IRS Releases Snapshot With Guidance on Third-Party Loans and Qualified Plans

The IRS issued a snapshot addressing certain audit and compliance issues about qualified plan investments in third-party loans. Qualified retirement plans are not explicitly prohibited from investing in third-party loans. The IRS snapshot reminds taxpayers that the plan may not lend money to disqualified persons or make loans that benefit those disqualified persons. Further, plan assets may only be used for the exclusive benefit of participants and beneficiaries. Auditors will examine investments in third-party loans to confirm that the primary purpose of a loan is to benefit participants. Defined contribution plans are also required to value plan assets at least once per year to determine their fair market value. Auditors are instructed to carefully review Forms 5500 for asset loan values that don't vary much from year to year--which may indicate that loan payments have not been made or that their fair value isn't properly being determined and reported. Overvaluing a loan can also cause a defined benefit plan to overstate their funded status, which can lead to failures to satisfy minimum funding requirements. For more information on the prohibited transaction rules, visit Tax Facts Online. Read More: Link to Q3982.