rights benefits and features

[Scuba 401]

This one has me going in circles.  If the plan has a high limit investment which is offered to all participants, but and only one HCE takes advantage, does it fail the 410(b) component of the RBF test?

[Tom Poje]

Yes, reg cite listed below, but for convenience I copied the list from the ERSA Outline Book (2008 electronic version) the issue being, a "Minimum threshold" for investments is not on this list that can be disregarded

Chapter 9, section X Part B

Other conditions that are disregarded when testing the current availability of all BRFs. To determine whether a BRF is currently available, the following conditions are disregarded: 1) a specified vesting percentage requirement (e.g., option is made available only to participants who are 100% vested),

2) termination of employment (e.g., distribution available only after employment terminates),

3) death,

4) satisfaction of a specified health condition,

5) disability (e.g., certain form of payment available only upon disability),

6) hardship,

7) family status (e.g., QJSA available only to married participants),

8) default on a loan (e.g., offset against account triggered by loan default),

9) execution of a covenant not to compete (e.g., lump sums in excess of $50,000 available only if a noncompete agreement executed),

10) application for benefits or other ministerial acts (e.g., application required before distribution can be made),

11) execution of a waiver of rights under the Age Discrimination in Employment Act or other federal or state law, or

12) absence from service. Treas. Reg. §1.401(a)(4)-4(b)(2)(ii)(B).

These conditions may be disregarded regardless of whether the BRF is an optional form of benefit, a social security supplement, an ancillary benefit, or a right or feature. Compare this to the rule in 2.b. above, where age and service conditions may be disregarded only when testing the availability of optional forms of benefit or social security supplements

 

 

[My 2 cents]

I imagine that an investment option with a sufficiently high minimum investment would not be acceptable under the non-discrimination rules.  Why should it be?  It is almost obvious that the rank and file are being excluded.  Solution is probably for the HCE to invest after-tax money, outside the plan.  The whole idea behind non-discrimination rules is that the plan is NOT to function as a tax-favored individual savings vehicle for one or more HCE's.  If you want to play the game, you have to make it so that everyone else can do so too.

[Scuba 401]

I thought so, but it doesnt make sense to me. Why wouldn't it be an issue with any fund choice that only one HCE purchases? 

[Tom Poje]

why?

because all employees could purchase other investments, even if they didn't. in this case they can't.

let's change the options.

A plan has 10 investments, no limit on 9 of them. they are all money mkt accounts at different banks, all paying the current .001% +/- .0005% or so

the other investment is S and P 500, but you have to have 100,000 to invest. would you have a problem with that set up? I hope so.

...........

by the way, the reg cite I referred to only dealt with current availability. arguably, even if you passed that, you probably would fail effective availability, which is purely facts and circumstances.

how many of the folks can effectively take advantage of the investment you described?

[Scuba 401]

OK, but look at it from a different perspective. Let's say for arguments sake, all the plan participants meet the limit but none of them take advantage of the investment.  Utilization per Sal's book isnt relevant as long as it is adequately communicated. 

[My 2 cents]

If, for argument's sake, all plan participants could in practice avail themselves of the investment but only the HCE chooses to do so.  If adequately communicated and the minimum amount requirement is not burdensome to the rank and file participants, then there would presumably be no problem.

Of those entering as new employees, how long does it take to accumulate enough to participate in that fund?  There is a huge difference between a fund with a $1,000 minimum and a fund with a $25,000 minimum investment.

[ESOP Guy]

Another take on this issue:

I don't think you can "backdoor" the restriction via an indirect condition that seem neutral in regards to all the people. 

Years ago I knew of a plan that wanted to offer a Self Directed Brokerage Account (SDBA) but really only to the owner.  So the proposal was to offer the SDBA to everyone but announce that due to the cost of doing all the accounting for the SDBA there would be a flat $500 fee to any account that did an SDBA.  Ever attorney and TPA I knew back then rejected the idea as discriminatory as the owner was the only one whose assets were large enough to reasonably expect could earn enough in the SDBA to cover the fee and not ruin the ROI on the account.  He had millions in his account.  The next highest account balance was around $25,000 so he would have had to earn 2% a year to break even after this fee.  A $10k holder 5%. A guy with say $2M only had to earn a .025% return to break even after this fee.

The point being in this case it was offered to 100% of the employees but a seemingly neutral (and reasonable sounding) condition made it effectively available to the one HCE. 

