Allocating Certain Plan Expenses to Individual Participants' Accounts in Profit Sharing, 401(k)

Posted on October 01, 2003


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 In a new Field Assistance Bulletin 2003-3, the DOL has rescinded its position and provides guidance as to how and when a defined contribution plan (e.g. profit sharing, 401(k) plan) may charge participants' accounts for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). TheDOL 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 e-mail David M. Mosier, Esq. or call (814) 459-2800.

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