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What are the "Reasonable" Expenses That Can Be Paid Out From Plan Assets?

Posted by Corey F. Schechter | Jul 09, 2018

Under the Employee Retirement Income Security Act of 1974 (ERISA), retirement plan sponsors have a fiduciary duty that requires them to act solely in the interest of plan participants and beneficiaries. Plan sponsors are also limited to using plan assets for the reasonable expenses of administering the plan. Using plan assets for other plan expenses could be a breach of the sponsor's fiduciary duty and lead to potential fines and costly litigation.

Providing a qualifying retirement plan generally involves a number of administrative costs to set up and run a plan. It is important for plan sponsors to understand what all the fees are for and how they should be classified as plan expenses. Misclassifying plan expenses could result in an investigation by the Department of Labor or a lawsuit by a plan participant. Plan sponsors may be held personally liable for expenses which are deemed unreasonable or unnecessary.

The DOL Employee Benefits Security Administration (EBSA) has provided some guidance on ERISA plan expenses. Expenses are generally divided into two categories: settlor expenses and plan expenses. Settlor expenses generally benefit the plan sponsor and are not directly tied to participant benefits. Plan expenses that are reasonable and which benefit plan participants can, unlike settlor expenses, generally be paid out of plan assets.

Plan Expenses

Under ERISA, reasonable plan administrative expenses may be paid out of plan assets. The plan documents may provide for which expenses will be paid out of plan assets. However, the plan may also provide that the plan sponsor can pay for plan expenses even if they could be paid out of plan assets. Fiduciary or plan expenses may include costs related to:

  • Recordkeeping,
  • Annual compliance administration,
  • ERISA compliance,
  • Trustee fees,
  • Participant recordkeeping,
  • Participant distributions,
  • Statement mailings, or
  • Independent plan audits.

Settlor Expenses

Settlor expenses are generally those costs that benefit, in whole or in part, the plan sponsor. For example, the costs of consulting, advice, or design of a 401(k) plan are related to establishing a benefit plan but would generally be considered settlor expenses because they are expenses that benefit of the plan sponsor. Settlor expenses may include costs related to:

  • Plan setup (and plan termination),
  • Plan design studies,
  • Design change consultations,
  • Plan provider search,
  • Consulting fees for deciding whether to terminate a benefits plan,
  • Legal fees for corrections under IRS voluntary compliance programs, or
  • IRS or DOL penalties for plan filing corrections.

In Doubt About Whether an Expense Can Be Paid Out of Plan Assets?

The DOL guidance on settlor vs. plan expenses provide sample fact patterns to help plan sponsors understand the difference and what types of expenses do not qualify. However, plan expenses may not always fall nicely into a settlor or plan expense. If there is an argument that it could fall into both categories, it is generally safer to err on the side of paying out of the plan sponsor's account instead of plan assets.

Following fiduciary best practices can protect the plan sponsor and company from liability and unnecessary litigation. Any questions about what expenses qualify as plan expenses should be addressed by discussing the expense with experienced ERISA and employee benefits lawyers.

Should you, as a plan sponsor, find yourself in the unfortunate position of having accidentally paid settlor expenses with plan expenses, don't panic! So long as the error is caught before an audit of the plan by the IRS or DOL, the DOL's Voluntary Fiduciary Correction Program (VFCP) provides a means by which to voluntarily correct the error with little pain. Our highly experienced attorneys are able to assist with all aspects f the VFCP application process should you find yourself in need of utilizing the program.

If you have any questions about ERISA compliance, the VFCP, and fiduciary duties for your employee benefits plan, Butterfield Schechter LLP is here to help. We are San Diego County's largest firm focusing its law practice on employee benefits law. Our firm can provide fiduciary counseling and help you stay compliant with ERISA and tax laws and regulations. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.


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