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In conjunction with investigations involving reviews of plan expenses, a
number of questions have been raised concerning the extent to which plans
may pay certain expenses that might be viewed as conferring a benefit on the
plan sponsor. In this regard, the department has issued a number of letters
which have attempted to lay out the fiduciary provisions, principles and
considerations relevant to an analysis of this question.(1)
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Nonetheless, it has been determined that further clarification and guidance
will facilitate both compliance and enforcement efforts in this area.
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In an effort to specifically address the most frequently raised questions,
the Pension and Welfare Benefits Administration has developed a set of six
hypothetical fact patterns in which various plan expense issues are both
presented and addressed.(2)
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Questions concerning this guidance may be addressed to:
U.S. Department of Labor
Pension and Welfare Benefits Administration
Office of
Regulations and Interpretations
200 Constitution Avenue, NW, Suite N-5669
Washington, DC 20210
Attention: Settlor Expense Guidance
Tel 202.693.8510
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During 1997, ACD Inc. agreed to sell a business segment to EFG Inc., a
friendly competitor. The closing date for the sale was January 1, 1998. As a
result of this sale, 1,600 participants and $180 million (the amount of
accrued benefits attributable to the transferring employees) were to be
transferred from the ACD defined benefit plan to the EFG defined benefit
plan on the sale closing date. In December 1997, the companies were forced,
through no fault of the parties, to postpone the sale closing date until May
1, 1998. The following expenses were paid by the ACD plan as a result of the
business segment sale:
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$80,000 for a plan design study
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$30,000 to amend the ACD Plan to
provide for the spin-off
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$75,000 to compute the amount
necessary to implement the transfer of plan assets from the ACD Plan
to the EFG Plan and an additional $75,000 to re-compute the amount of
the asset transfer due to the changed closing date
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$25,000 for negotiations with
various unions related to the transfer of assets and participants
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Which of the above expenses, if otherwise reasonable, may be paid by the ACD
Plan?
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The department has taken the position that there is a class of activities
which relates to the formation, rather than the management, of plans. These
activities, generally referred to as settlor functions, include decisions
relating to the formation, design and termination of plans and, except in
the context of multi-employer plans, generally are not activities subject to
Title I of ERISA. Expenses incurred in connection with settlor functions
would not be reasonable expenses of a plan. The department also has taken
the position that, while expenses attendant to settlor activities do not
constitute reasonable plan expenses, expenses incurred in connection with
the implementation of settlor decisions may constitute reasonable expenses
of the plan. See Letters to Carl J. Stoney, Jr. (2001, Advisory Opinion
01-01A); Samuel Israel (1997, Advisory Opinion 97-03A); Kirk Maldonado
(1987); and John Erlenborn (1986).
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Applying the foregoing principles, the $80,000 for a plan design study
clearly constitutes an expense for a settlor activity and, therefore, cannot
be paid by the ACD Plan. The $30,000 to amend the ACD Plan to provide for
the spin off should, in the view of the department, be treated as a settlor/plan
design expense inasmuch as the plan fiduciary would have no implementation
responsibilities under the plan until such time as the plan is actually
amended.
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The $75,000 expense incurred to determine the amount of plan assets to be
transferred to the EFG Plan would be a permissible plan expense if the
expense is attendant to implementing ACD’s decision to spin off certain
participants, rather than for assisting ACD in formulating the spin-off. The
second $75,000 expense incurred to re-compute the amount of the asset
transfer due to the changed closing date also may be a reasonable plan
expense, where, for example, the delay in the closing date was through no
fault of the sponsor and the plan was duly amended to accomplish the merger
at the new closing date.
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The $25,000 expense related to negotiations with various unions would be a
settlor expense. The described union negotiations typically take place in
advance of plan changes. Activities (such as union negotiations, benefit
studies, actuarial analyses) that take place in advance of, or in
preparation for, a plan change will almost always constitute settlor
activities, the expenses for which would not constitute reasonable plan
expenses.
