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Payment of legal fees by forfeiture account funds


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11 replies to this topic

#1 KHenry14

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Posted 04 September 2008 - 11:28 AM

We are in the process of performing a VCP, and we are using outside legal counsel for this project. My question is, can we use our forfeiture account funds to pay their legal fees for helping us with our VCP? Please note, I am aware that we cannot use those funds to pay any fines or penalty interest, we are just curious about the fees the ERISA atty is charging us.

Any thoughts?

#2 Guest_named_Sieve_*

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Posted 04 September 2008 - 12:58 PM

My first inclination is to consider the attorneys' fees for fixing an error in administering the plan a settlor expense, i.e. not an administrative expense and therefore not payable from plan assets. Moreover, one of EPCRS' overriding principles is to put the plan back in the same place it would have been absent the error, and if you were to take fees and exenses from plan assets then the plan (and participants) would not be in the same place.

Seems to me that the employer (or the TPA, or whoever) must pay attorneys' fees and other expenses associated with EPCRS correction.

#3 david rigby

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Posted 04 September 2008 - 01:26 PM

Sieve's comments seem right on to me; the legal expense appears to be a settlor expense.
Minor Q: w/r/t putting "the plan back in the same place", would it matter if the plan states that forfeitures are used to reduce ER contributions? Technically, not permitted? Practically, no harm?
I'm a retirement actuary. Nothing about my comments or advice is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, certainly not all the time, it might be reasonable to interpret my comments as actuarial advice.

#4 Guest_named_Sieve_*

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Posted 04 September 2008 - 01:44 PM

David --

We agree that the settlor expense issue prevents the plan from paying any fees/expenses with respect to an EPCRS application Therefore, the following discussion is purely academic.

Be that as it may, I think the IRS would take the position that you can't put the plan back into the same position if you take fees/expenses from the forfeiture account because, in fact, there is "harm" in that instance unless the employer chooses to make a like contribution to bring the plan back up to even. Reducing a contribution to $0 is different from taking $$ directly from the plan and actually reducing plan assets, and therefore there would be "harm".

#5 masteff

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Posted 04 September 2008 - 02:36 PM

Be that as it may, I think the IRS would take the position that you can't put the plan back into the same position if you take fees/expenses from the forfeiture account because, in fact, there is "harm" in that instance unless the employer chooses to make a like contribution to bring the plan back up to even. Reducing a contribution to $0 is different from taking $$ directly from the plan and actually reducing plan assets, and therefore there would be "harm".

Just to clarify...
Is the paragraph I've quoted here predicated on it being an EPCRS correction (ignoring the settlor issue) or have I missed something in the last 2-3 years limiting a plan's ability to elect to use forfeitures to pay plan expenses?
Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

#6 Guest_named_Sieve_*

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Posted 04 September 2008 - 02:54 PM

Masteff --

The paragraph you refer to related only to paying fees/expenses from forfeitures as part of an EPCRS correction (not the use of forfeitures, in general, to pay administrative expenses--and ignoring the settlor issue with regard to payment for EPCRS).

Edited by Sieve, 04 September 2008 - 02:55 PM.


#7 masteff

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Posted 04 September 2008 - 03:55 PM

Thanks, just making sure I hadn't missed something since my last job change. (Although I admit such things were decided above my pay grade even then.)

Then it makes an interesting case. Would you still take the same position if it was a normal expense they would have incurred but for whatever failure at hand? (The only weak example coming to mind is failure to maintain proper recordkeeping and having to pay a TPA for multiple years at once.)

Edited by masteff, 04 September 2008 - 04:00 PM.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

#8 Guest_named_Sieve_*

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Posted 04 September 2008 - 04:50 PM

My answer might be different as to the administrative expenses themselves, but not as to the expenses of preparing the EPCRS applicaton.

