Do you need to pay expenses for participants who are ex-employees
Many Plan sponsors preferred to pay Plan expenses from its corporate revenues rather than see then be a charge against Plan assets. Such policy only increased the value of the Plan as a benefit to participants.
However, many Employers chaffed at paying from corporate revenue the expenses associated with the maintenance of the Plan account of an ex-Employee. Since participants who are ex-employees with balances greater than $5,000 could opt to leave their account balances with the Plan until the Plan's Normal Retirement Age (at which point a Plan Sponsor could force a distribution), Employers were incurring an expense they otherwise would like to avoid.
Although the DOL's Field Assistance Bulletin 2003-3 allowed a Plan Sponsor to pay for the Plan expenses of active employees and charge pro-rata costs against the assets of terminated employees, the DOL acknowledged that this might create difficulty for the Internal Revenue Service. Advisors consoled Employers from acting on this aspect of the DOL's Bulletin for fear of disqualifying the plan because it imposed a "detriment" on former employees.
In Revenue Ruling 2004-10 , the IRS concluded the allocation of the expenses to the former employees' accounts was not a "detriment'-in essence agreeing with the position of the DOL.
IRS Ruling 2004-10 specifically approves only a pro rata allocation of plan expenses to former employees' accounts. The ruling fails to address a per capita method of allocating expenses. If a Fiduciary chooses to use a per capita method of allocating expenses based on this ruling, the plan will have the burden of demonstrating to the IRS that the method is both reasonable and nondiscriminatory.