3938 / Can an employer contribute property other than money to a qualified plan trust?

The U.S. Supreme Court has held that an employer’s transfer of unencumbered property to a defined benefit plan in satisfaction of a funding obligation is a prohibited transaction.¹ The Court left open the question of whether a transfer of unencumbered property that is not in satisfaction of a funding obligation might be permissible without violating prohibited transaction rules.

The Department of Labor has expressed the view that a contribution of property other than cash that reduces a sponsor’s funding obligation would be a prohibited transaction in the absence of a statutory or administrative exemption, whether it is made to a defined benefit or a defined contribution plan; a contribution in excess of amounts needed to meet a plan’s funding requirements may be permissible, provided that acceptance of the contribution is consistent with the general standards of fiduciary conduct under ERISA.²

Certain contributions of employer stock and employer real property are exempt from the prohibited transaction rules ( Q 3980). Furthermore, there is an administrative exemption for the contribution of a life insurance policy to a plan if certain conditions are met ( Q 3974). This exemption also protects self-employed owner-employees and more-than-5-percent shareholder-employees of S corporations from the prohibited transaction rules of Title I of ERISA ( Q 3980).³ If only a sole proprietor or partners and their spouses participate in the plan, Title I of ERISA does not apply.⁴

A contribution of an employer’s promissory note to a trust does not constitute payment and no deduction is allowable until the note is paid.⁵ The IRS has taken the position that the contribution of an employer’s own term promissory note is a prohibited transaction.⁶

A sale by plan fiduciaries of some of their customers’ promissory notes to a plan was a prohibited transaction, notwithstanding the fact that the notes generated a competitive rate of return.⁷ An earlier letter ruling indicated that a contribution of a third party promissory note was payment and that its fair market value could be deducted.⁸ Contribution of a check is only conditional payment; if the check is not paid, the deduction will be disallowed.⁹

The fair market value of contributed property is considered to be the amount contributed for purposes of calculating annual additions within the overall Section 415 limits ( Q 3868, Q 3719, and Q 3728).¹⁰

For special rules applying to the sale of employer securities to a defined contribution plan, see Q 3731. The requirements for a Section 1042 election upon the sale of employer stock to an ESOP are explained at Q 3820.