Deferred sales charge paid by employer

[Guest JB2]

When an employer reimburses participants for deferred sales charges by making a contribution to their account, does the plan document have to include language that permits this type of contribution? What is the contribution typcially labeled, miscellaneous?

[PMC]

Wouldn't it be more of a payment of an expense levied against the plan vs. a contribution made to the plan?

[KJohnson]

I haven't looked at this lately, but I think the safest course is to provide in you document that the plan sponsor can pay the administrative expenses of the Plan and then have the employer pay this "outside" of the Plan.

I think by having the employer contribute into the plan you run the risk of having these contributions included in all of your testing as well as your 404/415 limits etc.

[QDROphile]

You are playing with fire if the account is not charged with costs that are like commissions. Deferred sales charges are very much like commissions. The IRS will treat reimbursement of such expenses as diguised contributions. If the employer wants to make up the charges through additional contributions, the plan document had better cover it expressly because the contributions won't be allocated the way "real" contributions are allocated under plan terms. And the contribution scheme will have to pass all tests applicable to contributions.

[actuarysmith]

At the risk of stating the obvious - proceed with caution!!

You would benefit greatly by reading an article called "The do and don'ts of restoration payments" by Fred Reish and Bruce Ashton. (www.benefitslink.com/reish/articles/doanddonts.html)

According to the article, which cites several PLR's, there are only two ways you can make a contribution.

1) Any employer contribution other than a restoration payment would be considered an employer contribution to the plan. It would have to be allocated according to the terms and conditions in the plan document. In addition, it would be subject to 404, 415, 410(B),401(a)(4), etc. etc.

It is extremely unlikely that the amount you are trying to "reimburse" has any relationship to compensation earned or service worked by a participant. (In fact it's related to the size of the account balance).

Therefore, it would need to fit the parameters of a restoration payment.

2) In order for an contribution to the plan to not be considered a normal employer contribution, there must be controversy over whether the loss resulted from a fiduciary breach. This must be evidenced by threats of lawsuits, claims of fiduciary wrongdoings, assertion of a fiduciary breach claim, etc.

It is unlikely that your scenario meets the criteria for 2).

I am not an ERISA attorney, but it doesen't appear that your client would be able to make up the loss. (based upon the limited information given in your description)