reimbursement for investment expense

I am fairly certain there are threads on this topic already - could someone help me find some? I'm not having much luck with my searches. 

The plan transferred assets and there were significant surrender charges related to annuity investments. The sponsor is trying to reimburse the plan for those charges. Can they?

I know there was some publication  (maybe a PLR?) that addressed investment losses due to a possible fiduciary breach, where the sponsor was permitted to make up the loss to the plan even if the participant's hadn't brought a lawsuit. I know it's not quite the same fact pattern, but if someone knows what I am talking about, and has a cite on it, I'd appreciate it. 

I think there was a different publication that did directly address reimbursement of plan expenses, and how to treat them depending on the type (annual addition or not). If someone has that cite I'd appreciate it too. 

Thanks!

The only thing I think I can help you with is that it was a Rev. Rul.

Are you referring to justifying the coverage of the investment "loss" based on a breach of fiduciary duty?  That has been approved by the IRS before.

10 minutes ago, QDROphile said:

Are you referring to justifying the coverage of the investment "loss" based on a breach of fiduciary duty?  That has been approved by the IRS before.

Yes, that is one that I recall seeing. I just can't put my finger on where I saw it...

12 minutes ago, jpod said:

The only thing I think I can help you with is that it was a Rev. Rul.

hmm. I didn't think it was a Revenue Ruling, but maybe. Any ideas as to which one? or even about which year? Or a decent way to search them?

I googled it and this popped out in 2 seconds:  Rev. Rul. 2002-45.  Hopefully that is what you were remembering. 

Thank you!

Revenue Ruling 2002-45 [http://www.irs.gov/pub/irs-drop/rr02-45.pdf] describes a restorative payment (the ruling’s antidote against counting an amount as a contribution) as a payment “made to restore losses to the plan resulting from actions by a fiduciary for which there is a reasonable risk of liability for breach of a fiduciary duty under title I of the Employee Retirement Income Security of 1974 (ERISA)[.]”

Beyond the examples given in the ruling, the IRS in practice has treated a payment as restoration if the employer made a written finding that the selection or negotiation of the insurance or investment contract was (or might have been) a breach of the employer’s fiduciary responsibility, whether under ERISA or other law, and the finding is plausible.

The Treasury department’s interpretation requires also that “participants who are similarly situated are treated similarly with respect to the [restorative] payment.”

For a limitation year that began or begins on or after July 1, 2007, the ruling’s principle is included in the annual-additions-limit rule.  26 C.F.R. § 1.415(c)-1(b)(2)(ii)(C).  https://www.ecfr.gov/cgi-bin/text-idx?SID=9ee62d943d4b498039cba586af9d3fc9&mc=true&node=se26.7.1_1415_2c_3_61&rgn=div8  The Treasury adopted my suggestion about looking beyond ERISA to other Federal law, and to State law.

The key driver is that there is “a reasonable risk of liability”.

Thank you Peter for laying it out so nicely. It has been a number of years since I've had a request like this but all of that is line with my understanding. 

I'm not convinced the purported restorative payment is appropriate, (there are other relevant details not posted here) but that's for them to decide, not me. 

I have seen where these payments have been made as special one-time contributions to the Plan. An amendment was written up detailing the amounts by participant that would be made. It did count towards 415 and deduction limits, I believe HCEs were excluded to ensure coverage was not an issue. This was years ago and before new comparability with each in own group was widely used.  

21 hours ago, justanotheradmin said:

I'm not convinced the purported restorative payment is appropriate, (there are other relevant details not posted here) but that's for them to decide, not me. 

I agree with you; surrender charges are just an investment expense (probably indicating a "bad" decision at the time of purchase but I doubt a fiduciary breach).

16 hours ago, Kac1214 said:

I have seen where these payments have been made as special one-time contributions to the Plan. An amendment was written up detailing the amounts by participant that would be made. It did count towards 415 and deduction limits, I believe HCEs were excluded to ensure coverage was not an issue. This was years ago and before new comparability with each in own group was widely used.  

Half right - they are in fact contributions.  A nice gesture and they might look and feel like "make-ups" for losses but not to be confused with the restorative payments described in the Rev Rul, the whole point of which was to confirm that they were not contributions.

(In other words, maybe I'm being picky but I'm quibbling with the phrase "these payments" - restorative payments are one thing and contributions designed to make up for losses that the sponsor might feel bad about but aren't fiduciary breaches are another.)