Many of the brightest and hardest-working investment and brokerage people in the country are obsessed with getting you to invest in stocks,bonds and mutual funds. Absolutely all the brokerage firms that reach out to you every day are designed to get you to invest where they benefit. To survive in this environment, you will need determination to withstand the constant pressures to invest in only stocks and bonds. It’s time to take back control of your investments. Look into Real Estate, Gold, Private Investments, LLC’s, Life Settlements and other alternatives. Just remember to have the assets correctly valued.
The fair market valuation of 401k assets is essential to compliance with the Internal Revenue Code requirements.
The valuation of 401k assets must be accurately determined to ascertain
(1) Prohibited transactions;
(2) Exclusive benefit violations under IRC 401(a);
(3) Violations of the limitation on benefits and contributions under IRC 415;
(4) Excess deductions under IRC 404;
(5) Violations of the minimum funding requirements under IRC 412; or
(6) Discrimination violations under IRC 401(a)(4).
In a profit sharing or 401k the valuation of 401k assets will determine the value of a participant account, and ultimately, a participant distribution.
Solo-k 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.
a. For example, the valuation in a single participant plan, a self-directed account, or frozen plan can be less formal in a year in which the plan or self-directed account receives no contribution and makes no distribution or change in investment.
(2) The reasonableness of the method for valuing plan assets is based on the surrounding facts and circumstances. Except for certain employer securities held by an ESOP, there is no absolute requirement the annual valuation be based on an independent appraisal.
Timing of Solo 401k Asset Valuation
Rev. Rul.80-155 requires that a defined contribution plan assets be revalued at least annually. 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 80-155 C.B. 84, provides that since amounts allocated or distributed to a participant must be ascertainable,
the plans must value their trust investments
(1) at least once a year,
(2) on a specified date,
(3) in accordance with a method consistently followed and uniformly applied.
When employer securities are acquired or sold, the securities must be valued at the time of the
Determining Solo 401k Asset Values
Factors for Consideration in Determining Value
(1) There are a number of factors to consider when determining the value of anasset, for example:
a. Nature and history of the business issuing the security
b. General economic outlook and the outlook for the specific industry
c. Book value of the securities and the financial condition of the business
d. Company earning capacity
e. Company dividend paying capacity
f. Goodwill value
g. Recent stock sales
(2) ERISA 3(18) applies for purposes of some prohibited transaction exemptions
under both 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 named fiduciary pursuant to the terms of the plan
(4) DOL Reg. 2510.3 defines fair market value as the price at which an asset would change hands between a willing buyer and a willing seller when either party is not under any compulsion to enter into the transaction.
(5) Rev. Rul. 59-60, 1959-1 C.B. 237, provides guidance for determining thevalue of plan assets. Although Rev. Rul. 59-60 provides methods for valuing
shares of stock of closely held corporations for estate and gift tax purposes,the factors may be used to determine values of assets in qualified plans.
a. The factors in Rev. Rul. 59-60 are not an restricted list of factors for valuing closely-held employer securities. Other factors may be included
where appropriate. Also, not all of the listed factors will be relevant to all companies and transactions.
(6) The detail of the assets valuation is examined in light of the plan assets involved.
a. As example, the valuation should contain extensive detail if it values a limited partnership interest or a closely held corporation.
(7) If appropriate, stock values should be discounted due to a lack of marketability and, where appropriate, a control premium should be added to the stock value.
Types of Plan Assets
(1) Plans may invest a portion of their assets in limited partnerships and invest directly in real property, or in mortgages on real property.
(2) Plans may also invest in life insurance contracts. Described below is a safe harbor that may be used when such contracts are distributed.
(1) The partnership itself can invest in virtually any type of asset.
(2) Generally, limited partnership interests are not listed on national securities exchanges.
(3) The valuation of a plans interest in a partnership is especially important in a year in which the plan is making a distribution.
(1) Mortgages valued at cost may be incorrectly valued if based solely on the purchase price of the real estate.
(2) Under special circumstances, the mortgage valuation should reflect the current value of the real property.
a. For example, if the fair market value of property held for investment by the plan is lower
than the indebtedness secured by the property, the value of the mortgage should be marked down. Also, the value of the mortgage is based on the loan balance.
(3) Although a contribution of property to a plan may be a prohibited transaction if it is not subject to an exemption, a contribution need not be paid in cash to be deductible under IRC 404. If overvalued property is contributed to the plan, the employer may have deducted an amount in excess of that allowed under IRC
Life Insurance Contracts
(1) Section 1.402(a)-1(a)(1)(iii) of the Income Tax Regulations provides, in general,that a distribution of property by a qualified plan is taken into account by the distributee at its fair market value
a. In the case of a non-variable life insurance contract, compare the premiums paid with 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 accumulated at a reasonable rate of interest (at least 2 or 3 percent) less reasonable cost of insurance charges (generally, except for very high ages, less than $ 5,000 per $ 1 million of death benefit) less reasonable policy expenses (generally, less than $ 1,000 per $ 1 million of
b. In the case of a variable life insurance contract, the actual investment return should be considered. Generally the value of a variable life insurance contract should be close to the premiums paid under the
contract accumulated at the actual investment return rate earned by the contact (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 high ages, of less than 5,000 per $ 1 million of death benefit) less reasonable policy
expenses (generally, less than $ 2,000 per $ 1 million of death benefit).
(2) If assets are valued more frequently than annually in a way that favors distributions to highly compensated employees, prohibited discrimination could occur.
(3) An improper valuation of qualified plan assets can cause a plan to exceed the limitations on benefits and contributions .
a.This could occur, for example, if there was an exempt contribution of undervalued property to a plan and the resulting annual additions to participant
accounts based on the improper valuation are within the limits of IRC 415,but the annual additions based on fair market value of the contributed property would
exceed the IRC 415 limits.
b. Similarly, there could be excess annual additions if property were sold by the plan 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.
(1) Under 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 qualifying employer securities or qualifying employer real property is exempt under IRC 4975(d)(13), only if the securities or real
property is sold or acquired for adequate consideration as defined under ERISA 3(18). This requires a proper valuation.
Solo – Where Do You Want Me To Put It
Music video by Solo performing Where Do You Want Me To Put It. (C) 1995 UMG Recordings, Inc.