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Home > Library > Stable Times > Volume 5, Issue 1

The quarterly publication of the Stable Value Investment Association
First Quarter 2001 • Volume 5 Issue 1

New Guidance on Plan Expenses

By Donald J. Myers & Michael B. Richman, Reed Smith LLP

On January 19, 2001, the Department of Labor ("DOL") issued interpretive guidance to clarify the circumstances under which ERISA plans may properly pay certain types of plan-related expenses, in response to questions raised by a series of recent DOL regional office investigations. These investigations, by challenging the payment of various types of plan expenses that ERISA practitioners thought were permissible, had resulted in a number of complaints to DOL. In its press release, DOL said that there had been a "misunderstanding regarding the department's views on a variety of plan expense issues."

The regional office investigations, principally out of the Kansas City regional office, challenged the ability to charge ERISA plans for such expenses as the costs of performing routine nondiscrimination testing, obtaining IRS determination letters and preparing plan amendments. Several members of the ERISA community asked the DOL national office to intervene in these matters by providing further guidance on these types of expenses.

The guidance consists of two parts. The first is Advisory Opinion 2001-01A (January 18, 2001), which clarifies issues raised by a 1997 advisory opinion that was the basis for the positions taken in the regional office investigations. The second is a set of hypothetical fact patterns. These can be found on the DOL web site.

Advisory Opinion 2001-01A

The 1997 advisory opinion (Advisory Opinion 97-03A) had discussed the application of ERISA to the payment of plan termination expenses from the assets of a plan that had been taken over by the California insurance commissioner. In it, DOL restated its established position that while a plan may pay for the reasonable expenses of administering the plan, including direct expenses properly and actually incurred in the performance of a fiduciary's duties, activities that relate to the formation, rather than the management, of plans are "settlor" functions that generally are not fiduciary activities governed by ERISA. These include decisions relating to the establishment, design and termination of plans. According to DOL, expenses incurred in the performance of settlor functions would not be reasonable expenses of the plan because they would be incurred for the benefit of the employer, so that the employer would be expected to bear their cost in the normal course of its business operations. Nevertheless, reasonable expenses incurred in connection with the implementation of settlor decisions would generally be payable by the plan.

In its 1997 Opinion, DOL took the position that because the tax-qualified status of a plan confers benefits on both the plan sponsor and the plan, a portion of the expenses relating to tax qualification may not constitute reasonable plan expenses. Thus, it may be necessary, said DOL, to have an independent fiduciary allocate the expenses of maintaining tax qualification in connection with a plan termination between the sponsor and the plan to avoid a prohibited transaction. In Opinion 2001-01A, DOL said that this view had been construed to require an apportionment of all tax qualification-related expenses between the plan and the plan sponsor, a reference to the position taken by certain DOL regional offices in their investigations. DOL then stated that it does not agree with this reading of its prior opinion. Citing to the Supreme Court opinions in Lockheed Corp. v. Spink and Hughes Aircraft Co. v. Jacobson, DOL said that any benefit that a plan's tax-qualified status confers on the employer should be viewed "as an integral component of the incidental benefits that flow to plan sponsors generally by virtue of offering a plan." The mere receipt of such "incidental" benefits by plan sponsors, said DOL, "does not convert a settlor activity into a fiduciary activity or convert an otherwise permissible plan expense into a settlor expense."

Consequently, while a plan may not pay for the settlor activity of the formation of a plan as a tax-qualified plan, the implementation of that settlor decision "may require plan fiduciaries to undertake activities relating to maintaining the plan's tax-qualified status for which a plan may pay reasonable expenses (i.e., reasonable in light of the services rendered)." The implementation activities are described to include drafting plan amendments required by changes in the tax law, nondiscrimination testing, and requesting IRS determination letters, some of the very activities challenged in the regional office investigations. Any activity involving the plan sponsor's analysis of a choice among options for amending the plan, however, would be a settlor activity for which the plan could not pay.

