Terminated Participants charged their share of fees.

[Guest Tim Breedlove]

Profit Sharing Plan, Several doctors and common law employees. The company wants to charge terminated doctors with segregated accounts their share of the fees (management fees and administrative fees)the terminated doctors agree to pay their share while in the plan knowing that if they roll out to IRA's they would pay more fee by themselves. The company wants to pay the remainder of the fees outside the plan. Since terminated HCE's no longer provide an economic benefit to corporation can you charge their share of fees to their segragated accouts.

[Jon Chambers]

You need to treat former participants uniformly with current participants. Otherwise, it looks like a "force-out" designed to circumvent the rules against requiring distributions of accounts greater than $5,000. IRS frowns on techniques such as differential expense charges, or restricting investment selections for former employees.

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Jon C. Chambers

Principal

Schultz Collins Lawson Chambers, Inc.

(415) 291-3004

[Guest Tim Breedlove]

Does it make any difference if all of the terminated participants are highly compensated employees?

[MWeddell]

No, it's the same rule regardless of whether the affected participants are highly compensated or not. One cannot impose a significant detriment on employees with > $5,000 vested account balances who choose to defer their distributions.

[Guest Tim Breedlove]

In my situation the terminated doctors are the older ones of course with several million dollars. Their acct balances are half of the plan since the younger ones are smaller balances. It doesn't seem that you can force the expenses on the company when its half the plan expenses and the younger doctors would be paying the older ones fees. Any suggestions on how to handle this.

[M R Bernardin]

Are the terminated doctors the only ones with seg accounts? If the company were to adopt a policy of requiring those with seg accounts to pay any fees associated with maintaining those accounts, and applied that policy uniformly to both active and terminated participants, it would probably work. Another approach: have the company increase its contribution to cover the cost of the extra fees.

[Guest Bob Collins]

Below are excerpts from the CCH Pension Guide, Section 26,629. Do any of you have any comments about the material below?

Alan Tawshunsky, Special Counsel with the IRS's Employee Benefits and Exempt Organizations division, talked about the ruling's [Rev. Rul. 96-47}potential impact before the American Law Institute and American Bar Association meeting in Washington, D.C [10/6/96]. . .

. . . He also suggested that charging an administrative fee to terminated vested participants who leave their money in the plan but not to current employeees would also not be a significant detriment, as long as the fee was reasonable. A reasonable fee might be one that does not exceed the terminated vested participant's share of administrative expenses. "If you tried to charge all of the administrative expenses of the plan to the terminated vested or if you tried to charge them an extra rate, I think that would be a problem," Tawshunsky noted.

[Guest Tim Breedlove]

This is becoming a big concern for us because all of our doctor groups are turning over, older ones retiring leaving the younger ones with small balances and the older ones have the majority of the account balances. Taking care of the management and admin fees is a real issue when the older ones leave their monies in the plan.

[Guest Dan Ashley]

I do not agree with the position expressed Mr. Chambers (you "have to" treat former participants uniformly). It is my view that the law is not so clear-cut. I believe the state of the law under Sec. 411, as of three months ago when I took a look at it, was:

1. There is no authority for the position that you have to treat former participants uniformly. By “authority” I mean statutory authority, final regulation authority, or revenue ruling.

2. There is no case law to support this position.

3. There is no “non-authority” by the IRS to support this position. By non-authority I mean private letter rulings which cannot be cited as authority, letters from the National Office to District Directors, non-acquiescence in the result of a lawsuit, preamble to proposed regulations, etc.

4. The only indication of which way the wind is blowing on this issue is the speech by Alan Tawshunsky posted by Bob Collins, above. The only one I found, anyway.

5. MWeddell’s above analysis is correct, the legality of the charge depends on whether it is a “significant” detriment.

I think the analysis of whether the charge is a significant detriment should be based on the totality of the circumstances surrounding the expense. How do the charges compare with the charges in a rollover IRA? Are the charges a percent of dollars, or a flat fee per account? Are you assessing the charges against accounts which are under $5000, or have you gotten rid of those accounts? If you analyze this, and decide to go ahead with the charge, and the IRS later decides your analysis was wrong, what is the predicted correction mechanism to preserve the qualified status of plan? Is this an acceptable risk? (i.e. What is your tolerance for risk?)

So those are my thoughts on the 411 issue.

There is also an issue of whether or not the lack of the extra fee is a BRF which must be tested under Treas. Reg. 1.401(a)(4)-4. Once again it is my view that this area is vague, and until the IRS issues authority or other guidance, you must consider the totality of the facts and circumstances. In this case, I think you will be looking at those facts and circumstances, and considering your risk tolerance, in light of the “meaningful value” test set forth in Treas. Reg. 1.404(a)(4)-4(e)(3)(i) and (ii)©.

Daniel Ashley, Esq.

Ogletree Deakins

312-558-1258

[EGB]

I seem to recall some "authority" or "non-authority" regarding providing different investment options for former participants and that this is a "significant detriment" problem. If my recollection is correct, there was much speculation about what bearing the "authority" may have on other issues for former participants (for ex, loans, hardships, etc.). My experience is that many have continued to treat former participants different in areas other than investment selection and plan to continue to do so until some "authority" or "non-authority" specifically addresses the particular situation and conflicts with the company's practice.