Payment of Management Fees

[Guest jimmybeau]

In this plan employees have the option of having a separate investment account within the plan or being part of a pooled account. The owner wants to pay the management fees on his account rather than having them deducted from the investment. This allows him to effectively leave more money in the plan. Is this allowed. Would it be discriminatory as long as all participants had the option? Where could I look this up?

I appreciate any help.

Thanks

Jimmy

[ERISAnut]

You have to break issues like this down into simplified components. The confusion takes place when you attempt to combine them together while overlooking some fundamental rules creating the framework of a qualified plan. With that said, 'not a chance' is the answer to your question.

1) The fees being paid are paid by one of two methods; the plan or the plan sponsor. If the plan sponsor is paying the fees, then that is a plan expense paid for by the employer sponsoring the plan. If the plan is paying the fees, then that is a plan expense paid for by the investments inside the plan.

2) So cherrypick the employees and allow them the option of paying the fees from their own pockets while others do not would serve to undermine the governing principle that these assets do not belong to the participants; but belong to an ERISA protect trust that require they are used exclusively for the employees (and their beneficiaries).

3) Another argument against would be that this would be the equivalent of a contribution to the plan by a participant who wants the investments replaced when his account was hit with the fee; while other employees who are strapped for cash would choose to continue allowing the plan pay for their separate accounts.

[Guest Sieve]

Certainly the plan could permit after-tax employee contributions--which are subject to their own non-discrimination (IRC Section 401(m)) testing--and the fees could come first out of after-tax accounts and then out of pre-tax (deferral, employer-provided) accounts.

And, come to think of it, what in ERISA or the Code would prevent an employee from paying, outside of the plan, the fees covering that employee's accounts? Some IRA fees can be paid from outside an IRA without being considered IRA contributions. If that doesn't apply here, then we just have the after-tax contribution issue addressed above (which the plan would have to provide for in its provisions). But I don't think there's anything in ERISA that would prevent it--unless it is, in some way, a PT.

[ERISAnut]

I never find it useful to compare IRA functionality to Qualified Plans as it tend to add more confusion to a seemingly complex system of tax advantaged plans. The simple fact of the matter is that that qualified plan assets are part of a trust (a legal entity separate from the employer and employees) that is operated under the shield of ERISA. IRAs are not.

As for the arguments for the fees for expenses incurred in the operation of a qualified plan to be paid by the individual employees (at their own discretion) would appear to undermine the notion that each separate account is still part of the qualified plan's trust. But, hey, this is a risk assessment that would ultimately be made by the owner of the company. Good luck.

[Guest Sieve]

I agree that comparing IRA funtionality to qualified plans does have limited utility, but it may be instructive if we're talking about whether paying administrative fees might, in fact, be considered, from a tax perspective, as an employee contribution to the IRA/qualified plan--which you suggest in your original answer as a possible result.

Now, since a qualified plan--and not an IRA (except if it's an employer-sponsored IRA program, of course)--is, as you say, "operated under the shield of ERISA", what is it in ERISA which would prevent an individual--ANY individual, even a third-party Rockefeller wanting to do good for others--from paying a Plan's administrative fees? I wouldn't be surprised if there's a prohibited transaction violation somewhere in there, but I just don't see it--even if it is a participant who is doing the paying--although it may be staring me right in the face. I don't beleive that "undermining the notion that each separate account is still part of the qualified plan's trust" is an ERISA violation--especially since compliance with ERISA Section 404© removes fiduciary responsibility from the normal fiduciary and from the participant for self-drection of an individual's account, which seems to me to be undermining enough as it is.

[K2retire]

Larry,

I don't think the problem is with who is paying the fees. It is with some participants' fees being handled differently than others. At that point doesn't it become a BRF issue?

[Guest Sieve]

ERISAnut seems to say he sees an ERISA issue. But, in any event, if everyone has the right to pay the fees with outside money--as suggested in the original post--what's the BRF issue? I would agree that if some are permitted to pay with outside money and others aren't, then, yes, there's a BRF issue.

[WDIK]

But, in any event, if everyone has the right to pay the fees with outside money--as suggested in the original post--what's the BRF issue?

Would it be possible to argue that some NHCE's are "effectively excluded" from this right because of a disparity in income? Certainly that is the logic used against creating a benefit formula that gives a higher match at higher deferral percentages.

[Guest Sieve]

Could make the argument, but I don't suspect that the fees are high enough to bring that into play. I've never heard the DOL complain about loan fees, for example, which generally run in the neghborhood of $75 one-time & $75 annually. The DOL thresshold for loan availability is $1,000, and an annual administrative fees for an account are not nearly up there (yet!) . . . Besides, the DOL has no problem if the fees are paid by the account--regardless of size--so I don't see a problem with paying from outside the plan. We're talking here of tenths of a percent of annual comp., anyway.

[WDIK]

We're talking here of tenths of a percent of annual comp., anyway.

I am not necessarily disagreeing that this fee payment scenario is possible.

However, if the fees are that negligible, it does not seem practical to me consider such an approach as viable. The small benefit gained probably doesn't justify the additional cost, hassle and possible scrutiny.

[Guest Sieve]

The fees may not be as small is I suggest--but I don't know. Actually, I am of the belief that payment of these management fees outside the plan may well be considered after-tax employee contributions which are subject to 401(m) testing, and therefore are subject to built-in non-discrimination testing (and are no longer allowed under virtually all plan docments). And that also may raise Section 415 issues in some situations. So, it's not likely to occur in a plan coming to a neighborhood near you . . . If jimmybeau is still with us, he's wondering what happened to his original question. Answer: probably not a good idea to try it--too uncertain & risky.

[WDIK]

Answer: probably not a good idea to try it--too uncertain & risky.

I concur.