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ERISA Plan Expense Account


401(k)athryn

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We have discovered that a plan has been accruing funds in an ERISA Plan Expense Account since 2016 and none has been used to pay expenses or reallocated back to participants.  The amount is over $25,000.  I'm not exactly sure when this type of account would NOT be considered a plan asset, but, in this case, it seems to be plan assets (although not included in prior year 5500 reporting) and the amounts should have been allocated to participants each year.  Does this need to be corrected similarly to improperly carried over forfeitures, where the extra revenue each year has to be allocated to those who would share in each of those years, meaning we must go back to 2016, 2017, 2018, etc. to do a separate allocation for each year?

Obviously, I would love to allocate only based upon current participant balances.  Any option here without submitting through VCP?  There are no fees that can be paid with this because advisor and TPA are already paid in full through asset-based payments from the Plan.

Thank you!

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Does the plan document say anything about this unallocated account?

They would only be able to self-correct at this point if it is an insignificant failure. I can't tell you if the failure is significant or not based on the info provided. If you believe the failure is eligible for self-correction, then the best way to correct would be to put the plan in the position it would have been in had the failure not occurred. In this case that would probably mean allocating the assets to the participant accounts on a year by year basis, or whatever the plan document says was supposed to happen.

If you want to try to do something different, like allocating based on current account balances, then VCP is the safest bet.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Hello.  Now the investment provider is saying that the ERISA budget account is NOT plan assets, which is why it was never included on the trust reports.  Do you typically report this type of account as part of plan assets on the Form 5500?  Is an ERISA account always plan assets, never plan assets (until allocated) or does it depend?  Please not the latter!

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I've never reported them, but I never understood why.

I started a thread many years ago here, but I don't remember any resolution to it.

My theory was that the funds belong to the plan.  If they are used for fees, so be it--plan funds were used to pay fees.  If not, then it got allocated to the participants as earnings.  Still a plan asset.

Maybe it's not considered earnings until it's actually allocated, like a dividend?  Dividends are declared ahead of time, but are not considered plan assets until they are actually allocated...

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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To help you prepare to ask your lawyer for advice (or to ask the plan’s administrator to instruct you), you might read:

 

ERISA Advisory Opinion 2013-03A (July 3, 2013) (Principal Life Insurance Company).

https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/2013-03a.pdf

 

That interpretation includes EBSA’s view that, even if an arrangement involves no set-aside, a contract right to have some amount “applied to plan expenses” could be the plan’s asset.

 

A plan’s administrator should not rely on the investment or service provider’s description that an arrangement is not plan assets.  (1) It can’t be prudent to rely on legal advice from a person that denies that it provides legal advice.  (2) It is imprudent for a retirement plan’s fiduciary to rely, without further steps, on advice from a person that has an interest (other than the plan’s interest) about the subject for the advice.

 

Further, if something is plan assets, the plan’s administrator might want its lawyer’s advice about how to allocate the plan trust’s assets.  This might involve careful readings of the plan, its trust, and the plan-expenses arrangement.

 

Not every plan-expenses arrangement has the same terms, and (even within IRS-preapproved documents) governing documents can state different provisions about how to account for and use an arrangement.

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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On 12/16/2020 at 8:39 AM, 401(k)athryn said:

Hello.  Now the investment provider is saying that the ERISA budget account is NOT plan assets, which is why it was never included on the trust reports.  Do you typically report this type of account as part of plan assets on the Form 5500?  Is an ERISA account always plan assets, never plan assets (until allocated) or does it depend?  Please not the latter!

But was it technically contributed to the Trust pursuant to the terms of the plan document? If yes, then it is plan assets, whether or not it has been reported in the trust accounting reports. To me, everything else is a distinction without a difference.

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  • 3 years later...

taking the lead from this discussion re Unallocated Accounts and including them in Form 5500....specifically SF here.

When the recordkeeper adds funds to the Unallocated Account. wouldn't that be treated as Other Income?

Looking at a takeover plan where they seemed to completely ignore the Unallocated Account from the 5500 but I'm of the sort that thinks it should be included.

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If the plan’s administrator finds that the plan-expenses account is a plan asset.

For Schedule H’s asset statement, a balance of the plan-expenses account might fit 1c(15)?

For Schedule H’s income-and-expense statement, a credit to the plan-expenses account might, depending on the arrangement and other facts, fit line 2c other income or be a negative amount for line 2i(11)?

If the plan-expenses account’s balance includes a carry-over from before the reported-on year began (and preceding years’ reports omitted the asset), one might encounter difficulty reconciling the asset statement with the income-and-expense statement. Or the report might need an adjusting entry.

