That is a question we are regularly asked. Benefit plans are not free. A bill arrives and either the company or the plan has to pay. Can the bill be paid using plan assets? Rest assured that the government, through ERISA and the Department of Labor (DOL), has provided guidance.
ERISA tells us that a benefit plan may use plan assets only to pay reasonable administrative expenses. That raises some questions:
What is reasonable?
There are no set dollar amounts to determine whether an expense is reasonable. The DOL tells us an expense must be reasonable with respect to the services provided, which depends on the service and can change over time as the market for benefit plan services changes. Even a very large fee may be reasonable if it is the going rate for those services in the marketplace. The person(s) responsible for approving the expense must make the determination that the expense is reasonable. Large expenses may justify benchmarking the fee or conducting an RFP (request for proposal) process to support the reasonableness of a fee.
The payment of reasonable expenses using plan expenses is a fiduciary duty under ERISA. The decision of what expenses are reasonable administrative expenses that can be paid from plan assets must be made by a plan fiduciary. That may be a board of directors or equivalent governing body, retirement plan committee or trustee, depending on your plan document and governance of the plan. Any delegation of that responsibility must be in writing. The responsible fiduciary must know what fees are being paid from plan assets, determine the fees are reasonable and qualify as administrative expenses, and document approval of the payment.
What are administrative expenses?
Administrative expenses are expenses necessary for the maintenance and administration of the plan and the payment of benefits. Common examples of administrative expenses include preparation of a summary plan description (SPD), distribution or loan fees, required IRS compliance amendments and IRS submissions, plan audit expenses, recordkeeping expenses, Form 5500 costs, and fiduciary expenses such as investment advice.
What are not administrative expenses?
Expenses that are for the benefit of the plan sponsor rather than administration of the plan, known as settlor expenses, are not permitted to be paid from plan assets. Common examples of settlor expenses include modeling potential changes to a plan (e.g., adding a lump sum window to a pension plan), discretionary amendments to the plan, and plan termination.
Some expenses may be difficult to judge. Legal fees are often for the benefit of the plan sponsor and not for the administration of the plan, but in some cases, such as fees for preparing a required IRS amendment or advice on a participant benefit question, legal fees may be administrative expenses. An SPD is a required document so the preparation and distribution costs would qualify as an administrative expense. However, a booklet that includes the plan’s SPD, but also SPDs or information on other benefits or company activities, combines administrative expenses and settlor expenses. The responsible fiduciary may determine it is reasonable to have the plan pay its proportionate share of the expenses of preparing the booklet and have the company pay the rest.
If you are unsure whether an expense qualifies as a reasonable administrative expense or whether your process for approving the payment of plan expenses would withstand DOL scrutiny, please consult with any of our employee benefits attorneys.