expenses paid from plan and FICA

[Guest Iwonder]

Local government hired a person who will only work on the plan. The plan allows expenses to be paid from the plan. They want to pay him from plan assets. Can FICA be paid from plan assets? Can they issue a W-2? I think the answer to both is no. I thought FICA should not be paid from plan assets, and that a 1099 is appropriate when a payment is made from a plan. Am I wrong (wouldn't be the first time).

What questions should I ask?

Thank you.

[PensionPro]

If an ERISA plan, seems to be a PT under ERISA 408©(2):

408. © Nothing in section 406 shall be construed to prohibit any fiduciary from--

(2) receiving any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of his duties with the plan; except that no person so serving who already receives full-time pay from an employer or an association of employers, whose employees are participants in the plan, or from an employee organization whose members are participants in such plan shall receive compensation from such plan, except for reimbursement of expenses properly and actually incurred.

[J Simmons]

ERISA shouldn't apply because you state the ER is a local governmental entity (assuming it meets definition for ERISA exemption, such as taxing authority and election of controlling board by residents of geographical area).

You posted in the 403b section and indicate that the ER hired this person just to work on the plan. So it sounds like the EE is not otherwise or already on the ER's payroll. Is the EE employed by the local governmental entity or by the plan?

Since a 403b plan is not funded by a single trust but by group annuity contract, individual annuity contracts or individual mutual fund-only accounts, I'm a bit puzzled about the mechanics of how the funds will be drawn against the plan to pay this EE.

Separate and apart from those concerns, the payment of benefits from a plan is not usually subject to FICA, but if a plan itself has an EE I know of no prohibition from paying FICA (in fact, I would think as the ER, the plan would be required to withhold FICA).

[ERISAnut]

While the plan is not subject to ERISA, the assets must still remain for the exclusive benefit of participants and their beneficiaries. This is reinforced in Sections 401(a)(2) and 401(a)(13); making this an IRS enforcement issue.

What appears to happen here is that the employer (local government) is using the plan assets to pay for an employee of the local government. Regardless of who is making the payments to the individual managing the plan, the individual appears to be a common law employee (see Rev. Rul. 87-41) of the local government. The local government is, therefore, responsible for this persons salary. Why would the plan pay this? If paid, why would it be paid on a W-2, as the plan does not appear to be the common-law employer.

I hope it works out for you.

[J Simmons]

ERISAnut,

What provision of the Code makes 401a2 or 401a13 apply to a 403b plan?

If the governmental entity is the 'plan administrator', can the governmental entity's hiring of the individual and supervising the EE not be for and on behalf of the plan as the ER rather than for the governmental entity itself as the employer?

Iwonder,

Is the governmental entity a public school? If not, it might not be an eligible 403b ER.

[ERISAnut]

J Simmons,

You and I are on the same page, I merely jumped ahead in assuming that it is not a 403(b) plan since the sponsor is a local government. Normally, it would be stated at a public shool in the question.

This left the Governmental 457(b) and a Qualified Plan as the remaining alternatives. I merely assumed it to be a qualified plan since IWonder stated plan administrator.

I absence of detail always gets us. I am merely assuming that this is likely a qualified plan, but do not know whether it is a DB or DC; not that this such a distinction would matter.

I just assumed it is a QP from the fact pattern.

[Guest Sieve]

For the sake of argument for just a moment, let's assume the plan is either subject to IRC Section 4975 or ERISA. I had never really thought of it before, but if an employer assigns one employee fulltime to administer the employer's plan--i.e., to perform plan administration functions rather than merely settlor functions--why couldn't the employer, as PA, obtain reimbursment for its expenses in plan adminstration: e.g., the employer would be "receiving . . . reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of . . . duties with the plan"?

[ERISAnut]

For the sake of argument for just a moment, let's assume the plan is either subject to IRC Section 4975 or ERISA. I had never really thought of it before, but if an employer assigns one employee fulltime to administer the employer's plan--i.e., to perform plan administration functions rather than merely settlor functions--why couldn't the employer, as PA, obtain reimbursment for its expenses in plan adminstration: e.g., the employer would be "receiving . . . reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of . . . duties with the plan"?

In the event you are reimbursing the employer, the payment should be made to the employer, not the employee of the employer. So, the question of whether FICA should be paid in addition would be moot, as the expense is paid to the employer. Also, the individual hired by this employer do perform these services will ultimately become a participant in this plan. Again, do you want the plan issuing a check to a participant who is performing services to the plan?

