Annual Recordkeeping Fees

[Nassau]

One of my clients is looking to split their annual recordkeeping fees, which their participants pay, by active and terminated employees. The question the client has is can those fees be different meaning $40 for actives and $50 for terminated participants? Would that be discriminatory in nature?

[david rigby]

You want one class of participants to subsidize other classes?

[Nassau]

No, the client just wants to charge the actives one price and the terminated participants another price. Does the fee need to be uniform accoss the board?

[Lou S.]

It can be different but it would need to be disclosed in the participant notices.

[QDROphile]

Be careful. If you look at the guidance, you might find that it is OK for the employer to cover a per capita fee at different rates for employees than for former employees. If there is a $50 fee, the employer can cover $10 for the employee and zero for the former employee. That makes for an account charge of $40 to the employees and $50 to the former employees, but the fee is still the same for each participant.

[Peter Gulia]

A retirement plan must provide that a vested benefit that exceeds $5,000 may not be distributed without the participant’s consent. Interpreting both this ERISA provision and a related tax-qualified-plan condition, a Treasury department interpretation provides that a participant’s “consent” to a distribution isn’t valid if the plan imposed a “significant detriment” on a participant who doesn’t consent (and thus leaves his or her account invested under the plan.) To interpret this significant-detriment interpretation, the Treasury department stated its view that a plan may charge the accounts of former employees (even while not charging current employees) as long as the expense otherwise is proper and a severed participant’s account bears no more than its “fair share” of the plan’s expense. (However, the reasoning of the ruling suggests some possibility that an expense allocation that’s more than the “analogous fee[] [that] would be imposed in the marketplace … for a comparable investment outside the plan” might be a precluded “significant detriment”.) To illustrate the “fair-share” idea, the Treasury department’s ruling expressly cautions that former employees’ accounts must not subsidize current employees’ accounts: “[A]llocating the expenses of active employees pro rata to all accounts, including the accounts of both active and former employees, while allocating the expenses of former employees only to their accounts” would be an improper allocation. Following this, the Treasury department said that a plan doesn’t impose a “significant detriment” because it charges beneficiaries’, alternate payees’, and severed participants’ accounts “on a pro rata basis”.

The Treasury department ruling’s reference to “a pro rata basis” doesn’t mean that a plan can’t allocate expenses among accounts under what the Labor department calls a “per capita” method. The Labor department’s Bulletin uses “per capita” to express the idea of charging an account an amount that’s the same for each account in the class and that doesn’t vary based on the account balance, and uses “pro rata” to express the idea of charging an account a percentage of an account (or subaccount) balance. The Treasury department’s ruling doesn’t draw this distinction, and instead uses “pro rata” only to express the idea of allocating to accounts of former employees (or persons other than current employees) no more than those accounts’ proportionate share. Nothing in the Treasury department’s ruling says that these proportionate shares could not be computed regarding all accounts by dividing the expense by the number of accounts or allocating the expense as a percentage of plan account balances.

Rev. Rul. 2004-10, 2004-7 I.R.B. 484-485 (Feb. 17, 2004).