Reimbursement of Plan Sponsor by Plan for Plan Expenses

[Guest SCUDDESLER]

Assume that a plan document provides that a plan will pay certain eligible expenses, e.g., reasonable plan administration expenses. The annual administration bill is presented to the plan sponsor. The plan sponsor pays the bill and then seeks reimbursement from the plan (in lieu of presenting the bill to the plan and then having the plan write a check). If the plan reimburses the plan sponsor, does such reimbursement result in a prohibited transaction and, if so, is there an applicable exception.

Also, what limits, if any, apply to how far back a plan sponsor may request reimbursement. For example, suppose that the plan sponsor has paid the past four annual administration bills and now would like the plan to reimbursement it for all four bills. Can the plan simply write a single check to reimburse the plan sponsor for four years of plan administration? What if the plan sponsor had requested reimbursement for eight years? Ten years?

Thanks so much for your help.

[KJohnson]

From the 2002 DOL/JCEB-ABA Q&A's (Q&A 11 is more relevant, but read 10 first)

QUESTION 10. An employer closed operations and proceeded to effect distributions of all accounts under its defined contribution plan to its former employees, all of whom had a termination of employment. The distribution election forms clearly stated that account balances would be credited with interest through June 30 and any earnings thereafter would be prorated among any accounts remaining under the plan. Election forms were returned and all accounts under the plan were paid out with earnings through June 30. The actual distribution of all accounts occurred August 31. The trustee placed the assets in an interest-bearing account as of June 30. The plan stated that administration costs could be assessed to the plan, but the employer paid those costs. Can the plan reimburse the employer from the post-June 30 earnings for the administrative costs associated with plan termination paid by the employer before distributing the post-June 30 earnings to the participants?

PROPOSED/SUGGESTED ANSWER 10. Yes. It should be permissible for the plan to reimburse the employer for its payment of the plan termination-related plan expenses, assuming the expenses were necessary and reasonable for the administration of the plan. Reimbursement of the employer should be allowed under ERISA 408(b)(2).

DEPARTMENT OF LABOR ANSWER 10. Staff agreed with the answer with certain reservations. Staff would want to see evidence of a “meeting of the minds” that the expenses would be reimbursed at or before the time the services were performed. With the plan language being permissive, the fundamental question is whether there is an obligation on the part of the plan to reimburse the expenses. The staff believe that where there is a clear understanding or agreement on or before the time the services are performed that the plan will reimburse the employer, a fiduciary could justify reimbursing the expenses. The staff did not believe that a written understanding or agreement is necessarily required.

QUESTION 11. (Same facts as Question 10). Separate and apart from the termination costs referred to in the prior Question, can the plan reimburse the employer for administrative costs paid by the employer for prior years?

PROPOSED/SUGGESTED ANSWER 11. No. The reimbursements would be impermissible under ERISA 406(a)(1)(B).

DEPARTMENT OF LABOR ANSWER 11. Staff generally agreed with the proposed answer. As in the prior question, because the plan language is permissive (that is, allowing the plan to pay expenses), the fundamental question again is what circumstances would compel a fiduciary to reimburse the employer for paying those expenses. Again, reimbursement could be appropriate if there was a clear understanding or agreement on or before the time the services were performed that the plan would reimburse the expenses. Without such understanding or agreement, the staff felt there would be no basis for the fiduciary to reimburse the expenses. Staff felt that under the facts presented, a significant delay in reimbursement may stretch the “expectation” of reimbursement theory. Rather than a reimbursement theory, it might be possible to argue that reimbursement is consistent with Prohibited Transaction Class Exemption 80-26. However, the meeting of the minds about the arrangement (i.e., that there was an interest free loan) must be supported by evidence. Under the circumstances presented, the permissive plan provision would not, in and of itself, be sufficient evidence.

[david rigby]

If you are curious about the source of KJohnson's material, this link is pretty useful: http://www.abanet.org/jceb/agency.html

[Guest SCUDDESLER]

Thank you very much for your assistance. It is greatly appreciated.