Brokerage Account in 401k Plan

[cpc0506]

New client wants to offer a Brokerage Account (managed) to the participants in the plan. The minimum account balance is $25,000 for this type of account.

Is this discriminatory? Do I need to test this 'feature of the plan'?

Thanks

[John Feldt ERPA CPC QPA]

Is this discriminatory?

Maybe. If enough NHCEs have $25,000 accounts, then you're okay.

Do I need to test this 'feature of the plan'?

Yes.

[Bird]

I thought I remembered that if it's not a plan-imposed limit it is ok. Sorry, no cite.

[austin3515]

No cite either, but I agree with Bird. It's in the EOB though, I had looked this up once before.

[John Feldt ERPA CPC QPA]

Well, unless Sal changed his mind in the 2010 version of the EOB, here's what I find on page 9.153, which is Chapter 9 (Nondiscrim), Section X, Part B,2.e. of the 2009 EOB.

"... the eighth option is a separate brokerage account. The brokerage account option requires [a] $50,000 minimum account balance, whereas all account balances may be invested in any of the other seven options. The brokerage account option is a separate right or feature that must be tested for availability ..."

Thus sayeth Sal. Please review and comment.

[J Simmons]

If one drills down deeper into what Sal the Great has to say (at least in 2010 EOB), you see that he does make the distinction of an external-to-the-plan imposed conditions versus those imposed by plan officials:

[9.B.]2.e.3)b) Minimum investment requirement. Based on the informal response of the IRS with respect to fees charged for certain investment options, as discussed in 2.e.3)a) above, it would seem to be reasonable that if the investment option has any other type of condition that could be unfavorable to NHCs, such as a minimum investment amount requirement, but that condition is determined externally (e.g., by the SEC or by an investment provider that is independent of the plan sponsor), the current availability test could be treated as satisfied if there are at least similar investment options available to NHCs that do not have such a condition. For example, if under SEC rules, there is a minimum net worth requirement for investment in a particular class of stock, but other classes of stock are available for selection by all of the participants, it should be reasonable to treat all of the classes of stock as a single investment option for purposes of the nondiscriminatory available test. This also should apply where employer stock is involved, and a class of employer stock is available only to individuals with minimum net worth (as required under SEC rules), as long as a class of employer stock that is not subject to the minimum net worth requirement is available to a nondiscriminatory group of employees.

[John Feldt ERPA CPC QPA]

So, "the current availability test could be treated as satisfied if there are at least similar investment options available to NHCs that do not have such a condition"

Back to the OP: If the NHCE participants have similar investment options that do not have such a minimum balance condition, then you can avoid the test, based on the informal IRS comments.

[J Simmons]

Using the rationale that Sal does based on those IRS comments in Q&A-51 at ASPPA's 1999 Annual Conference, I think if the $25,000 minimum for this type of account is imposed by plan officials, it must be tested. If the $25,000 minimum is imposed by the investment brokerage, then I do not think it must be tested. The OP description is too oblique in this regard to know: "The minimum account balance is $25,000 for this type of account."

[austin3515]

What if the participants accounts are at, say, John Hancock, and the owner has his money with his financial advisor in an FBO account. The advisor has a $500K mininimum account balance.

Hard to suggest that the participants have similar options. Are we saying that this would not be allowable (because obviously it won't pass testing since no NHCE's have the option)?

[J Simmons]

What if the participants accounts are at, say, John Hancock, and the owner has his money with his financial advisor in an FBO account. The advisor has a $500K mininimum account balance.

Hard to suggest that the participants have similar options. Are we saying that this would not be allowable (because obviously it won't pass testing since no NHCE's have the option)?

I would say that since the $500k minimum is not imposed by decision of plan officials (such as would the decision be to offer participant loans), but by the advisor, it is not a 'benefit, right or feature' of the plan. Therefore, it is not subject to testing.

[austin3515]

satisfied if there are at least similar investment options available to NHCs that do not have such a condition.

You are suggesting that this test is satisfied then in the scenario that I laid out? (BTW, I hope it is b/c we've let clients do this because we had agreed that this was true!)

[Bird]

I dunno, you read that cite and it says "the current availability test could be treated as satisfied if there are at least similar investment options available to NHCs that do not have such a condition." You're saying the investment options are A. John Hancock, or B. money manager with $500K minimum. Seems like there's no "similar" option to B.

[austin3515]

That;s not good.. Am I the only that thinks this is pretty common in the "micro market"?

[John Feldt ERPA CPC QPA]

I think it's commonly tried and comes up frequently (maybe 1% to 2% of the clients) in the small plan market.