Can administrative fees for a plan audit be paid from the plan?

[dmb]

Can administrative fees from a plan audit be paid from the plan??

[Jon Chambers]

Assuming that you mean the annual CPA audit required, the answer is generally yes, but you may want to be aware of the DOL's position in the Kansas City region, discussed in other threads, which holds that all admin fees must be paid by the employer, or shared according to some reasonable formula.

[dmb]

No, I'm talking about a random IRS audit.

[Jon Chambers]

I think responding to the IRS audit will be deemed a "settlor" function, which means it's a corporate responsibility. While you might be able to get an opinion to the contrary, it's likely that the opinion would be more costly than simply paying the response costs directly.

[richard]

While the DoL's position is that certain payment of expenses are not allowed, are there any specific situations where the DoL has challenged an actual payment. And what happened? Did they fine the plan sponsor? Did they just negotiate so the plan sponsor reimbursed the plan for all (or some) of the payment. Or did they do something more serious?

[Jon Chambers]

Yes, there have been numerous recent instances of DoL challenges in the Kansas City region. There is an excellent article on the topic in the September/October issue of Profit Sharing, the magazine of the PSCA (www.psca.org). I'm not sure exactly how the DoL is enforcing excess payments. It may just be that they are requiring a make-good, although they may be calling the excess payment a prohibited transaction (since the DoL's position is that the employer should have paid the expense, thus benefitted from a cost reduction) which presumably would trigger excise taxes and penalties. I don't have any direct experience, although I have one client currently under DoL audit, and they appear to be focussing on fees. I'll be interested in the resolution of this audit.

[Bill Berke]

I believe that the costs of preparing and handling an IRS audit are plan expenses. From what I've read and discussed, the DOL focus is on making sure that expenses which benefit the employer-settlor are not charged to the plan. The annual CPA audit is a proper plan expense so similarly, I believe, these IRS audit costs are plan expenses. However, the plan must get a no-change letter or I'm singing a very different tune.

[Scott]

I dug up this 2-year-old thread while searching for an answer to the question whether expenses relating to dealing with an IRS audit of a plan can be paid out of plan assets. When the thread first appeared, Jon Chambers and Bill Berke had opposing views. Does anyone have any fresh thoughts on this?

[mbozek]

I thought the DOL position was that any costs necessary to maintain the plan's qualified status, e.g, submissions to IRS were legitimate plan expenses. If an IRS audit is conducted for the purpose of determining whether the plan is qualified in operation then the expenses of responding to IRS requests for information, issues, etc should be required as a cost necessary to maintain qualfied status. There is a dol opinion 2001-3 plan expenses and some examples on what are acceptable expenses on the DOL web site. I dont know what is the significance of a no change letter since virtually every plan has a ding somewhere and most dings are minor and result in no fines or penalities. Also in my experience the IRS does not give out no change letters in every audit-- sometimes they just stop asking for info and the plan never hears from the agent again. Correcting an operational defect is necessary to maintain the plan's qualfied status. However, the cost of fines or penalties for operational failures should not be paid from plan assets.

[Bill Berke]

This thread was made rather meaningless once the DOL issued Adv. Op 2001-4(?) where the National Office shot down the Kansas City's office absrd positions. Reading that Opinion and the examples should give you rather clear guidance on what is a proper plan expense. And having the plan pay for audit expenses is a proper charge. As you noted, the plan cannot pay any penalties or fines levied as a result of the audit.

[Jon Chambers]

I agree with Bill's comment. Under the Kansas City office's earlier opinion, ALL expenses had to be allocated between the plan and the sponsor, since KC DoL was taking the position that the sponsor benefited from the plan's qualification. Absent distinct policy, they presumed a 50-50 cost allocation. Clearly, this position was in conflict with earlier national office opinions, and IRS interpretations. Now that KC has moved off their bizarre interpretation, I agree that the costs of responding to an IRS audit can be charged to the plan.

[david rigby]

See Advisory Opinion 2001-01A and Hypothetical Examples here:

http://www.dol.gov/dol/pwba/public/program...01/opnion01.htm