Alternative Investments in Employee Benefit Plans – Part 2

The final installment in a 2-part series

Last week, we posted Part 1  of a series focused on the current trend of employee benefit plans looking at alternative investment strategies for plan investment decisions. Here are two more critical concerns beyond the investment risk and performance.

Plans with direct ownership in certain investments – Certain investments generate unrelated business income and may obligate a plan to file Form 990-T and pay tax to the IRS. Care should be taken to determine whether there are federal and/or state unrelated business income tax liabilities being generated by the holding of certain investments. 

Plans with direct ownership in foreign investments – In addition, certain U.S. tax forms may be required to be filed to report foreign investments to the IRS (including, but not limited to, Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, which is filed by way of attachment to Form 990-T, even in cases where Form 990-T may not be applicable). State filings may apply as well. Noncompliance with these filing requirements may result in potentially onerous penalties for any current and prior years. For instance, if a plan holds a direct interest in a foreign corporation and invests $100,000 or more in a year, it may trigger an IRS filing requirement. One way to remedy past noncompliance with these filing requirements is to enter into the currently available Internal Revenue Service Offshore Voluntary Disclosure Program (“OVDP”). This may result in the abatement of related penalties for non-filing, including, but not limited to, the lesser of 10% of the investment’s fair market value or $100,000 per year for non-filing of Form 926. The OVDP could change or terminate at any time, so timely addressing any direct foreign investments posing exposure is encouraged.

These filings are often required for investments in many defined benefit plans as more and more plan sponsors are diversifying into foreign investments.