Can redemption fees be reimbursed by plan sponsor

[Guest Jennyb473]

We are a tpa that does true daily val recordkeeping and we have a plan that has switched custodians and 1 of their investments cannot be moved to the new custodian. We are going to replace the fund in the plan with a new fund at the new custodian, per the instruction of the Investment Committee. However the old fund has a redemption fee (1% for 6 months). There are about 7 people effected by this redemption fee. If we were to sell the fund today and incur the redemption fee (total for all 7 participants only comes to about $125) would either the plan sponsor or the Investment Advisor be able to reimburse the participants the fee amount to make them whole without having to count it as a contribution? The other option is to keep the old investment at the old custodian until June 2012 to get past the 6 months, then sell and and move the money to the new custodian and invest in the new fund. My concern about doing this is 1) what if someone decides to sell out of that fund and take the hit on the redemption fee? I don't have any other money at the old custodian so I cannot make their transfer in a timely fashion because I have to move money to the new custodian in the middle of the transfer 2) it is more time consuming and costly to administer the plan at 2 custodians (much more costly than $125) for 6 months.

I'm looking for a way to make this work and am not sure I'm going to come up with one. Any thoughts?

[K2retire]

Will the old custodian agree to allow the employer to pay them directly instead of charging the participant accounts?

[KJohnson]

Look at Rev. Rul. 86-142 which talks about direct and indirect contributions in such a circustance. I would be hesitant, but still this was in Q&A- 16 of the May 2005 Q&A session between the Treasury Department and the American Bar Association.

16. §401(a) - Employer Contributions

A plan sponsor decides to change record keepers. The old record keeper informs the plan sponsor that there is a surrender charge to transfer the plan assets to the new record keeper. If, instead of charging the surrender charge to the accounts of the plan participants, the old record keeper charges the plan sponsor directly, and the plan sponsor pays the surrender charge directly to the old record keeper, is the payment considered an employer contribution subject to testing under §415 and §401(a)(4)?

Proposed Response: No. Since no money was deposited by the plan sponsor into the plan, no contribution has been made.

IRS response: The IRS agrees with proposed response for this fact pattern, but is not willing to give a blanket endorsement to the proposed rule that since no money was deposited by the employer to the plan, no contribution has been made. It is a facts and circumstances determination whether a contribution has been made.

[Guest Jennyb473]

the redemption fee is not taken directly out of the accounts (since it is an omnibus account) so we are actually considering paying the fee from the forfeiture account instead so that the plan is paying the fee not the participants