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Terminated participant fees


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Just having a brain cramp - but if the accounts of terminated participants are charged an annual fee (50.00, 100.00, whatever) and this fee is paid to the employer, how is that not a prohibited transaction? 

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It might be ok if the employer is merely collecting the fee from the plan and then immediately turning around and paying it to a service provider. It would be much cleaner of course if the plan could pay the service provider directly, but it is not necessarily a PT for the employer to be in the middle of that transaction.

I am also concerned that you only asked about terminated participants. Do active participants not get charged this fee? I don't think you can different fee structures for active and terminated participants.

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Thanks - I couldn't see it either. But perhaps they really mean it is paid to the trust, then the trust uses it to pay plan expenses - TPA fees, advisor fees, etc..., but doesn't pay it directly to the employer. 

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CB - I seem to recall some DOL guidance that said it was ok to charge a different fee (has to be reasonable) to terminated participants, since there is extra expense in tracking them, communicating, etc., etc., but I'd have to look.

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Here's one of many similar discussions from a quick Google search. I just get squeamish when I hear that the compensation is being paid DIRECTLY to the plan sponsor, rather than to the plan. I think it is ok to have it reduce the amount otherwise billed to the sponsor, since it is not a "settlor" expense. 
Any thoughts are appreciated!

https://www.napa-net.org/news-info/daily-news/can-plan-charge-fees-terminated-participants-not-active-ones

P.S. here's an excerpt from DOL 2003-3.

Accounts of Separated Vested Participants. Some plans, with respect to which the plan sponsor generally pays the administrative expenses of the plan, provide for the assessment of administrative expenses against participants who have separated from employment. In general, it is permissible to charge the reasonable expenses of administering a plan to the individual accounts of the plans participants and beneficiaries. Nothing in Title I of ERISA limits the ability of a plan sponsor to pay only certain plan expenses or only expenses on behalf of certain plan participants. In the latter case, such payments by a plan sponsor on behalf of certain plan participants are equivalent to the plan sponsor providing an increased benefit to those employees on whose behalf the expenses are paid. Therefore, plans may charge vested separated participant accounts the account's share (e.g., pro rata or per capita) of reasonable plan expenses, without regard to whether the accounts of active participants are charged such expenses and without regard to whether the vested separated participant was afforded the option of withdrawing the funds from his or her account or the option to roll the funds over to another plan or individual retirement account.

Ugh - this gets a little murkier all the time. It seems that under IRC Section 4975(d)(10), assets of a Plan can be used to reimburse a disqualified person for properly and actually incurred expenses related to services rendered for the Plan without being classified as a prohibited transaction that is subject to penalties.

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Belgarath, the payment of an administrative fee by plan trust to employer would in the first instance be a PT under ERISA 406(b)(1)(C). You could claim exemption under ERISA 408(b)(2), but would need an independent fiduciary to approve the contractual arrangement under Reg. 2550.408b-2. The equivalent Code sections are 4975(c)(1)(D), (d)(2), and Treas. reg. 54.4975-6.

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Hi Luke following up on this. I haven't yet done any exhaustive research - first, I don't even find an ERISA 406(b)(1)(C). Did you mean another section?  Also, ERISA 406(a) starts with "Except as provided in Section 408." So, what about ERISA 408(c)(2)? The employer is a fiduciary, and has incurred the administrative expense charged by the (TPA, etc.) - does this do away with the bother of relying on a whole pile of other guidance? I haven't yet looked further than this, other than to note that PTE 80-26 might help...dunno yet. Thanks.

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12 hours ago, Belgarath said:

Hi Luke following up on this. I haven't yet done any exhaustive research - first, I don't even find an ERISA 406(b)(1)(C). Did you mean another section?  Also, ERISA 406(a) starts with "Except as provided in Section 408." So, what about ERISA 408(c)(2)? The employer is a fiduciary, and has incurred the administrative expense charged by the (TPA, etc.) - does this do away with the bother of relying on a whole pile of other guidance? I haven't yet looked further than this, other than to note that PTE 80-26 might help...dunno yet. Thanks.

Thanks for pointing out my failings, Belgarath. 🙂 Supposed to be 406(a)(1)(C), provision of services to plan by party in interest.

