Fees in Pooled PS - Expenses or Forfeitures

[Kathy Nichols]

We have a 85 participant pooled profit sharing plan with $17,000 in total assets.  Employer wants to amend the plan to 'charge' the accounts of terminated participants an annual administrative fee the year beginning after the year after termination (Term 2020, fees start 2022 if account not fully paid out.)  Since this is a pooled account would these expenses to the terminated participants accounts become additional earnings to the other participants or forfeitures to be re-allocated to active participants OR something else altogether?

I know the plan can be amended to allow for the expenses to be charged (must also send a notice to each participant regarding the change). Just not sure how to handle the recognition of the expense charges.

Thanks for any input.  Really struggling with this.

Kathy Nichols

[Bri]

I'd make sure your plan allows assigning individual expenses against individual participants, but if so,

you'll just assign that fee to everyone affected, see what that does to their account balances - seems like it would zero many out - and then since you have a pool, you can compare these adjusted (after the fee) balances against the assets to figure out whether the trust has a net gain or loss to then spread across the remaining balances.  Of course, if you're assessing a fee, you actually have to pay that fee out of the trust assets.  You can't just "say" there's a fee to drop the balance to $0 if no such actual transaction was levied against the trust, I suppose.

[Bird]

20 hours ago, Bri said:

Of course, if you're assessing a fee, you actually have to pay that fee out of the trust assets.  You can't just "say" there's a fee to drop the balance to $0 if no such actual transaction was levied against the trust, I suppose.

That's a good point. Otherwise you are essentially shifting assets from one group of participants to another. Might that be ok? I don't think so.

[CuseFan]

My understanding is that you cannot charge fees only to terminated participant accounts as that would be a detriment to a valid voluntary election to take a distribution. That is, you cannot through adverse plan provisions coerce a participant to take a distribution, such as making only those accounts pay fees or (if otherwise participant directed) transferring accounts into a money market fund. Maybe that has changed as I'm long removed from DC administration, but I would tread carefully. Admin fees can be charged against everyone's account on some reasonable and nondiscriminatory basis, but as Bri said, these would have to be actual fees physically paid from plan assets.

Big picture - why are they even maintaining such a PSP, average participant balance of $200, and paying admin fees for $17,000 in assets? That's crazy. 

[Doc Ument]

I have no opinion on the administration of the plan.  From an IRS perspective, though, I recommend reading Revenue Ruling 96-47 (i.e., potentially a “significant detriment” as applied to only terminated participants), and from a DOL perspective, I recommend reading the NAPA article referenced below.  That article cites DOL guidance and concluded that “a plan may charge administrative expenses to terminated participants, while not charging active participants, provided the method is not a breach of fiduciary responsibility, and the expenses are proper, reasonable and done in a nondiscriminatory manner.”

https://www.napa-net.org/news-info/daily-news/can-plan-charge-fees-terminated-participants-not-active-ones#:~:text=The%20DOL%20and%20IRS%20have,done%20in%20a%20nondiscriminatory%20manner

 

[CuseFan]

Interesting, thanks for the correction Doc!

I can see the position where an employer says we'll pick up the RK expense for our current employees as an employee benefit that is part of their total rewards/compensation package but not for former employees who no longer get compensation from us, and see that as defensible assuming the required conditions are satisfied.