CDSC Treated as a Plan Expense

[DTH]

I have a plan that is transferring from one insurer to another. The insurer's contract has a surrender charge for leaving before five years. Can the CDSC be treated as plan expense and be paid by forfeitures and/or the plan sponsor?

[Beltane]

I have a plan that is transferring from one insurer to another. The insurer's contract has a surrender charge for leaving before five years. Can the CDSC be treated as plan expense and be paid by forfeitures and/or the plan sponsor?

Not in a direct dollar for dollar sense.

The plan document should address the allocation and use of forfeitures. Typically, forfeitures are reallocated as an additional employer contribution, used to reduce an employer contribution or to play plan ADMINISTRATIVE expenses.

The CDSC cannot be paid for by the employer without being treated as an employer contribution, thus, any aggregate contribution amount would have to be allocated as such, rather than allocated to pay CDSC charges. Payment by the employer to pay individual CDSC charges would probably not, in this case, be considered a 'restorative payment' under IRS Rev Ruling 2002-45.

Typically, your HCE's would have a higher CDSC charge in dollar terms, thus I think you can see the discrimination possibility here if they are reimbursed more than your non highs.

So I would say the answer to this question is no.

[DTH]

Thanks.

The plan document says that forfeitures can be used to pay "Plan" expenses (not limited to just administrative expenses).

My research has shown that some individuals think that a CDSC can be treated as a plan expense and some say not. I'm just looking for insight from others.

[Bird]

I agree with Beltane; it can't be done. IMO it's an investment loss, not an expense.

[Beltane]

Thanks.

The plan document says that forfeitures can be used to pay "Plan" expenses (not limited to just administrative expenses).

My research has shown that some individuals think that a CDSC can be treated as a plan expense and some say not. I'm just looking for insight from others.

The CDSC is not a plan expense, its part of the intrinsic value of the investments. If you use forfeitures to pay for the CDSC, the CDSC will vary from participant to participant in dollar terms, whereby plan expenses are either earmarked [e.g., loan origination fees], or, for fees required by ERISA, allocated across the board equally in percentage or dollar terms. The incurrance of the CDSC is not an ERISA required expense like a form 5500 return filing is.

Forfeitures cannot be used to pay for earmarked expenses, and non earmarked expenses must be ERISA required expenses.

[Guest anne1]

If the sponsor pays the fee, it will be considered a contribution and subject to the deduction limit, testing etc. As noted by another responder, since HCEs may be getting a larger dollar amount than NHCEs it would not pass 401(a)(4) testing. One approach we have used in the past is to have the sponsor only reimburse the NHCEs. That way, there is no testing issue. The employer can then make the HCEs "whole" outside of the plan if they choose to.

[DTH]

Thanks to you all.

anne1, even if the contribution just goes to the NHCEs, it would still be subject to 415 testing - correct?

[Bird]

Yes, subject to 415. But if HCEs get more dollars it isn't necessarily a problem. You just might pass on a current contributions testing basis (i.e. NHCEs get at least what HCEs get as a % of current pay) or if you want to get more complicated you could apply new comp testing to the contributions...actually, to the total employer contributions for the year.

[Sully]

Won't the plan document dictate how contributions (CDSC payments) are allocated? For example, if you have a non-integrated profit sharing plan, then the payment of the CDSC charges (contributions) would have to be allocated comp/total comp. Agreed?

[Bird]

I think the idea is that you have a special amendment dictating how this one-time contribution is allocated. Yes, there are potential pitfalls with allocation requirements, document form (std prototype is not conducive to this situation), etc.