OK for employer to pay an annual per-participant charges for employed

[PMC]

A plan sponsor wants to pay an annual per participant charge for active participants but wants to have terminated participants who leave their accounts in the plan pay those same expenses. Would this have to be tested as a BRF? Other comments?

[Kirk Maldonado]

I think that arrangement violates the Section 411(a)(11) regulations.

[rcline46]

Nice try. Right up there with having participants pay to get their benefits from the plan. You cannot treat plan participants differently. Tell the sponsor to either get them paid out (force out under $5000) or bite the bullet.

[QDROphile]

I am against the practice of charging terminated participants differently and believe it is illegal, but the IRS routinely issues determination letters with such provisions in the plan document.

[IRC401]

I disagree with Kirk that it would be an automatic 411(a)(11) violation to charge admin charges to only terminated participants, but there would be a 411(a)(11) facts and circumstances issue.

[Kirk Maldonado]

IRC401:

You may disagree with me, but the IRS doesn't. This specific question was posed to the IRS via the ABA a number of years ago, and that was the response we received.

Now the IRS may not prevail in court, should you decide to litigate the issue, but you are virtually guaranteed that the IRS will fight you on this issue.

[IRC401]

Kirk-

Isn't the issue whether the fee is a "significant detriment" under 1.411(a)-(11)©(2)? Are you taking the postion that any fee, even a small one, is a significant detriment?

[Kirk Maldonado]

IRC401:

Significant is a relative term. For somebody that only has $100 in his or her account in the plan, a $25 annual fee would be a significant detriment.

[Greg Judd]

Originally posted by philip m clark

A plan ...wants to have terminated participants who leave their accounts in the plan pay...expenses.

Just send the 'balance-leavers' a newsclipping or 3 with their termination papers, or their periodic plan statements, about about the funny biznez that occasionally happens with sponsor mgmt of 4k assets....that might do the trick.

It still astounds me that people would leave their balances behind. Do they also leave their wallets in their desks when they leave a job?

[PMC]

There may be reasons why an individual would leave their account in their former employer's plan. If their account is small then they would be cashed-out. But if their account is $5000+, how is a $20-25 annual per head charge viewed as a "significant detriment" to that individual? It actually could be one of the better options they have and they are the ones consenting to leave it in the plan and incur that expense. Say the plan sponsor wants to go that route and willing to go through any facts and circumstance examination the IRS imposes, is it anything that would have to be tested under BRF?

[david rigby]

Ditto. I left an account several years ago. I am now charged an annual fee of $5. Not bad since I get quarterly statements, daily valuation, and the ability to move the money among several funds.

[Greg Judd]

Originally posted by pax

Ditto.  I left an account several years ago.  I am now charged an annual fee of $5.  Not bad since I get quarterly statements, daily valuation, and the ability to move the money among several funds.

Ok, ok, if pax is doing it, it must be alright.

But isn't the fee issue the tail of the dog? I'd think sponsor stability/reliability would be paramount--& even then its a complicating factor, since the 'several funds' mentioned also have mgmt that may goof up. It just seems that leaving the $ in the plan adds a layer of expense/mgmt risk that is tough to justify.

[alanm]

Most DC plans state that when a participant separates service they become a "terminated participant" and therefore

not an "affected participant" under 411(d)(3). If they are not an affected participant, you can charge them. This position is supported by Borda V. Hardy

6th circuit court, decided in 1998.

Since a terminated participant can remove their balance at will, they would not be "affected" by the imposition of a charge on their account under 411. As long as the charge is reasonable, I don't think there is a problem.