A plan sponsor is in the business of issuing mortgages – they loan money to real estate purchasers in need at above market rates. The retirement plan is also heavily invested in similar mortgages (they are heavily secured, low loan-to-value ratios, well documented investments that have performed very well with a minimum of risk). The plan does not participate in any loans with the plan sponsor. However, it was recently noted that the family trust of one of the Trustees is a co-investor in a few of the mortgages. The family trust did not purchase the mortgages from the plan. The mortgages were issued with the plan and the family trust both participating (at the same terms) in the investments – essentially as if 2 acres of real estate are for sale by a third-party and the plan buys one acre and the Trustee’s family trust buys the other. Do you believe this to be a prohibited transaction despite the absence of a transaction between the plan and the party-in-interest? Do you see any arguments against P/T status if audited?

Remember that a PT is a direct or indirect transaction between the Plan and a party in interest. Is it your argument that the Trust of a Trustee is not a party in interest.

Years ago, I had a client who was similarly involved in mortgages from the plan to property. It was undisclosed on the 5500 as a PT when discovered on audit, it was referred for criminal prosecution.

Brett, this appears to simply be a joint investment and not a transaction between the plan, either directly or indirectly, and a party in interest. Therefore, I fail to see how it's a prohibited transaction. To me it's akin to the plan buying Microsoft and the owner of the company buying Microsoft.

Can you elaborate on your answer?