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badger,

all right; here's a return volley in the giveth-ing and taketh-ing away:

1. §4975(a), (b) & (c) particularly (c)(1)(B) make the loan between the plan and you (or your spouse) a prohibited transaction.

2. §4975(d)(1) seems to (or temporarily) bring back the loan ability as long as the loan environment is level for all participants in the plan.

3. However, §4975(d)starts with "except as provided in (f)(6)" which is the "taketh away" part and says "shall not apply to a transaction which...(i) lends...to...any such owner-employee..."


drilling down further into §4975 (f)(6), it seems that the language from subparagraph A that you quote in your point 3 is a general rule.

however, subparagraph (B) introduces a special rule covering shareholder-employees, which would seem to govern this situation.

clause (iii) of subparagraph (B) deals with loans by the plan to shareholder-employees. this clause specifically exempts shareholder-employees from the definition of "owner-employee" used in subparagraph A.

subparagraph (c) goes on to elaborate upon the definition of "shareholder-employee":
For purposes of subparagraph (B), the term
"shareholder-employee" means an employee or officer of an S
corporation who owns (or is considered as owning within the
meaning of section 318(a)(1)) more than 5 percent of the
outstanding stock of the corporation on any day during the
taxable year of such corporation.


thus it would seem that officers of S corporation who own more than 5% of the stock - and that would be me - are shareholder-employees, and therefore NOT owner-employees. as such, they qualify for the exemption in §4975(d), and they may conduct "prohibited transactions" with the plan without suffering onerous tax consequences.

am i missing something in there?

trp
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