We have a client who invests some of the plan's money in a Real Estate LLC. He gets a K-1 which we use to value the asset etc.

For purposes of ERISA Bonding, does this qualify as a "statement from a regulated financial institution"?

We're ok with the participant directed piece of the puzzle, just unceratin as to whether the K-1 reaches the standard of "a statement...."

Thanks for any input.

In the past 18 months, an employer that was investing in a real estate LLC was valuing the interest off of the K-1's as well. On field audit, the EBSA regional office challenged valuation by that method as not meeting arriving at fair market value in the way defined in ERISA 3(26), even though the plan had language that the plan's trustee could perform the valuation or hire appraisers. The EBSA office would not resolve and close the audit until an independent appraisal was obtained.

There, the plan's investments were pooled and made at the direction of the trustees, so the valuation would affect the amount of cash payouts of benefits. You indicate that your client, as a participant, directed the investment. Thus, no one's benefits distribution amount would be affected by the valuation method used. Hopefully EBSA would recognize that distinction if the plan you are dealing with is audited.

Don't know about your bonding question.

dbvail

Did you omit some info ?

You said that the K-1 was from the LLC. How does the LLC get to be a financial institution and outside of the state division of corporations what else exercises any oversight over LLCs ?

I have never heard of division of corporations being regarded as regulation and a Real Estate LLC seems more like a private business entity. I usually see the term "financial institution" used in reference to banks, CUs, Trust cos, investment banks etc.

Here is the definition. Even if the LLC is the right type of entity, I would be surprised if you can successfully argue that a K-1 reports the fair market value of the investment.

2520.104-46(b)(1)

(ii) For purposes of paragraph (b)(1), the term "qualifying plan assets" means:

(A) Qualifying employer securities, as defined in section 407(d)(5) of the Act and the regulations issued thereunder;

(B) Any loan meeting the requirements of section 408(b)(1) of the Act and the regulations issued thereunder;

© Any assets held by any of the following institutions:

(1) A bank or similar financial institution as defined in Sec. 2550.408b-4©;

(2) An insurance company qualified to do business under the laws of a state;

(3) An organization registered as a broker-dealer under the Securities Exchange Act of 1934; or

(4) Any other organization authorized to act as a trustee for individual retirement accounts under section 408 of the Internal Revenue Code.


(D) Shares issued by an investment company registered under the Investment Company Act of 1940;

(E) Investment and annuity contracts issued by any insurance company qualified to do business under the laws of a state; and,

(F) In the case of an individual account plan, any assets in the individual account of a participant or beneficiary over which the participant or beneficiary has the opportunity to exercise control and with respect to which the participant or beneficiary is furnished, at least annually, a statement from a regulated financial institution referred to in paragraphs (b)(1)(ii)©, (D) or (E) of this section describing the assets held (or issued) by such institution and the amount of such assets.

Thanks all. My position was that this investment would not be considered "qualifying plan assets" and would affect the bonding requirement. I wanted to get a sense of what others thought and agree that the limited partnership doesn't get there. It is not a regulated financial institution.

GBurns - sorry, it is a limited partnership, not an LLC, you are right (again) and I apologize for the sloppy use of the term.

Jumping in late, but I agree that these are not qualifying plan assets and affect the bonding requirement. I'd go a step further and say that a K-1, from a retirement plan's perspective, is a useless piece of paper. It is for tax reporting and has nothing to do with anything. (Oh, I suppose you might glean some info if you're reporting UBTI, but for valuation purposes - useless.)