Employer reimbursement of investment fees.

[Guest Thornton]

A plan offers employer stock as an option in its 401)k) plan. (thinly NASDAQ traded) It has been little used. The employer wants to change to employee directed brokerage accounts for employees who purchase company stock. The account would be limited to company stock, traded quarterly. The employer would reimburse each brokerage account for commissions. Question: Does anyone see a 404© or discrimination issue? Can the fees be reimbursed, or is this considered a company contribution? Could this also be discriminatory? Thank you.

[KJohnson]

brokerage fees could not be reimbursed without them being a contribution. There is some discussion of this in this thread:

http://benefitslink.com/boards/index.php?showtopic=16129

[Guest Thornton]

Thank you for your response and the link. Rev. Ruling 86-142 is clear that reimbursements of brokerage commissions are not deductible under section 162 or 212, and would be considered contributions under section 404. I have two questions:

1) This company has no maximum 404 issues, so it could take the deduction under 404. All participants may purchase company stock in a brokerage account (with a single firm), and there is no fee to do so except the brokerage commissions, so I don't see a discrimination issue here. However, if the reimbursement of commissions is considered contributions, I see possible discrimination since the contribution levels are higher for these participants. Does anyone have a comment on this?

2) If the brokerage house holding the company stock accounts charges a wrap fee (assuming that it is reasonable) instead of commissions, and the company pays this directly to the brokerage house, do we aviod the reimbursement issue? Thanks for your thoughts.

[KJohnson]

1) I think it would have to be treated as a contribution and tested under 401(a)(4).

2) I don't think a wrap gets you around this because I think you will still need to treat the portion of the wrap attributable to commissions as a contribution under 401(a)(4). You may want to look at PLR 8941010. Please note that the portion of this PLR regarding reimbursement to the plan of the wrap (as opposed to the wrap being paid by the employer directly) was withdrawn in PLR 9124034.

[Guest Thornton]

Well, I've read you're citations and I have to agree with your position, although it's not the answer that I wanted. Any ideas on how accomplish my client's goal?