Prohibited Transaction?

[chris]

Employer has one employee who spends 2/3's of time handling all aspects of profit sharing plan administration. Employer now wants to explore the following alternatives:

1. Employer charges Plan a management fee of .25% of assets;

2. Plan shares cost of employee's salary on some percentage basis, e.g., 2/3's of salary paid by Plan and remaining 1/3 paid by Employer;

3. Plan pays employer a set dollar amount for plan administrative services.

I am going to pull out the rules on prohibited transactions, but just wanted to see if any or all of these were dead in the water before I jumped into the research... Thanks for any help.

[jpod]

There are some hoops to jump through.

Hard to believe in this day and age of daily val plans and bundled service providers that you have 2/3 of an employee working full time on your plan. Assuming it is the case, wouldn't it be simpler to reduce the employer's annual discretionary contribution by the 2/3rds of the cost to carry this employee?

[chris]

This is an "old-school" employer, still has an annually valued plan and is a medical practice to boot. Employer would still like to contribute as it has been but wants to see if there is a way for Plan to "pay its way" as it relates to employee providing services to the Plan since but for those services employee could be otherwise providing additional service to Employer. Any thoughts on the above three scenarios appreciated.... Thanks.

[Peter Gulia]

Does the employer have the employee's detailed time records that would prove to an examiner's satisfaction that the employee really used 1,333 hours of work to administer a plan that has for the year only one valuation and, one assumes, only one cycle of distributions?

[masteff]

Be sure to evaluate to what extent any of the time is really a "settlor" expense which the DOL says the employer should pay.

[jpod]

The "hoops" to which I referred can be found in Section 408© of ERISA and 29 C.F.R. Section 2550.408c-2.

[Kevin C]

My opinion is that all three options you listed will get the employer in trouble. I suggest a 4th option.

4. Find an independent qualified Third-Party Administration firm to do the plan work. Reasonable administrative expenses can be paid by the plan, so the plan can "pay its way". As previously mentioned, fees for settlor functions will need to be paid by the Employer. The employee can go back to working only for the medical practice.

If you can't find someone to help you, I sure just about everyone on this site, including me, would be glad to help.

[K2retire]

Unless this is a large medical practice, it is likely that the doctor has the bulk of the assets in the plan. Does he realize that when the plan pays the fees, a big part of that is coming from his personal account?

[chris]

Not that it matters substantively but the employee actually only devotes 1/3 of time to Plan matters and 2/3's to employer. Medical practice is a small shop -- several docs and various support staff. Employer's perspective is that if it (management fee, etc.) is something that could be paid to outside third party, then it should be payable to employer P.A. Employer has specifically asked if Plan accounting fees (handled by outside consulting firm) can be paid from forfeitures in Plan even if other stuff, ie, management fee, partial compensation of employee providing service to Plan, cannot....

[Bird]

It's a bad idea and most likely a PT. You could conceivably have the plan pay someone directly for plan services, but IMO the costs of doing so wouldn't be nearly worth it. As noted, there's no way someone should be taking that long on plan admin functions.

[Kevin C]

Employer's perspective is that if it (management fee, etc.) is something that could be paid to outside third party, then it should be payable to employer P.A.

It doesn't work that way. The employer is not supposed to make money off of the plan. If they insist on trying this, they need an ERISA attorney who is familiar with the PT rules.

[mbozek]

Employer's perspective is that if it (management fee, etc.) is something that could be paid to outside third party, then it should be payable to employer P.A.

It doesn't work that way. The employer is not supposed to make money off of the plan. If they insist on trying this, they need an ERISA attorney who is familiar with the PT rules.

There are several DOL opinion letters going back 25 years on what plan administration duties performed by employees can be billed to the Plan. The earliest letter is referred to as the Maldinato opinion after the attorney who requested it. While some expenses directly related to plan administration which are performed by employees can be charged to the plan, there are strict accounting and administrative requirements such as keeping written records of hours worked by employees on plan matters and having receipts for all expenditures that are billed to the plan.

Plan sponsors usually give up on trying to bill employee costs to the plan after they see the detailed record keeping requirements.

[Bird]

Also, read the document. Mine explicitly say the Plan Administrator (generally the employer) will not charge for services.

[chris]

Sounds like doc/trustee is alternatively considering charging an asset management fee as he has overseen invested Plan assets this year for a 18% to 20% return. I understand that he has not ever charged such a fee in years past.

[Bird]

Sounds like doc/trustee is alternatively considering charging an asset management fee as he has overseen invested Plan assets this year for a 18% to 20% return. I understand that he has not ever charged such a fee in years past.

Someone, perhaps you, needs to take charge and just tell him no to all of this nonsense.

[chris]

I pulled a few DOL Opinion Letters re plan reimbursing employer for plan admin matters as well as the 408 Regs and outlined the same for employer to shoot all of it down. Sounds like consultant was pushing that all of it was ok to do... Thanks for the valuable input.