Paying Fees from Plan Assets


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COVID-19 is obviously causing financial stress and, when it comes to your clients’ qualified retirement plans, they may be looking for ways to reduce expenses. In this talk, we’ll detail the three options they have to use plan assets to pay some plan expenses as long as they follow Department of Labor and IRS rules.

Plan sponsors can generally use plan assets to pay for administrative expenses. “Administrative expenses” include the costs of annual administration, recordkeeping, compliance testing, preparing Form 5500, and distribution and loan processing fees that are paid by the company. Administrative expenses also include costs for plan amendments that are mandated by the IRS and the cost of CPA audits for larger plans.

There are some expenses that cannot be paid for with plan assets. These include business costs for designing and drafting a plan document, costs for installing a new plan, or the fees associated with drafting discretionary amendments. Also, plan assets can not be used to pay for IRS correction program fees, or, fees associated with a plan termination.

When it comes to paying fees from plan assets, sponsors have the choice to draw from participant accounts, from the plan’s forfeiture account, or from an ERISA fee account. Let’s quickly look at all three options.

First, plan sponsors can pay plan expenses from participant accounts.

The rules say that if a plan sponsor chooses to pay plan expenses from participant accounts, it needs to do so in a way that doesn’t discriminate and with a formula that’s uniform. That means: a fee must be charged against all participants to whom it applies, and the fee must not favor highly-compensated employees.

A proportionate, or “pro rata,” method allocates the fee based on the percentage each participant should share based on their account balance.

Here’s a simple example of the “pro rata” method: Sue’s account balance is one-hundred-thousand dollars. The plan has a total balance of one-million dollars. Since her account balance is 10% of the total, her proportionate—or pro rata—share of a $500 fee would be $50.

A per capita method divides the fee equally by the number of applicable participants in the plan.

For example: If Sue’s plan has 20 participants, a $500 fee would be divided by 20. That’s $25 per participant.

Second, plan sponsors can use forfeitures to pay plan expenses.

A qualified retirement plan may make some employer contributions subject to a vesting schedule. If an employee terminates before being fully vested in such contributions, they forfeit the non-vested portion of their balance back to the plan. That amount is held in the plan’s forfeiture account.

Forfeiture accounts can be set up to re-allocate money to other participants, to reduce employer contributions, or to pay administrative expenses. The plan document spells out how forfeitures are to be handled each year.

Third, plan sponsors can use an ERISA budget account to pay plan expenses.

In a 401(k) or a similar plan, a client may have an ERISA Budget Account for revenue sharing fees paid by mutual funds. 12b-1 and sub-transfer agent fees are tracked in this separate account within the plan. The balance in this account may be distributed to plan participants or it may be used to pay plan expenses.

Please reach out to us to talk about communicating to plan sponsors best options and guidance for managing retirement plan costs. We’re here to help.



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