The exception you need is 408(b)(2), as interpreted by the regulation I cited previously. The point is that while the employer's taking a reasonable fee from the plan for services is OK under 408(b)(2) (and, as you point out, under 408(c)(2)), the employer violates 406(b)(1) and (2) if it makes the decision on behalf of the plan to hire itself to perform the services. That's why you would need an independent fiduciary to make the decision for the plan to have the employer perform the services and get paid for performing them. See 29 CFR 2550.408b-2(a). At least that's the DOL's view of the matter. Some have viewed 29 CFR 2550.408b-2(a) as impermissibly cutting back on what the statute was trying to say, but I don't think that has even been the subject of a judicial decision.

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Ok, thanks, but here's where I'm getting hung up, and I guess it hinges upon the interpretation of the language. Mine is probably wrong... back to 408(c)(2). Is it reasonable to look at it through the following lens: Since the fiduciary (the employer) has ALREADY incurred these administrative expenses, and they have been determined to be proper and reasonable expenses of the plan, why can't the employer be reimbursed?

The employer/fiduciary has not contracted with itself to be paid for providing these services - the services have been provided by a third party, and the employer is being billed for them. If the employer pays the bill, then isn't reimbursement allowable under 408(c)(2) without having to rely on an exemption for the EMPLOYER providing the services?

That's the interpretation I'd LIKE to take, but the regs on 2550.408c-2(b)(3) seem not to really support that interpretation. So perhaps one could rely on PTE 80-26? Appreciate your thoughts!

P.S. - my own feeling on all of this is that it is, at best, the hard of way of doing something. Makes much more sense to simply have the plan pay the fees directly to the TPA, rather than messing around with trying to reimburse the employer. But the question was asked...

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6 hours ago, Belgarath said:

Is it reasonable to look at it through the following lens: Since the fiduciary (the employer) has ALREADY incurred these administrative expenses, and they have been determined to be proper and reasonable expenses of the plan, why can't the employer be reimbursed?

Belgarath, the above was not in your original post. It could change things, and the no interest loan characterization might also be a valid approach, but be aware of the below from the preamble to 2006 amendment to 80-26. The key is that in theory you need to be sure that the employer's payment of the expenses, at the time it did so, was intended as a loan. Even though it would be the same expenses, and let's assume they are reasonable, if the employer intended to pay them, but then changes its mind, it's not a loan under 80-26. I realize the extreme hypothetical in the excerpt below from the preamble is extreme (years), but that's a straw man, and your facts are likely to file in between 3 days and several years. The rules seem clear when you have hypotheticals, but of course they become less clear when they come into contact with actual facts and circumstances.

One of the commenters recommended that the class exemption expressly require that loans with durations that exceed a certain number of days be in writing. This commenter expressed concern that the removal of the three-day limit without additional conditions will raise the potential for abuse of a plan's assets.

For example, the commenter describes a scenario in which a plan sponsor pays certain expenses on behalf of a plan without intending to be repaid. Years later, the plan sponsor seeks to re-characterize such payment as a “loan” covered by PTE 80-26, and, thereafter, causes the plan to “repay” the plan sponsor in reliance on the relief provided by the class exemption. The commenter states that the situation described above may arise where a plan sponsor experiences a change in personnel, including the plan's fiduciaries, and the “new” plan fiduciaries are unsure whether the payment by the plan sponsor was originally intended to be a loan covered by PTE 80-26. According to the commenter, it is also possible that a plan sponsor may seek to re-characterize a payment the sponsor previously made on behalf of a plan, notwithstanding the sponsor's full awareness that such payment was not intended to be repaid by the plan.

The commenter states that, in the above situations, the Department may have difficulty demonstrating that the payments by the plan sponsor are not loans covered by PTE 80-26. The commenter recommends that the class exemption contain a condition expressly requiring that all loans of extended durations be made in writing, and that such written loan agreements exist at the time the plan enters into the loans.

As noted in the preamble to the proposed class exemption, section 404 of ERISA requires, among other things, that a fiduciary act prudently and discharge his or her duties respecting the plan solely in the interest of the participants and beneficiaries of the plan. Accordingly, a plan fiduciary would violate section 404 of ERISA if such fiduciary transferred plan assets to the plan sponsor in the absence of specific written proof or other objective evidence demonstrating that the plan originally intended to enter into a loan transaction with the plan sponsor. In this regard, a written loan agreement executed at the time of the loan transaction and demonstrable evidence that the plan was experiencing liquidity problems, would alleviate the uncertainty regarding whether the parties actually entered into a loan or other extension of credit. Of course, any attempt to re-characterize past payments as loans after the fact would be outside the scope of relief provided by the exemption.

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