Charging Expenses to Participants (updated February, 2004)
by: Lynda Morrison
www.cbginc.com
email: lmorrison@cbginc.com

Significant expenses can be incurred in the administration of a retirement plan. Plan sponsors have often sought ways to pass these expenses on to participants of the plan. ERISA generally permits a plan to pay reasonable administrative expenses. Please note that certain expenses related to business decisions (e.g.; whether to establish, whether to amend) have long been treated as "settlor" expenses which are not payable by the plan..

Expenses paid by a plan must be allocated among participants, usually based on respective account balances or based on a set amount per participant. Employers often feel it would be appropriate to charge a specific participant for certain expenses. For example, a qualified domestic relations order ("QDRO") submitted to a plan generally requires a legal determination of whether the QDRO satisfies certain requirements. The expenses incurred in this determination are properly payable by the plan. However, DOL guidance provided that the expenses could not be allocated to the specific participant but rather had to be allocated among all participants.

The DOL issued a field directive and has changed its position. In the DOL's view, if a plan document specifically provides for an individual participant's account to be charged for certain expenses, the plan administrator and other fiduciaries must follow the document. The DOL position expressly permits the allocation of five common expenses directly to an individual participant's account. These expenses include the costs to:

determine if domestic relations orders meet the requirements to be considered a QDRO;

process hardship withdrawals;

calculate benefits payable under different plan distribution options;

process benefit distributions; or

maintain accounts for terminated vested participants.

If the document leaves the charging of expenses up to the plan administrator's (or other fiduciary's) discretion, the determination of whether to charge an individual participant's account or the plan as a whole is a fiduciary decision that is subject to ERISA's fiduciary standards. In that case, the decision on how to allocate the expense must be made prudently and in the sole interests of the plan's participants and beneficiaries.

With respect to expenses incurred in maintaining accounts for terminated vested participants, the DOL's position allows the employer to pay the cost of maintaining accounts of active employees while passing on the cost of maintaining accounts of terminated participants to their respective accounts. Initially, the Internal Revenue Service suggested caution since Treasury regulations prohibit the imposition of a "significant detriment" on participants who elect to remain in the plan post-termination. However, in January, 2004, the IRS issued guidance clarifying that a plan sponsor could continue paying expenses (reasonably) allocated to employed participants while the plan paid expenses allocable to the accounts of terminated participants.

With respect to other expenses, employers wishing to pass expenses onto specific participants need to prepare a plan amendment and provide a related summary of material modification or summary plan description to the participants. In addition, the list of expenses is not exclusive. Expenses not expressly set forth in the directive could arguably be allocated to specific participants (e.g. plan loans). However, specific advice should be sought before any action is taken.