Plan Expenses

Background

Only certain expenses related to a plan can actually be charged to the plan and paid out of plan assets (participants’ accounts). Other expenses must be paid by the plan sponsor, called “settlor” expenses. In general, if an expense involves an action that is required to maintain the plan, it can be charged to the plan. Whereas, if an expense is accrued while evaluating which direction to take with the plan, the expense cannot be charged to the plan and must be paid by the plan sponsor. Some expenses clearly are categorized as either a proper plan expense or plan sponsor expense but the divide is not always clear.


Since the decision of whether to charge an expense to the plan involves the use of plan assets, it is a fiduciary decision. Improperly charging a plan for a settlor expense is a prohibited transaction. It can result in excise taxes and could also result in civil penalties and personal liability.


How bills are paid can feel routine and is therefore often overlooked. It’s important to ensure that any expenses paid from the plan are clearly permissible. Where the rules are not clear, it is safest to have the plan sponsor pay the expense from its general assets and not use plan assets.


Plan Expenses

Expenses that can be charged to the plan generally include expenses that are required to maintain the plan. For example:


  • Legally required reporting (5500)
  • Nondiscrimination testing
  • Benefit distribution expenses (including processing of Qualified Domestic Relations Orders (QDROs) and Qualified Medical Child Support Orders (QMCSOs) and calculation of the benefits payable under the different distribution options)
  • Plan accounting, recordkeeping, trustee and legal services necessary for administering the plan as a whole (including audits)
  • Drafting required plan amendments
  • Required disclosures (e.g., summary plan descriptions, summary annual reports and individual benefit statements provided in response to individual requests)
  • Pension Benefit Guarantee Corporations (PBGC) Premiums that apply to certain defined benefit plans (including late payment penalties) except in a distress or involuntary termination
  • Bonding

Some permissible plan expenses aren’t technically required to maintain the plan but are generally undertaken to benefit plan participants. For example:


  • Communicating plan information to participants and beneficiaries not required under ERISA's disclosure requirements
  • Educational seminars
  • Retirement planning software and investment advice

Fiduciary insurance coverage, which arguably benefits the fiduciaries and not plan participants directly, can be charged to the plan under certain circumstances. Insurance for fiduciaries or for the plan to cover liability or losses occurring by reason of the act or omission of a fiduciary can be charged to the plan if the insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by such fiduciary. Arguably, offering the insurance helps beneficiaries indirectly by attracting qualified fiduciaries to service the plan.


Plan Changes

Expenses incurred while evaluating which direction to take with the plan cannot be charged to the plan and must be paid by the plan sponsor. This means that different parts of a related transaction could be a permissible plan expense and others may not. The most common example relates to plan amendments. Discretionary and required amendments are treated differently:


  • Discretionary Amendments. A plan sponsor may decide it wants to begin making employer contributions but isn’t sure whether it wants to contribute profit sharing contributions or matching contributions. If an outside expert is consulted to prepare cost evaluations of different employer contribution formulas, those fees must be paid by the plan sponsor. Any fees to create the actual plan amendment once a decision has been made are also paid by the plan sponsor. Once the amendment has been adopted, administrative expenses to carry out the new contribution are plan expenses that may be charged to the plan.
  • Required Amendments. Required amendments work differently. A change in law may require the plan to adopt a plan amendment to be in compliance with the law. If there are choices in how the plan implements the required change, any expenses incurred to evaluate the options are settlor expenses that may not be charged to the plan. The cost of the amendment itself, however, may be charged to the plan as a plan expense as well as any administrative expenses to carry out the required change.

While the expenses incurred while making a settlor decision are not permissible plan expenses, reasonable expenses incurred to implement the decision are permissible plan expenses. For a discretionary amendment, the amendment itself is optional and cannot be charged to the plan. Once the amendment is adopted, however, implementing the amendment is not optional since plans are required to follow their terms.


Plan Sponsor Expenses - Settlor Expenses

The following expenses are clearly settlor expenses that may not be charged to the retirement plan or paid out of plan assets:


  • Establishment of the plan
  • Design of the plan (evaluation of options for the plan)
  • Termination of the plan
  • Plan spin-offs
  • Payment of IRS sanction or other correction program payment (Internal Revenue Service’s Employee Plans Compliance Resolution System (EPCRS), Department of Labor’s (DOL) Voluntary Fiduciary Correction Program (VFCP) and the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP))

Note that payment of sanctions or corrections fees are not permissible but fees to keep the plan in compliance (PBGC premiums and costs to receive a determination letter from the IRS) are permissible plan expenses.


Summary

Determining how to charge a plan expense is not always a simple determination. When making the decision, plan sponsor must typically weigh the cost of the expense against the cost of receiving legal advice on how the expense can be charged. If a settlor expense is erroneously charged to the plan, the error can be corrected through the DOL’s VFCP. Correcting the error voluntarily will cost less than if the error is discovered on audit.