[13069]
January 22, 2001
TO: PENSION MEMBERS No. 3-01
PENSION OPERATIONS ADVISORY COMMITTEE No. 6-01
RE: DOL ISSUES GUIDANCE ON PLAN EXPENSES
The Department of Labor recently issued guidance on the question of whether plan
expenses may be paid from plan assets or must be paid by the employer. The guidance takes
the form of an advisory opinion and a release that sets forth six hypothetical fact patterns
intended to address the most frequently raised questions regarding the payment of plan
expenses.
Advisory Opinion 2001-01A. In Advisory Opinion 2001-01A (January 18, 2001), the
Department addresses the extent to which an employee benefit plan may pay the costs of
maintaining the plan’s tax-qualified status. In the advisory opinion, the Department states 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. ” Notably, such costs need
not be apportioned between the plan and plan sponsor.
The Department previously expressed the view in Advisory Opinion 97-03A (January
23, 1997) that the tax-qualified status of a plan confers benefits on both the plan sponsor and the
plan and, therefore, a portion of the expenses relating to tax-qualification activities may be
reasonable plan expenses. In Advisory Opinion 2001-01A, the Department clarifies that this
prior guidance should not be construed to require an apportionment of all tax-qualification
related expenses between the plan and plan sponsor. Rather, in the context of tax-qualification
activities, fiduciaries must consider whether the activities are settlor in nature for purposes of
determining whether related expenses may be paid by the plan. In making this determination,
according to the advisory opinion, a fiduciary need not take into account the benefit a plan’s
tax-qualified status confers on the employer, because any such benefit should be viewed as an
“incidental benefit” that flows to plan sponsors by virtue of offering a plan.
Hypothetical Examples of Settlor v. Plan Expenses. The Department sets forth in a
separate companion document six examples clarifying the distinction between settlor and plan
expenses.
2Example 1. The first example deals with costs associated with a plan spin-off and the
transfer of employees from the prior employer’s defined benefit plan to an acquiring employer’s
plan. In this context, the Department clarifies that plan design study costs, amendments related
to the plan spin-off and related union negotiation costs are treated as settlor expenses not
chargeable to the plan. However, expenses incurred to determine the amount of assets to be
transferred would be a permissible plan expense if the expense related to implementing a
decision to spin-off certain participants, rather than to the formulation of the spin-off.
Example 2. Example 2 addresses the actuarial costs of implementing an early retirement
window in a defined benefit plan. In this case, plan design expenses, including cost projections
determining the financial impact of the plan change on the plan sponsor, are not payable from
plan expenses. However, the expense of calculating benefits for participants with respect to the
retirement window and the cost of communicating plan information about the plan change may
be reasonable expenses of the plan, even though the activities might be viewed as furthering the
objectives of the company.
Example 3. Example 3 deals with the implementation of a participant loan program and
an early retirement window for management employees, and the continued maintenance of the
plan’s tax-qualified status. In this example, the Department states that the expense of amending
the plan to comply with tax law changes and performing routine nondiscrimination testing may
constitute reasonable plan expenses. By contrast, the cost of amending the plan to establish a
loan program would be a plan design/settlor expense “inasmuch as the plan fiduciaries have
no implementation obligations until the time the plan is amended.” Subsequent to the
amendment, however, expenses attendant to operating the loan program may be paid from
plan assets. With respect to amending a plan to establish an early retirement window and
obtaining a subsequent determination letter, the amendment would be a plan design/settlor
expense, but the cost of obtaining the determination letter may be allocated between plan and
plan sponsor. In this case, the Department indicates the plan fiduciaries should obtain from the
service provider a determination of the specific expenses attributable to the fiduciaries’
“implementation responsibilities.”
Example 4. Example 4 also clarifies that the expense to amend a plan and obtain a
determination letter in light of tax law changes may be paid from plan assets. Similarly,
nondiscrimination testing performed as a result of a plan amendment that increases benefits
may also be paid from plan assets. In contrast, however, consulting fees incurred analyzing a
company’s options for complying with tax law changes or costs incurred negotiating a plan
change with a union are plan design/settlor expenses and may not be paid by the plan.
Example 5. Example 5 involves costs associated with an employer’s provision to
employees of a booklet incorporating summary information about all of the employer’s benefit
plans and other benefits. The Department states that plans may pay the cost of complying with
ERISA’s disclosure requirements. Furthermore, nothing in Title I of ERISA would preclude a
plan fiduciary from providing more information than is required by statute. Therefore, the cost
of producing and distributing individual benefit statements or benefit booklets may be treated
as plan expenses. The Department notes, however, that each of the plans should pay their
proportionate share of the expenses of the booklet and the plan sponsor should pay that portion
of the costs of the booklet that relate to non-plan matters.
3Example 6. Example 6 addresses a plan fiduciary’s decision to out-source plan
administration. To the extent that services provided by the firm to which the plan is outsourced
are necessary for the administration of the plan, including both start-up and ongoing
administrative fees, they may be treated as plan expenses.
Russell G. Galer
Senior Counsel
Attachment
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Attachment (in .pdf format)