Mortgage or other Third Party Loan Investments in Your Plan?  Do they Pass Muster under IRS Issue Snapshot?
Third Party Loan

The IRS Issue Snapshot-Third Party Loans from Plans dated August 23, 2022 is a short advice document for examiners to use when auditing tax-qualified retirement plans that invest in mortgages or other third party loans. IRS Issue Snapshots are often  indicators of likely future audit targets. In the Snapshot the IRS discusses the following issues that may be triggered by third party loans:  (1) a possible prohibited transaction; (2) violation of the exclusive benefit requirement; (3) proper asset valuation; (4) minimum funding violations in defined benefit plans; (5) income tax issues (primarily for the borrower); and (5) fraud.

A prohibited transaction would be triggered if the borrower is a “disqualified person.” The term disqualified person includes the employer, fiduciaries to the plan, service providers to the plan (e.g. attorneys, accountants and actuaries), individuals and entities which have a direct or indirect ownership interest in the employer in excess of a specified percentage, and certain relatives of disqualified persons.

Due to the direct and indirect ownership rules and the inclusion of certain relatives within the definition of disqualified person, determining who is a disqualified person may not be readily apparent to a plan fiduciary when considering extending a loan to a third party.  The first audit step after determining whether there are third party loans held by the plan is whether the loan is made to a disqualified person.  A plan fiduciary considering making loans to third parties must do the same disqualified person analysis.

Rev. Rul. 80-155 requires trust assets for defined contribution plans be valued at least once a year. Failure to properly value the third party loans may trigger qualification problems for defined contribution plans.  For defined benefit plans, funding is determined using the value of plan assets. If the third party loans are overstated or are deemed to be uncollectable they may trigger excise taxes for failure to satisfy minimum funding requirements under Internal Revenue Code Section 412 and/or failure to limit the form of payment options under Internal Revenue Code Section 430 due to plan underfunding.

The Snapshot directs examiners to be alert for fraud. “Attempting to avoid [possible adverse consequences of third party loans] may present opportunities for fraudulent reporting and recordation to attempt to otherwise describe plan investments as compliant.”  The IRS strongly suggests that fraud may permeate third party loans.

If there are third party loans in your plan’s investment portfolio, this is a good time to conduct a self-audit.  The members of our Employee Benefits Section are happy to assist you with the self-audit process and, if necessary, corrections of any problems detected. Please contact Sharon FreilichGeorge Kasper, or Zachary Zeid.

Posted in IRS

Related Practices & Industries

This blog/web site presents general information only. The information you obtain at this site is not, nor is it intended to be, legal advice, and you should not consider or rely on it as such. You should consult an attorney for individual advice regarding your own situation. This website is not an offer to represent you. You should not act, or refrain from acting, based upon any information at this website. Neither our presentation of such information nor your receipt of it creates nor will create an attorney-client relationship with any reader of this blog. Any links from another site to the blog are beyond the control of Pullman & Comley, LLC and do not convey their approval, support or any relationship to any site or organization. Any description of a result obtained for a client in the past is not intended to be, and is not, a guarantee or promise the firm can or will achieve a similar outcome.

Subscribe to Updates

About Our Labor, Employment and Employee Benefits Law Blog

Alerts, commentary, and insights from the attorneys of Pullman & Comley’s Labor, Employment Law and Employee Benefits practice on such workplace topics as labor and employment law, counseling and training, litigation, union issues, as well as employee benefits and ERISA matters.

Other Blogs by Pullman & Comley

Connecticut Health Law Blog

Education Law Notes

For What It May Be Worth

Recent Posts


Jump to Page