The Department of Labor (DOL) recently issued guidance on those expenses the department believes may be paid from ERISA plan assets. The issuance of this guidance was a result of DOL plan audits and the inconsistent application of existing rules by its regional offices.
ERISA permits an employee benefit plan to pay "reasonable expenses of administering the plan." In addition, ERISA contains two prohibited transaction exemptions that apply specifically to the payment of plan expenses. First, a fiduciary may receive reasonable compensation for services rendered to the plan or be reimbursed for expenses properly and actually incurred in the performance of fiduciary duties. Second, a plan may contract or make reasonable arrangements with a party in interest for legal, accounting or other services necessary for the establishment or operation of a plan and pay reasonable compensation for such services. Improper payments from plan assets may constitute a breach of fiduciary duty and a prohibited transaction that could result in the restoration of amounts improperly paid by the plan, civil penalties and a 15% excise tax on the amount involved. The DOL has never issued regulations (which would allow for public comment before finalization) on what are reasonable plan administration expenses or fiduciary services. The DOL has, however, issued several advisory opinions that represent its view of the law with respect to a specific set of facts.
In recent years, several regional offices of the DOL (notably Kansas City) audited numerous employee benefit plans to determine the types of expenses being paid from plan assets and reportedly challenged many plans’ payment of certain expenses. The reasons for disallowing these expenses included that the plan did not permit payment of expenses from plan assets and that the expenses were not supported adequately by written documentation. Additionally, contrary to accepted interpretations of the law, the DOL took the position that certain expenses that benefit both the plan sponsor and the plan participants must be allocated between the plan sponsor and the plan. The DOL gave no guidance as to how such an allocation should be made.
We believe there are two primary reasons for the DOL’s issuance of the recent advisory opinion. First, recent U.S. Supreme Court decisions clarifying the distinction between plan sponsor ("settlor") activities and plan fiduciary activities called into question earlier DOL advisory opinions. Second, the DOL regional offices were applying different standards for determining proper plan expenses, and it became increasingly clear that uniform standards need to be applied nationwide. For these reasons, the department issued Advisory Opinion 2001-01A and a set of hypothetical scenarios describing expenses that are properly payable by ERISA plans.
The advisory opinion, which is intended to clarify a previous DOL opinion, provides generally that expenses related to settlor (plan sponsor) functions are not proper plan expenses. The opinion also states that expenses related to plan management or administrative functions may be properly paid from plan assets, even if the plan sponsor benefits incrementally from such expenses. For example, the costs of establishing a tax-qualified retirement plan are not expenses that may be paid by the plan because the establishment of a plan is a settlor function. Reasonable expenses for the maintenance of the tax-qualified status of the plan may be paid from the plan, without any requirement that such expenses be allocated between the plan sponsor and the plan. As expected, the DOL stated that expenses related to plan formation and plan design studies may not be paid from plan assets, but most other reasonable expenses for the on-going administration of the plan (such as nondiscrimination testing expenses) may be paid from plan assets. The DOL, however, stated that costs of amending a plan for a design change generally may not be paid from the plan.
As a result of this recent guidance, plan sponsors and plan fiduciaries should carefully consider the following:
- If plan administrative expenses are paid by the plan, the plan (or trust) documents should specifically provide that such expenses are to be paid by the plan and not by the plan sponsor.
- Plan administrators should make sure that all expenses that are paid by the plan are reasonable and fully documented so on audit the plan sponsor can demonstrate compliance with ERISA’s requirements. Such documentation would include, for example, salary and time records if the plan pays for in-house personnel who perform plan administration functions.
- Plan administrators should make sure that expenses paid by a plan do not include expenses that are for settlor, rather than fiduciary, activities. The distinction between these types of expenses is not always clear and should be discussed with counsel. Plan administrators are advised to establish guidelines for the payment of plan expenses and to follow the established guidelines.
While the recent DOL guidance is a positive sign, the payment of expenses from plan assets is an area that requires review by plan sponsors and fiduciaries to ensure compliance with ERISA requirements.