May a plan’s assets be used to pay a credit to a participant’s account if she persuades a coworker to join the plan?

[Peter Gulia]

An employer maintains a retirement plan that allows non-highly-compensated employees to make elective contributions. These contributions are by affirmative election. The employer is unwilling to provide any automatic-contribution arrangement. The plan provides no nonelective or matching contribution.

Although the plan has no difficulty with any coverage or non-discrimination test, the employer’s human-resources people want to “do something” to urge more employees to choose retirement savings. But whatever is to be done must involve no work time of the HR people, and must not ask the employer to spend any money.

The plan’s trust has a plan-expenses reserve that resulted from mutual funds paying shareholder-servicing, 12b-1, and revenue-sharing fees in amounts greater than the recordkeeper’s fees.

The HR chief would like to use this trust subaccount to add a credit, perhaps $48, to the plan account of a participant who persuades his or her coworker to make elective contributions.

The plan and its trust each includes a provision, following Internal Revenue Code § 401(a)(2), that the plan’s assets must not be “used for, or diverted to, purposes other than for the exclusive benefit of [the employer’s] employees or their beneficiaries[.]”

What are the arguments for and against using the plan-expenses reserve to provide the proposed credit?

[david rigby]

I have no idea about the "for and against", but the word "persuades" stands out like a sore thumb.

Who determines? Open to abuse?

What if A persuades B, while simultaneously B persuades A?

Any requirement that the "persuader" already be making contributions?

What if a contributing EE stops, and one month later is "persuaded" to start again? And again?

[mphs77]

What if the persuader is a decision-maker? Is the election to contribute freely elected?

Sounds to me to be so bad on so many levels.....

[ESOP Guy]

If trust assets have to be used for the benefit of the plan participants how are the participants benefiting in this situation?

I don't see this benefit to anyone but the person being paid. (Maybe the one joining can be said to benefit.) But everyone else seems to not benefit at best and is harmed at worse since that $48 could have been used to offset general expenses.

I see this as a fiduciary failure but I can't cite anything but the logic given above.

[jpod]

I think it's kinda weird, but I can't think of any problem with it as long as the identities of the persons getting the credit don't raise PT or 401(a)(4) issues. As to 401(a)(2), using plan assets for one participant is good enough to satisfy that. Not sure what it is, although it probably doesn't matter: An annual addition? An allocation of earnings?

[GMK]

Nope, you can't do it ... because by the time you have procedures in place to ensure that there are no PT or 401(a)(4) issues, the employer will have had to spend money for HR work or ERISA attorney advice or probably both, and according to the OP, the employer won't spend the money.

You increase participation by installing automatic enrollment or raising the match or both ... and I'll bet the employer won't spend the money for those, either.

[Peter Gulia]

David Rigby, I didn't mean anything in particular by "persuades", and because I sought to focus on the exclusive-benefit question, I didn't want to get into the proposed details about exactly what facts and conditions would get the credit.

mphs77, all of the participants are non-highly-compensated employees, and among them none is an officer or even a supervisor.

ESOP Guy, for those participants who get neither the credit nor the value of starting retirement savings, is there an argument that increasing participation will, over time, increase the plan's asset size, which could get the plan more purchasing power, enabling it to buy superior investments or less-expensive services?

jpod, would there be a nondiscrimination issue if only non-highly-compensated employees can get the credit?

[CMarkB]

Query: how long have these amounts been in this plan expense reserve account? One cannot keep unallocated funds in a plan beyond the end of the plan year.

[Peter Gulia]

GMK, it's feasible to pursue the idea without asking the employer to spend money because the plan enjoys the services of an investment adviser and an employee-benefits lawyer, both of whom contribute their time without fee.

Do you think there is a prohibited transaction if the credit is applied only to a participant's account under the plan, and the participant is not a fiduciary (and also not anyone who could decide anything for the plan's sponsor)?

[ESOP Guy]

ESOP Guy, for those participants who get neither the credit nor the value of starting retirement savings, is there an argument that increasing participation will, over time, increase the plan's asset size, which could get the plan more purchasing power, enabling it to buy superior investments or less-expensive services?

That strikes me as a too hypothetical of a benefit.

[My 2 cents]

"Although the plan has no difficulty with any coverage or non-discrimination test, the employer’s human-resources people want to “do something” to urge more employees to choose retirement savings. But whatever is to be done must involve no work time of the HR people, and must not ask the employer to spend any money."

Wow! That sounds like such a great company! Where do I sign up!

[GMK]

is there an argument that increasing participation will, over time, increase the plan's asset size, which could get the plan more purchasing power, enabling it to buy superior investments or less-expensive services?

Serious question - what, if any, federal pronouncements, official or otherwise, have been made on this argument, in the circumstances of this thread or under any other circumstances?

[GMK]

GMK, it's feasible to pursue the idea without asking the employer to spend money because the plan enjoys the services of an investment adviser and an employee-benefits lawyer, both of whom contribute their time without fee.

Do you think there is a prohibited transaction if the credit is applied only to a participant's account under the plan, and the participant is not a fiduciary (and also not anyone who could decide anything for the plan's sponsor)?

That's a beyond-lucky plan to have a free adviser and a free ERISA lawyer, assuming the fees aren't paid from the expense ratios of the plan's investment funds. (My apologies if I sound skeptical.)

I don't know if there's a PT. I'd have to ask the ERISA lawyer.

[Belgarath]

Well, from what seems to me to be a practical standpoint, I can't possibly imagine any such provision is in a pre-approved plan. So how do you even attempt to put it into a plan without submitting a D-letter, thereby forcing employer to spend money, as GMK mentioned previously?

ANY plan has to have definitely determinable benefits/allocation formula, and I'm dubious that the IRSA would approve it. I don't have time to attempt the intellectual exercise to see if there are specific statutory/regulatory provisions that would automatically cause it to fail, but my gut says it isn't allowable. Doesn't mean I'm right...

Even if the IRS were to ultimately approve it, I can't possibly see a cost/benefit analysis showing the expense to implement and administer such a provision as being worth it, but maybe there is one gigantic pot of unallocated expense fund money there, and an enormous pool of non-participants.

Interesting question, though. Good luck with it!

[Peter Gulia]

I do not recall any court decision or administrative-law document that explicitly analyzes whether a pursuit of improving the plan's purchasing power is within the exclusive-benefit concept.

That's why I ask what BenefitsLink maven think.

[jpod]

Ok, I guess we are talking about a small nonprofit that gets pro bono services from you and an investment advisor and either can't, won't or doesn't need to spend any more money on employee benefits and diverts all funds towards its mission. Fair enough. If no HCEs involved then obviously no 401(a)(4)issues. I think bottom line is that the risk of disqualification as a result of implementing this kooky idea is about as close to zero as you can get.

[Peter Gulia]

Belgarath and jpod, thank you for the helpful further observations.

[Kevin C]

Query: how long have these amounts been in this plan expense reserve account? One cannot keep unallocated funds in a plan beyond the end of the plan year.

I think this is the more significant issue. How long have these trust assets have been unallocated?

As for giving an additional contribution to select NHCEs, a new comp allocation with everyone in their own group makes that easy. But, if one requirement is that HR spends no time on this, who is going to keep track of who qualifies for the extra $?

[movedon]

My standard advice for the client that wants to engage in malarkey that might or might not be legal but is almost certain to result in operational failures is - the potential cost of cleaning this foolishness up later vastly exceeds the imagined benefit of doing it in the first place. My cite is "every plan, ever."