Audit Expenses

[Guest Sieve]

I have very few audit plans, so this is probably an easy answer for those of you who do . . .

Is there any reason that the professional fee for a plan audit--if that fee is reasonable--cannot be deducted from plan assets (if the document permits)?

[TPAMan]

Generally, it is considered a permissable plan expense.

[Guest Sieve]

What do you think about this, then . . .

Plan does not file Forms 5500 for 5 years, and now is having 5 audits performed in order to file the Forms 5500 under the delinquent filer program. Even if the audit expenses are reasonable on a per-year basis, what do you think about deducting all 5 years' worth of expenses (audit & Forms 5500) from plan assets in one plan year?

My inclination is that it's ok.

[Bill Presson]

What do you think about this, then . . .

Plan does not file Forms 5500 for 5 years, and now is having 5 audits performed in order to file the Forms 5500 under the delinquent filer program. Even if the audit expenses are reasonable on a per-year basis, what do you think about deducting all 5 years' worth of expenses (audit & Forms 5500) from plan assets in one plan year?

My inclination is that it's ok.

If I was a participant that joined the plan sometime in the last 4 years, I don't think I would agree.

[four01kman]

My take is since the employer is the Plan Administrator (usually), the failure to timely file would no longer be a plan expense, but a settlor expense. The Plan (and the participants) could not have filed timely.

[Guest Sieve]

Of course, under normal circumstances you wouldn't like it if you joined even this year (since the normal audit charges paid this year would be for an audit covering last year).

Do you think, then, in my fact pattern, that the charges against plan assets for prior years' audits would not constitute "reasonable expenses of administering the plan"? Does ERISA say that a specific charge against assets must be a reasonable amount, or just that the expenses themselves must be reasonable in amount for the services rendered? Would it make a difference if the CPAs had forgotten to bill for 4 years, then billed for 5 years all at once?--could the Administrater not charge all these reasonable expenses against the plan in one year? Does it make a difference that the expenses are all being charged in one year because the administrator screwed up and therefore 5 years of its fiduciary obligations are being performed & billed in a single year?

[jpod]

If it is a db plan I wouldn't be concerned. If it is a dc plan, what kind of dc plan? Daily valued self-directed? If so, what is the source of payment? Forfeitures? Pro rata depletion of participants' accounts?

[david rigby]

If it is a db plan I wouldn't be concerned.

Under PPA, it could be relevant for a DB plan, if the "extra" expense causes the plan's funded ratio to drop below an important trigger.

[Guest Matthew Gouaux]

Assuming it is otherwise permissible to charge participant accounts for prior year audit fees, perhaps a reasonable compromise would be to charge participants only what they would have been charged had the audit been timely performed and have the employer cover the balance. For example, if the audit fee for Year 1 is $8,000 and there were 100 participants in the plan when those audit fees would have been allocated to participant accounts, each participant would have paid $80 (assuming the plan provides for equal allocation of expenses). If only 80 of those 100 participants still have an account balance, then an equal allocation would result in each of them paying $100 of the audit fee, which arguably is unreasonable. One way to put those participants back in the position they would have been in had the audit been timely performed may be to charge them each the $80 they would have paid (perhaps with an adjustment for earnings) and have the employer cover the $1,600 balance. This would seem to be consistent with the general correction principles under EPCRS (i.e., each party should end up in the position they would now be in had the problem not occurred).

[Guest Sieve]

To answer an earlier question, this is a DC plan, & expenses would be charged pro rata against individual accounts (probably on an asset, rather than per capita, basis).

Actually, I like Matthew's approach a lot . . . But, I don't understand four01's statement that the failure to timely file is no longer an admin expense--I would agree that any delinquent filer fees are not an admin expense, but I fail to see how the normal audit expenses, even if incurred late, are not an admin expense just because the plan administrator is the employer.