December 17, 1990
TO: PENSION MEMBERS NO. 41-90
INVESTMENT ADVISER MEMBERS NO. 56-90
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 52-90
RE: PAYMENT OF ADVISER FEES FROM 403(b) ACCOUNTS
__________________________________________________________
As we previously informed you, the Internal Revenue Service
has provided letter rulings regarding the income tax consequences
of payment of market timing and other advisory fees from IRAs.
(See Institute Memorandum to Pension Members No. 38-90,
Investment Adviser Members No. 49-90 and Investment Adviser
Associate Members No. 44-90, dated October 3, 1990.)
In this regard, the Service recently released the attached
ruling regarding payment of advisory fees from annuity contracts
under section 403(b) of the Code or custodial accounts under
section 403(b)(7) of the Code. The ruling concerned a situation
in which a state statute amended the state's annuity program to
permit payment of investment advisory fees from the participant's
custodial account or annuity. The statute required the fees to
be limited to 2 percent annually, paid directly to a registered
investment adviser and subject to a written contract for services
between the participant and the investment adviser. Such
contract would provide that the custodial account or annuity is
solely liable for the payment of the investment advisory fees and
that the participant will not pay this fee at any time.
The Service ruled that the advisory fee arrangement was
analogous to the payment of expenses under an IRA. Therefore, as
long as the respective annuity contracts or custodial accounts
were solely liable for payment of the investment expenses, the
payment of such fees would not disqualify the 403(b) arrangement
and would not be treated as a distribution from the account. As
such, the payment would not be included in the participant's
gross income.
The Service noted that the ruling would not apply if the
annuity or custodial account were not solely liable for
investment advisory fees or if the accounts did not actually pay
the fees.
We will keep you informed of further developments.
W. Richard Mason
Assistant General Counsel
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