Plan Expenses

There are different categories of expenses involved in operating a qualified plan and the method of payment allowed differs. The initial expenses of designing a plan, drafting the original plan document, amending the plan document if the amendments are focused on employer required changes rather than regulatory changes, addressing future plan design questions (e.g., how to handle early retirement offers to employees meeting certain criteria), or terminating a plan may NOT be paid from plan assets. They fall under the category of "settler" functions that rightly are an expense of the organization sponsoring the plan.

Most other expenses can be charged to the plan and include the management and custody of assets, plan administration costs, recordkeeping, reporting, disclosures, PBGC premiums, bonding and fiduciary liability insurance, and even payment for necessary office space or services (actuarial, legal, accounting, appraisal, employer provided staff specific to the plan activities).

Pro Rata vs. Per Capita

How are fees to be charged against Plan assets?

Most fees associated with the operation of a plan are calculated based on the amount of assets in the plan, in particular advisory, recordkeeping, trustee and custodial services. Such asset-based fees should be charged similarly "pro rata" against Plan assets.

Expenses for maintaining a particular asset (e.g., real estate holdings have property taxes and liability insurance premiums) should be charged pro-rata to the holders of the asset

Although a long-standing practice of charging some per account or per transaction expenses to each participant or beneficiary, the Department of Labor only approved of this wholesale practice in its Field Assistance Bulletin 2003-3 on May 19, 2003.

"A per capita method of allocating expenses among individual accounts (i.e., expenses charged equally to each account, without regard to assets in the individual account) may also provide a reasonable method of allocating certain fixed administrative expenses of the plan, such as recordkeeping, legal, auditing, annual reporting, claims processing and similar administrative expenses."

It is mandatory that the method for charging Plan expenses be fully disclosed in the Plan's Summary Plan Description.

One Fiduciary obligation is to make certain that the fees charged against the Plan are reasonable. Plan fiduciaries should insist on full disclosure of fees deducted against plan assets, particularly ones in which the service provider is the manager of the investment pool, i.e., insurance company or mutual fund company.

Often many of the expenses of plan administration is charged against the net asset value of the investment alternative, precluding an itemized disclosure of those charges.

Plan fiduciaries should also insist upon full disclosure of the revenue sharing mutual funds pay, including 12b-1 fees, sub-transfer-agency fees and "finder's fees."

Ex Employees

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.