Should I Pay Or Should I No(t) Now: Which Expenses Can be Paid with Plan Assets?

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by Brenda Berg

One question that often comes up is whether an expense related to an ERISA plan can be paid with plan assets. The decision of whether to use ERISA plan assets to pay an expense is an ERISA fiduciary decision. With the recent IRS guidance clarifying the timing of use of forfeitures, this question may come up even more.[1] Using plan assets inappropriately is a fiduciary breach and subject to possible DOL and IRS penalties. It is important to have a fiduciary process in place for reviewing expenses and determining whether a payment is proper.

Plan assets can only be used to pay plan expenses if the answer is yes to each of the following questions:

  1. Does the plan document language permit using plan assets for payment of expenses? Most plans allow the use of plan assets for payment of expenses, but the fiduciary must confirm.
  2. Is the expense related to the fiduciary’s administration of the plan, rather than to a plan sponsor/settlor function? This is the tough question and is discussed in more detail below.
  3. Is the amount of the expense reasonable, and is the payment prudent? The fiduciary should only approve payment of amounts that are reasonable and prudent. If the expense benefits multiple plans, then the expense must be allocated appropriately.
  4. Has the fiduciary confirmed the payment would not be a prohibited transaction? If the payment is being made to a “party in interest” —such as the plan sponsor, the recordkeeper, or anybody else involved with the plan—then the payment might be a prohibited transaction. A prohibited transaction exemption may allow the payment anyway, but this must be determined. For example, if the payment is being made to the plan sponsor to reimburse amounts the plan sponsor advanced on behalf of the plan, the arrangement may require documentation that allows such an arrangement since there was essentially a “loan” between the plan sponsor and the plan.

Back to item 2: Unfortunately, it is not as easy as one might think to determine whether the expense is related to the fiduciary’s administration of the plan—and thus is a fiduciary expense that may be paid—rather than related to the plan sponsor/settlor duties. The DOL has issued guidance on various expense items, but there are also other types of expenses that are not specifically addressed. In short, if the expense relates to a required administration duty, then the expense is probably fiduciary and may be chargeable to the plan. In contrast, if the expense relates to plan design or a plan sponsor decision, or anything else that is not required but relates to a plan sponsor decision and is for the benefit of the plan sponsor, then the fiduciary probably should not charge it to the plan.

Examples of items that are typically administrative/fiduciary in nature and thus may be chargeable to the plan (if the other requirements are met):

  • recordkeeping fees
  • investment and custodial fees
  • required compliance testing
  • required reporting (e.g., 5500, required valuation reports and filings on a pension plan), disclosures, and participant communications (e.g., SPD)
  • required PBGC premiums
  • actuarial fees for plan administration
  • plan interpretation
  • claims processing and benefit calculations
  • drafting plan amendments that are required by law to maintain the plan’s qualified status
  • legal and consulting fees that relate to the above fiduciary functions

Examples of items are typically not administrative/fiduciary in nature and thus would not be chargeable to the plan:

  • modeling or consulting fees for plan design decisions (e.g., employer contribution level or terminating or freezing a plan)
  • drafting plan amendments that are discretionary (i.e., not required by law)
    • Note that once the plan is amended as a settlor decision, the actual implementation of the change is likely fiduciary, and those costs could be chargeable to the plan. For example, a decision on whether to merge the plan is a settlor decision, but the implementation of the plan merger is fiduciary.
  • correction fees (e.g., VCP filing fee) or penalties on the employer
  • legal and consulting fees that relate to the above non-fiduciary functions

We have seen the issue of improper charges arise in plan audits, so some attention to this on the front end can save a “clash” with a DOL auditor down the road.

[1] See our blog on forfeiture use at https://www.employeebenefitslawblog.com/one-way-or-another-forfeitures-will-have-to-be-administered-under-your-retirement-plan-and-the-irs-just-proposed-new-regulations-that-provide-simplified-guidance/.