Establishing and maintaining a qualified retirement plan for employees can be expensive. It is important for plan sponsors to understand all the costs involved, if those costs can be classified as plan expenses that can be paid from plan assets, and how to allocate those expenses.
Plan sponsors have a fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA), to act in the best interest of plan participants and beneficiaries. Plan sponsors are also limited to using plan assets for the payment of reasonable fiduciary expenses of administering the plan. So, what are reasonable expenses?
The DOL Employee Benefits Security Administration (EBSA) has provided guidance on what is considered a plan expense and what is a settlor expense. Settlor expenses relate to the establishment, design and termination of a qualified plan, and those types of expenses must be paid directly by the plan sponsor. Examples of settlor expenses includes the cost of preparing the plan document, plan design studies, certain types of discretionary amendments made to the document, or costs involved in setting up the investment of plan assets. Administrative or plan expenses, which provide a benefit the participants in the plan, may be paid out of plan assets. Examples of these types of expenses includes annual recordkeeping, compliance and trustee fees, participant distribution processing fees, costs related to mandatory participant disclosures such as statement mailings, and plan audit expenses.
The plan document should provide for which expenses can be paid out of the plan assets. It’s not uncommon that the language will state that the plan sponsor can pay for plan expenses even if they could be paid out of plan assets. Your plan document may also indicate how those expenses are allocated within the plan. The method of allocating investment earnings and expenses paid by the plan are often the same but your document can be written to have different allocation methods for each. Expenses are most commonly allocated either (1) pro rata on the balance of the other investment account (OIA), less distributions and forfeitures, to the sum of the other investment account balances (OIA) of all participants or (2) pro rata on total account balance (including company stock account), less distributions and forfeitures, to the sum of total account balances of all participants.
Special consideration should be made if you allocate expenses pro rata to the OIA and you are segregating former employees out of company stock and into OIA assets. If segregated participant balances are part of a pooled investment within the plan, then most of the expenses will be paid by the terminated participants. In this scenario, it could be considered a detriment to the terminated participants and a best practice would be to have the expenses allocated on total account balance. Then all participants will equally share in the allocation of expenses.
ERISA and the DOL provide limited guidance on the allocation of expenses. Following best practices can help you avoid company liability and litigation. If you have questions about what expenses qualify as plan expenses, you should contact your Blue Ridge ESOP Associates administrator or contact your ERISA counsel.
If you find you have accidentally paid settlor expenses with plan assets, you can use the DOL’s Voluntary Fiduciary Correction Program (VFCP) to correct the error. Please note this program protects fiduciaries with respect to the Department of Labor (DOL) and not the Internal Revenue Service (IRS). It is important to work with your ERISA counsel with respect to the proper correction methods in the event that settlor expenses are paid from plan assets.