Guest Article

DOL Provides New Guidance on Payment of Expenses from Plan Assets

On January 18, 2001, the Department of Labor issued a new advisory opinion (DOL Letter 2001-01A) and additional guidance, in the form of six hypothetical case studies, which clarify what expenses can be properly charged to a plan. This guidance is extremely critical and timely given the announced audit initiative in many regional Department of Labor offices to apply a stricter standard in determining the propriety of expenses paid for with plan assets (see PGFM e-mail release dated December 13, 2000). Under this recent audit initiative many of the Department of Labor's regional offices viewed expenses related to nondiscrimination testing and determination letter applications, for instance, as benefiting both the plan and the plan sponsor and consequently took the position that those expenses should be apportioned between the plan and the plan sponsor.

DOL Letter 2001-01A is the first official statement from the Department of Labor on the issue of charging expenses to a plan since the commencement of the new audit initiative at the regional office level. In many respects, DOL Letter 2001-01A reflects an affirmation of the Department of Labor's official stance on this subject prior to the new audit initiative. As in prior official statements of policy, the Department of Labor drew a distinction between "settlor" functions and "administrative" functions. Expenses related to "settlor" functions, that is, those that relate to the establishment, design and termination of plans, are normal business expenses and can not be charged to a plan. However, "administrative" functions, such as those related to the ongoing administration of the plan, are properly chargeable to a plan.

The most significant aspect of DOL Letter 2001-01A is the recognition by the Department of Labor that even though certain administrative functions bestow a benefit on the employer in addition to the plan, such as maintaining a plan's tax-qualified status (because if the plan is tax-qualified the employer can take a full deduction for contributions to the plan), that benefit is incidental to the ongoing administration of the plan. This ruling in large measure appears to be an instruction to the regional offices to reverse the recent, more conservative, position that they have been taking in their audit initiatives. Therefore, costs attributable to amending a plan to maintain its tax-qualified status, nondiscrimination testing and requesting IRS determination letters, are expenses that are properly chargeable to a plan despite the fact that the employer maintaining the plan receives some benefit from the tax-qualified status of the plan.

The additional guidance issued by the Department of Labor provides more clarification on expenses that can be charged to a plan. In the case study examples issued with this guidance, the Department of Labor found the following expenses could not be charged to a plan:

• Design studies
• Amendments to effectuate corporate transactions
• Costs attributable to negotiations with unions
• Projected cost studies for new benefits designs
• FASB 88 Statement costs
• Amendments to establish early retirement windows
• Amendments to establish a loan program
• Consulting fees to review various ways to comply with law changes
• A portion of a communications booklet describing all the company's benefits (each plan can pay only its proportionate share of the costs).

The Department of Labor found that the following charges may be properly charged to a plan. However, as to each charge the plan fiduciaries must determine if the expense is a prudent charge to incur on behalf of the plan and that the amount is reasonable.

• Computation of amount necessary to implement plan-to-plan transfer of assets
• Recomputing the amount necessary to implement plan-to-plan transfer caused by a delay in transfer date that was not attributable to the plan sponsor's actions
• Computation of benefits under a window benefit program, if computation occurred following amendment of plan to provide for window benefit (if the expenses were incurred prior to amendment of the plan, those expenses could not be charged to the plan because they would be more in the nature of design expenses)
• Communication costs
• Benefit calculations for participants
• Amendments to comply with tax law changes
• Routine nondiscrimination testing
• Obtaining an IRS determination letter
• Outsourcing costs attributable to plan administration (start-up and ongoing)

If a charge from a vendor covers both expenses that can be charged to the plan and expenses that can not, the Department of Labor requires that the plan obtain a statement from the vendor prior to payment from the plan, as to what portion of the charge is attributable to expenses that relate to the activities that are properly chargeable to the plan. Further, the Department of Labor notes that even though an expense may relate to administrative functions, it may be payable from a plan only if the plan does not otherwise preclude the payment of expenses from plan assets.

Because every situation is inherently factual, we advise you to not rely on the list above as support for the fact that any expense is proper to charge against plan assets. We encourage you to review your internal procedures for determining which expenses can be charged against plan assets and discuss with us whether a particular expense is properly chargeable to the plan.

For further information regarding anything contained in this email release please contact your regular Powell Goldstein contact or one of the following attorneys.

Rick Arenburg 404-572-6765
Armin Brecher 404-572-6634
Paul Concannon 404-572-6856
Cass Hollis 404-572-6923
Anthony Provenzano 404-572-6815
Steve Schaffer 404-572-6830
David Thomas 404-572-6909

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