But, to answer your question, I think the debate would be weather a reimbursement of employee salary is a reasonable expense. I would argue that it is not. An important fact that is stated, however, is that this individual is working exclusively on the plan which would seem to support the notion that the expenses may be reasonable. But the first time this individual performs a duty that is not directly related to the plan becomes problem. My argument would be why to even cross that bridge.

[GBurns]

I find this quite analogous to wanting the health plan to pay the employees whose handle the day to day aspects of the operation of that aspect of the employee benefits plan. You would not do it there, so why even consider it in this case.

If you could, the Plan would have to be the common law employer (which it could not) and pay the employee as the employer in order to pay FICA.

Reimbursing the employer for expenses in entirely different from paying a plan employee.

[Guest Sieve]

It is my understanding that some multi-employer plans have their own employees, and that the plan pays them a salary to administer the plan. Obviously ERISA contemplates an individual--a fiduciary, in fact--receiving reasonable compensation from a plan. Just look at ERISA Section 408©(2), cited earlier by PensionPro (and look at DOL Reg. Section 2550.408c-2). Why would it always be "unreasonable" to pay an employee to administer a plan, as suggested by ERISAnut? If the Plan has 15,000 participants, why not have an employee of the sponsor perform those services and be paid by the trust?--it might be a great fiduciary decision, since the cost might well be much less than what an independent entity would charge to do the same things.

Why can't a plan or trust have common law employees? Where is that prohibited? Or, why can't an employer be reimbursed for the full amount paid to an employee who is performing no service other than administering the plan? After all, in that case, none of the expenses--including the employee's salary, FICA, whatever--would not have been incurred but for the services performed for the plan. Look at ERISA Section 408(b)(2): "contracting or making reasonable arrangements for . . . other expenses necessary for the . . . operation of the plan, if no more than resaonable compenstion is paid" is an exemption from the PT rules. According to DOL Reg. Section 2550.408b-2(b)--which has not been rewritten under the proposed regs--"[a] service is necessary for the . . . operation of a plan . . . if the service is appropriate and helpful to the plan . . . in carrying out the purposes for which the plan is established or maintained." Why wouldn't it make sense, and be allowable, for an employer to hire someone to provide quarterly enrollment & education meetings for a 401(k) plan at the employer's 75 national locations, regularly review ADP/ACP testing, & process distributions, loans, and hardship distributions?

The fact that "the term "reasonable compensation" does not include any compensation to a fiduciary who is already receving full-time pay from an employer" certainly contemplates that "reasonable compensation" can include situations in which a non-fidicuary receiving full-time pay from the employer also can receive reasonable compensation directly from the plan, or a non-fiduciary being paid nothing by the employer can receive reasonable compensation directly from the plan--as long as that individual is not performing settlor functions, I would think.

[GBurns]

The OP did not say that it was the Plan that would be having its own employee. The OP clearly stated that the local government was the employer and wanted the Plan to pay the employer matching FICA for that employee.

[J Simmons]

The OP states that the ER hired the employee. It does not say that the person was hired to be an employee of the ER or of the Plan. The ER did the hiring. It may have done so in a capacity as the administrator of the plan, and hired the person to be an EE of the Plan. The OP asks if the Plan should issue a W-2, which heightens the possibility that the OP contemplated the EE being employed by the Plan.

[GBurns]

If the hiring is done in the capacity of Administrator, then the hirer is the Plan Administrator NOT the ER.

The Administrator would then be the employer with the employee on its payroll and employer matching FICA would be an automatic by-product of that payroll. The employee would be subject to a W-2 from the Administrator, as employer. If this was the case the OP's questions would be pointless.

[J Simmons]

A Plan cannot act by itself. That's why it has an administrator. The administrator could hire someone to be an employee of the Plan, just as the administrator can hire, for example, an attorney to represent the plan's interests, not the administrator's interests. While an attorney is typically an independent contractor and if paid by the plan trust a 1099-MISC is issued by the plan trust to the attorney, if a service provider hired by the plan is an employee, the plan would issue that person a W-2. As Sieve pointed out, multiemployer plans sometimes have employees.

Probably most compelling, however, is that Congress contemplated that employee benefit plans can have employees. In ERISA § 3(14)(A) as part of the definition of who may be a 'party in interest' for purposes of a prohibited transaction,

any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such employee benefit plan

[GBurns]

So to answer the question of the OP:

Who is the employer ? is the question to ask.