Paying Plan Expenses from Plan Assets
Anne Freelove, QKA
Can plan-related fees and expenses be paid out of a qualified retirement plan?
Fees and expenses that are necessary for the administration of a qualified retirement plan are known as administrative expenses. ERISA requires plan fiduciaries to administer their plans for the exclusive benefit of participants and beneficiaries. Within this guideline, guidance permits a plan sponsor to pay reasonable administrative expenses out of plan assets. Some examples of these types of expenses are recordkeeping fees, third-party administrator fees, and fees paid for preparation of annual compliance testing and year-end reporting.
For example, a qualified retirement plan that covers employees is required to report plan activity on Form 5500, Annual Return/Report of Employee Benefit Plan, each year. Plans required to file as a large filer must complete an annual audit as part of the Form 5500 filing process. As a result, reasonable fees for the plan’s Form 5500 audit or for Form 5500 preparation are permissible to pay out of plan assets if the plan document indicates that this is an option.
On the other hand, expenses pursuant to a business decision made by the employer are considered settlor expenses, as they benefit the employer rather than plan participants. Examples of settlor expenses are costs related to establishing or terminating a plan or changing service providers. Settlor expenses generally may not be paid out of the assets of the plan.
Before directing service providers to pay plan expenses out of the plan, plan sponsors should discuss with their legal counsel or other advisors whether the fee in question is reasonable, whether it can be considered administrative in nature, and whether the plan document permits fees to be paid out of plan assets.
Can a balance in a qualified retirement plan’s forfeiture account be used to pay plan expenses? What other plan account balances may be used to pay plan-related fees?
If the plan document permits, forfeiture balances may be used to pay reasonable administrative expenses. If a plan has a balance in a different plan-level placeholder account, whether this can be used toward fees depends on the type of account. For example, a balance in a suspense or adjustment account may be the result of an adjustment made to a contribution that was initially processed incorrectly. This generally may not be used to pay administrative fees, as it is more appropriate to use this account to provide funding for a future employer contribution to the plan.
As another example of a plan-level unallocated account, some plans are set up with an “ERISA recapture account,” an “ERISA budget account,” or a “fee credit account”—different service provider names for the same thing. This type of account collects revenue from balances invested in the plan’s funds or investment options. Amounts that accrue within such an account generally are specifically intended to be used toward plan administrative fees. The plan sponsor may need to work with its service provider to determine how these amounts can be used, such as whether the plan sponsor must provide direction each time a fee is to be paid, or whether processing may be automated if certain conditions are met.
If the employer intends to pay any administrative fees from participant accounts, this must be disclosed to participants beforehand. Plan sponsors are required to provide a fee disclosure to participants annually and within a reasonable time before there are changes to plan fees that will affect a participant’s account.
If a fee directly affects a participant (for example, a processing fee for a distribution or plan loan), it is very common for this expense to be paid by the account of the participant requesting the transaction. Any such fees must be disclosed on the participant-level fee disclosure.
If a qualified retirement plan has a mandatory amendment or restatement, can that fee be paid out of plan assets?
A regulatory plan amendment or restatement results from the requirement to update plan documents to comply with changes in laws and/or regulations governing qualified retirement plans. Such an amendment fee could be considered an administrative fee, which would be permitted to be paid out of plan assets if the plan document provides for this.
On the other hand, an amendment fee resulting from a change the employer has elected—such as changing eligibility age or service requirements, adding or removing an employer contribution, or changing distribution events—would be considered a settlor expense and generally may not be paid out of the plan.
Plan sponsors looking to determine whether a specific plan expense may be paid out of plan assets should seek the guidance of their own advisors or legal counsel.
