GT Alert

New DOL Guidance On Plan Related Expenses: The DOL Takes a Drastic Change From Its Prior Position

July 2003
By Jeffrey D. Mamorsky and Deanna H. Niño, Greenberg Traurig, New York

  View or download the PDF version of this Alert here.

Reversing a ten year old policy, the U.S. Department of Labor’s Employee Benefits Security Administration ("EBSA") has issued dramatic new guidance on the allocation of expenses in defined contribution plans (Field Assistance Bulletin ("FAB") 2003-3, May 19, 2003). In general, FAB 2003-3 provides that plan sponsors and fiduciaries have considerable discretion in determining whether plan expenses will be paid from the plan itself or by the plan sponsor or administrator. In addition, there appears to be broad discretion on how those expenses will be paid from the plan if the fiduciaries or plan sponsor determine payment will be made using plan assets (e.g., allocated among the participants and beneficiaries, on a pro rata basis, a per capita basis or through the utilization of some other methodology).

ERISA and the DOL Regulations:

"The U.S. Department of Labor’s Employee Benefits Security Administration has issued dramatic new guidance on the allocation of expenses in defined contribution plans."

Neither ERISA nor the Department of Labor ("DOL") regulations contain statutory guidance regarding how plan expenses are to be allocated among plan participants and beneficiaries.1 As such, the DOL decided to issue this guidance to clarify their opinion regarding the allocation of plan expenses. Specifically, FAB 2003-3 provides that if the plan’s governing instruments are silent regarding the payment of plan expenses from plan assets, the "plan fiduciaries must act prudently and solely in the interests of the participants and beneficiaries in determining how to alocate expenses."2 Additionally, FAB 2003-3 states that "plan sponsors and fiduciaries have considerable discretion in determining, as a matter of plan design or a matter of plan administration, how plan expenses will be allocated among participants and beneficiaries."3

Allocation of Expenses Among Participants and Beneficiaries: Pro Rata v. Per Capita

FAB 2003-3 provides that the first step in determining how expenses are to be allocated among the participants and beneficiaries is to examine the instruments governing the plan. If the plan provides for an exact method of allocation in the governing instruments, then "the method of allocating expenses, in effect, becomes part of defining the benefit entitlements under the plan."4 If the governing instruments are silent or ambiguous regarding the allocation of expenses, then it is the responsibility of the plan fiduciaries to select a method for allocating plan expenses. The fiduciaries must make sure the decision is prudent and made "solely in the interest of the participants."5 Specifically, in order to ensure that the allocation is prudent, the plan fiduciaries must weigh "competing interests of various classes of the plan’s participants and the effects of various allocation methods on those interests."6 When determining the allocation methodology and weighing the various interests of the plan participants, the fact that one class of participants will be disfavored does not mean the "solely in the interests of plan participants" test will fail provided that a rational basis exists for the selected methodology.7 In addition, if the fiduciary making the decision regarding the methodology to be used for the allocation of plan expenses is a plan participant, then the prohibited transaction rules of ERISA §406 may be triggered if the plan fiduciary receives a benefit that is more than incidental based on the methodology selected.8

The methodologies with respect to allocating plan expenses to plan participants vary greatly. Two of the most common methodologies utilized by plan sponsors and/or plan administrators are pro rata allocation and per capita allocation. The pro rata allocation methodology is the allocation of plan expenses among the participants and beneficiaries based on the amount of assets in their individual account (i.e., based on their percentage of the overall assets in the plan). The per capita allocation methodology is the allocation of plan expenses among the participants and beneficiaries equally without regard to the amount of assets in their individual accounts (i.e., $50 per participant or beneficiary). Generally, per capita allocation is utilized when there is a fixed administrative fee imposed upon the plan for recordkeeping, auditing, etc. However, when fees are generated by a service provider based on the amount of assets held in the plan then the pro rata share allocation methodology is ideal because it takes into consideration the amount of each participant’s percentage of the assets.9

Allocation of Expenses Among All Participants v. Solely to an Individual Plan Participant

DOL originally provided some guidance with respect to the allocation of expenses which may be charged to the plan as a whole versus a particular participant in Advisory Opinion No. 94-32A (otherwise know as the Homer Elliot opinion). However, DOL has reevaluated its original opinion in AO 94-32A which stated that the imposition of a fee upon a particular participant for the determination of their Qualified Domestic Relations Order ("QDRO") was improper as it would constitute "an impermissible encumbrance on the exercise of the right of an alternate payee, under Title I of ERISA, to receive benefits under a QDRO."10 DOL now believes that neither the analysis nor conclusions drawn in that Advisory Opinion were legally compelled by ERISA and as such, the same factors listed above with respect to prudence, acting solely in the interests of the participants and beneficiaries and the weighing the various interests of the plan participants must be considered in order to determine if an expense should be allocated to a particular participant versus the plan as a whole.

