Background
The Department of Labor (DOL) has recently changed its longstanding
position regarding the allocation of certain plan fees to
the accounts of participants who utilize certain plan features.
In Advisory Opinion 94-32A, the DOL concluded that imposing
the costs of a Qualified Domestic Relations Order (QDRO)
determination on the participant (or alternate payee) would
violate ERISA. Consequently, the costs to determine whether
a domestic relations order have been borne by the plan as
a whole or paid by the employer. In a new Field Assistance
Bulletin 2003-3, the DOL has rescinded its position and provides
guidance as to how and when a defined contribution plan (e.g.
profit sharing, 401(k) plan) may charge participants' accounts
for certain expenses.
The issue arises because ERISA provides little guidance
on the allocation of plan expenses in a defined contribution
plan. In general, plan expenses must be reasonable and must
be proper plan expenses. If the plan document specifies a
method for allocating expenses, the plan fiduciary generally
should follow the plan terms unless the terms are discriminatory.
When the plan document is silent or ambiguous with respect
to expense allocation, the plan fiduciary must be prudent
and must select a method consistent with the fiduciary’s
duty to act "solely in the interest of the participants
and beneficiaries." The Knox McLaughlin Prototype Plan
provides at Section 10.05 that "The Trustee will pay
from the Trust Fund all fees and reasonable expenses incurred
by the Plan, to the extent such fees and expenses are for
the ordinary and necessary administration and operation of
the Plan…unless the Employer pays such expenses."
What Does This Mean to Your Plan?
The DOL bulletin means that a defined contribution plan
may elect to allocate certain expenses to individual participants
based on service or feature utilization rather than allocate
the fees and costs to the plan as a whole or the employer
paying the costs. In particular, a plan may allocate the
expenses associated with loans, hardship withdrawals, benefit
calculations (e.g., expenses to calculate the benefits payable
under different plan distribution options), distribution
fees (check writing, 1099-R preparation, preparing and transmitting
the distribution forms) and QDROs (determining whether the
domestic relations order is "qualified").
How Does the Plan Elect to Allocate Certain Expenses to
Employee Accounts?
To implement this policy change, the policy must be adopted
by the employer, the Summary Plan Description must be amended,
and notice of the change given to participants in the form
of a Summary of Material Modification. The DOL has not published
any specific guidance as to what constitutes a "reasonable
amount" for any of the various expenses. It is recommended
that the fees and costs set forth on a third party administrator's
fee chart for the various services be used to determine the
participant expense. For example, if the unrelated provider
of plan administration services charges the Plan $200 for
processing a hardship distribution, and if the trustee believes
that this is a reasonable charge, then the Plan should consider
using this (or some lesser amount, if the Employer wants
to subsidize part of the cost) as the charge to the Participant.
Similarly, fees may be established for QDRO determinations
or the other services or features identified above.
This Seems Too Good To Be True. What's the Catch?
The DOL bulletin addresses some other areas in which the
DOL takes the position that allocating fees and expenses
to participants is permissible – BUT – in these
areas the DOL is specifically indicates that it does not
speak for the Internal Revenue Service. For example, many
employers would like to assess a fee on terminated employee
participants who have not taken a distribution of their account
balance (even though no such fee is assessed on current employee
participants). The DOL bulletin indicates that this is permissible.
However, the IRS has indicated that such disparate treatment
between current and terminated employees may violate the
terminated employee's right to consent to the distribution.
(In other words, it is perceived as a penalty for not taking
a distribution.) In addition, the DOL bulletin discusses
charging some plan fees on a "per capita" basis
(based on the number of participants) rather than a pro-rata
(based on account value). For example, if annual administration
expenses were $3000 and there are 10 participants, a per
capita charge would be $300. This would be a significant
economic detriment to a participant with a $400 account balance.
Consequently, until the IRS provides some guidance on the
issues regarding the disparate treatment of terminated employees
and per capita charges, we are not recommending changes regarding
these two areas. The IRS has indicated that it will comment
during 2004.
If you have questions or if you would like to discuss the
implementation of a policy to assess certain fees and costs
to the account of the individual participant incurring the
Plan service or feature, please email dmosier@kmgslaw.com or call (814) 459-2800.
For additional information, please contact:
David M. Mosier, Esq.
Knox, McLaughlin, Gornall & Sennett, P.C.
120 West Tenth Street
Erie, Pennsylvania 16501-1461
Telephone (814) 459-2800; Fax (814) 453-4530
E-mail:
dmosier@kmgslaw.com
This Guide and any information in it is not to be reproduced
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