surrender charges not restorative payment but ER contribution

[pmacduff]

ok - Plan Sponsor moves plan assets from product with surrender charges. There are individual accounts. Sponsor wants to reimburse the surrender charges. Charges are not unreasonable but Sponsor wants to reimburse just the same. I know these have to be treated as Employer contributions not restorative payments.

Am I reading things correctly that Sponsor can amend the plan for a special formula for this allocation and then must test the allocation to be sure it is not discriminatory?

I did see a method described whereby the Employer "bonuses" each affected participant through payroll and then gives them the option to defer some or all (provided the Plan Doc allows). Are there any issues with this scenario?

[Bird]

Am I reading things correctly that Sponsor can amend the plan for a special formula for this allocation and then must test the allocation to be sure it is not discriminatory?

That's how I see it. You have to be careful of all the usual stuff like the timing of the amendment and whether you might take a document out of prototype status. I remember doing it once - did not request a special FDL but the next time we applied for one, just included that amendment in all of the "amendments since the last FDL" and had no problems.

I did see a method described whereby the Employer "bonuses" each affected participant through payroll and then gives them the option to defer some or all (provided the Plan Doc allows). Are there any issues with this scenario?

I guess if someone was already at the 402(g) limit or otherwise wanted to defer the max they might feel cheated. But I don't see anything "wrong" with it.

[Jim Chad]

I can't remember where, but I think I have read that if this is the settlement of a complaint, it can be deductible and not a contribution. Can anyone add to this?

[pmacduff]

Jim - not sure if you have access to the "Pension Answer Book"; but I have a copy of the 2010 edition and question 12.2: "How are restorative payments treated" might answer your question.

The answer is quite lengthy but the first sentence of the answer is:

"IRS has ruled that an employer could deduct in full a restorative payment made to its defined contribution plan in response to actual and potential claims for breach of fiduciary duty because the payment was considered an ordinary and necessary business expense and was not limited by the plan deduction limits. [Rev. Rul 2002-45, 2202-2 C.B.116]"

There is much more there but I thought this might help you get started....

[BG5150]

Any other thoughts on this?

I have a plan that is doing the same thing: moving from group annuities to another investment platform and there are surrender charges involved.

The ER wants to make the participatns whole after the transfer.

Are the only two options 1) special allocation don by amendment and tested or 2) a "bonus" paid to affected people with the options to fully defer the amounts?

And for testing, it probably would have to pass on an allocation basis, right?