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Reimbursing Fees


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Just took over a new plan and haven't seen this in a long time - the employer reimburses investment fees through thru the trust instead of paying directly.  I believe this is considered a contribution when they do that.  Does anyone have a cite that clarifies this? 

Rosemary C. Raymer, ERPA, QPA, QKA

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I see where you're coming from, JPod - instead of what kind of fees (not commissions and broker fees) let me rephrase my first question so that I can get my answer I need.  Let's call them TPA fees.  If the administrative fees come out of the trust and the  employer reimburses the trust, I believe that is considered a contribution subject to 415 limitations.  Does anybody have a cite as to yea or nay on that?

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Amounts contributed (or treated as contributed) to a plan are deductible subject to the rules and limits in section 404. This is the case without regard to whether the amounts are used to pay brokers’ commissions, administrative or overhead expenses (such as trustee or actuary fees), or cash benefits.  Revenue Ruling 86-142.

PensionPro, CPC, TGPC

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But the question is whether the reimbursement is a contribution subject to section 404, section 415, and the allocation provisions of the plan.  Generally, reimbursable “TPA expenses” that are reimbursed by the employer are not contributions and are deductible as business expenses under section 162.

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FWIW, and I don't claim expertise on this, but I think it is worth noting that Revenue Ruling 86-142 was for a DB plan.  I think the scenario is different for a DC plan.  I think the RR is saying that the payments for expenses are indeed deductible, but they are contributions.  In a DB situation, that's sort of a "who cares" as long as you're not bumping against limits.  In a DC scenario, if they are contributions, then they have to be allocated.

Can't say I read every word so I might be off base but that's how I see it.  Prior threads indicate they are contributions, but there are no cites that I know of.

Ed Snyder

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I can't cite precedent on this, but I would think that it depends on the documents and arrangement. Generally, if the company meant to pay, and they were paid by plan by accident, you could probably characterize the reimbursement as that, and not a contribution. But generally speaking, if the plan intended to pay, and now the employer is saying, "Gee, I wish I had paid it directly," it's probably a contribution. Depends on what the plan and employer intended at time of payments, in other words.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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I will research further, but if one person is reimbursed $3000 because he's been there longer and has a higher account balance than the person that is reimbursed $100 I believe it causes discrimination issues.  These are self-directed brokerage accounts so it's easily determinable how much was provided for each person.  Bottom line is, fees paid by the employer should be paid directly and not pass through the trust so as to not cause such issues.  I remember in the late 90's we were told this and there was precedent where the fee reimbursement was reclassified as a contribution on audit - just will require more research.

 

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RosemaryCR raises a good point and demonstrates how important the facts and circumstances analysis will be. I do believe, however, that the facts and circumstances could show in specific cases that the intent was for the employer to pay the fee, so it is reimbursing the plan, with the reimbursement being allocated back to individual accounts in the same amount as the expense was borne, not making a contribution.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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