Loan fees

[rlb64]

We are a TPA. The investment provider does the daily val. However, the investment provider has not been able to track loans. That is, their system was unable to split principal and interest and update loan balances as loan repayments were deposited. So, it has been up to us to reflect loan activity and balances on the year-end participant statements that we prepare.

Our loans fees charged to the participants were an initiation fee of $100 plus $30 per year prepaid maintenance fee based on the term of the loan. For example, a 5 year loan cost $250 deducted from the participant's account and no subsequent fees.

The investment provider is now able to track loans. Their fee includes an initiation fee plus a $3 per month maintenance fee charged monthly against the participant's account.

So, we have a problem. We'd like to transfer these loans onto their loan system, but we don't feel it's fair to have charged participants our maintenance fee and then turn around and charge an additional $3 per month fee.

One thought we've bounced around is simply reimbursing the participants our prepaid fee (or portion thereof based on remaining payments). However, our concern is the IRS might view the reimbursement as a contribution to the plan subject to 404 and 401a4.

Any thoughts or suggestions?

[Belgarath]

Since you aren't the employer, and the fees aren't an obligation of the employer, I don't see how reimbursement could be considered a contribution subject to 404. I also don't necessarily see a 401(a)(4) issue here. And I applaud the fact that you don't want to shaft the participants.

A couple of things come to mind - sounds like the maintenance fee is 6.00 per year higher with the new system. I'd be very hesitant to charge them more on an existing loan than the already agreed upon (and paid) fees. How did you handle it in the past where a participant prepaid a loan, and you had already deducted 5 years (or 30 years if for a mortgage loan, for example) of fees? Did you reimburse? If not, then there's possibly a discrimination issue.

As far as the initiation fee - are they going to get hit with a second initiation fee when you switch over, or will this be reimbursed as well?

As long as the total fees charged to existing participants with loans remain equal or go down in all cases, then I'm not sure I see any problems. But it's Monday, so I'm even less sharp than usual - maybe someone else will have clearer thoughts on the issues you raised.

[rlb64]

We do not reimburse when a participant decides to prepay a loan.

As far as getting hit with a new fee... Isn't this the same as a change in recordkeeper? I would think new service providers charge participants their own maintenance fee and not the fee originally agreed upon in the loan agreement, even if higher.