Prohibited Solo 401k Transactions: Lending of Solo 401k plan assets or other extension of credit

The Solo 401k plan may not lend money, or otherwise extend credit to a disqualified person (e.g., your spouse, daughter, father, to name a few) nor may disqualified person loan money, or otherwise extend credit, to the Solo 401k plan. See ERISA 406 (a) (1)(B).

This includes direct or indirect transactions.

EXAMPLE: Indirect benefit derived from trustee who authorizes the plan loan. A loan to a partnership in which one of the trustees had a 39% partnership interest was ruled to be a prohibited transaction in TAM 9119002 because it was an indirect loan from the plan to the trustee who was a partner of the borrowing partnership.

EXAMPLE: Loan to a disqualified person. Fred’s Solo 401k plan has cash balance of $300,000. His Son recently started a new business and needs a short-term loan. Fred offers his son $100,000 in exchange for a promissory note paying ten percent interest in 64 monthly installments. This would be considered a prohibited transaction-lending of money or other extension of credit between a plan (Solo 401k) and a disqualified person (Fred’s son).

Solo 401k loans to trustee (participant) are allowable.

Provided the Solo 401k plan document allows for participant loans, a loan from the Solo 401k plan to the trustee is not considered a prohibited transaction as long as all the Solo 401k participant loan documents are completed. In this case, the disqualified person is receiving the Solo 401k participant loan in her capacity as a Solo 401k plan participant, and an exemption is available under ERISA 408(b)(1) as long as the loan program rules are satisfied. For more information on Solo 401k participant loans, visit: www.mysolo401k.net/Solo401kLoan.html

Loans with substantially-owned businesses/attribution of ownership.

Where a business is substantially owned (i.e., 50% or more) by a Solo 401k plan’s Trustee, the company, a service provider (e.g., the Solo 401k’s accountant), a prohibited transaction occurs with respect to loans between the Solo 401k plan and such business. Reason being, under the definition of a disqualified person under IRC 4975(e)(2)(G) indirect ownership through family attribution all disqualified parties are lumped together to determine the 50% or more ownership rule. An example of this is illustrated in DOL Advisory Opinion 2006-09A, involving an IRA and a corporation substantially owned by the IRA owner’s daughter and son-in-law, where investment in corporate notes would result in a prohibited loan. Here is the link to this DOL Advisory Opinion:www.dol.gov/ebsa/regs/aos/ao2006-09a.html

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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