Question: Quincy – Just did an IRA Class in Orange County, CA with Pete. Had 80 paid attendees which was pretty good.
Had a lady with a house owned by her IRA approached me about making a loan for her IRA. The attached exemption says a non-recourse loan can be made by her to the IRA if she doesn’t charge interest. But as I read it, the loan can only be for 3 days. Do you have any experience of insight on this exemption?
Answer: Yes, I am familiar with it, at least tangentially. You are not looking at the most current version, which I have attached. You will note that it says:
“On December 15, 2004, the Department proposed to remove the three-day duration limit that applied to loans engaged in under PTE 80-26 for a purpose incidental to the ordinary operation of a plan. The Department recognizes that broadening the scope of the exemption in this manner would greatly benefit plans facing liquidity problems. The Department believes that plans will be adequately protected regarding such loans, i.e., loans for a purpose incidental to the ordinary operation of a plan where such loans have durations that exceed three days, to the extent the conditions of the class exemption, as amended herein, have been met. Accordingly, the Department has determined that the effective date of the amendment will be December 15, 2004; the date the proposed amendment was published in the Federal Register.”
“Section IV. Prospective General Exemption
Effective as of December 15, 2004, the restrictions of section 406(a)(1)(B) and (D) and section 406(b)(2) of the Act, and the taxes imposed by section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(B) and (D) of the Code, shall not apply to the lending of money or other extension of credit from a party in interest or disqualified person to an employee benefit plan, nor to the repayment of such loan or other extension of credit in accordance with its terms or written modifications thereof, if:
(a) No interest or other fee is charged to the plan, and no discount for payment in cash is relinquished by the plan, in connection with the loan or extension of credit;
(b) The proceeds of the loan or extension of credit are used only–
(1) for the payment of ordinary operating expenses of the plan, including the payment of benefits in accordance with the terms of the plan and periodic premiums under an insurance or annuity contract, or
(2) for a purpose incidental to the ordinary operation of the plan;
(c) The loan or extension of credit is unsecured;
(d) The loan or extension of credit is not directly or indirectly made by an employee benefit plan;
(e) The loan is not described in section 408(b)(3) of ERISA and the regulations promulgated thereunder (29 CFR 2550.408b-3) or section 4975(d)(3) of the Code and the regulations promulgated thereunder (26 CFR 54.4975-7(b)); and
(f)(1) Any loan described in section IV(b)(1) that is entered into on or after April 7, 2006 and that has a term of 60 days or longer must be made pursuant to a written loan agreement that contains all of the material terms of such loan.
(2) Any loan described in (b)(2) of this paragraph that is entered into for a term of 60 days or longer must be made pursuant to a written loan agreement that contains all of the material terms of such loan. “
I would be concerned about your lady’s proposed transaction on more than one front. First of all, would the IRA she proposes to make a loan to be considered an “employee benefit plan?” Secondly, could such a loan be considered to be “for a purpose incidental to the ordinary operation of the plan?” I think it’s highly likely that the answers to both of those questions would be no, and therefore the exemption would not apply. If you read the totality of the exemption it seems clear that this is not meant to apply to an IRA borrowing funds from the IRA owner for the purchase of real estate or whatever.