Fee Reimbursement

[Guest Big Al]

have a daily val 401k plan in which the plan sponsor is so nice that at the end of the year he reimburses the participants the daily Asset Management Fee that was deducted from their accounts throughout the year. He does so, by cutting a check and redepositing it into the trust. I was under the impression that this was OK, but that the reimbursment would be considered a profit sharing contribution and thus subject to testing and limits.

Another TPA is telling them its not so. Anyone know for sure and have any proof.

thanks

[QDROphile]

An employer can make a discretionary contribution on whatever basis the employer chooses, as long as the plan allows a discretionary contributions, the contribution does not run afoul of applicable limts, and the contribution is allocated in accordance with plan terms. The employer could use the average daily temperature as a guide.

Are you asking if the expenses can be paid by the employer though reimbusement of expenses paid by the plan, which, among other things, would change the allocation to participants as compared with a contribution of the same amount?

[BG5150]

Can't the sponsor set it up so the fees get billed to the employer and not the participants to avoid this?

[Guest Big Al]

An employer can make a discretionary contribution on whatever basis the employer chooses, as long as the plan allows a discretionary contributions, the contribution does not run afoul of applicable limts, and the contribution is allocated in accordance with plan terms. The employer could use the average daily temperature as a guide.

Are you asking if the expenses can be paid by the employer though reimbusement of expenses paid by the plan, which, among other things, would change the allocation to participants as compared with a contribution of the same amount?

QDRO guy,

I am asking if the "reimbursments" MUST be considered a "Contribution". I think it has to be. Thus you could potentially have a 415 violation, if a prior year terminee still had a balance and keeps his money in the plan and thus gets a deposit.

[Guest Big Al]

Can't the sponsor set it up so the fees get billed to the employer and not the participants to avoid this?

in this particular case they cant. The daily val platform insists on deducting the money daily from the participants accounts.

[BG5150]

every day?

time to move platforms?

[Guest Big Al]

every day?

time to move platforms?

daily is how most of them do it (Hancock, American, ING etc...).

they net it out of the investment performance.

[QDROphile]

I don't know how an "Asset Management Fee" works. First, some expenses cannot be paid by an employer. The IRS ruled that comissions on stock sales could not be paid by the employer because commissions were inseparable from the price of the stock. Second, procedural and timing issues can affect the viability of employer payment of expenses. As suggested by BG5150, expenses that are separately billed and paid directly by the employer are the best circumstances. Long delays are not good circumstances no matter if the employer agrees up front to pay and then reimburses late or defers the decison to reimburse until some time after the expense is actually covered.

I agree that a contribution cannot be allocated to a participant who is not eligible for contributions and participants who are former employees will not be eligible for a plan year after the year of termination.

[ESOP Guy]

QDRO guy,

I am asking if the "reimbursments" MUST be considered a "Contribution". I think it has to be. Thus you could potentially have a 415 violation, if a prior year terminee still had a balance and keeps his money in the plan and thus gets a deposit.

Has anyone really answered this question? I have once worked on a PS plan where the trust company insists on taking their money on the day it is due (which is the same day they create the bill) from the trust assets and the company puts a few days later an equal amount back into the trust. And everyone from their lawyer to the firm I worked for to the CPA auditing the plan had not problem calling this an expense reimbursement and not a contribution. So the way we showed this for record keeping was an expense went out and a reimbursement went in and it netted to zero. So the employees' accounts showed no activity in regards to these money movements.

I have seen more and more people the last few years take the position that can't be done this way and it has to be a contribution. I have not looked into it hard as those fact patterns have not come up lately but is there guidance out there saying you can't just call it an expense reimbursement and stop?

[jpod]

Most plans say that the plan is responsible for plan administrative expenses "unless the employer pays them." I don't think I've seen a plan that said that the plan is responsible but the employer can elect to reimburse the plan. I think if you have that language you should be fine treating it as an expense reimbursement rather than a contribution which must be allocated in accordance with the contribution allocation formula. If you don't have that language, I agree with QDRO that the more time which has passed the harder it is to characterize as an expense reimbursement rather than a contribution.