As plan sponsors are aware, operating any employee benefit plan costs money. Depending on the nature of these costs, they may be paid from plan assets. Where a plan is subject to Employee Retirement Income Security Act of 1974 (ERISA), in addition to general considerations of prudence any such reimbursements are subject to ERISA’s prohibited transaction rules. A thorough understanding of these rules can help plan sponsors be properly paid for those plan-related expenses for which they are entitled to reimbursement. These include salaries and fringe benefits for employees dedicated to providing services to a plan (or multiple plans), but can extend to a far wider range of expenses.
Broadly speaking, there are two sets of rules that apply to any proposed reimbursement to a plan sponsor of plan administration costs:
- Plan assets cannot be used to pay for “settlor” expenses incurred in connection with actions or decisions that are not made in a fiduciary capacity such as costs associated with plan design decisions or plan amendments.
- Assuming an expense borne by the plan sponsor is fiduciary in nature, ERISA and the applicable Department of Labor (DOL) regulations require that the expense being reimbursed be reasonable and limited to “direct expenses.” Direct expenses can be viewed as those that cannot be allocated, such as general overhead, and cannot include a profit margin. Additionally, the expense must be one that the plan sponsor would not incur, but for the fact that services are being provided to the plan.
A common example is an employee who spends a portion of their time on plan work. If the employee would still be employed on the same basis (e.g., full-time) were they not providing services to plans, no portion of that employee’s salary and benefits would be reimbursable by a plan. If the employee spends the majority of their time on plan matters, a portion of their salary and benefits costs may be reimbursable by the plan to the employer.
Plan sponsors that provide a higher level of support to their plans should be aware that permissible reimbursements may extend well beyond salaries and fringe benefits. The DOL requires that any method used to allocate these non-salary expenses to plans track actual costs – tracking methods that provide only an estimated allocation of costs or usage are considered by the DOL to be insufficient. Depending on the scope of plan support provided by the sponsor, the effort required to create a defensible tracking and allocation protocol may be well worth the cost. Newport Group’s fiduciary experts have extensive experience developing methodologies to appropriately track and document a variety of allocable expenses.
As with any matter involving ERISA compliance, plan sponsors considering plan reimbursements for services they provide to a plan should consult with their advisors to craft an approach designed to satisfy applicable legal requirements.
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