Individual self directed subaccounts restricted to a specified minimum

[Guest Joe Twidwell]

Can a plan which allows particiapnts to have individual self directed subaccounts, restrict the availability of those accounts to only participants with balances in excess of $10,000 or $20,000? Has the IRS or DOL issued an opinion on this question and if so, what is the cite?

[Fredman]

here are a few discussions that might help you...just watch the dates of the discussions...

http://www.benefitslink.com/boards/index.p...ST&f=20&t=14662

http://www.benefitslink.com/boards/index.p...ST&f=20&t=15726

http://www.benefitslink.com/boards/index.p...=ST&f=20&t=8869

http://www.benefitslink.com/boards/index.p...ST&f=20&t=15306

http://www.benefitslink.com/boards/index.p...=ST&f=20&t=7700

[jaemmons]

As long as the account minimum is a guideline established outside of the plan by the financial institution, I don't see any problem with it. Aside from fiduciary concerns, if the plan and/or trust agreement states the account minimum, the plan will have to test for current availability of that right.

[MWeddell]

I disagree with the prior post, but there's sure to be a longer explanation of my interpretation and various others in the threads that Fredman linked to. The fact that the plan document doesn't expressly contain the minimum doesn't strike me as a reason for thinking that there's no BRF testing required. There are a lot of examples of other rights or features, such as the right to a particular class of an investment product, that wouldn't typically be stated in the plan document but yet 1.401(a)(4)-4 would seem to require to be tested.

[mbozek]

I dont think there is any authority for requiring an investment option to be available to all participants if the investment is offerred as an option under the plan but is not part of the plan. Financial providers can enforce minimum asset requirements under the plan the same as any mutual fund can require that a minimum investment be required as long as it is consistent with the fund requirements for individual investors. Requiring a minimum amt is not discriminatory because it is not based on compensation of the participant.

[KJohnson]

Mbozek. We have had the discussion before and I disagree. The regulations state that

"...the term other right or feature generally means any right or feature applicable to employees under the plan. Different rights or features exist if a right or feature is not availalbe on substantially the same terms as another right or feature."

Thus I think the test is whether the investment option is "applicable" to any employee under the plan and this does not mean that the investment option has to be "part" of the plan or "provided in" the plan.

Also, I don't agree that " Requiring a minimum amt is not discriminatory because it is not based on compensation of the participant"

I don't think you are saved because the BRF is based on account balances rather than a participant's compensation. Let's say that you only allowed participants with over $1 million account balance to receive a lump sum distribution. Are you saying you would not have to test this optional form of benefit (which is a BRF) for discrimination because it is based on account balances rather than a participant's compensation?

http://benefitslink.com/boards/index.php?showtopic=17791

[Mike Preston]

I think it all boils down to reasonability. If the minimum account was to be $1,000,000 I would think there is an effective availability issue. If the minimum account is related to a reasonable definition of profitability, I don't think the DOL or the IRS will ever be able to strike it down.

It is a fiduciary issue as to whether to offer individual accounts at all. Once offered, if the fiduciaries effectively restrict access to those accounts by selecting service providers with exceedingly high minimums, they have to answer to the fiduciary rules. If they select service providers with $10,000 minimums I don't think there is a problem, unless, as pointed out above in this thread, the minimums are inconsistent with the minimums available to other customers (individual investors?) of the service provider.

[KJohnson]

I think the analysis has to be "is it a BRF"? If it is, then doesn't it have to be tested for current availability--a purely mathematical test-- as well as effective availability which may be a reasonableness test?

I am not sure where the idea of "profitability" and "reasonableness" get you for current availability. If it fails 410(B) standard incorporated into current availability how do you come to the conclusion that the IRS couldn't strike it down. Is it because you don't think it is a BRF? If its not a BRF then there would never be an effective availability issue.

[Mike Preston]

The political reality is that the investment houses that provide these services have tremendous political clout. To clarify what I previously said, I think that the DOL and the IRS will be forced to back away from challenging something that might technically violate the regulations if the net effect were to preclude the investment houses from "business as usual."

Getting back to the technical definitions, however, I agree that the ability to have a particular investment option is a BRF (1.401(a)(4)-4(e)(3)(iii)((B) & ©).

In the current context as long as the participants that are eligible for the threshold established by the investment firm meets the current availability test, do you agree it is unlikely that the effective availability test would be failed?

[KJohnson]

I agree with you on both counts. I think the political reality and not an analysis of the regs is why the Service intimated at an ASPA conference that if the broker set the minimum there should not be a BRF problem.

