Can I Invest In Real Estate With My Cash Balance Plan?


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How would you like to contribute six figures into a cash balance plan, take an immediate tax deduction and invest all of it into real estate? Is this legal? You might be surprised.

I get asked this question all the time. The typical scenario is when a real agent, broker, syndicator has made a bunch of money and is looking first for a tax deferral. But they may not trust (or even understand) the stock market. Real estate investment is really their thing.

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Well the good news is that this can be done. There are few extra hoops to jump through. But if you are set on getting it done, we can help you out.

If the goal of the owner is to invest in real estate, the plan sponsor must hire a third party administrator (TPA) who familiar with investing in real estate in these pension plans. The plan benefit formula must be carefully determined along with the funding requirements. The plan itself must also allow such investments.

Investing in Real Estate in a Cash Balance Plan

But first things first. I would not recommend investing in such assets when there are employees other than the owner (and the owner’s spouse). The risk and compliance (and headaches) is just too much when many employees are concerned.

The compliance issues that need to be considered will generally include the following:

  1. Understanding bonding requirements
  2. Understanding form 5500 requirements
  3. Year-end valuation issues

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Another important issue is understanding the owner’s exit strategy. Since real estate is not exactly a liquid asset, careful consideration needs to be done to sell enough assets to distribute the amount required to pay benefits. If the fair market value of the real estate not sufficient to pay benefits they may have to contribute additional cash.

Real Estate Bonding

For cash balance plans subject to ERISA, the company must have a fidelity bond that covers at least 10% of the total value of the qualified plan assets. This is calculated based on the beginning of the plan year. There is a minimum bond requirement of $1,000 and a maximum bond requirement of $500,000. These bonds are relatively cheap and easy to get. We help clients get these bonds all the time.

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The DOL regulations waive any audit requirement for small pension plans that have fewer than 100 participants as long as the plan meets at least one of the following exceptions:

  1. No more than 5% of the total value of plan assets are derived from what is called “non-qualifying assets.” A non-qualifying asset is generally any asset that is not held by a regulated financial institution such as a brokerage, bank, insurance company, or mutual fund company. This is not a problem with most pension plans because the majority will invest in mutual funds.
  2. The plan has a fidelity bond for at least 100% of the value of non-qualifying assets held by the plan. If your plan is not a one-participant plan, does not already meet one of the exceptions to the DOL audit requirement, and/or if you do not already have a bond to meet the ERISA bonding requirement, you should contact your insurance broker to obtain appropriate fidelity bond coverage immediately.

Normally, a one person plan is not covered by ERISA, so it can just file form 5500-EZ and would typically not be required to maintain a bond. However, once a 1-participant plan holds non-qualifying assets, it must file Form 5500 (not EZ or SF).  This Form does not have a ‘one-participant plan’ election available in Part I.  Thus, it is treated as a single-employer plan which triggers the required bonding coverage. 

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It would only need 100% of the non-qualifying asset coverage is needed in this case though. But bonding shouldn’t really scare you. You can often get a bond for $500 or so that will cover a few years. So it is pretty small.

It might make sense to buy a larger bond than is currently required, so that increases in the bond to cover increases in the value of plan assets may be less frequent. Alternatively, you may wish to purchase a policy rider that will automatically increase the bond coverage amount as the value of plan assets increase.

Valuation of Investment Real Estate in a Cash Balance Plan

One important point to note is that the TPA will need to know the value of assets in the plan as of year-end. This is critical for the actuarial calculation. Current value represents fair market value as available. Otherwise, it will be deemed to be the fair value determined based on the good faith of a trustee assuming an orderly liquidation at time of the calculation date.

A complete and accurate determination of fair market value is critical to the plan’s compliance and must be calculated annually. This is where real estate investing can be a challenge as it does not trade on an established market like mutual funds and stocks. Other assets that can have valuation issues include cryptocurrency, non-publicly traded securities, member shares in limited partnerships, and certain collectibles.

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Although the fair market value of pension plan assets must be completed annually, there is no actual requirement that the plan assets (other than specified non-publicly traded employer securities held in ESOPs) be valued each time by an independent outside appraiser.

In general, an appraisal is completed by an independent third party who knows how to judge and value the type of real estate. This appraiser should not have an ongoing relationship with the plan or it’s fiduciaries other than for the completion of the appraisals.

Can you use a cash balance plan to invest in real estate?

Yes you can, but there are a couple complications. First of all, you will have to file form 5500 rather than for 5500-EZ. You will also have bonding requirements and will need a year-end valuation. So as long as you can navigate the challenges, you can do it.

How to invest in real estate in a cash balance plan

  • Make sure you understand the complications. Non-qualifying investments like real estate will require form 5500, bonding and valuations. Just make sure you get educated before you dive in.
  • Make sure that assets are titled in the cash balance plan. You should have a trust document with your cash balance plan. The real estate should be owned by the trust and NOT your business.
  • Communicate the investment to the TPA. Your TPA will be the one that will most likely direct you from a compliance standpoint. Check with them so you will get specific instructions.
  • Run all rental income and expenses through the plan. Do not commingle plan income and expenses with your personal account. These should be kept separate to avoid prohibited transactions.
  • Don’t forget bonding. Bonding requirements are often overlooked. Fortunately, bonding is relatively inexpensive.

In Conclusion

Investing in real estate in a cash balance plan can certainly be done. But there are a few tips and compliance headaches that need to be considered.

We have a great deal of experience in real estate investment in qualified plans so make sure that you reach out. We can make sure you get on the right track!

Paul Sundin

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