DOL Investigation Highlights Risks and Rewards of Employers' Recouping Benefit Plan Costs

The Department of Labor (DOL) recently launched an enforcement initiative in the Midwest Region focusing on the use of retirement plan assets to pay plan administration costs. The government is taking a very hard line, especially on expenses involved in maintaining a plan's qualification (e.g., the cost of required amendments or a determination letter), which the government claims should be split between the plan and the employer. Although there are strong arguments that a plan should pay the full cost, most employers are yielding on this issue.

The DOL investigations highlight the risks of misinterpreting ERISA requirements governing the use of qualified plan trust assets to pay plan expenses. Such expenses include fees for third-party service providers (such as actuaries, auditors and lawyers), as well as reimbursement of the plan sponsor for facilities and services provided to the plan. Although the DOL plan expense audit initiative is currently limited to employers in the Midwest Region (Colorado, southern Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota and Wyoming), it is considering expansion of the program to other regions.

ERISA Standards

The DOL investigations do not negate an ERISA plan sponsor's right to pass appropriate administrative expenses on to the plan. ERISA Sections 403(c)(1) and 404(a)(1)(A) specifically permit payment of expenses from plan assets to defray the reasonable costs of administering the plan.

Whether a particular expense is "reasonable" (and therefore payable from the trust) requires a review of the expense under the applicable ERISA fiduciary guidelines. DOL guidance divides expenses into two categories. Expenses relating to an employer's establishment, termination and plan design are "settlor functions" relating to the employer's business activities and not properly chargeable to the plan. On the other hand, payment for services that benefit the plan, such as auditing the plan, preparing and filing annual reports, preparing benefit statements, calculating accrued benefits and notifying participants and beneficiaries of their plan benefits, may be "plan expenses." A single expense should be allocated if it falls into both categories.

Even if an expense is a plan expense and properly chargeable to a plan, the expense cannot be paid to a recipient ineligible to receive the payment under the ERISA Section 406 prohibited transactions rule, unless additional conditions are satisfied that prevent self-dealing. These rules apply to a person who is a plan fiduciary or other "party in interest." Improper payment of an expense from a plan must be corrected by the fiduciary and will be subject to penalties under the Code or ERISA.

From Seth Tievsky, Washington, DC