Also, I would think that if you pass 410(B) on current availability grounds, then I would think that you would not have a problem with effective availability. I suppose there might be a far-fetched factual secnario where this is not the case (i.e. small company where HCE has spouse and five kids working who would all otherwise by NHCE's and therfore he can "play" with the 410(B) test), but even there I think the IRS would be hard pressed to make an effective availability argument.

[mbozek]

I think the practical problem of being able to test current availability and effective availablity on an annual basis in a volitile investment environment where account balances go up or down by 20-50% a year prevents any application of the BRF rules to minimum account requirements, even if such minimums of the fund sponsor are considered part of the plan. Plans could pass or fail the BRF test soley because of investment performance of participants' accounts in the year. Enforcing the rule would require that plans liquidate investment options solely to prevent failing the BRF test. Since the minimums are usually disclosed in the prospectus it would be difficult for the IRS to track such restrictions without a lengthy audit. If there was a real problem the IRS would issue a ruling as it did with cash balance plans that violated the voluntary consent provisions of IRC 411(a)(11) for terminated participants. See Rev. Rul 96-47. A minimum which is equal to the minimums for non plan investors is not a problem.

[KJohnson]

I guess to restate my view,

1) I don't think that the investment feature being considered "part of the plan" is the test on whether it is a BRF,

2) Investment options offered to participants are BRFs no matter where they "appear" or how they are offered

3) If you fail 410(B) with regard to the offering of a BRF because of account balance limitations youhave a problem under the regulations no matter who sets the limit. (Although you can offer BRF's on a discriminatory basis as long as you provide that only individuals UNDER a certain account balance are entitled to the BRF--see 1.401(a)(4)-4(B)(2)(ii)(B))

4) The risk of catching this on audit, or if caught the risk of the IRS pursuing it for political reasons is very low. That said, a complaint to the IRS along the lines of "My boss said that he could use a stock broker to invest his plan account balance but that I can't because I don't have enough money in my account" may, in fact, raise some eyebrows.

[Jon Chambers]

I do quite a bit of consulting on this topic, and I have to say that I agree with KJohnson. One brief observation--there are plenty of competent SDBA providers that impose a minimum of $1,000 or $2,000, so if there ever were a conflict on this topic, I believe it would be difficult for the fiduciaries to justify the selection of an SDBA provider that imposed a $10,000+ minimum.

[mbozek]

With all due respect to your posts, you have not given any thoughtful response to to question of how the plan sponsor can comply with the BRF testing in the face of a volitile investment climate where account balances will go over and under fixed amounts because of the economic climate. Also I seed no authority for incorporating the terms of the investment options as plan terms. If this were true a lot of plans could be subject to disqualification under the BRF rules for the conditions/fees imposed by funds. If the IRS has no problem with these restrictions then is no reason to construct hypothetical arguments as to why they apply. I dont think that selection of funds is to be determined on the basis of lowest minimum amounts any more than they should be determined by lowest mgt fees. If low fees/ minimums were the criteria for selection of funds then the only index funds would be appropirate investments for plans and a lot of investment advisors would be out of business.

[KJohnson]

MBOZEK--You see hung up on "plan terms" I don't see that in the definition of BRF.

Also, in a daily environment, if you know account balances on a daily basis and presumably know account minimums on a daily basis then the "math" of the percentage of individuals who satisfy the account minimums for the investment option does not strike me as that big of a deal if anyone put their mind to it.

Finally, I would agree with Mike Preston's prior post that the "economic" reality of the situation is that, right now, the IRS may look the other way on this issue. They, in fact, indicated as such at a more recent ASPA conference. However at the 1998 ASPA conference, they took a different view--at least as to effective availability:

.

Nondiscrimination: Nondiscriminatory Benefits, Rights and Features

An employer has a profit sharing plan with individually directed accounts at a major mutual fund house. The participants are all being given the option of electing to use an investment manager for their accounts if they so desire. The management fees would be paid directly from the participant's account.

Only the HCEs have account balances at the minimum amount necessary, as established by the investment manager, to be serviced by the manager. There is a concern that the use of investment managers by the HCEs would violate the benefits, rights and features requirements of the non-discrmination rules. Is this an issue?

RESPONSE

Yes, there is an issue. If the option of using individually directed accounts is only effectively available to HCEs, the plan is in violation of the nondiscriminatory benefits, rights and features requirement.

