surrender charges paid by employer

[Guest isg2013]

Hello,

Been a while since this came up. Plan currently has a fixed option and are moving to our platform. They would incur about $20k in penalty --employer asked about making the participants whole and "repaying " their accounts the surrender penalty.

I thought if it is allowable, it would be treated as annual addition, and would be a contribution to the participants accounts. Because not all participants are in the fixed option, it would be a non-uniform allocation --therefore general test it (?)

Has anyone run into this ?

Thanks

[Lou S.]

Can the Plan Sponsor simply write a check to the prior carrier as a Plan Expense?

[Guest isg2013]

Lou,

No, had asked the carrier to do that and they said no.

[BG5150]

The fiduciary had a duty to provide the best investments available to the participants. Perhaps the investment in question was not prudent, given the surrender charges.

The IRS does allow for fiduciaries to make a contribution to make up a loss as a deductible contribution if they (fiduciaries) feel the loss occurred due to their choice of the specific asset or that participants might likely sue.

[Lou S.]

That's odd, most will let you do it if you pre-pay before they send the money out.

If doing it as you suggest yes I think the IRS position is this is treated as a contribution subject to plan terms which can be problematic at times for ex-employees and general testing and allocation conditions.

You could try a private letter rulling though that seems excessive.

I'm not saying this is the best idea or if it would even work but the Sponsor could take the position that they are simply restoring plan expenses to head off a potential fiducicary breach lawsuit. Again not saying that is the correct position but it seems like one that could potentially be supported.

edit - BG's response is better than mine.

[QDROphile]

BG5150's post is based on an IRS ruling that you should review for the appropriate standard. There has to be a risk of liability and that requires an implication of fiduciary breach. It is not pretty stuff and requires serious consideration, but there are not other good approaches.

[BG5150]

Has anyone done a quick calc to see if this would pass non-discrim?

[rcline46]

Bonus the employees. If a 401k, let them defer. Eliminates all problems.

[BG5150]

Bonus the employees. If a 401k, let them defer. Eliminates all problems.

Can't force them to defer it, though. Plus, need to be careful of people who already defer the max. Those putting away the max won't get the benefit of their account being trued up for the surrender charges.

[Kevin C]

Does the document have an allocation method that can produce the desired contribution levels?

You might also want to read PLR 200317048. Also on topic is PLR 200137064, although it deals with annuity surrender charges under a 403(b).