I think the first question to ask is if the expenses, if incurred timely, would have been settlor expenses had they been incurred timely--if so, they certainly remain settlor expenses. If, however, they were/are administrative expenses which just happen to have been incurred on an untimely basis, then I think I'd generally be ok with them being paid from the plan, even now (as long as they don't result from a breach of someone's fiduciary duty). The issue with reagrd to very untimely administrative expenses (absent a breach of fiduciary duty), is, I believe, whether it is appropriate and equitable for the employer to assign payment of those administrative expenses to the plan (& its participants) at such a late date

A similar issue was raised in an earlier thread wondering whether or not paying for the preparation of multiple Forms 5500 as part of a delinquent filer program should come from plan assets (similar to your hypo). I would think the answer ought to be yes because, whenever the Forms 5500 are prepared (late or timely), the fees have to be paid. You could even make an argument that preparing 10 Forms 5500 at one time actually saves the plan some $$ rather than paying for 10 separate Forms 5500 on an annual basis (a good planning tool perhaps??)!! See: http://benefitslink....s...ic=29655

Of course, that begs the question whether it is at all appropriate to take old administrative fees (e.g., fees for preparing Forms 5500 for plan years from long ago) out of the pockets of participants who were not even in the plan when the Forms should have been filed--we're not talking about a billing gap spanning the year (like a 2007 Form 5500, prepared & filed late in 2008 which is then billed & paid in 2009), but we're talking many years. I would encourage the employer NOT to pay those administrative expenses from the Plan in that situation--but, at the same time, I personally think it's ok as long as the fees are not payable due to a breach in fiduciary duty in overseeing the plan properly.

So, I believe that expenses can be paid from the plan if they are for normal administrative services, even if those expenses were incurred as part of an EPCRS correction process--such as expenses for calculating the allocation of an additional contribution for employees inadvertently kept out of the plan, or expenses to fix a failed ADP or Section 415 test as a result of an oversight when changing providers. However, the attorneys' fees to prepare the EPCRS filing or to give advice about the pros and cons of making an EPCRS filing/correction, or even TPA expenses to determine the cost to the employer of taking one corrective approach as opposed to another--those expenses, I believe, would be settlor expenses not payable by the plan.

But I suspect there are other viewpoints out there.

#9 jpod

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Posted 05 September 2008 - 08:04 AM

Assuming one concludes that it is not a settlor expense, and further assuming that the plan document permits the payment of expenses with forfeitures and in fact always pays all expenses with forfeitures and usually uses up all forfeitures to pay expenses, wouldn't that resolve the "same position" concern?

#10 Kevin C

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Posted 05 September 2008 - 08:39 AM

Even if you conclude that it is not a settlor expense, it still has to be a reasonable expense of administering the plan before it can be paid from plan assets. The topic is legal fees that the plan would not have incurred if the plan had been administered properly. I don't see how those legal fees could be considered reasonable expenses of administering the plan.

It might also be useful to look at the plan's language regarding indemnification of fiduciaries.

#11 Fiduciary Guidance Counsel

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Posted 05 September 2008 - 09:27 AM

One practical way to get some unofficial guidance is to ask the lawyer who will advise on the VCP submission whether he or she objects to getting a check drawn on the plan trust’s, rather than the employer’s, bank account.

A smart employee-benefits lawyer doesn’t want to receive the proceeds of a prohibited transaction or knowingly participate in a fiduciary breach. Although a cautious client would want written advice, the next best thing is to hope that a lawyer’s self-preservation instinct practically results in a safe-enough answer.

Also, a client might ask its lawyer to provide fee statements that detail which portions of the fee may be paid from plan assets and which must be paid by the employer without using plan assets.
Peter Gulia PC
Fiduciary Guidance Counsel
Philadelphia, Pennsylvania
215-732-1552
Peter@FiduciaryGuidanceCounsel.com

#12 Guest_named_Sieve_*

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Posted 05 September 2008 - 12:30 PM

jpod --

It's a stretch for me to conclude that attorneys' fees for advising/preparing an EPCRS correction are plan administrative expenses, whether reasonable or not. BUT--to expand, in my own way, on Kevin C's comments--assuming they are administrative expenses, and assuming they are reasonable, and assuming the plan always pays reasonable administrative expenses from plan assets, I still don't think you are putting the plan in the same position it should have been by paying admin expenses which would not have been incurred but for the error being corrected.

EPCRS (2008), Section 6.02: "(1) Restoration of benefits. The correction method should restore the plan to the position it would have been in had the failure not occurred, including restoration of current and former participants and beneficiaries to the benefits and rights they would have had if the failure had not occurred." These additional expenses simply would not have been incurred "had the failure not occurred", so paying these expenses from the plan--even if it were otherwise permitted--is in direct contravention of this correction principle. (Of course, sticking with these principles is not mandatory, but should be adhered to as best as possible--especially in self-correction, where there is no IRS oversight.)

Edited by Sieve, 06 September 2008 - 12:31 PM.