K-only asset valuation formality

(1) Whether a formal valuation is required will depend on the transactions that occur with the plan and the form of the plan.

has. For example, the assessment in a single-participant plan may be less formal in a year in which the plan or self-directed account receives no contributions and makes no distribution or investment changes.

(2) The reasonableness of the method for valuing plan assets is based on the surrounding facts and circumstances.

Timing of Asset Valuation 401k Only

Rev. Rule. 80-155 requires that the assets of a defined contribution plan be revalued at least once a year. If the requirements of Rev. Rule. 80-155 are not met, the plan is not qualified.

(1) In a defined contribution plan, Rev. Rule. 80-155, 1980-1 CB 84, establishes that since the amounts allocated or distributed to a participant must be determinable, plans must value their fiduciary investments-

(1) at least once a year,

(2) on a specific date,

(3) according to a method consistently followed and uniformly applied.

When employer securities are acquired or sold, the securities must be valued at the time of the transaction.

Determining Asset Values ​​401k Only

Factors to Consider in Determining Value

(1) There are a number of factors to consider when determining the value of an asset, for example:

has. Nature and history of the business issuing the security

b. General economic outlook and outlook for the specific industry

against Book value of the securities and the financial situation of the business

d. The earning capacity of the company

me. Capacity to pay dividends of the company

F. goodwill value

gram. Recent Stock Sales

(2) ERISA 3(18) applies for purposes of some exemptions of prohibited transactions in both ERISA and the Code.

(3) ERISA 3(18) defines the term adequate consideration for “assets other than securities for which there is a generally recognized market” as the fair market value of the asset as determined in good faith by the trustee or trustee designated in accordance with the terms of the plan

(4) DOL Reg. 2510.3-18(b)(2) defines “fair market value” as the price at which an asset would change hands between a willing buyer and a willing seller when neither party is required to participate in the transaction.

(5) rev. Rule. 59-60, 1959-1 CB 237, provides guidance for determining the value of plan assets. Although Rev. Rule. 59-60 provides methods for valuing closely held stock for estate and gift tax purposes, the factors can be used to determine asset values ​​in qualified plans.

has. The factors in Rev. Rule. 59-60 are not a restricted list of factors for valuing employer privately owned securities. Other factors may be included where appropriate. Also, not all of the factors listed will be relevant to all businesses and transactions.

(6) The asset valuation detail is examined in light of the plan assets involved.

has. As an example, the valuation should contain extensive detail if you are valuing a limited partnership interest or a closely held corporation.

(7) If applicable, the values ​​of the shares must be discounted for lack of marketability and, if applicable, a control premium must be added to the value of the shares.

Types of Plan Assets

(1) Plans may invest a portion of their assets in limited partnerships and invest directly in real estate or mortgages on real estate.

(2) Plans may also invest in life insurance contracts. A secure port that can be used when distributing such contracts is described below.

associations

(1) The company itself can invest in practically any type of asset.

(2) Limited company interests are generally not listed on national stock exchanges.

(3) The valuation of a plan’s interest in a partnership is especially important in a year in which the plan makes a distribution.

real estate

(1) Mortgages valued at cost may be incorrectly valued if they are based solely on the purchase price of real property.

(2) The mortgage appraisal must reflect the current value of the real property.

has. For example, if the fair market value of property held for investment by the plan is less than the debt secured by the property, the value of the mortgage must be reduced. Also, the value of the mortgage is based on the balance of the loan.

Life Insurance Contracts

(1) Section 1.402(a)-1(a)(1)(iii) of the Income Tax Regulations provides, generally, that a beneficiary accounts for a distribution of property by a qualified plan in his ” fair market. worth”.

has. For a non-variable life insurance contract, compare the premiums paid to the value of the contract. Generally, the value of a non-variable life insurance contract should be close to the premiums paid under the contract accrued at a reasonable interest rate (at least 2 or 3 percent) less the reasonable cost of insurance charges (usually , except for very high ages). , less than $5,000 per $1 million death benefit) less reasonable policy expenses (generally less than $1,000 per $1 million death benefit).

b. In the case of a variable life insurance contract, the actual return on investment must be considered. In general, the value of a variable life insurance contract should be close to the premiums paid under the contract accrued at the actual investment rate of return earned by the contract (which can vary widely because the premiums paid under such contracts are generally invested in mutual fund-like instruments) less reasonable cost of insurance charges (generally, except for very old ages, less than $5,000 per $1 million death benefit) less reasonable policy expenses (generally, less than $2,000 per $1 million death benefit).

(2) If assets are valued more frequently than annually in a manner that favors distributions to highly compensated employees, prohibited discrimination could occur.

(3) An improper valuation of qualified plan assets may cause a plan to exceed benefit and contribution limitations.

has. This could occur, for example, if there was an exempt undervalued property contribution to a plan and the resulting annual additions to participants’ accounts based on the incorrect valuation are within the IRC 415 limits, but the annual additions based on the Fair market value of contributed property would exceed IRC 415 limits.

b. Similarly, there could be excess annual additions if the plan sold the property for more than fair market value.

(4) In extreme cases, an exclusive benefit violation under IRC 401(a)(2) may occur if a qualified plan engages in a prohibited transaction in which it acquires property for more than fair market value.

Prohibited Transactions

(1) Pursuant to IRC 4975(d)(13) and ERISA 408(e), a plan may acquire and hold qualifying employer securities and qualifying employer real property.

(2) The acquisition of qualified employer securities or qualified employer real property is exempt under IRC 4975(d)(13), only if the securities or real property are sold or acquired for “adequate consideration” as defined in ERISA 3(18). This requires a proper assessment.