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Mr. Carl J. Stoney, Jr.
Crosby, Heafey, Roach & May
Two Embarcadero Center, Suite 2000
San Francisco, California 94111-4106
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2001-01A
ERISA Sec. 403 - 404
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Dear Mr. Stoney:
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This is in response to your recent correspondence in which you request
confirmation of the continued viability of the Department of Labor’s views
expressed in Advisory Opinion 97-03A (January 23, 1997), discussing the
application of the Employee Retirement Income Security Act (ERISA) to the
payment of certain plan termination expenses by tax-qualified plans
administered by the Insurance Commissioner of the State of California in its
capacity as liquidator of the companies which sponsored the plans. Further,
you request any other guidance that the department may be able to provide on
the issue of permissible plan expenses. In this regard, you indicate that
you represent the Conservation and Liquidation Office of the State of
California Department of Insurance in connection with the termination of,
and attendant distribution of assets from, tax-qualified retirement plans
sponsored by now-insolvent insurance companies.
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Since the issuance of Advisory Opinion 97-03A, questions have been raised
concerning the extent to which an employee benefit plan may pay the costs
attendant to maintaining tax- qualified status, without regard to the fact
that tax qualification confers a benefit on the plan sponsor. The following
is intended to clarify the views of the Department of Labor on this issue.
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As discussed in Advisory Opinion 97-03A, a determination as to whether to
pay a particular expense out of plan assets is a fiduciary act governed by
ERISA’s fiduciary responsibility provisions. ERISA provides that, subject
to certain exceptions, the assets of an employee benefit plan shall never
inure to the benefit of any employer and shall be held for the exclusive
purpose of providing benefits to participants and beneficiaries and
defraying reasonable expenses of administering the plan. In discharging
their duties under ERISA, fiduciaries must act prudently and solely in the
interest of the plan participants and beneficiaries, and in accordance with
the documents and instruments governing the plan insofar as they are
consistent with the provisions of ERISA. See ERISA sections 403(c)(1),
404(a)(1)(A), (B), and (D).
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With regard to sections 403 and 404 of ERISA, we noted that, as a general
rule, reasonable expenses of administering a plan include direct expenses
properly and actually incurred in the performance of a fiduciary’s duties
to the plan. We also noted, however, that the department has long taken the
position that there is a class of discretionary activities which relate to
the formation, rather than the management, of plans, explaining that these
so-called settlor functions include decisions relating to the
establishment, design and termination of plans and, except in the context of
multi-employer plans, generally are not fiduciary activities governed by
ERISA. Expenses incurred in connection with the performance of settlor
functions would not be reasonable expenses of a plan as they would be
incurred for the benefit of the employer and would involve services for
which an employer could reasonably be expected to bear the cost in the
normal course of its business operations. However, reasonable expenses
incurred in connection with the implementation of a settlor decision would
generally be payable 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. This view
has been construed to require an apportionment of all tax qualification-
related expenses between the plan and plan sponsor. The department does
not agree with this reading of the opinion. The opinion recognizes that,
in the context of tax-qualification activities, fiduciaries must consider,
consistent with the principles articulated in earlier letters,(1)
whether the activities are settlor in nature for purposes of determining
whether the expenses attendant thereto may be reasonable expenses of the
plan. However, in making this determination, the department does not
believe that a fiduciary must take into account the benefit a plan’s
tax-qualified status confers on the employer. Any such benefit, in the
opinion of the department, should be viewed as an integral component of
the incidental benefits that flow to plan sponsors generally by virtue of
offering a plan.(2)
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In the context of tax-qualification activities, it is the view of the department
that the formation of a plan as a tax-qualified plan is a settlor activity
for which a plan may not pay. Where a plan is intended to be a tax-qualified
plan, however, implementation of this settlor decision may 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 by changes in the tax law,
nondiscrimination testing, and requesting IRS determination letters. If, on
the other hand, maintaining the plan’s tax-qualified status involves
analysis of options for amending the plan from which the plan sponsor makes
a choice, the expenses incurred in analyzing the options would be settlor
expenses.
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The foregoing views are intended to clarify, rather than supersede, the
views of the department set forth in Advisory Opinion 97-03A. We hope the
information provided is of assistance to you.
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This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41
Fed. Reg. 36281, August 27, 1976).
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Sincerely,
Robert J. Doyle
Director of Regulations and Interpretations
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See letter to John N. Ernlenborn
from Dennis M. Kass (March 13, 1986); letter to Kirk F. Maldonado from
Elliot I. Daniel (March 2, 1987).
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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. It is the view of
the department that 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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