PLANSPONSOR - February/March 2018 - 62

ERISA EXAMINATION
Whose Expense
Is It Anyway?
What may and may not be paid
for with plan assets
T
he plan sponsor has just received, from outside counsel, a
bill that includes charges for advising on a potential discretionary
amendment to the retirement plan. Human
resources (HR) brings the bill to the next committee meeting
and seeks approval to have the plan pay the charge.
Stop right there, and step away from the bill! While the plan
may pay administrative expenses, costs associated with adopting
a discretionary plan amendment are not considered administrative
and may not be paid by the plan. But how does a committee
know what expenses are, or are not, permitted?
The Department of Labor (DOL) has issued guidance distinguishing
reasonable expenses of administering a plan from
those in connection with the plan sponsor's " settlor " functions.
Settlor functions relate to decisions involving the establishment,
termination and design of a plan. These are considered to be for
the benefit of the plan sponsor, and the plan may not pay them.
However, reasonable expenses incurred to implement a
settlor decision are generally payable by the plan. Thus, for
example, the costs associated with deciding to implement a
401(k) safe harbor matching formula and amending the plan
to do so are settlor expenses and may not be paid by the plan.
On the other hand, reasonable costs associated with preparing
and distributing the plan's safe harbor notice once the plan is
amended are administrative and may be paid by the plan.
Some common examples of eligible administrative
expenses are: accounting fees associated with filing Form 5500
and performing annual plan audits; recordkeeping fees; trustee
fees; investment consultant/advisory fees; outside counsel fees
for preparing legally required amendments, vs. discretionary
amendments; outside counsel fees for answering plan administration
questions; preparation of participant communications;
Internal Revenue Service (IRS) determination letter filing
fees-but not fees for corrections under the Employee Plans
Compliance Resolution System (EPCRS); and fidelity bond costs.
As outside counsel may assist with settlor functions and
administrative functions-e.g., drafting discretionary plan
amendments and preparing participant communications, respectively-the
committee may ask that counsel separate the bills to
easily distinguish between the two types of expenses. But keep in
mind that even if an expense is administrative and the plan may
pay it, whether to do so is a fiduciary decision.
Often the committee will determine that the plan will
pay administrative expenses, but the committee then delegates
authority to review bills and pay plan expenses to HR or
another authorized fiduciary so that bills don't stack up between
committee meetings.
The authorized fiduciary must review the expense and
determine that it is reasonable and prudent before initiating
payment by the plan. To make sure the fiduciary is approving
only reasonable eligible expenses, the committee may adopt a
formal policy governing what the plan is permitted to pay. Such
a policy would describe eligible expenses, how such expenses are
determined and the requirement that expenses be reasonable.
Rather than paying eligible administrative expenses
directly to a service provider, the authorized fiduciary may
direct the plan to reimburse the sponsor after it has paid them.
However, such reimbursement may be considered an impermissible
plan loan unless paid within 59 days or unless the requirements
of Prohibited Transaction Exemption (PTE) 80-26 are
met. Generally, PTE 80-26 requires that the reimbursement be
pursuant to a written agreement and no interest may be charged.
Under certain circumstances, the plan sponsor may be
reimbursed for administrative costs associated with plan
sponsor employees who work on the plan. But be careful-this
does not mean the plan may be charged to pay all HR employees.
Reimbursable costs are limited to direct costs, which means they
would not have been incurred except for the plan administration
(i.e., the employee has a job only because he is administering
the plan), the costs are properly allocated (i.e., between whatever
plans the employer provides), and the costs do not represent a
portion of the plan sponsor's overhead costs. For reimbursement
of employee time, the sponsor should retain time sheets, hour
summaries or some other method of tracking employees' time
spent on the plan or plans.
Ultimately, it is important to understand the difference
between administrative and settlor expenses, as well as the
requirement that expenses be reasonable, before the plan pays
them. And, of course, the decision to charge the plan for eligible
expenses should be well-documented so there is evidence of the
prudent process in determining what the plan pays.
Summer Conley is a partner in the Los Angeles office of
Drinker Biddle & Reath LLP. Michael Rosenbaum is a partner
in the firm's Chicago office.
62 PLANSPONSOR.com February-March 2018 Art by Joseph Ciardiello
http://www.PLANSPONSOR.com
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