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Roadmap for Qualified Benefit Plan Reimbursement

July 27, 2018

Which expenses can your retirement plan cover, and which must you pay as an employer? The distinction matters.

Not all expenses incurred in conjunction with running your company’s 401(k) plan — or any other kind of qualified retirement plan — can be charged to plan participants. It’s important to know the distinction to keep on the right side of the law. Unfortunately, there are some gray areas.

Who Benefits?

In a nutshell, expenses related to the ongoing operation of the retirement plan that are incurred for the exclusive benefit of participants can be charged to the plan (and thus its participants). Expenses that can’t be charged to them are called “settlor” expenses. Those are expenses that primarily benefit the employer.

Settlor Expenses

When the plan is first being set up, examples of settlor expenses include the cost of plan design consulting services and service provider search and bid analysis support. Once the plan is up and running, settlor expenses can include such tasks as:

  • Amending the plan, when the plan amendments are discretionary,
  • Fixing the plan if it is determined to be noncompliant upon examination by regulators (as opposed to simply updating the plan document to comply with new regulations), and
  • Correcting operational errors, such as failing to credit participant accounts on a timely basis or file a 5500 form on time.

If you decide to terminate your plan, the legal and consulting service fees incurred in that process also wouldn’t be chargeable to the plan. Why? The benefit from those services clearly accrues to you as the plan sponsor, not to the participants.

In contrast, administrative expenses chargeable to the plan include routine services such as:

  • Recordkeeping,
  • Custodial services,
  • Asset management,
  • Discrimination testing,
  • Mandatory plan amendments, and
  • Loan processing and distributions.

Categorization Challenge

Some expenses may not be easy to categorize. For example, suppose your participants’ routine plan statements also include information about your company’s other benefit programs, such as physical fitness center access, an annual company picnic, and an annual holiday party. Can you charge the full cost of producing and distributing that document to plan participants?

The answer is that the plan can cover the proportion of the cost pertaining to the plan, and the employer needs to pick up the tab for the rest. That scenario was one of several “fact patterns” described by the Department of Labor (DOL) to provide guidance to plan sponsors on this topic. Other fact patterns flesh out the DOL’s views on the distinction between the two basic expense categories.

Got Questions?

When in doubt, contact our employee benefit plan specialists. We can help you decide which expenses can be charged to the plan under the DOL guidance.

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