Plan fees paid by employer - is this a problem?

[Santo Gold]

An employer wants to pay certain plan fees, but will only do so if he can deduct the fees as an expense against income.

If the company pays for these expenses and takes a deduction, then the amount the company pays is really an employer contribution and is subject to the allocation formula in the plan, correct?

It seems like this could lead to problems, but I'm not sure why. Does anyone have experience with this situation?

Thanks

[rcline46]

Most employers pay the fees of the plan and deduct under reasonable and ordinary expenses. This is not a contribution to the plan.

[QDROphile]

Certain expenses, such as comissions and possibly other investment transaction expenses (not including investment advice) would be treated as contributions if covered by the employer. Most expenses would not be treated as contributions.

[Guest b2kates]

Certain expenses, such as comissions and possibly other investment transaction expenses (not including investment advice) would be treated as contributions if covered by the employer. Most expenses would not be treated as contributions.

What is your authority for treating commisions and other transaction expenses as contributions?

[Bill Presson]

Certain expenses, such as comissions and possibly other investment transaction expenses (not including investment advice) would be treated as contributions if covered by the employer. Most expenses would not be treated as contributions.

What is your authority for treating commisions and other transaction expenses as contributions?

Hope this helps. I think the conclusion is that if the employer put those amounts in the plan to pay the commissions, etc., it would be a contribution.

Question:

Are plan expenses paid by the employer deductible as business expenses? Or, do they count towards the deduction limit for plan contributions under Code Section 404?

Answer:

They are deductible as business expenses, and do not count towards the 404 contribution limit. The exception would be if the fees relate to commissions, which the IRS regards as contributions (for 404 purposes) even if they are paid directly from the employer to the service provider.

The following is from the PWBA Opinion Letter 97-15A:

Concerning the portion of the "Wrap Fee" arrangement consisting of fees paid to the brokerage firm generated by services rendered on behalf of Plan X, Rev. Rul. 86-142, 1986-2 C.B. 61, considered the deductibility of broker's commissions charged in connection with the purchase and sale of securities for a qualified employees' trust or an IRA. It notes that broker's fees are not recurring administrative or overhead expenses incurred in connection with the maintenance of the trust or IRA. Rather, brokers' commissions are intrinsic to the value of the trust's or account's assets; buying commissions are part of the cost of the securities purchased and selling commissions are an offset against the sales price. Based on this analysis, Rev. Rul. 86-142 held that employer contributions to the trust of a qualified plan, or direct payments by the employer to a broker, to pay brokers' commissions cannot be separately deducted as ordinary and necessary expenses under section 162 or 212 of the Code.

[Santo Gold]

Certain expenses, such as comissions and possibly other investment transaction expenses (not including investment advice) would be treated as contributions if covered by the employer. Most expenses would not be treated as contributions.

What is your authority for treating commisions and other transaction expenses as contributions?

Hope this helps. I think the conclusion is that if the employer put those amounts in the plan to pay the commissions, etc., it would be a contribution.

Question:

Are plan expenses paid by the employer deductible as business expenses? Or, do they count towards the deduction limit for plan contributions under Code Section 404?

Answer:

They are deductible as business expenses, and do not count towards the 404 contribution limit. The exception would be if the fees relate to commissions, which the IRS regards as contributions (for 404 purposes) even if they are paid directly from the employer to the service provider.

The following is from the PWBA Opinion Letter 97-15A:

Concerning the portion of the "Wrap Fee" arrangement consisting of fees paid to the brokerage firm generated by services rendered on behalf of Plan X, Rev. Rul. 86-142, 1986-2 C.B. 61, considered the deductibility of broker's commissions charged in connection with the purchase and sale of securities for a qualified employees' trust or an IRA. It notes that broker's fees are not recurring administrative or overhead expenses incurred in connection with the maintenance of the trust or IRA. Rather, brokers' commissions are intrinsic to the value of the trust's or account's assets; buying commissions are part of the cost of the securities purchased and selling commissions are an offset against the sales price. Based on this analysis, Rev. Rul. 86-142 held that employer contributions to the trust of a qualified plan, or direct payments by the employer to a broker, to pay brokers' commissions cannot be separately deducted as ordinary and necessary expenses under section 162 or 212 of the Code.

The fees in question are for self-directed assets held in a pooled brokerage account. Twice each month 401k monies are deposited and subsequently invested into mutual funds, as directed by the participants. There is a $10 fee per transaction so for 8 mutual funds, thats $80 a payroll, or at least $160/month. The employer wants to pay for these costs.

Would you agree that this is a transaction fee, but not a commission? I think the employer can deduct as a business expense.

Thanks

[KJohnson]

Bill,

I don't see that language in 97-15A

http://www.dol.gov/ebsa/programs/ori/advisory97/97-15a.htm

Santo Gold

I would go back and read 86-142. I think that if it is an "intrinsic part" of the investment it might be treated as a contributio.

[Bill Presson]

Bill,

I don't see that language in 97-15A

http://www.dol.gov/ebsa/programs/ori/advisory97/97-15a.htm

Santo Gold

I would go back and read 86-142. I think that if it is an "intrinsic part" of the investment it might be treated as a contributio.

The cite is actually from PLR 8940014. I got it corrected at my source.

[Santo Gold]

Thanks to everyone for commenting.

I read Rev. Ruling 86-142 and am coming to the "undesired" conclusion that in this specific case referred to, that payment of these transaction fees cannot be deducted as a business expense. They appear to be more like a broker's commission and thats what 86-142 is dealing with, that commissions cannot be expensed. If the employer pays for these transactions, either directly to the broker or through the plan as reimbursement, they are considered contributions for 404.

Its also interesting (at least I did not know this) that for other investment fees, that if the ER pays them directly, they are an expense. But if the ER reimburses the plan for the fees, then its a contribution.

[KJohnson]

Bill as to reimbursing the plan for a fee that the plan paid I believe PLR 9124037 revoked part of 8940014. That partial revocation of 8940014 is what people cite for the propostion mentioned by Santo Gold that reimbursing a plan for a fee will always be treated as a contribtion even if the fee is something that the employer could pay and deduct outside of the plan without it being treated as a contribution.

Also you might want to look at PLR 200507021 where the IRS stated that paying the "wrap" outside of an IRA was not treated as a contribtion to the IRA even though a portion of the wrap was for brokerage. Doesn't seem consistent with 86-142 but maybe they figured it was too hard to determine what portion of the wrap reprsented brokerage.