reimbursement of investment management fees incurred by participants in the 401(k)/Profit Sharing Plan

[Guest shark]

I am a partner physician who participates in a self-directed 401K and Profit Sharing Plan. Our plan includes about 40 physicians and other employees for the corporation. Since the plan is self directed I have a professional financial planner manage my money. He charges me a fee about 1% per year (WRAP), he does not charge any other commissions or fees. He bills the corporation quarterly, and they pay his fees directly- this money is NOT taken out of my retirement account, but is "yellow sheeted" and comes out of my quarterly bonus (saving me income taxes on this payment). I am the only physician that does this, but many others now also want to do the same thing. I know that those who just have a brokerage account can not deduct commissions or brokerage fees.

Our new office manager got approval for this by our accountant, who gave the following reply:

Fees associated with the self-directed retirement plan accounts can be paid from the retirement accounts themselves or from funds outside the plan. If paid outside the plan, the fees can be yellow-sheeted. Ideally, invoices for the fees to be yellow-sheeted would be addressed to XXX, FBO the participant.

· An option, not as ideal, would have the expenses submitted by the participant to XXX as a yellow sheet reimbursement.

His advice on this treatment “follows the notion that corporations can choose to pay plan admin fees from retirement assets or from corporate funds as a tax-deductible expense”.

He than wanted to ask our lawyer the following question:

Does this policy (XXX’s “choice” to pay admin fees) require consistent treatment among all participants?

· Does the fact that participants also include non-physician employees complicate the application of this policy?

· In addition, does inconsistent treatment among all participants raise an issue of additional “contributions” to those who are reimbursed?

· The Profit Sharing and 401k investments are commingled in many (or all) accounts. Does the fact that Profit Sharing contributions are made by the corporation and 401k contributions are elective by the employee make a difference in the discussion?

Your formal guidance on this topic would be helpful. Thank you.

This is his response:

The purpose of this email is to respond to the issues raised regarding the reimbursement of investment management fees incurred by participants in the 401(k)/Profit Sharing Plan (“Plan”). I note the following for your consideration:

(a) The tax treatment of plan expenses paid or reimbursed by the sponsor of a qualified plan is a material issue in most case. Specifically, depending upon the nature of the expense, the payment or reimbursement of the expense may either be a deductible expense by the plan sponsor under Section 162 or 212 of the Internal Revenue Code (“Code”) or a plan contribution subject to the contribution limitations under Sections 404 and 415 of the Code. In the case of the Plan, where the maximum contribution is generally made for all physicians, any payment or reimbursement of a plan expense that is categorized as a contribution would have a significant impact on the Plan’s qualified status.

(b) As a general rule, the tax treatment of the payment of an expense paid or reimbursed by the plan sponsor hinges on whether the payment constitutes a plan overhead expense (in which case the payment is a deductible expense for the plan sponsor and not treated as a contribution) or a payment that is “intrinsic” to the value of the plan assets themselves (e.g., sales commissions) (in which case the payment will be treated as a contribution).

© At least one private letter ruling (PLR 9252029) has concluded that the plan sponsor’s direct payment of investment management fees were deductible by the plan sponsor and not considered plan contributions; provided that the fee was based on the value of the plan's assets and not related to brokerage or other transactional fees. Interestingly, the Internal Revenue Service issued and then revoked three private letter rulings (PLRs 8941009, 8941010, and 8940013) which concluded that investment management fees that were paid by the plan trustee and reimbursed by the plan sponsor were considered plan contributions. No clear guidance appears to exist explaining the different conclusions reached in these private letter rulings.

(d) Based on the above, while it is difficult to conclude why direct payments of investment management fees are treated differently then reimbursement of these fees, from a conservative standpoint, if XXX is to pay investment management fees, these fees should be paid directly to the investment manager. Unfortunately, I understand that this direct payment is not possible in all cases.

(e) If XXX wishes to pay investment management fees, the failure to pay these fees on behalf of all plan participants, arguably, may result in a violation of Section 401(a)(4) of the Code which requires that “benefits, rights and features” under the plan be provided in a nondiscriminatory manner. While not entirely clear, the fact that non-highly compensated employees would be required to potentially bear expenses not paid for by XXX exposes the plan to a potential violation of Section 401(a)(4) which would impact the qualified status of the Plan.

Based on the inability of XXX to pay investment management fees directly in all cases and the potential discrimination issue, we would not recommend a policy which includes the direct payment or reimbursement of investment management fees incurred by XXX physicians within the Plan and the associated "yellow sheeting" of these expenses.

As always, please call me with any questions or concerns.

XXX

Our office manager concluded the following:

What does this mean? Essentially the last paragraph in Mr. XXX email gives us the advice we need to make a decision. The inability to pay investment fees directly for all investments held by participants in the plan and the fact that we are not reimbursing expenses for all participants HUB is recommending that we not reimburse or “yellow sheet” these expenses for the partners. The basic issue comes down to maintaining the qualified, read “tax deductible”, status of our entire Profit Sharing and 401K Plan. I believe that Mr. XXX explanation is clear and unequivocal.

Effective in 2011 we will not be reimbursing any expenses related to investment fees for the Profit Sharing or 401K Plan.

I do not agree with this conclusion, my financial planner also does not agree - he states that this is done all the time and follows the law.

I know this is a long post, but I would appreciate your opinion on this issue

Thanks

[K2retire]

Short version summary of what they already told you: In general, plans can pay investment related fees. However, paying fees for an HCE while not paying them for an NHCE is likely to be discriminatory and therefore prohibited.