Hypothetical Fact Patterns

To provide further clarification and facilitate compliance and enforcement, DOL released six hypothetical fact patterns on plan expenses on the same day it released the advisory opinion. Through these fact patterns, DOL provided the following illustrations of the application of its position on plan expenses:

Settlor expenses not payable by the plan
Plan design studies or consultations
Cost projection to determine the financial impact of a plan change on the sponsor
FASB Statement No. 87 or 88 calculations—because these relate to the sponsor's financial statements
Amending a plan to provide for a spin-off—because the plan fiduciary has no implementation responsibilities until the plan is actually amended
Negotiations with unions—because these typically take place in advance of, or in preparation for, a plan change
Amending a plan to establish a participant loan program—because plan fiduciaries have no implementation obligations under the plan until the plan is amended (although subsequent to the amendment, the costs of operating the established loan program would be implementation expenses payable from the plan.) Permissible plan expenses (subject to being reasonable):
Determining the amount of plan assets to be transferred in a spin-off—assuming this relates to implementing the spin-off decision rather than assisting in the formulation of the spin-off.
Re-computing the amount of plan assets to be transferred in a spin-off—if the delay necessitating the new computation was through no fault of the sponsor.
Computing potential benefits for those participants eligible for an adopted early retirement window—if the fiduciary determines that such an expenditure is a prudent use of plan assets (even though providing the information might be viewed as furthering the objectives of the company.)
Computing benefits for those opting to retire under an adopted early retirement window—as an administrative function of the plan.
Communicating information about plan benefits—DOL noted that because communicating plan information to participants and beneficiaries is an important plan activity, administrators and plan fiduciaries should be afforded substantial latitude in the method, form and style of their plan communications, if the expenses are otherwise reasonable (but see below under "Allocation required".)
Amending a plan to comply with tax law or ERISA changes.
Obtaining an IRS determination letter.
Routine nondiscrimination testing (even if necessitated by a union-negotiated plan amendment.)
Start-up fees and ongoing administration fees of a third party plan administrator. Allocation required:
Single charge by a service provider for amending a plan to establish an early retirement window and obtain an IRS determination letter—the plan sponsor must get the service provider to allocate its charge between the cost of amending the plan to establish the early retirement window (a plan design activity treated as a settlor expense) and of obtaining an IRS determination letter (an implementation activity payable as a plan expense.)
Benefit booklets with information on all benefits provided by the employer, including non-plan benefits—the plan sponsor should pay that portion of the costs that relates to non-plan matters, and each plan described in the booklet should pay its proportionate share of the remaining costs. While, as noted above, plan administrators and fiduciaries should be given considerable deference on communication and disclosure matters, they should be able to explain and justify the attendant costs.
The example implies that the allocation would be based on the proportionate number of pages in the booklet devoted to each plan. That approach should apply only to the printing and distribution costs, and not to costs (such as performing benefit calculations) that are not based solely on the number of pages used.
DOL did not indicate that this allocation must be performed by an independent fiduciary, suggesting that DOL may have abandoned its 1997 position that an independent fiduciary is necessary to allocate these types of expenses.

The subject of charging a plan for the costs of preparing plan amendments had arisen frequently in the regional office investigations, and was in need of clarification. The newly articulated standard draws a clear line between permitted and non-permitted expenses. According to DOL, the cost of amending a plan to comply with a tax law or ERISA change can be charged to the plan. However, the cost of amending a plan to provide for a design or structural change, such as the addition of a loan program or a plan spin-off, should be paid by the plan sponsor as a settlor expense. It is only after such an amendment has been adopted that the implementation phase, the costs of which can be charged to the plan, can begin. Previously, based on the general distinction DOL had drawn between settlor decisions and the implementation of those decisions, the costs of preparing such plan amendments was generally viewed as part of the implementation phase, and therefore a permissible plan expense.

One of the DOL fact patterns raises the issue of the need for plan authorization to pay plan expenses, and of the ability of the sponsor to transfer services being provided at no cost to the plan to a provider that will charge fees to the plan. According to DOL, where the plan document is silent, the plan may pay reasonable administrative expenses. Where it provides that the employer will pay any such expenses, and the employer has reserved the right to amend the plan document, ERISA would not prevent the employer from amending the plan to require, prospectively, that the relevant expenses be paid by the plan. (DOL believes that an employer cannot make such an amendment retroactive without violating the prohibition in ERISA against self-dealing.) Applying these concepts to the fact pattern, DOL said that where a plan sponsor has assumed responsibility for payment of plan expenses, and later prospectively shifts that responsibility to the plan, the plan may pay those expenses. This was a reiteration of a previously-stated DOL position.

Conclusion

The newly-released DOL guidance has the advantage of providing greater certainty on plan expense issues, resolving the "misunderstandings" created by the regional office investigations. However, some of the certainty comes at the cost of treating certain expenses as no longer payable from plan assets. The general message is that plan expenses continue to be an important fiduciary compliance issue, and likely an important enforcement priority, for DOL, so that plan fiduciaries should review their expense policies and procedures in light of DOL's position in order to reduce the risk of DOL enforcement action.

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