Investment Expenses paid by employer

[austin3515]

Facts: 401(k) Plan with $10MM in assets. HCE's have very large balances. Employer pays all asset based investment expenses of the plan.

Is this discriminatory? Effectively, the HCE's get a larger "contribution" from the employer?

I'm pretty sure that I read somewhere that this would cause problems (at least it would necessitate general nondiscrim testing).

Any sites/articles/regs etc. would be helpful.

Thanks,

[david rigby]

Discriminatory for the employer to bear expenses? Have not heard that one before.

[austin3515]

LEt's say for example that there was one HCE who's account has $1MM, and one HCE who's account has $10,000. There's an asset based chard of 1% of assets, which is paid by the Plan. I don't think it's a stretch to say that the HCE got an extra $10,000 contribution through this arrangement...

[QDROphile]

The IRS maintains that Employers cannot pay commission charges for trades of the plan's assets. The payment would be treated as a contribution, but the use of the funds would not follow the plan's allocation terms.

[KJohnson]

I would look at Rev. Rul. 86-142. Also look at PLR 8941009 (partially revoked in PLR 9124035).

If these are investment advisory fees you probably don't have an issue. If, as Q-phile points out you are looking at some kind of wrap that includes brokerage commissions and transaction costs then you have an issue.

I think the test is whether the employer is paying is an "overhead expense incurred in connection wth the maintenance of the trust" which is fine. Or whether it is a charge that is "intrinsic to the value of the asset" in which case it must be treated as a contribution. There are several long discussions on the Board regarding employers paying surrender fees or CDSC's in this regard.

[austin3515]

Surrender charges! That's what I saw!

I will definitely look up the references. Thanks everyone!

[Brian Gallagher]

Asset fees are not commissions, are they? It's almost like an administration fee.

And in this example, the company is paying the fees for ALL the participants. I would think is was discriminatory if the company paid the fees for people's accounts that were over, say, $100,00 and that everyone esle would pay out of their own accoutns.

[KJohnson]

I think that asset based fees can sometimes include commissions in certain wrap arrangements. That's where you might have a problem. But a straight asset based investment advisory fee should present no problem.