On May 19, 2003, the Department of Labor (DOL) issued Field Assistance Bulletin 2003-3 in which it provided guidance regarding the allocation of plan administrative expenses in a defined contribution plan. The guidance was significant because it reversed a longstanding DOL policy regarding the allocation of plan expenses. Specifically, the guidance permits a plan to allocate certain expenses, such as distribution and QDRO expenses, to the participant who is receiving the distribution or obtaining the divorce, rather than allocating the expense among all of the participants. The guidance also permits a plan to allocate to former-employee participants their share of the plan’s administration expenses even though the employer is paying for administration expenses of the current-employee participants. Unfortunately, the DOL indicated its guidance with respect to charging former-employee participants was limited to Title I of ERISA and was not intended to provide IRS approval.
Initial statements by IRS officials indicated an IRS reluctance to approve the allocation of expenses to former-employee participants because of the possibility of compromising the consent rules. The consent rules prohibit a plan from making a distribution to a terminated participant without his/her consent if his/her account balance exceeds $5,000 until the later of age 62 or the plan’s normal retirement age. In other words, a participant with an account balance that exceeds $5,000 can leave his/her benefit in the plan by not consenting to the distribution. Furthermore, the regulations prohibit the plan from imposing a detriment on the participant because he/she refuses to provide consent for the distribution. The possibility of violating the consent rules (i.e., imposing a detriment) has dissuaded employers from allocating plan expenses to former-employee participants’ accounts where the employer is paying for the administration expenses of current employees. Many employers choose to pay plan expenses rather than to have the expenses deducted from the participant’s accounts. The IRS permits an employer to pay the plan expenses and deduct the expenses as a general business expense. However, employers paying for plan expenses often prefer to limit the payment of expenses to current-employee participants because they see no business purpose in paying the plan expenses of former employees, some of whom are in competition with the employer. Previously, commentators have discouraged an employer from paying the plan expenses of current employees, but allocating to former employees their share of the plan expenses, for fear of disqualifying the plan because it imposed a detriment on the former employees.
In Revenue Ruling 2004-10, the IRS issued guidance holding that a plan will not be imposing a detriment if it allocates to former employees’ accounts a reasonable, pro rata share of the plan’s administrative expenses. In other words, the employer may pay for the administration expenses of the active employees but allocate to the former-employee participants’ accounts their pro-rata share of the plan expenses. The IRS concluded the allocation of the expenses to the former employees’ accounts was not a detriment since the former employees would have to pay IRA expenses if they rolled over the amounts to an IRA.
The ruling specifically approves of a pro rata allocation of plan expenses to former employees’ accounts and does not address a per capita method of allocating expenses. If a plan chooses to apply this ruling using a per capita method of allocating expenses, the plan should be aware it has the burden of demonstrating to the IRS that the method is both reasonable and nondiscriminatory.
The plan’s method of allocating expenses is a right or feature that must be available on a nondiscriminatory basis. However, the nondiscrimination rules test former employees separately from current employees. Therefore, if a plan allocates the plan expenses uniformly to all former-employee participants, the plan will comply with the nondiscrimination requirements.
Many employers will want to take advantage of this ruling immediately. The ruling allows the employer to reduce its costs without taking anything away from current employees. Most plans (including the Corbel, PPD and FDP documents) grant the plan administrator (i.e., employer) broad discretion in allocating plan expenses. Therefore, employers should be able to implement this ruling immediately without the necessity of amending their plan document. If the employer decides to allocate plan expenses to former employees’ accounts (but not to current employees) and if the plan’s summary plan description (SPD) or summary of material modifications (SMM) addresses plan expenses, the employer probably should indicate in the SDP or SMM that it intends to allocate plan expenses to former-employees’ accounts. Note: Sungard Corbel will update the sample SMM on plan expenses available on the website within the next week.
Web Seminar on Plan Expenses
On February 12th, we will present Plan Expenses - How Hard Can It Be To Pay A Bill? This Web Seminar will explain both the DOL guidance and the IRS guidance. The Web Seminar will provide both a thorough explanation of the guidance and practical instruction on how a practitioner can implement this guidance immediately.