What Expenses Can Be Paid from Plan Assets?
Plan sponsors sometimes wonder what expenses can be paid from retirement plan assets and what expenses must be paid from business assets. (Here, we will consider the plan sponsor and plan administrator to be identical.) The Department of Labor has provided some guidance to answer this question.
Under ERISA, certain expenses can be paid from plan assets.
- At a minimum, the plan and/or trust document must permit expenses to be paid from plan assets. As a practical matter, most do. However, make sure.
- Even if the plan is permitted to pay for these expenses, the amount paid cannot be unreasonable.
- These rules apply to both defined benefit and defined contribution plans.
- There are three decisions with a defined contribution plan. First, the plan sponsor must determine whether the expense is permitted to be paid from plan assets. Second, the plan sponsor must determine whether it wants to have the expense paid from plan assets. Finally, the plan sponsor must determine how the expense is allocated to (i.e., charged against) plan participants. Whether this allocation is reasonable is not discussed in this article.
The decision of whether an expense can be paid by the plan is a fiduciary act (subject to the usual fiduciary standards). The “exclusive benefit” requirement specifies that plan assets may only be used to pay plan benefits and reasonable expenses of the administration of the plan. The Department of Labor has indicated that “settlor expenses,” which are business expenses related to a retirement plan (and are not expenses for the administration of the plan), cannot be paid by the plan. Only reasonable administration expenses can be paid by the plan.
Settlor expenses are generally the cost of services that provide a benefit to the business. So, once a plan is in place, the key question is: “Is the service primarily for the benefit of the business or is the service for the administration of the plan?”
Types of Services That Meet the Needs of the Business – Settlor
- Consulting to assist with the decision of whether or not to adopt a plan
- Preparation of the initial plan and trust documents
- Consulting to assist with the decision of whether to amend the plan (e.g., different benefit levels, offer loans, etc.), provided that these amendments are not required for the plan to remain qualified (“Discretionary Amendments”)
- Preparation of plan amendments that are not required for the plan to remain qualified
- ASC 715 calculations and related consulting
Types of Services Directly Relating to the Proper Administration of a Retirement Plan – Non-settlor
- Annual actuarial valuation
- Preparation of Schedule SB, Form 5500, AFTAP certification, SAR, AFN
- PBGC forms, premiums
- Annual allocation of contributions, calculation of account balances, updating vesting
- Benefit statements
- Benefit calculations
- Adoption of plan amendments required to keep the plan qualified (“Required Amendments”)
One area where careful judgment is required involves the payment for services to implement a settlor expense.
- The Department of Labor’s view is that the decision to make a discretionary amendment (for example, changing the eligibility, benefit or allocation formula, vesting, permitting loans, etc.) is a business decision. Hence, any related consulting fee would be a settlor expense, and cannot be paid from plan assets.
- Until the plan is actually amended to implement the plan design decision, there are no administrative responsibilities related to the amendment. So, the fee to prepare the discretionary amendment is still a settlor expense because the plan design changes are not yet part of the plan.
- However, once the discretionary amendment has been adopted, the obligation to properly administer the plan must now reflect the provisions of the amendment. Therefore, implementing expenses (fees for DL application, employee communications, benefit calculations, etc.) are administrative and non-settlor.
To illustrate the Department of Labor’s rationale regarding settlor vs. non-settlor expenses, let’s consider the following examples.
Initial Adoption of the Plan
The decision of whether or not to adopt a plan is clearly a business decision; hence, any fees incurred would be settlor expenses. But what about the implementation of that decision – the preparation of the plan and trust documents. Until the plan is established, there is no requirement to complete these tasks, so fees for these tasks would be settlor expenses.
Plan Amendments Required to Keep the Plan Qualified
In general, all expenses to maintain qualification of an existing plan (amendments, application for DL, employee communications) are administrative and non-settlor. An exception could be if there were alternative methods of compliance. For example, remember when the law changed to tighten vesting requirements; a plan sponsor could choose between a 7-year graded vesting schedule and 5-year cliff vesting. The consulting solely related to this choice was a business decision, and fees for this were settlor expenses.
Plan Amendments Not Required to Keep the Plan Qualified
Let’s say that a plan is amended to create an early retirement window. The consulting fees charged to assist the plan sponsor in determining whether the window should be offered (feasibility studies, related calculations and projections) are settlor expenses. The fees to amend the plan to implement the window are also settlor expenses. However, once the amendment is adopted, the fees for resulting expenses (employee communications, calculations for actual participants, etc.) are administrative and not settlor expenses.
The same logic applies to mergers and spinoffs. The consulting fees to help the plan sponsor decide as well as the resolutions or amendments are settlor expenses. Once the plan is amended, the fees for resulting implementation tasks are administrative.
The decision of whether or not to terminate the plan is a business decision; hence, any related consulting fees (feasibility studies, calculations of potential unfunded liability or surplus, etc.) would be settlor expenses. The fees to prepare the resolution to implement the plan termination along with plan amendments (other than required amendments) are settlor expenses. However, once the plan termination resolution and related amendments have been adopted, the implementation costs (PBGC filings, DL application, employee communications, benefit payments) are administrative and non-settlor.
‘Regular’ Annual Work
The regular tasks that are required annually (actuarial valuation, AFTAP Certification, Schedule SB, Form 5500, PBGC filing and premiums, coverage/non-discrimination testing, benefit statements, benefit calculations, QDRO processing, etc.) are generally administrative and non-settlor. Sometimes, the classification of these expenses is not completely clear. For example:
- a plan sponsor decides to make a specific contribution to a profit sharing plan, but wants to analyze 17 different potential allocations among plan participants. Is the fee for this level of analysis primarily for the benefit of the business, and therefore a settlor expense?
- A plan sponsor is considering 12 different contribution amounts, and wants allocation alternatives for each. Is the fee for this level of analysis primarily for the benefit of the business, and therefore a settlor expense?
There was a time when the Department of Labor was more restrictive. In fact, they took the position that most of the regular tasks involved in maintaining a plan was to keep the plan qualified. Since having a qualified plan conferred significant tax benefits to the employer, the regular annual costs were mainly settlor expenses. The DOL has generally backed down from that position.
Economic Benefit of the Plan Paying Expenses – DB vs. DC
From the viewpoint of a plan sponsor, having a defined contribution plan pay expenses essentially shifts some costs from the plan sponsor to the plan participants. Accordingly, there is a true economic benefit to the plan sponsor.
However, if a DB plan pays expenses, the plan sponsor will ultimately have to make additional contributions into the plan to pay for promised benefits. Under PPA, expenses expected to be paid by the plan sponsor are included in the Target Normal Cost. As a practical matter, unless the DB plan is in surplus, this cost shifting is temporary and illusory.
From the Department of Labor’s viewpoint, this distinction is not relevant. Their focus is simply on whether or not the expense is a settlor expense.
Even if an expense is non-settlor and can be paid from the plan, the amount cannot be unreasonable. It is an important fiduciary decision for the plan sponsors to determine what is reasonable. While this applies to all fees paid from plan assets, one should take note of the current litigation challenging the level of investment fees charged against participant accounts.
A good resource (other than ERISA itself) is the “Guidance on Settlor v. Plan Expenses” page on the Department of Labor’s website. Other resources include various DOL advisory opinions and field assistance bulletins, as well as publications by law firms and consulting firms.
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