Expenses associated with maintaining a qualified retirement plan are often paid directly by the employer sponsoring the plan. However, in many cases, expenses can also be paid by the plan itself. In this article we will examine this feature and its limitations.
Fiduciary
The Plan Administrator, generally the sponsoring employer, has the responsibility to determine what expenses will be paid by the plan. This is a fiduciary decision, and in that role, the Plan Administrator must act solely in the benefit of plan participants and beneficiaries. Under section 404(a)(1)(A) of ERISA, the fiduciary may exercise this power in only two ways:
To provide benefits to participants and beneficiaries, and
To defray reasonable expenses of administering the plan.
As a fiduciary decision, the determination of what expenses will be paid by the plan must be made solely considering the interests of the participants and beneficiaries of the plan; the Plan Administrator may not consider what benefit it might bring to the employer. This can be a tricky consideration when the Plan Administrator and the employer are the same person! However, the fiduciary may consider that the employer could be required to terminate the plan or scale it back if expenses become too burdensome to be paid by the employer.
Reasonable Expenses
The determination of whether a given expense is reasonable is also a fiduciary action. The fiduciary must act prudently when making this determination.
Settlor Expenses
The Department of Labor has expressed the view that certain expenses, known as “Settlor Expenses,” are to the primary benefit of the employer, and thus may not be paid from the plan. Settlor expenses generally include any discretionary action taken by the plan sponsor with regard to the design or operation of the plan.
A non-exhaustive list of settlor expenses, which may not be paid from the plan, includes:
Cost to initially adopt a qualified plan;
Cost of drafting amendments which change the plan’s eligibility, vesting schedule, method of satisfying ADP/ACP test, definition of compensation, or any other discretionary change to the plan’s specifications;
Costs to freeze or terminate a plan; and
Costs of corrections under the IRS Voluntary Correction Program (VCP).
Plan Expenses
Plan-related expenses which are reasonable, and are not settlor expenses, may be paid from the plan. Examples of expenses which may be paid from the plan include:
Cost to prepare required amendments (due to new regulations or law changes);
Required plan restatements;
Nondiscrimination testing;
Preparation of Form 5500;
Audit by IQPA;
PBGC premiums;
Bonding; and
Costs associated with processing participant benefit distributions, including QDROs.
Method of Paying Expenses
The plan document must allow for reasonable expenses to be paid from plan assets, or, at least, must not prohibit such payment. Most pre-approved plan documents will allow the payment of reasonable expenses from plan assets, but it is important to check to be sure. If the plan document does not permit expenses to be paid from plan assets, the document must be amended before any expenses can be paid.
Payment should be made directly from the plan to the service provider or other payee. The plan should not reimburse the plan sponsor for expenses, even if the expense was reasonable and was not a settlor expense. Such a transfer of plan assets to the sponsor could result in a prohibited transaction.
Disclosures
In a participant-directed plan, participants must be regularly notified of expenses which have been or may be charged against their account. In addition they must be notified of their rights under the plan.
Department of Labor regulation 2550.404a-5 lays out both an annual notice requirement and a quarterly notice requirement. The annual notice must contain:
Information about how the participant can direct their investments, and any limitations on their ability to do so;
Information about any designated investment alternatives offered under the plan;
A description of any pass-through voting rights and any restrictions on such rights;
A description of any brokerage windows or self-directed brokerage accounts available under the plan;
An explanation of any fees and expenses which may be charged against their account for general plan administrative services (legal, recordkeeping, etc.), and the basis by which such fees are allocated to the participant’s account (pro rata, per capita, etc.); and
An explanation of any fees and expenses that may be charged against their account for individual services (loan and distribution requests, etc.).
If any of the information in the annual notice changes, an updated notice must be provided at least 30 days, but not more than 90 days, in advance of the change. This can affect the timing for sponsors who wish to begin having expenses paid from their plans. If the most recent annual notice did not inform participants that administrative expenses may be paid from the plan, an updated notice must be provided, and the expenses may not be paid until at least 30 days after the updated notice has been provided.
The quarterly notice must contain:
The dollar amount of the fees and expenses actually paid from the participant’s account for general plan administrative expenses during the preceding quarter, a description of the services to which the fees relate (legal, recordkeeping, etc.), and, if applicable, a statement that some of the plan’s administrative expenses were paid from revenue sharing arrangements, 12b-1 fees, sub-transfer agent fees, or similar; and
The dollar amount of the fees and expenses actually paid from the participant’s account for individual services during the preceding quarter, and a description of the services to which the fees related (loan and distribution requests, etc.).
As a practical matter, the quarterly notices are often included with quarterly participant account statements.
Plans which do not have participant-directed accounts, such as pooled account plans, are not subject to these notice requirements.
If you would like more information about paying expenses directly from your plan, please contact us.