(end of Q&A)

What their view tomorrow might be is anyone's guess. Will they ignore the issue all together. Will they only look at effective availability and not current availability (Who knows how you could arrive at this analysis under the regs. ). Will they ask whether the Plan attempted to negotiate the minimums on a plan level rather than an individual account level, or whether they requested a waiver of the minimum account balance requirement? (touchy-feely compliance--did you care enough to ask?) However, I generally find that addressing what I think appears to be a fairly clear compliance issue with the answers: "The IRS isn't looking at that" or "Our software won't do that" is a strategy that may lead you into trouble.

[Mike Preston]

Also note that the BRF rules in the a4 regulations have some (clear?) guidance on what to do when a BRF is discriminatory. Obviously, going back and retroactively lowering the account balance minimums necessary for a particular investment is not practical. But 1.401(a)(4)-11(g)(3)(vi)©(2) essentially gives a plan sponsor until the very last day of the year to make an amendment to eliminate a discriminatory BRF. In this context it could be analogized to an option that is not part of the plan document itself (such as an account balance minimum) by calling for the elimination of the option on or before the last day of the plan year. Doing the math, as pointed out above, seems somewhat trivial so the ability of a plan sponsor to understand whether an option needs to be eliminated or not certainly exists.

I still think it unlikely that a minimum imposed on all accounts by the investment provider, to the extent not significantly discriminatory is not likely to be challenged. In this regard, I think it is exactly what we get paid for to provide advice to a client that says when an area is black and white, and when an area is grey, and, if grey, what the likelihood of having a problem is. If we are uncomfortable with predicting such a likelihood we can always pass the buck to plan counsel.

[Jon Chambers]

And, for whatever it's worth, I know of at least one large plan sponsor, with a moderate SDBA minimum account size ($2,000), that does annual 410(B) testing to demonstrate that the SDBA BRF is effectively available to a non-discriminatory classification of participants, even though the SDBAs are in fact used disproportionately by HCEs.

[four01kman]

For what its worth IMHO, this is clearly a BRF issue. The amount at issue should be the amount to get into the investment option, not how much the option is worth at any point in time. If there is a minimum amount required that favors the HCEs, it certainly sounds like a discriminatroy BRF.

[mbozek]

Different rights or features exist ony if a right or feature is not available on "substantially the same terms" as another right or feature. Making an option available (again assumung this a plan term) only if there is a minimum balance is not a different right or feature if the minimum amount is not excessive.

[KJohnson]

I don't see how it can be on "substantially the same terms." Someone who has the minimum balance has the BRF and those who do not have the minimum balance do not have the BRF. Admittedly, if the balance is minimal, you probably pass 410(B) on the BRF.

Also, I don't think this tracks from the rest of the reg. The IRS specifcially stated that you could place a minimum account balance in the case of one BRF ( plan loans) and not have to test the BRF. However, they placed the minimum at $1,000 1.401(a)(4)-4(B)(2)(E). Thus, they thought they specifically needed an exemption in the regs for making a BRF contingent upon a "minimal" account balance of $1,000. No such exemption exists in the case of investment options.

[KJohnson]

Just was looking at the 2002 ASPA IRS Q&A's and noted these. Apparently the IRS is taking the position that you do have to run BRF testing on this.p

5. If a 401(k) Profit Sharing Plan uses an individual funding vehicle with a

$2,000 threshold and the business owners are able to immediately move into this funding vehicle that had multiple investment options, but non-owners with smaller 401(k) contributions are in a pooled money market until they reach the $2000 threshold, is this discriminatory? What if the threshold is $10,000? $25,000? $100,000?

Answer: This is a benefits, rights and features issue and, depending on the facts, could either pass or fail.

p 6. Is it okay to restrict Individual Brokerage Accounts to participants that are 100% vested in all accounts? Is this a BRF problem / issue?

Answer: See question 5 above. This would be acceptable if you pass the BRF test.

[Tom Poje]

interesting you should post the comment. I have a similar plan, the fun part was getting the system to generate a report to do the testing. At least I was able to create one in Relius (Quantech) without too much work.

[mbozek]

ok- how does the plan test for BRF? Unlike other features, a fund option could be discriminatory on a year by year basis because of a change in market conditions which will affect the number of participants who will be deemed elgible for a particular option, e.g. if stock market goes down assets of participants will decline making a particual option discriminatory because fewer nhces would qualify for investment. Is BRF tested on assets in year the participant become eligible or on a current yr basis? Second what about BRF where fund charges different fee structure based upon amount invested, e.g. lower fees for more assets invested? Is each fee structure a separate BRF? Third cant this BRF issue be avoided if employer allows directed brokerage accounts? Then every participant can invest in any investment that will accept his/her deposit.