If the plan’s administrator engages an independent qualified public accountant to audit the plan’s financial statement, consider collaborating with the CPA firm about what classifications they consider fair accounting.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Here are some random thoughts that may be relevant to assessing the status of accounts that hold unallocated amounts.

If the account is included in the plan's trust account, it is an asset of the plan.  All assets of the plan should be accounted for in the reporting on the From 5500 series, and any differences between the Form 5500 reporting and trust reports should be reconciled and the reconciling items should be legitimate receivables or payables.

The IRS abhors unallocated amounts.  They emphasized this a few years ago in their highlighting that plan's should not accumulate assets in forfeiture accounts, and that all forfeitures needed to be handled in a timely manner in accordance with the plan provisions.  Grudgingly, they acknowledge that sometimes there are practical operational reasons where an unallocated amount may exist, but any such amounts also should be handled in a timely manner and in accordance with plan provisions.  In effect, "timely manner" means no later than the end of the plan year following the year in which an amount was credited to an unallocated account.

The DOL has its own rules about payment of plan expenses and they, too, frown on accumulations in unallocated accounts.  The logic is along the lines of if amounts are not posted or are deducted from participant accounts but instead are moved to an unallocated account to pay expenses, and these amounts exceed what is needed to pay valid plan expenses, then the excess amounts belong to the participants and is should be credited to them.  Otherwise, participants are being charged for that the amount of the valid expense.

If the unallocated account is considered to be outside of the trust, then the source of the funds put into the account should be reviewed carefully.  If the source of the funds was the plan's trust, then moving funds to an account unrelated to the plan smells like a prohibited transaction.  If the trust and the unallocated accounts are both held by the same financial institution, then this raises potential questions about a plan fiduciary's responsibilities.

Just some food for thought...

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Imagine this (hypothetical) example:

A $1 billion plan has plan-administration expenses—a recordkeeper, an administrator (not the plan’s sponsor), a CPA firm, a law firm, and an investment consultant—around $1.5 million a year.

If this were charged to the 20,000 individual accounts by the heads, that would be a $75 charge ($18.75 each quarter-year) on each account. That could burden beginner and other low-balance participants. Instead, the fiduciary decides to charge accounts 15 basis points, so bigger-balance participants subsidize lower-balance participants.

The charges on individuals’ account are imposed and collected only quarter-yearly, and so a little less often than the plan pays some service providers.

Further, the plan’s capacity to meet dollar-measured expenses using asset-measured charges is vulnerable to sometime dips in investment markets. Considering both these factors, the fiduciary leaves a prudent reserve in the plan-expenses account so money is there when needed to pay service providers.

Imagine that, as at a December 31, the plan-expenses account’s balance is $1 million, and that amount then is around one-tenth of one percent of the plan’s assets. Is that too much?

Or, perhaps after some runups in investments, is $2 million too much?

What if the fiduciary prudently finds that money might be needed toward expenses? What if the fiduciary seeks to guard against two or three years of a downturn in investment markets? Or what if the employer’s business might call for layoffs, with many participants taking their account balances when they leave?

Has either agency published even nonrule guidance about how much of a plan-expenses reserve is too much? Or is it just what some people in EBSA or the IRS think?

Paul I and other BenefitsLink neighbors, your thoughts?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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How expense accounts are funded, how and what expenses are paid, whether excess amounts are allocated to participants, are expense accounts plan assets, and even more topics are all factors to be considered.  I find the Plan Sponsor Best Practices page in the Oppenheimer guide (attached, see page 9) to provided an excellent framework for a plan fiduciary to use when considering implementing or reviewing the operation of an expense account. 

The Multnomah white paper on defining expense accounts - while aged - also comments on how an expense account may or may not be a plan asset.

We do not have bright-line official guidance on expense accounts likely because of the many ways in which fees are paid to service providers (such as basis point loads, sub-TA fees, revenue sharing, direct payments, management fees, administration subsidies...).  We not have bright-line official guidance on how determining what are excessive fees (which has generated a whole class of ERISA litigation aimed at making that determination on a case-by-case basis).

We do see the agencies voice concerns about fees, and this has led to enhanced disclosure requirements like 404(a)(5) and 408(b)(2).  These disclosure requirements were put in place with the intent of providing participants and plan fiduciaries with more information about fees so they can make their own determinations.

There also was the attempt to force disclosure of fees paid to service providers on Schedule C. 

For now, I think it is best to leave it up to the plan fiduciaries in consultation with ERISA legal counsel to determine if an expense account is a plan asset and if the account is operating properly.  I also think it is appropriate for a TPA "if they see something, then say something" but not to attempt to make the determination.

Oppenheimer-A-Guide-to-Retirement-ERISA-Accounts.pdf Multnomah Group White-Paper-Defining-Expense-Accounts.pdf

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