GIC Surrender Charge - Terminated Plan

[52626]

Plan is terminating effective 2/29/2016. The Plan offered a GIC investment. As a result of the termination, participants invested in the GIC will be charged and early withdrawal charge.

Can the Employer pay this fee?

There are only 8 out of 45 participants in the GIC that will be subject to the Surrender Charge. If the Employer pays the cost, and the fee is treated as a contribution, to these 8 participants, does the plan need to pass 410(b) as it relates to this contribution. If so, it will no pass coverage.

[Mike Preston]

Yes, if it is nondiscriminatory and otherwise treated as a directed contribution. I'm on the fence as to whether a plan amendment would also be necessary. I'm leaning towards not.

[Lou S.]

Can you have the ins company send a quote for the early withdrawal change and pay it directly to the INS CO as an investment expense?

[Mike Preston]

I don't think so. Don't have time to look it up but the IRS went out of its way at one point to make it clear that such payments count as annual additions (i.e., contributions) and are not deductible except as contributions. Maybe there is a distinction I'm not remembering that would allow treatment of withdrawal charges as administrative expenses (which can be paid by the sponsor without contribution-like treatment).

[Lou S.]

I remember they used to be real sticklers on that point but I thought around the time of Enron they relaxed their position. But I could be forgetting something or confusing it with another point.

2 of the biggest problems with it treating it as a contribution even if nondiscriminatory are 415 issues for participants with relatively large balances to current salary and terminated participants who have no 415 comp.

[Belgarath]

I seem to recall something about if, in the judgment of the Fiduciary/Administrator/Sponsor/whatever, the imposition of the surrender charge would result in a lawsuit, then the plan sponsor would be justified in paying the surrender charge. But I really don't remember the details, and would have to dig into it to see if my memory is even remotely correct, and even if it is, does such a stance still exist.

[Lou S.]

^that seems to be my vague recollection as well.

[Peter Gulia]

Revenue Ruling 2002-45 [http://www.irs.gov/pub/irs-drop/rr02-45.pdf]describes a restorative payment (the ruling’s antidote against counting an amount as a contribution) as a payment “made to restore losses to the plan resulting from actions by a fiduciary for which there is a reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security of 1974 (ERISA)[.]”

Beyond the examples given in the ruling, the IRS in practice has treated a payment as restoration if the employer made a written finding that the selection or negotiation of the insurance or investment contract was (or might have been) a breach of the employer’s fiduciary responsibility, whether under ERISA or other law, and the finding is plausible.

The Treasury department’s interpretation requires also that “plan participants who are similarly situated are treated similarly with respect to the [restorative] payment.”

For a limitation year that began or begins on or after July 1, 2007, the ruling’s principle is included in the annual-additions-limit rule. 26 C.F.R. § 1.415©-1(b)(2)(ii)©. The Treasury adopted my suggestion about looking beyond ERISA to other Federal law, and to State law.

The key driver is that there is “a reasonable risk of liability”.

[James B]

Seeing this thread late ... I've always thought that a fiduciary that buys products with early termination charges has committed the fiduciary breach of stupidity, unless the plan is tiny and does not have access to decent investment products. I still see these in the non-profit world, especially individual contract sales. But lately, I've seen "market adjustments" on large stable value funds upon plan termination or merger. This is not exactly fiduciary incompetence at work.

[My 2 cents]

Whose decision was it to put some of the assets in the GIC, the sponsor or the individual participants?

If the participants chose to go with the GIC, in order to avoid having potential market losses, why would that trade-off constitute a breach by the sponsor? Presumably, the early surrender provisions were made clear to the participants, who chose to use that vehicle anyway.

The surrender charges are being incurred because the sponsor decided to terminate the plan (a settlor function, not a fiduciary act) and all plan investments must now be liquidated.

Depending on the actual market conditions, perhaps the GIC provider would be willing to waive the surrender charge.

[GMK]

Depending on the actual market conditions, perhaps the GIC provider would be willing to waive the surrender charge.

Do the BenefitsLink mavens (to use the FGC term) have an experience of this ever happening? and if so, under what conditions?

We have avoided stable value funds, because getting out of them, for example, if the plan wants to change providers, looks as time-consuming and expensive as a bad divorce. We could be wrong ...