DOL ISSUES GUIDANCE ON PAYMENT
OF PLAN EXPENSES

The Department of Labor (the "DOL") has issued new guidance to clarify and reinforce its position regarding the appropriate payment of plan expenses by a qualified retirement plan. On January 19, 2001, the DOL released Advisory Opinion 2001-01A and a document entitled "Guidance on Settlor v. Plan Expenses." This guidance provides valuable insight into an issue that has been the source of considerable confusion.

Background of the Issues Addressed in the Guidance. Historically, the DOL has recognized two different types of plan expenses: ongoing administrative expenses and "settlor expenses." In Advisory Opinion 97-03A, the DOL stated that ongoing administrative expenses could be paid by a plan if the plan document contained language permitting payment of such expenses by the plan. Opinion 97-03A also provided, however, that the plan could not pay for settlor expenses relating to the design, establishment, and/or termination of a plan. This guidance created confusion among plan sponsors about the difference between ongoing administrative expenses and settlor expenses.

To further complicate this issue, several regional DOL offices performing plan audits interpreted the DOL's position in different ways. At least one regional office recently proposed that certain ongoing administrative expenses should be paid, at least in part, by the employer if the employer realized more than an incidental benefit from the services that generated the expenses. This created concern among plan sponsors about how to determine objectively which expenses could be shared and the relative benefit to the employer of any such shared expenses.

The DOL's recent announcement of its intention to audit aggressively the payment of Plan expenses heightened the need for further guidance regarding the proper payment of plan expenses.

Summary of the Guidance. To alleviate the confusion surrounding the DOL's interpretation of its prior guidance and the inconsistency in its enforcement in this area, Advisory Opinion 2001-01A reiterates and affirms the DOL's long-standing position that the payment by a plan of all non-settlor administrative expenses related to the plan -- even those resulting from certain settlor decisions -- is acceptable if the plan document provides that the plan may pay such expenses. If a plan document is silent with regard to the payment by the plan of reasonable administrative expenses, the DOL will not prohibit the plan from paying such expenses. However, if a plan specifically prohibits the payment of administrative or other expenses by the plan, it can only be amended prospectively to allow the plan to pay permissible expenses in the future.

The DOL guidance further clarifies that a plan should not pay any expenses incurred by the settlor in reaching its decisions with regard to the establishment, amendment, or termination of the plan.

The DOL guidance reasserts the DOL's position that the determination of the appropriateness of the payment of any expenses out of plan assets is a fiduciary act. The Advisory Opinion also provides that the primary focus of the fiduciary when making decisions in this regard should be on whether the expenses were incurred as a result of settlor or fiduciary activity, not on the relative benefit to the settlor and the plan. In fact, the concept of expense sharing based on relative benefit is rejected by the DOL through this guidance.

Specific Examples of Settlor and Plan Expenses. Recognizing that there might be lingering confusion regarding whether a plan could properly pay certain expenses, the DOL also issued "Guidance on Settlor v. Plan Expenses," which contains six detailed case studies that provide clear examples of expenses and describes their proper treatment as settlor or plan expenses.

Expenses a Plan May Not Pay:

• "Settlor expenses" relating to the design, formation, and/or termination of a plan, which may include:
  • Plan design studies, projections, and consulting fees prior to the establishment or amendment of a plan;
  • Legal or other fees for the preparation of plan amendments reflecting corporate or design changes;
  • Expenses related to union negotiations in advance of plan design changes; and
  • FASB 88 statement costs.
    
    
• Any fees for services that do not directly relate to the plan (such as communication fees for consolidated information about all employee benefit plans and programs offered by an employer).

Expenses a Plan May Pay:

• Reasonable expenses for services or activities that directly relate to the ongoing operation, administration, and management of the plan. If these services are consolidated with services for other plans or programs offered by the employer, the plan should require a separate accounting of any fees attributable solely to the plan. The services or activities may include:
  
  • Computation of contributions, benefits, or corrective allocations;
  • Preparation and distribution of communications materials; and
  • Trust accounting and reporting.
    
    
• Expenses regarded as tax qualification implementation activities, for example:
  
  • Annual or routine nondiscrimination testing;
  • Plan amendments to comply with law changes; and
  • IRS determination letter requests.
    
    
• Expenses incurred as a result of a plan amendment that creates a fiduciary duty to implement and administer the plan design change, such as:
  
  • Spin-off or merger activities;
  • Participant loan program, early retirement window, or any other change in benefit structure; and
  • Any change in operational provisions.

Observations About the Guidance. While the guidance provides valuable assistance to fiduciaries in determining the proper payment of plan expenses, its examples of expenses that may be incurred in connection with a plan are not exhaustive. Therefore, fiduciaries should carefully analyze and scrutinize all expenses relating to the plan to determine whether the plan may pay the expenses, and they should document the criteria used in reaching such decisions.

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