(b)lines Ask the Experts – Tax Treatment of Fees Deducted from Participant Accounts

August 30, 2011 (PLANSPONSOR (b)lines) – “Currently, a TPA for the 403(b) plan that we sponsor is paid by the vendors as a plan administrative expense from the participant custodial accounts and annuities.

“Since these plan assets are tax-deferred, the fee payment by the custodial account essentially has no Federal income tax consequence to the participant.  I understand that in some plans the fees are deducted from participant paychecks instead of plan assets. Could such deductions be treated as pretax deductions in a manner similar to 403(b) elective deferrals (e.g. subject to FICA, but not taxable for Federal and State (where applicable) purposes)?”  

Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answers:  

No.  While one might think that such pretax deductions would be possible, the problem here is the Code and Regulations definition of what constitutes an exclusion from income under 403(b).  The income exclusion only applies to amounts paid to purchase 403(b)(1) annuity contracts or contributed to 403(b)(7) custodial accounts.  If the deduction is not paid into one of those, it is an after-tax deduction.  

If you sponsor an ERISA plan, there may be other concerns that, depending on the structure and nature of the fee, would need to be considered in deducting and paying such an expense.  And, for all plans, there may be issues of whether state payroll deduction laws permit such a deduction (pre- or post-tax) in any given state.  


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.