Making up fees assessed to participants

[jquazza]

401(k) Plan Sponsor is changing service provider. Few Participants who held a guaranteed fixed income fund are being assessed a "market value adjustment." Sponsor doesn't feel participants should be penalized for its decision and would like to make up the charge to the participants.

Would you count this fee reimbursement as a contribution to the plan?

[K2retire]

It is my understanding that any deposit to the plan by the employer is a contribution and must be allocated according to the terms of the document. They could, however, pay those amounts as bonuses which the employees would have the option to defer into the plan. Or they can negotiate with the service provider to pay them directly, rather than having them charged to the participant.

[Peter Gulia]

A restoration payment is not an annual addition. 26 C.F.R. § 1.415©-1(b)(2)(ii)©.

For a payment to be restoration, there must be (or have been) a reasonable risk of liability. That potential liability need not be limited to ERISA, but may include other applicable Federal or State law.

There is a condition that similarly situated participants must be treated similarly. It should be enough that a restoration payment is allocated uniformly in relation to the loss that resulted from the fiduciary's possible breach.

If a restoration payment meets all the conditions to be treated as not an annual addition, the Internal Revenue Service usually will concur with a plan administrator’s good-faith treatment of the payment and its uniform allocations as not elective deferrals and not counted in ADP, ACP, or similar non-discrimination testing.

This overview is a bulletin-board pointer among practitioners, and isn’t advice to anyone.

[K2retire]

Peter. does your answer change if the fee is NOT the result of any sort of fiduciary breach?

[Peter Gulia]

Yes, although the restoration-payment rule is not necessarily the only means by which an employer may put money into a plan without it being a contribution.

To meet the cited restoration rule’s conditions, there must be a reasonable risk of liability.

One way to begin that analysis is to imagine each claim that an informed plaintiff could assert and then consider whether at least one claim might survive a motion to dismiss – applying recent interpretations that require a statement of a claim (with all facts alleged hypothetically assumed to be true) to be plausible.

If helpful to allow money that the employer seems ready to provide, a practitioner might consider that selecting the contract that included the exit charge could have breached one or more duties, or that exiting a contract when doing so would impose an unanticipated (and perhaps undisclosed) charge on participants might be a breach.

[david rigby]

... a guaranteed fixed income fund ... assessed a "market value adjustment."

Not such a great guarantee, huh?

BTW, read the contract carefully, rather than take at face value anyone's statement that such adjustment must apply.

[jquazza]

Thanks for the citation Peter.

David, I let the investment adviser deal with investment related issues.

[david rigby]

David, I let the investment adviser deal with investment related issues.

Any comments, Peter?

[Peter Gulia]

David, maybe; but it's not clear what question, if any, remains in the thread.