(I am ignoring for now if the fee was reasonable and so forth.  The current question is discrimination and the consensus back then was the $500 fee would fail a facts and circumstances part of the test.) 

In fact since then the highest fee for a SDBA account I have seen is $50. 

[Scuba 401]

this older thread really confuses me

https://benefitslink.com/boards/index.php?/topic/4558-is-a-self-directed-brokerage-investment-option-that-requires-a-minimum/

CCH also says that a limit set by the investment company would not be discriminatory. frankly it makes no sense to me. also tom's post indicates the minimum can make it discriminatory.   

[ESOP Guy]

17 minutes ago, Scuba 401 said:

this older thread really confuses me

https://benefitslink.com/boards/index.php?/topic/4558-is-a-self-directed-brokerage-investment-option-that-requires-a-minimum/

CCH also says that a limit set by the investment company would not be discriminatory. frankly it makes no sense to me. also tom's post indicates the minimum can make it discriminatory.   

As I read the thread you link to with the exception of the 2nd comment the general opinion on there seems to be it would be a problem/discriminatory.  That seems to be the prevailing opinion here.  Are you reading it differently? 

The 2nd comment quotes an informal opinion by the IRS that is over a decade given at a conference. 

[My 2 cents]

That older thread is really pretty old - it's from almost 20 years ago.  Maybe some of the rules have been clarified a bit in the interim.  As noted by ESOP Guy above, it appears to echo the idea that a minimum investment set at a level too high for most non-HCEs to access would probably be a discriminatory BRF.

[Scuba 401]

8 minutes ago, My 2 cents said:

That older thread is really pretty old - it's from almost 20 years ago.  Maybe some of the rules have been clarified a bit in the interim.  As noted by ESOP Guy above, it appears to echo the idea that a minimum investment set at a level too high for most non-HCEs to access would probably be a discriminatory BRF.

hard to believe that thread is 18 years old.  i guess i am getting old. 

[Mr Bagwell]

Would a market alternative investment like a illiquid REIT be in the same context as the original question?  Most rank and file would never meet the requirements to be able to purchase.

What about a HCE wanting to purchase a strip mall under the 401k SDB?

I have seen SDB fees greater than $200......

[My 2 cents]

26 minutes ago, Mr Bagwell said:

Would a market alternative investment like a illiquid REIT be in the same context as the original question?  Most rank and file would never meet the requirements to be able to purchase.

What about a HCE wanting to purchase a strip mall under the 401k SDB?

I have seen SDB fees greater than $200......

Are there prohibitions against self-dealing under SDBAs?  Like using account balance assets to buy into strip malls where the participant has an economic interest?  Just wondering.

[Scuba 401]

Could the client get around this by allowing all participants to invest with any broker they want and the owner invests in the hedge fund? Basically an SDBA for all participants with a small fee to avoid the problem brought up in one of the earlier posts. 

[My 2 cents]

Why doesn't the owner just invest after-tax assets in the hedge fund and leave the 401(k) plan (which is NOT a personal investment vehicle for the owner) out of it?

[Scuba 401]

6 minutes ago, My 2 cents said:

Why doesn't the owner just invest after-tax assets in the hedge fund and leave the 401(k) plan (which is NOT a personal investment vehicle for the owner) out of it?

he wants to invest his 401(k) money in the fund.  do you see any reason why everyone can't have their own brokerage account. 

[BG5150]

Even if the NHCE accounts were sufficient to invest in the high limit investment, I think you would have to look at total account balances as well.  An example:

Investment minimum:  $15,000

Owner account: $250,000

Average NHCE account balance: $20,000

If the HCE invested the minimum, she would be only putting in 6% of her balance.  If the average NHCE did so, they would be forced to put 75% of their balance in.

Doesn't seem feasible given the DOLs penchant for diversification.

[Tom Poje]

what is so special about this particular investment that makes the minimum investment so high?

are the stocks or whatever that valuable at providing a super rate of return or whatever?

[Scuba 401]

so getting by the minimum issue and the fact that it would only be available to accredited investors which i think makes it discriminatory, can the sponsor just allow each participant to open a brokerage account and buy whatever they want. then the owner can have his hedge fund. 

[ESOP Guy]

If I understand your question you are trying to saying that a SDBA is functionally the same as this investment in that everyone gets to choose.  I am not sure a SDBA is the same as a discrete investment. 

Scuba, I think you are working too hard to rationalize to keep a client happy.  I get the desire clients pay the bills, but if you have to work this hard it seems to tell you something about the idea.