FAB 2003-3 sets forth various examples of specific plan expenses which "ERISA does not specifically preclude" allocating to a particular participant as long as they are reasonable, such as the following: 1) hardship withdrawals; 2) calculation of benefits payable under different plan distribution options; 3) benefit distributions; 4) fee to maintain an account for separated vested participants; and 5) QDROs and Qualified Medical Child Support Order (QMSCOs) determinations.11 However, the fact that ERISA does not specifically preclude these types of allocations does not mean they are "permissible" or that another body of law may prohibit them, such as the employee benefit provisions of the Internal Revenue Code ("IRC") as discussed in greater detail below.

Reporting and Disclosure Implications

It is important to note that the DOL regulations regarding Summary Plan Descriptions (SPD) require that the SPD include any provision in the plan which results in the imposition of a fee or charge to the account of a participant or beneficiary and that the SPD include all circumstances in which an "offset or reduction … of any benefits that a participant or beneficiary might otherwise reasonably expect the plan to provide on a basis of the description of benefits …"12 As such, it is advisable that the plan’s SPD be revised to reflect the fees and charges imposed and the methodology utilized for such allocation of fees so that participants and beneficiaries are apprised of the charges which may ultimately affect their benefit entitlements.

FAB 2003-3 and Its Relationship to the Internal Revenue Code

EBSA specifically provides in FAB 2003-3 that "[t]he views set forth herein relate solely to the application of Title I of ERISA. We express no view as to whether any particular allocation of expenses might violate the Internal Revenue Code ("IRC") or any other Federal statute." As such, the guidance issued within the FAB 2003-3 may not be consistent with the IRC or the regulations promulgated by the IRS. Specifically, Treasury Regulations §1.411(a)-11(c)(2)(i) does not permit a plan to impose a "significant detriment" upon a participant who does not elect to receive an immediate distribution.13 Arguably, the imposition of a fee upon a deferred vested participant would violate this provision if a similar fee is not placed upon an active participant’s account. Additionally, there is some concern that the imposition of an expense in a non-uniform manner might create a "benefit, right or feature" requiring nondiscrimination testing upon that feature in compliance with §401(a)(4) of the IRC.14 Lastly, there is also a concern that §411(d)(6) of the IRC, otherwise know as the anti-cutback rule, might be violated if expenses are taken from the participant’s account as the result of a distribution.15

What To Do

It is important to hold off on amending your plan to conform with FAB 2003-3 until the IRS provides guidance on whether the allocation of expenses to plan participants might violate the IRC’s qualification requirements . Specifically, Paul Schultz, Director of the IRS’s Employee Plans Rulings and Agreements has stated:

"The IRS is concerned that there are issues to consider after the release of DOL FAS 2003-3. There are no conclusions to date. This issue will need to be studied; some areas to review are 401(a)(4), 411(d)(6) and significant detriment and impermissible forfeiture issues. The IRS planning year ends on June 30th, there is a possibility that this issue will be added to the upcoming guidance plan. So hopefully, we will have some specific guidance within the next 12 months."16

Nonetheless, it is very encouraging that the DOL had finally provided clear guidance on the allocation of expenses among plan participants and beneficiaries as it highlights the broad discretion which plan fiduciaries have in this area. Plan administrators, plan sponsors and plan fiduciaries must now wait and see what guidance the IRS issues in light of FAB 2003-3 before revising their plan documents and SPDs to conform with DOL’s new guidance.

Footnotes

1 ERISA does however provide certain circumstances in which imposing reasonable charges against participant and beneficiary accounts are permissible, such as ERISA §§ 104(b)(4), 602, 404(c) and 408(b)(1). However, ERISA does not provide specifics regarding the methodology for allocation of such expenses.

2 FAB 2003-3, page 2.

3 Id.

4 Id.

5 Id.

6 Id.

7 Id.

8 Id., citing Advisory Opinion No. 2000-10A.

9 Id.

10 A.O. 94-32A, page 3.

11 Id.

12 Id, at page 4, citing DOL Regulation 29 CFR §25020.102-3(l).

13 "DOL Addresses Plan Expenses and Gets It Right," Fredric Singerman, ASPA Government Affairs Committee, No. 03-09, May 23, 2003.

14 Id.

15 "What’s Up with Field Assistance Bulletin 2003-3?," Answers@tagdata.com.

16 Id.

© 2003 Greenberg Traurig

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