Solo-k asset valuation formality

(1) The need for a formal appraisal will depend on the transactions that are made with the plan and the form of the plan.

For. For example, valuation in a single-participant plan may be less formal in a year in which the plan or self-directed account receives no contribution and makes no distribution or investment change.

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

Solo 401k Asset Valuation Timing

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

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

(1) at least once a year,

(2) we have specified a date,

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

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

Determining Solo 401k Asset Values

Factors to take into account to determine the value

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

For. Nature and history of the company issuing the security.

B. General Economic Outlook and Industry Specific Outlook

vs. Book value of the values ​​and financial situation of the business.

D. Earning capacity of the company

me. Ability to pay dividends of the company

F. Goodwill value

gram. Recent stock sales

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

(3) ERISA 3 (18) defines the term adequate consideration for “assets other than a security 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 designated trustee of compliance with the terms of the plan

(4) Reg. DOL 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 obligated to participate in the transaction.

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

For. The factors in Rev. Rul. 59-60 are not a restricted list of factors for valuing closed equity securities. Other factors can be included where appropriate. Also, not all of the listed factors will be relevant to all businesses and transactions.

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

For. For example, the valuation should contain many details if you value a limited partnership interest or a closed corporation.

(7) If applicable, share values ​​should be discounted due to lack of marketability and, where appropriate, a control premium should be added to the share value.

Types of plan assets

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

(2) Plans can also invest in life insurance contracts. The following describes a safe harbor that can be used when distributing such contracts.

Associations

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

(2) Generally, shares in limited companies are not listed on national stock exchanges.

(3) The assessment of the interest of a plan in a partnership is especially important in a year in which the plan is making a distribution.

Real estate

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

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

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

Life insurance contracts

(1) Section 1.402 (a) -1 (a) (1) (iii) of the Income Tax Regulations provides, in general, that the distribution of the property by a qualified plan is taken into account by the distributed in its “fair market value”.

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

(2) If assets are valued more frequently than once a year in a way that favors distributions to highly paid employees, prohibited discrimination could occur.

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

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

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

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

Prohibited transactions

(1) Under IRC 4975 (d) (13) and ERISA 408 (e), a plan can acquire and hold qualifying employer securities and qualifying employer real estate.

(2) Acquisition of qualifying employer securities or qualifying employer real property is exempt pursuant to IRC 4975 (d) (13), only if the securities or real property are sold or acquired for “adequate consideration” as per it is defined in ERISA 3 (18). . This requires a proper assessment.