(NewsGlobal.com)- Employees at one hedge fund won’t be able to take advantage of a long-standing and coveted benefit anymore following multiple complaints from the Internal Revenue Service.
Recently, Renaissance Technologies said it would no longer allow workers to investment retirement savings in their employee-only fund without any fees. The announcement came as the IRS started to take notice of the practice.
According to a regulatory filing the company made, they cashed out all investments that were made into its Medallion fund that were put there by employees. Those funds were contributed through retirement accounts that had tax advantages and/or through private foundations.
Annual returns from Medallion had consistently been roughly 40%, dating all the way back to when the fund started more than 30 years ago. The employee perk of not having to pay any fees to invest in the fund was a substantial one.
Annual management fees, for instance, could be as much as 4% of all net assets, with other performance fees totaling as much as 44% of all profits.
The company declined to issue a comment to Bloomberg about the practice.
The IRS has scrutinized Renaissance’s Medallion fund in the past, too. Just last year, members of the firm — including its founder, Jim Simons — agreed to settle an IRS dispute by paying billions to the taxing agency. The dispute arose after the IRS took issue with an options strategy the fund used that ended up reducing taxes on the trading profits.
Since 2005, the Medallion fund has only been open to insiders at Renaissance. At the start of every year, the assets are capped at roughly $10 billion, with the profits being returned on a bi-annual basis. The company has more than 100 employees, and it’s become one of the most sought-after investment companies to work for in the country.
The company had obtained exemptions directly from the U.S. Department of Labor that allowed its employees to own Medallion shares through their own Roth IRAs. This allowed the employees to avoid being taxes on any of the future earnings from the fund — as Roth IRAs are designed to do.
The exemption specifically dealt with rules for pension plans that are designed to prevent any self-dealing. That’s an issue that can happen when money managers collect fees from the investments that employees make through either an IRA or 401(k).
Because of this arrangement with the Labor Department, millions of dollars in compensation that would’ve been taxable was shifted over into accounts that were tax free. That was a major benefit for employees at Renaissance, who were reaping the rewards of the high returns in the fund without having to pay taxes on it.
Making matters even better for the employees was that Medallion generated mostly short-term profits, which are typically subject to higher taxes than gains over the long term.
This is exactly what caught the attention of the IRS, especially after their settlement agreement with Renaissance last year.