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MNOP Corp., a Georgia gold mining company with pharmaceutical operations in
the Miami area, decided to reduce its staff after several years of poor
mining results, falling gold prices, and failed marketing projects in the
Miami area. After exploring several other staff reduction options, MNOP
decided to initiate an early retirement window (window) in their defined
benefit plan (plan) to induce older workers to retire. The plan paid the
following expenses related to the window:
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$150,000 for a plan design study to
determine the components of the window
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$80,000 for cost projections and to
determine the impact of the window on MNOP’s financial statements in
accordance with FASB Statement No. 87 (Employer’s Accounting for
Pension)
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Following adoption of the early
retirement window, $90,000 to compute potential benefits for those
participants that would be eligible for the window
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$30,000 to communicate selected
components of the window and the plan benefits under the window to
encourage eligible participants to take advantage of the early
retirement benefit offer
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$50,000 for benefit calculations for
those opting to retire under the window
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$20,000 to communicate plan benefits
to the participants that opted to retire under the window
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$10,000 for FASB Statement No. 88
(Employer’s Accounting for Settlements and Curtailments of Defined
Benefit Pension plans and for Termination of Benefits’)
calculations, as the window resulted in a plan curtailment
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Which of the above expenses, if otherwise reasonable,
may be paid by the plan?
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The expenses incurred in hypothetical question 2 fall
into three basic categories - plan design, benefit computation and
communication expenses.
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Plan design expenses clearly constitute settlor
expenses and, therefore, are not payable by the plan. Typically, plan
design expenses are incurred in advance of the adoption of the plan or a
plan amendment. In the case at hand, the $150,000 for plan design study
and the $80,000 for cost projections to determine financial impact of the
plan change on the sponsor are settlor expenses and may not be paid by the
plan. Similarly, the $10,000 for FASB Statement No. 88 expense relate to
the plan sponsor’s financial statements and are not payable by the plan.
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Calculating the actual benefits to which a participant
is entitled under the plan is an administrative function of the plan and,
accordingly, reasonable expenses attendant to such calculations may be
paid by the plan. Thus, the $50,000 expense for calculating the benefits
of those opting for the retirement window may be a reasonable expense of
the plan. In addition, the $90,000 paid to compute the potential benefits
for all eligible employees may be a reasonable expense of the plan, if the
fiduciary determines that such an expenditure is a prudent use of plan
assets. Even though providing such information to all eligible employees
might be viewed as furthering the objectives of the company, this benefit
to the employer would not prevent the plan from incurring the expense.(3)
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As suggested above, communicating plan information to
participants and beneficiaries is an important plan activity and,
therefore, expenses attendant to such communications will usually
constitute permissible plan expenses, if the expenses are otherwise
reasonable. In this regard, administrators and plan fiduciaries generally
should be afforded substantial latitude in the method, form and style of
their plan communications. Applying the foregoing, the $30,000 to
communicate selected components of the window to all eligible participants
and the $20,000 to communicate plan benefits to participants that opted
for early retirement under the window may constitute reasonable expenses
of the plan, even though, like the above benefit calculations, the
communication to all eligible participants might be viewed as furthering
the objective of the company to induce employees to opt for early
retirement.
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HIJ, Inc. is a major retailer in Boston, Chicago and
San Francisco. During the last two years, it was determined that HIJ’s
defined benefit plan (plan) was amended to offer a participant loan
program and an early retirement window for management employees. The plan
is intended to be maintained as a tax-qualified plan. HIJ normally
maximizes its tax-deductible contribution to the plan. Upon review of the
Plan’s financial records, it was determined that the following expenses
were paid by the plan:
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$100,000 to amend the plan to
establish an early retirement window for management employees and to
obtain an IRS determination letter
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$50,000 to amend the plan to comply
with tax law changes
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$25,000 to amend the plan to
establish a participant loan program
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$20,000 for routine
nondiscrimination testing to ensure compliance with the tax
qualification requirements
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Which of the above expenses, if otherwise reasonable,
may be paid by the plan?
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In Advisory Opinion 97-03A, the department expressed
the view that the tax-qualified status of a plan confers benefits upon
both the plan sponsor and the plan and, therefore, in the case of a plan
that is intended to be tax-qualified and that otherwise permits expenses
to be paid from plan assets, a portion of the expenses attendant to tax
qualification activities may be reasonable plan expenses. The department
further clarified its views on tax-qualification expenses in Advisory
Opinion No. 01-01. In that opinion, the department expressed the view that
a plan fiduciary is not required to take into account the benefits a
plan’s tax-qualified status confers on an employer in determining
whether the expenses attendant to maintaining a plan’s tax-qualified
status constitute reasonable expenses of the plan. The department further
noted that any such benefit should be viewed as an integral component of
the incidental benefits that flow to plan sponsors generally by virtue of
offering a plan.(4)
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In the context of tax qualification activities, it is
the view of the department that the design of a plan as a tax-qualified
plan clearly involves settlor activities for which a plan may not pay. On
the other hand, implementation of the settlor decision to maintain a
tax-qualified plan would require plan fiduciaries to undertake activities
relating to maintaining the plan’s tax-qualified status for which a plan
may pay reasonable expenses (i.e., reasonable in light of the services
rendered). Implementation activities might include drafting plan
amendments required to maintain tax-qualified status, nondiscrimination
testing, requesting IRS determination letters.
