Where to keep experience gains

[oriecat]

Previously our Sec 125 TPA would keep our experience gains and roll them from year to year, to use for admin fees or to fund any new expenses that hit before there were enough contributions for the new plan year. This year we just got a letter from them saying they won't be doing that any more, due to IRS guidance regarding the use of a trust and some other rule changes, and they sent us a big check to cash out our account for the last plan year. So I am pondering how to deal with these funds, and I thought I would set us up a separate bank account, to keep them segregated (as they are plan funds which must be used exclusively for plan participants or admin fees), but then I started thinking of my tiny amount of ERISA training and things like funded and unfunded and plan assets started going through my head and now I am wondering if maybe that wouldn't be the best thing to do, because it will change our ERISA requirements? But I really don't know, it is all very confusing.

Can anyone help me determine the best place to keep those experience gains and what sort of ERISA obligations could occur with each method?

Also on the letter from the TPA, they said they could pay claim out of any bank account we set up if we provide them with the information, so I thought that sounded like an interesting idea, so then we could receive the interest of the money, but again, I was wondering if that would further complicate things...

Thank you!

[J Simmons]

Your 125 plan is, from the sounds, of it primarily or 'exclusively' funded from the general assets of the employer. In the past, your TPAs have had a cash-flow fund--assets advanced by the employer that the TPA used to pay claims etc.

I've had concerns about that practice since the early 1990s in light of some conversations I had with Carey Gilbert of Fiduciary Intepretations at the DoL. He expressed that any segregation and eartagging of funds for the purpose of the cafeteria plan rendered it to be funded, even if just a cash-flow fund used by the TPA. To keep these funds as part of the employer's general assets and dispel the notion that the cafeteria plan was funded, I've recommended that the employer establish an account in it's name, with no mention in the title or other account documents that it is for employee benefits, the cafeteria plan or anything specific--just take the account in the name of the company, nothing more. Set it up so that the TPA may write checks against it, as well as the employer. This would make the 'funded' argument harder for DoL or an employee or the IRS to assert.

Back to your question, if your cafeteria plan is funded out of the general assets of the employer, I would take the position that the unapplied experience gains like all funds in the hands of the TPA were and have always been general assets of the employer and that the TPA merely had access to them to facilitate its administration of claims. Following the rationale of this argument, these unapplied experience gains would belong to the general assets of the employer and could be added to your company's general bank account for now.

However, you'll need to keep a ledger tracking these unapplied experience gains and have offsetting debits for plan expenses otherwise paid by the employer, such as for document updates, technical advice, etc. If at the end of a plan year there are yet more unapplied experience gains than such offsetting expenses, you'll need to deal with them per what your cafeteria plan documents and the regulations permit in this regard.

[Jacmo]

Your plan document should state how gains are to be used (most employers use them to offset admin fees).

I am assuming here that these "gains" are for FSA participant losses?

What has happened is that the TPA has just now discovered that they were in violation of ERISA asset trust requirements. Whenever plan assets leave the employer's general assets, they must be transferred into a trust--never into the control of some other entity (such as a TPA)--unless it's an insurance carrier or a bank custodian (for HSA money, for example).

The "cure" they have suggested to you is the correct one which meets ERISA requirements. In other words, by setting up a checking account that is controlled by you (the employer), you avoid ERISA asset trust requirements. That checking account must be indistinguishable from other employer general assets. For example, you will NOT want to name that account "the ABC Co. FSA account". Doing so would indicate a separation from the employer's general assets. So if your corporate checking account is named, for instance, "the ABC Co. general operating fund", then you might want to name this new account "the ABC Co. general operating fund #2", or some such. By doing so, you avoid ERISA asset trust requirements.

After you set up this new account, deposit the check from the TPA there, to be used in the same manner that it was being used before (according to the plan document).

You'll be fine from that point forward, and will still be able to do business with the TPA under the new arrangement, which is the legally correct one.

[oriecat]

Thanks for your replies! Let's say that the account got set up and the person who set it up added "Flex Plan" to the description, so we know what's what... and then suddenly we have a funded plan with plan assets, is that right? What other requirements would we be under? We would have to make it a trust account? (What exactly does that mean anyway?)

[Jacmo]

Yes--because you have distinguised those assets as separate from the employer's general assets. You now are subject to ERISA asset trust requirements. You must set up a trust. That requires very special legal expertise and very special accounting expertise. Translation----$$$$$$$$$$$$.

You are far better off to simply change the name of the account.

[J Simmons]

As Jacmo explained, you'd need an ERISA trust document. You'd also need to have the trust independently audited each year. Your costs really start to escalate just for the convenience of naming the bank account to identify it as for the flex accounts.

[oriecat]

Thank you!! I think I need to have my dental plan bank account name changed too!

[GBurns]

Didn't DOL Technical Release 92-01 say that there would be no enforcement of the Trust requirement for Cafeteria Plans and certain other Welfare Plans?

[J Simmons]

Yes, GBurns, DOL Technical Release 92-01 does indicate that the general requirement that welfare benefit plans' benefits be placed in a trust is not being enforced. This opened the way for cafeteria plans to simply be funded out of the general assets of the employer. Presently, you don't have to create a trust for your cafeteria plan, but if you nevertheless do--by segregating some funds and eartagging them for the cafeteria plan--then you trigger all the requirements that apply to an ERISA trust.