Plan sponsor making participants pay loan fees outside the plan

I thought I had seen this discussed here previously, but I'm not finding it...

We offer plans the ability to have our participant loan fees (both initial set up and annual maintenance) paid directly from the accounts on the recordkeeping platform, or some plan sponsors offer to pay the fees themselves (usually when there are few loans, or it's a tight-knit group).  And then sometimes this kind of thing happens, where the plan sponsor was paying the fees... and then at some point they decided that was stupid and started having the participants reimburse the employer for those loan fees on an annual basis once they got our invoice (it's itemized enough to show the fees for the loan charges, so it's not hard to figure out who the loan charges are for, especially for a small plan).

Of course, they don't tell us they are doing this until it is mentioned accidentally in a conversation and my distribution team person has her eyes pop out of her head.  She offers to change the plan so that the fees come from the accounts, and is told that, it's OK, this works for us.

So... does it, really?  The loan policy DOES include our loan fee in the amount that is being charged to participants (both at setup and annually), so maybe it does... though it does say that fees are deducted from the accounts from which the loan is taken, which is not correct, so we'd have to modify that.  But it's not on their 404a5 fee disclosure from the recordkeeper - only the recordkeeper's loan fees are shown.  And I don't think they'll let us add our fees there unless we are charging them from the plan accounts.  So my overall gut feeling is that this is danger zone territory.

Or, does the fact that this is handled "outside the plan" make this a moot point?  That feels wrong just typing that, but I think that's their rationale.

I have never heard of any company paying a plan expense and then getting the employee to reimburse the plan sponsor.  It seems like this primarily is an issue outside of the plan as long as all of the plan disclosures and plan accounting are consistent with the company paying the expense.

There potentially are a lot of issues on employment law and payroll side of this arrangement, and these are subject to both at the state and federal labor laws.  My guess is that the company collects the reimbursement through payroll deduction.  If so then an issue, for example, is the employee almost always must consent in writing and has the option to refuse to allow the deduction.  I also wonder what the company does when an employee with a loan terminates employment mid-year before the annual invoice is presented to the company.  Does the company attempt to collect the reimbursement from the former employee?

It will be interesting and educational to hear what our colleagues - in particular our attorney colleagues - have to say.

Without taking the time to think this through its possible ramifications, the easy and smart thing to do would be to advise your customer that loan fees should come directly from the borrower's account and be done with it.  If the employer persists, then let the employer know that this would be against your advice and you will not be responsible for any problems the employer has as a result and amend your indemnification agreement with the employer accordingly.  If the employer asks for your rationale, tell him that you cannot provide legal advice and refer him to his ERISA and employment law attorney.  I dodge the underlying question, of course, because I don't believe it's worth the time to fool with.