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Applying the above principles, the $50,000 to amend the
plan to comply with tax law changes and the $20,000 for routine
nondiscrimination testing may constitute reasonable expenses of the plan.
The $25,000 to amend the plan to establish a participant loan program
would be a plan design/settlor expense inasmuch as the plan fiduciaries
have no implementation obligations under the plan until such time as the plan
is amended. Subsequent to the plan amendment, however, expenses attendant
to operating the established loan program would be implementation expenses
with respect to which the plan may pay reasonable expenses.
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The single charge of $100,000 includes expenses for
plan design/settlor activities (i.e., amending the plan to establish an
early retirement window) and implementation activities (i.e., obtaining an
IRS determination letter). Inasmuch as fiduciaries may pay only reasonable
expenses of administering the plan, the fiduciaries of the plan would be
required to obtain from the service provider a determination of the
specific expense(s) attributable to the fiduciaries’ implementation
responsibilities (i.e., obtaining an IRS determination letter) prior to
payment by the plan.
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The QRS Corp. is a world-wide shoe manufacturer with
plants in the Cincinnati and Detroit areas. A review of the financial
records of the QRS Corp. defined benefit plan (the plan) reflected the
following expenses:
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$60,000 for consulting fees to
analyze the company’s options for compliance with Uniformed Services
Employment and Reemployment Rights Act of 1994 (USERRA) and Small
Business Jobs Protection Act of 1996 (SBJPA)
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$5,000 to amend the plan to comply
with USERRA and SBJPA and $5,000 to obtain an IRS determination letter
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$50,000 in actuary fees to perform
nondiscrimination testing due to a plan amendment increasing benefits
as a result of union negotiations
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$5,000 to amend the plan to comply
with the requirements of Title I of ERISA
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Which of the above expenses, if any, may be paid by the
plan?
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The expenses presented in this hypothetical raise some
of the same issues as those raised in hypothetical question 3 - the extent
to which expenses relating to maintenance of tax-qualification may
constitute reasonable plan expenses. Applying the principles set forth in
the answers to hypothetical question 3, the $5,000 expense to amend the plan,
the $5,000 expense for a determination letter and the $50,000 for
nondiscrimination testing may be necessary to maintain the plan’s
tax-qualified status and, therefore, may constitute reasonable plan
expenses. The fact that the $50,000 discrimination testing was necessary
because of a union-negotiated plan amendment does not affect the expense
being treated as a permissible plan expense. On the other hand, if the
$50,000 was incurred as part of the plan sponsor’s negotiating with the
union - in advance of adoption of the plan amendment giving rise to the
testing - the expense, as discussed in the Answer to hypothetical question
1, would be viewed as a settlor, rather than plan, expense. The $60,000
for consulting fees to analyze the Company’s options for compliance with
USERRA and SBJPA would constitute plan design/settlor expenses that may
not be paid by the plan.
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Similar to a fiduciary’s implementation
responsibility with regard to maintaining the tax-qualified status of a
plan, fiduciaries have an obligation to ensure that administration of
their plan comports with the requirements of ERISA, as well as other
applicable Federal laws. Accordingly, the $5,000 expense to amend the plan
to comply with the requirements of Title I of ERISA would be a permissible
plan expense, assuming that the amount is reasonable in light of the
services rendered.
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The public relations firm, TUV (the Firm), has offices
in Philadelphia, Dallas, Los Angeles and New York. The Firm operates a
defined benefit plan (plan). From 1993 to 1996, the plan, in addition to
distributing a Summary Annual Report (SAR), distributed an individual
benefit statement to each participant. The total preparation and
distribution costs for the benefit statements were approximately $50,000
annually.
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In 1996, the Firm decided it would be a good idea to
make sure its employees were aware of all of the benefits provided by the
Firm. Accordingly, for 1996 and subsequent years, the individual benefit
information was incorporated in a twelve page booklet that included
summary information about all the Firm’s benefit plans (health, dental,
vision), as well as one full page devoted to other Firm benefits (e.g.,
the physical fitness center, limousine services) and activities (e.g.,
annual picnic, Holiday party, etc). The booklets are prepared by the plan’s
actuarial consultant. The booklet costs approximately $125,000 to prepare
and distribute annually.
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What, if any, of these expenses may be paid by the plan?
