the IRA.” None of that was true in this case.