Plan Asset Rules Questions for Solo 401k or Self-Directed Solo 401k
QUESTION 1: Does the 25% ERISA plan asset rule apply to Solo 401kholdings/investments in an LLC, i.e. If 3 separate Solo 401k plans in the aggregate hold 25% interest in an LLC, does this trigger the plan asset rule?
ANSWER: Yes the 25% plan asset rule applies to all Solo 401k plans that hold equity interests in an LLC unless the LLC is an operating company or publicly traded company registered under the Investment Company Act of 1940, or if the LLC’s main line of business is the development of real estate (REOC) or providing operational services (e.g., a restaurant, clothing store, furniture store, electronics store). If one of these exceptions applies, the underlying assets of an entity, including an LLC, in which Solo401k plan(s) makes equity investment are not considered plan assets under ERISA plan asset rule.
ANSWER: Yes the 25% plan asset rule test applies in aggregate to all Solo 401k investors in the LLC. Therefore, to be in compliance with the 25% test, Solo 401k investors in aggregage are required to hold less that 25% of the value of each LLC membership units issued by the LLC.
In sum, as long as the Solo 401k plans in aggregate do not own 25% or more of a passive investment company the LLC will be in compliance with plan asset rules.
QUESTION 2: If Solo 401k plans invest in promissory notes issued by the LLC and hold no equity interest in the LLC- does the 25% rule apply?
ANSWER: The plan asset rules apply only to equity interest in a passive income business such as an LLC, but do not apply to debt instruments like notes.
QUESTION 3: If not, are there other minefields to watch out for?
ANWER: Yes you need to be aware of the requirements for a Real Estate Operating Company (REOC) which mirror the requirements of a VCOC. To qualify as a REOC the LLC must invest at minimum 50% of its assets in qualifying real estate considered managed or being developed.
What’s more, the REOC’s regular course of business is required to consist of managing real estate or the development of real estate.
Also, the LLC manager will need to continually monitor the level of Solo 401k plan assets held by the LLC under the 25% test because the calculation is performed after any recent equity investment in the LLC.
Lastly, as a result of the Pension Protection Act (PPA), governmental and church plans are no longer part of the 25% plan asset rule; therefore, these plan’s can hold substantial equity interest in private funds such as an LLC.
Department of Labor Regulation 29 CFR 2510.3-101 contains what are commonly called the Plan Asset Rules.