Funding of employer contribution by credit card

[Medusa]

I have been asked by the plan sponsor if they can fund their employer contribution with a company credit card. They want to get the points or miles or whatever from the credit card company. Is there any prohibition against this? I recognize that the mechanics of the transaction would be a challenge.

[Archimage]

I have to say that is the first time I have heard that one. I don't see why it would be a problem. It would be no different than an employer getting a bank loan to make the contribution to the plan.

[FundeK]

Isn't there something that prohibits the plan sponsor from receving kickbacks? (points, miles)? The plan is supposed to be operated for the benefit of the participants. How do the participants benefit from the miles or points?

[E as in ERISA]

I agree with FundeK. I would start with the assumption that you shouldn't do it.

[mbozek]

There is a prohibition of funding a plan with a promissory note or other credit instrument. However, this does not apply if the contribution is made with a cash advance since the plan will receive the dollars and the card holder will be deemed to have taken out a loan. I really dont see a PT problem if the cash advance is used since the loan is used to generate the points before the funds become plan assets. Would there be a PT if the cardholder writes a check against his line of credit to accumulate points and then deposits the check in his personal bank account to pay the contribution? From the plan's perspective dollars have been contributed, not a loan. There is no PT because the dollars which accumulate the points are not plan assets. The points credited on a cash advance deposited directly to the plan trustee would generate the points before they become plan assets.

[E as in ERISA]

I'd be cautious about parsing the transaction like that. In the fact situation described, there is a clear linkage between the earning of the points and the contribution. If the check is not used to make the contribution, the person won't earn the points.

I'm not saying the law is clear on this. But I'd say it's grey. And when a potential PT is involved, I'd err on the side of assuming you can't do it.

ERISA Section 406(b)(3) says that a fiduciary shall not "receive any consideration for his own personal account from any particy dealing with such plan in connection with a transaction involving the assets of the plan." I understand that what you're saying is that at the time the transaction occurs, the dollars are not plan assets. But I would think that the check would have to clear before you're actually entitled to the points? And aren't the dollars plan assets at that time?

I'd want the transactions to be much more discrete before I'd be comfortable that this was okay. At the very minimum, I'd want the deposit of the check earning points to be a separate transaction from the deposit of the contribution. I'd want the latter to be clean. There should be no "challenge" in completing the transaction from a plan standpoint -- no risk that extra services will be incurred for which the plan might be charged.

[Guest merlin]

How would this work mechanically? Would the plan have to become a "vendor", like Macy's or Bloomingdale's, that accepts the plan sponsor's credit card? Also, don't vendors typically pay some fee for each transaction to the card issuer, part of which is going to pay for the points, skymiles,etc.? So isn't the plan paying for the points, at least indirectly? Wouldn't that generate a PT?

[imchipbrown]

My credit cards come with checks which can be used to make purchases. I suppose you would write a check to the company. The company would write it's own check to the plan/trustee. Money is fungible, so who says what dollars went where?

My 2 cents.

[mbozek]

The prohibition applies to plan assets, i.e, amounts that are contributed to the plan. A benefit that accrues to the plan sponsor's personal account prior to the time a cash contribution becomes a plan asset cannot be a PT. That is why the transaction is structured so that the card holder makes the advance to the company bank account before making the contribution to the plan since money is fungible, i.e, the card holder could use the advance to pay bills in order to have other cash in the bank account needed to make the contribution.

Also the PT applies only if the sponsor receives a benefit from a party dealing with the plan. The facts do not indicate that the credit card co has any relationship with the plan but rather issued a line of credit to the employer. This is clearly different from the IRA owner/ sponsor receiving a cash payment or gift from the custodian for opening an IRA/HR10 plan provided that the credit card co is not the plan custodian.

If a cash advance is used the funds are usually available within 48 hours.

[FundeK]

Okay, you are winning me over. IF the plan sponsor writes a check to themselves (cash advance on the credit card), deposits it into their company checking account(thus commingling funds), and then pays for the employer contribution with a company check, there would be no PT. You wouldn't be able tell if the cash advance was used to fund the contribution or pay the sewer bill.

Would you feel differently if the plan sponsor wrote the cash advance check directly to the plan?

[Medusa]

Just to close the loop on this one, it turns out that the sponsor doesn't have any checks to write against the credit card anyway, and there is no way for the trustee to take a credit card transaction, so he gave up on the concept. He said he "just had to ask".