12b-1's

[wsp]

I did a quick search on this and found a topic that began to address it but it petered out before any resolution could be found...

Given full disclosure to the plan sponser and plan participants, can 12b-1 fees be allocated back to the participants as income?

Plan sponser is using a financial advisor that is using R-2 shares. We do not want to accept any 12b-1's (even to offset fees) as we simply would rather remain neutral as to assets (in this specific case there are cheaper recordkeeping opportunities that offer r-5's and thus no 12b-1's and savings to the participant) Since 12b-1's are really a reduction of income, I'm wondering if we can allocate them back as income to the same individuals...in essence making them whole? or do we run into the issue of them being labeled as "fee reimbursement" and thus a contribution and thus having to be allocated as such.

[Guest zdarskyj]

If the plan is using a financial advisor and the advisor is using R2 shares isn't the 12b-1 fee paid to the advisor's broker/dealer as compensation?

[Nate X]

The fees can reimbursed to plan participants. The "fee reimbursement" issue only comes into play when the money is in the hands of the employer. Examples: (1) The plan pays expenses to provider X and the employer reimburses the plan, (2) the employer pays expenses to provider X and is reimbursed by the plan, or (3) the employer is the service provider of the plan and charges the plan for expenses incurred.

[wsp]

If the plan is using a financial advisor and the advisor is using R2 shares isn't the 12b-1 fee paid to the advisor's broker/dealer as compensation?

Although broker/dealer gets paid equivalent of total of 12b1's, the mutual fund company also pays out percentage of assets to TPA. Anywhere from 5 to 12 basis points depending on amount of assets. So if they aren't 12b1's they are still sub-ta's of some nature. So, question still holds true. If we allocate it as income in the same manner in which they were taken, are they then not considered a contribution. And how careful must we be to ensure only those who had the fees taken are the ones that receive the rebate?

[Nate X]

"And how careful must we be to ensure only those who had the fees taken are the ones that receive the rebate?"

I am not aware of any guidance regarding how to apply reimbursed plan expenses. Therefore, I believe you can either use the little guidance that applies to how expenses are paid from the plan and apply the reimbursement as a current negative expense or reimburse those who actually had the fee taken.

Of course if you want absolute assurance, you can add it to the plan document and request an LOD, or request a private letter ruling.

www.dol.gov/ebsa/regs/fab_2003-3.html

[BG5150]

Just make sure none of the HCE's are getting more reimbursement than they paid out. I'm sure the DOL would have something to say about that.