Participant Receiving Commissions

[Guest KMP]

If a participant in a 401(k) plan receives investment commissions are they considered a "disqualified person" with regard to a prohibited transaction?

[Peter Gulia]

ERISA 3(14) defines a party-in-interest to include "an employee ... of a person described in subparagraph (B), ©, (D), (E), or (G) [which includes "an employer any of whose employees are covered by [the] plan"] ...."

The subparagraph of IRC 4975(e)(2) that's "parallel" to the quoted part of the ERISA definition refers to an officer, a director, a natural person with similar powers, some shareholders, and some highly-compensated employees - but not an employee who is none of those.

[Mike Preston]

I'd be concerned, and I have in fact been concerned in the past, about an indirect PT. If the plan sponsor takes into account that income and then pays the individual a different amount that might otherwise be paid, you clearly have an indirect PT. Could it be proven that such indirect PT did not take place? I suppose many things are possible.

[Peter Gulia]

Almost everyone thinks it stinks for a participant to get a commission on a retirement plan's investment.

In addition to the Labor and Treasury departments' opportunitites to pursue equitable relief, civil penalties, and excise taxes on one or more prohibited transactions, the IRS could assert that each year's plan loss - the difference between what is and what would have been if the plan held investments not loaded for the commission - or, if more, the commission paid is really a distribution, which is ordinary income and, if the participant is under 59-1/2, subject to the additional tax on an early distribution.