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The issues presented by this hypothetical involve the
extent to which a plan can pay expenses related to the disclosure of plan
information. Clearly, plans may pay those expenses attendant to compliance
with ERISA’s disclosure requirements (e.g., furnishing and distributing
summary plan descriptions, summary annual reports and individual benefit
statements provided in response to individual requests). As indicated in
the Answer to hypothetical question 2, communicating plan information to
participants and beneficiaries is an important plan activity. The department
notes that there is nothing in Title I of ERISA that precludes a plan
fiduciary from providing more information than that specifically required
by statute. Whether or not a particular communication related expense
should be incurred by a plan is a fiduciary decision governed by the
fiduciary responsibility provisions of Title I of ERISA.
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Accordingly, the $50,000 to produce and distribute
individual benefit statements would be a permissible plan expense to the
extent that the actual costs of preparation and distribution are
reasonable. Similarly, a portion of the $125,000 for preparation and
distribution of the benefit booklets may also be a permissible plan
expense. Clearly, the plan sponsor should pay that portion (1/12) of the
costs of the booklet that relates to non-plan matters (i.e., physical
fitness center, limousine services, picnic, etc.). In addition, a plan may
pay only those reasonable expenses relating to that plan, and therefore,
each of the plans should pay their proportionate share of the expenses of
the booklet. While plan administrators and fiduciaries should be given
considerable deference with regard to their disclosure decisions, plan
administrators should be able to explain their disclosure decisions and
justify the costs attendant thereto.
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The QT, P. C. (QT) is a law firm with satellite offices
in most major U. S. cities. QT operates a defined benefit plan (plan).
Until 1997, the plan was administered by a ten lawyer benefits committee.
In 1997, the plan fiduciaries decided to out-source the administration.
Following an in-depth search, the plan’s fiduciaries selected Firm, Inc.
and agreed to pay $1 million in start-up fees. The start-up fees were paid
from the plan and were used to set up data bases and transfer data to Firm
that was necessary to administer the plan. The new system operated by Firm
provides plan participants with a significantly enhanced level of service
than was previously provided by the staff of ten lawyers. Once the plan’s
administration was transferred to Firm, the plan paid all of Firm’s
administration fees.
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To what extent may the expenses associated with
outsourcing the plan’s administration be paid by the plan?
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Section 404(a)(1)(A) specifically contemplates the
payment of reasonable expenses by an employee benefit plan. Where a plan
sponsor has assumed responsibility for the payment of plan expenses and
later prospectively shifts that responsibility to the plan, the plan may
pay those expenses to the extent reasonable and not otherwise precluded by
the terms of the plan.(5)
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To the extent that the services provided by Firm are
necessary for the administration of the plan, the $1 million start-up fee
and ongoing administrative fees may constitute reasonable expenses of the plan
if they are reasonable with respect to the services provided, and not
otherwise precluded by the plan.
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See Letters to Carl J. Stoney, Jr.
from Robert J. Doyle (Advisory Opinion 01-01A, January 18, 2001);
Samuel Israel from Robert J. Doyle (Advisory Opinion 97-03A, January
23, 1997); Kirk Maldonado from Elliot I. Daniel (March 2, 1987); John
Erlenborn from Dennis M. Kass (March 13, 1986).
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The expense information set forth in
the following hypotheticals are for illustrative purposes only and are
not intended to reflect a determination by the department on the
reasonableness of an expense.
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The Supreme Court has recognized
that plan sponsors receive a number of incidental benefits by virtue
of offering an employee benefit plan, such as attracting and retaining
employees, providing increased compensation without increasing wages,
and reducing the likelihood of lawsuits by encouraging employees who
would otherwise be laid off to depart voluntarily. The mere receipt of
such benefits by plan sponsors does not convert a settlor activity
into a fiduciary activity or convert an otherwise permissible plan
expense into a settlor expense. See Lockheed Corp. v. Spink, 517 U.S.
882 (1996), Hughes Aircraft Company v. Jacobson, 525 U.S. 432 (1999).
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See footnote 3.
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The department has taken the
position that where a plan document is silent as to the payment of
reasonable administrative expenses, the plan may pay reasonable
administrative expenses. Where a plan document provides that the
employer will pay any such expenses, and if the employer has reserved
the right to amend the plan document, ERISA would not prevent the
employer from amending the plan to require, prospectively, that the
relevant expenses be paid by the plan. The department believes that
the prohibition against self- dealing in section 406(b)(1) precludes
an employer from exercising fiduciary authority to use plan assets to
pay for an amendment that would (retroactively) relieve the employer
of an obligation to pay plan expenses. See Advisory Opinion 97-03A.
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