Buying an investment from your practice's retirement plan requires a special exemption

August 1, 2008

Can I buy an investment from my practice's defined-contribution plan rather than selling it to a third-party for what I feel is an undervalued price?

Years ago, I bought two diamonds for $52,000, using funds in my incorporated practice's defined-contribution plan. A recent appraisal says they're now worth $82,000, but I can't find a buyer that will pay more than $54,000. Can I buy the diamonds from the plan myself, instead of selling them to a jeweler for so little? My accountant says this would be a prohibited transaction and advised me to get approval from the Department of Labor first.

Your accountant gave you wise counsel. The sale, lease, or exchange of property between a qualified retirement plan and a "disqualified person" - including an employer or plan fiduciary (trustee) - is indeed a prohibited transaction. You'd need to apply for an exemption from the Department of Labor before buying the diamonds from the plan; if you don't, you would owe a hefty excise tax - at least 15 percent and possibly as much as the diamonds' entire fair market value - even though you have good intentions. To request the exemption, you'd have to write a letter to the DOL.

For details on what the letter should include plus the appropriate mailing address, see the explanation of exemption procedures at the DOL's website, http://www.dol.gov/ebsa/publications/exemption_procedures.html. Be prepared to provide a good deal of documentation as part of your application, including statements from diamond appraisers and other experts. A hassle, yes - but worth the effort to avoid the severe excise tax for proceeding without an exemption. The DOL may well approve your request, since your strategy sounds administratively feasible as well as good for the plan, the participants, and beneficiaries.

Send your money management questions to MMQA Editor, Medical Economics, 24950 Country Club Blvd., Suite 200, North Olmsted, OH 44070, or send an email to memoney@advanstar.com (please include your regular postal address).