Allowable Plan Expenses vs. Settlor Expenses—What's the Difference?
Whether your organization’s retirement plan has been up and running for several years or you are looking into implementing a new plan, you may have questions about which plan-related expenses can be paid by the plan and which expenses the employer is responsible for paying. The Department of Labor (DOL) divides plan fees into two categories – administrative fees that can be paid from plan assets and settlor expenses that cannot.
Allowable Plan Expenses
Under the Employee Retirement Income Security Act of 1974 (ERISA), plan fiduciaries are allowed to use plan assets for the payment of reasonable expenses incurred in administering the plan. The ERISA exclusive benefit rule states that “the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.”
A few examples of allowable plan expenses may include:
- Plan recordkeeping
- Accounting fees
- Safekeeping of plan assets
- Periodic compliance auditing
- Preparation of legally required documents, such as Form 5500
- Claims processing
- Third-party administration
- Routine nondiscrimination testing
- Participant communications and distributions
- Statement mailings
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Use of a Forfeiture Account
Plan forfeitures may also be allocated to pay reasonable plan expenses. It is important that Plan Sponsors understand how to correctly use plan forfeitures. Forfeitures occur when a participant terminates employment before becoming fully vested. The unvested portion is forfeited back to the plan on a date specified by the plan.
In appropriate circumstances, forfeitures must be used in the plan year they occurred or no later than the following plan year. According to Revenue Ruling 84-156, forfeitures may be used to pay for a plan’s administrative expenses and/or reduce employer contributions.1 The plan document should always match how forfeitures are administered.
Settlor expenses are considered business expenses that cannot be charged to the plan. These expenses generally benefit the plan sponsor rather than plan participants.
A few examples of settlor expenses may include:
- Plan design consulting
- Establishing or terminating a plan
- Provider search
- Legal and consulting
- Discretionary plan amendments
- IRS or DOL penalties for plan filing corrections
Not all situations may fit neatly into one of these two categories – allowable plan expenses or settlor expenses. When this happens, it may be best to err on the side of caution and not pay these fees from plan assets. The DOL has issued guidance in the form of six hypothetical situations to help plan sponsors determine what is and what isn’t a settlor expense.
Plan Sponsors should follow fiduciary best practices to help keep the plan compliant. However, if questions do come up regarding what an allowable plan expense is, it is always prudent to contact an experienced ERISA attorney for further guidance.
We Welcome Your Questions
If you have questions regarding plan expenses and the use of forfeitures, your trusted ABG Southwest relationship manager is available to help. Contact Us.