Is there any problem with an employer paying broker fees outside of the plan for the participants buying and selling company stock?

I believe the IRS has said (Rev. Rul - early 90s?) that payment of broker fees by the employer would be considered a contribution - could be discrimination and deduction issues.

I was afraid of that.

We have a plan that has been doing this. We can stop, but is there any way to fix prior years?

You'll have to do some research. You can start with Rev. Rul. 86-142, 1986-2 CB 60 which says broker's commissions paid by the employer are contributions subject to the deduction limits of Code s 404 - but it doesn't refer to the nondiscrimination rules. My assumption has been that a contribution for deduction purposes would be considered a contribution for nondiscrimination purposes, but maybe there is some distinction that can be made?

Thanks. I had found 86-142, and it's clear that broker's fees are different from other administrative and overhead fees, because they are considered part of the asset itself, and therefore if the employer pays them, it's a "benefit" subject to 404 deduction limitations. I agree with you that there is no specific guidance saying its a contribution for all purposes, including allocation, nondiscrimination, 415, etc. But the general wisdom out there, including the ERISA Outline Book, says this is so.

I'm willing to assume these are "contributions" and advise the client to stop paying these fees directly. The next question is how to fix prior years. Has anybody dealt with this in a VCP filing or otherwise? The possible correction scenarios seem really messy.

If most of the "contributions" were allocated to NHCE's there's nothing to correct. The only time you usually run into trouble with this is if the fees are calculated based on account balance, and the owner's got a huge share. Sounds like yours are transaction based, which sounds more like a per-capita contriubtion? Even if the fee is "per share allocated", it should still pass nondiscrimination.

Were you maxing out under 404?

It is unlikely the plan will be maxing out Section 404 deduction limits, or that any employee will exceed the Section 415 limitation. Since the broker fees are paid per share, we are concerned that the fees paid would tend to be skewed in favor of the participants with big stock balances, and MAY be discriminatory. But even if they are not, the plan does not permit this type of benefit - the ONLY company contributions permitted are a match and corrective contributions for failure of ADP/ACP. Not even a discretionary profit sharing contribution.