Allocating Plan Expenses in 2004
Rev. 03/30/04, E-mail Alert 2004-7

Rev. Rul. 2004-10 addressed the IRS's position on allocating certain plan expenses to participants. However, that ruling did not address all the plan expenses discussed in the DOL's allocation-of-expense release FAB 2003-3. Does the IRS agree with the DOL on the rest of the issues addressed in FAB 2003-3? Click here for the answer and to review where we stand now on allocating plan expenses to participants.

Background
When the DOL's Employee Benefit Security Administration (EBSA) issued Field Assistance Bulletin 2003-3 (FAB 2003-3) on May 19, 2003, the IRS representatives were surprised and stated they needed time to address the allocation of expense provisions of the DOL's guidance. In particular, the IRS raised questions regarding the allocation of expenses to terminated participants and the need to consider the EBSA's QDRO expense allocation change. However, the IRS did not disagree with any of the other provisions of FAB 2003-3.

With the issuance of IRS Revenue Ruling 2004-10 on February 13, 2004, the IRS now concurs with FAB 2003-3 and permits the allocating of expenses to terminated participants, even if only to just terminated participants, provided the allocation method is reasonable.

Recently, we received client questions about the status of allocating plan expenses. Thus, below is a recap of the changes from FAB 2003-3 followed by a list of expenses that may and may not be charged to the plan. Keep in mind that EBSA regulations require that plan expenses allocated to participants must be disclosed in a Summary Plan Description or Summary of Material Modifications before they can be implemented.

FAB 2003-3 General Guidance
FAB 2003-3 indicates that plan sponsors and fiduciaries have considerable discretion under ERISA to determine, as a matter of plan provision or administrative policy, how expenses will be allocated among participants and beneficiaries. The FAB concludes that a method of allocating expenses as set forth in the plan document, effectively becomes a part of the benefit entitlements under the plan and fiduciaries generally will be required to follow those provisions.

If plan documents are silent or ambiguous on the subject, plan fiduciaries must act prudently and solely in the interests of participants in determining how to allocate expenses. These general principles apply to methods of allocating expenses among participants in the plan as a whole and of allocating specific expenses to individual participants, rather than the plan as a whole.

The FAB focuses upon the allocation of expenses among participants and does not provide a list of permitted expenses that may be charged to a plan. However, those that are addressed (and now that IRS is in agreement) are expenses that are clearly permitted. The FAB addresses expenses that may be allocated to a particular individual versus expenses that may be allocated among all participants. It further details expensing among all participants based on a pro rata versus per capita method.

FAB 2003-3 Expenses That May Be Charged Solely To a Particular Individual's Account Include:

• Administrative Expenses Attendant to Hardship Distributions
  
• Calculation of Benefits Payable Under Different Distribution Options e.g. joint and survivor annuity, lump sum, single life annuity, etc.)
  
• Reasonable Expenses for Administering the Plan May Be Charged to Vested Separated Participants. This may be accomplished without regard to whether the accounts of active participants are charged such expenses and without regard to whether vested separated participants are afforded the option to withdraw the funds or rollover the funds.
  
• Benefit Distributions may be charged to the participant to whom the distribution is made. This may be done for those receiving periodic distributions and may include check-writing expenses. The ruling does not address lump-sum payments, but presumably they are eligible for similar treatment.
  
• QDRO and QMSCO Determinations Expenses incurred in a determination as to whether a domestic relations order is a Qualified Domestic Relations Order (QDRO). (This is a reversal of the DOL's prior position in Advisory Opinion 94-32A.) In addition, expenses incurred in determining a Qualified Medical Child Support Order (QMCSO) also may be so charged to the affected participant.
  

Pro Rata and Per Capita Allocations

Pro rata allocation: Allocation of expenses are made based on the value of the assets in the individual account. This is defined as a permissibly equitable method of allocating expenses among participants.

Per capita allocation: Expenses are allocated on an equal dollar or percentage basis to each participant's or beneficiary's account, regardless of the value of the individual's assets. This may be used for allocating certain fixed administrative expenses of the plan, such as:

• recordkeeping
  
• legal
  
• auditing
  
• annual reporting
  
• claims processing
  
• similar administrative expenses

Under FAB 2003-3 guidelines, fees such as investment management fees, that are based on account balances should be charged on a pro rata basis because a per capita charge appears to be arbitrary.

Services that provide investment advice to individual participants may be charged on either a pro rata or per capita basis regardless of the actual utilization by particular participants.

IRS permits plans to allocate plan expenses to former employees on a pro rata reasonable basis, while not assessing current employees .

The IRS states that a plan may charge reasonable plan administrative expenses to the accounts of former employees and their beneficiaries on a pro rata basis; or on another reasonable basis, that satisfies the requirements of ERISA Title I; even though the accounts of current employees are not charged.

Caveat: Not all allocation methods are acceptable. Following is an IRS example of an unacceptable allocation formula:

Allocating the expenses of active employees pro rata to the accounts of active AND former employees, while allocating the expenses of former employees only to the former employees' accounts, is not reasonable because the former employees would be bearing more than an equitable portion of the plan's expenses.

• Plan Fees from the Following:
         Accountant Fees
         Actuarial Fees
         Appraisal Fees
         Annual valuations of trust assets
         Independent appraisal of employer stock in plan
         Attorney Fees
         Investment Advisory and Management Fees
         Third Party Administrator Fees
         Trustee and/or Custodian Fees
  
• Required Bonding
  
• QDRO & QMCSO Determination
  
• Claim Processing and Payment
         Check Writing
         Distribution processing
         Hardship
         Calculating of benefit
  
• Reporting and Disclosure
  
• Costs of amending plan for a required regulatory change
  
• Costs of implementing a plan termination
  
• Determination Letter expenses for initial qualification of plan
  

• Plan design and implementation of plan costs
  
• Legal costs for corporate issues involved in establishing a plan
  
• Amending a plan for a business reason (and not a regulatory required amendment)
         Employer decisions regarding amending the plan, for example for an allocation or        benefit formula change
  
• Plan termination costs other than those due to the implementation of the termination
  
• Costs associated with bringing the plan back into compliance under EPCRS
  
• Excise Taxes and cost of preparation of the Form 5330 to pay the excise taxes

Bill Grossman, QPA

References:
DOL Opinion 2001-01A; DOL Opinion 2001-01A. the Six Hypotheticals
Rev. Rul. 2004-10
FAB 2003-3