• IRS Allows Plan Expenses to Be Paid From Accounts of Former Employees
  • May 4, 2004 | Author: Angela M. Bohmann
  • Law Firm: Leonard, Street and Deinard, [incorporation phrase format]Professional Association - Minneapolis Office
  • In May of last year, the Department of Labor issued a Field Service Advice allowing employers to charge certain expenses to the accounts of individual participants. That guidance even allowed employers to charge former participants for expenses that the employer chooses to pay for active participants. (See the July 2003 issue of our Compensation and Benefits Update.) While the Department of Labor ruled that it was acceptable to charge former employees expenses that an employer paid for active participants, the IRS informally advised that such charges may be impermissible under the tax code. The IRS suggested that the charges could be considered a "significant detriment" on the statutory right of a former participant with a vested account balance of more than $5,000 to leave his or her account in the plan.

    In recently issued Revenue Ruling 2004-10, the IRS has changed its informal position and has concluded that employers may charge former employees for plan expenses that the employer subsidizes for active employees. The expense charges must be reasonable and must be reasonably related to the former employee's share of the expenses. The IRS concluded that such expenses would be similar to charges that a former employee could expect to pay if the former employee rolled the account to an IRA. Under the Department of Labor guidance, charging the expenses to those former employees must also be consistent with the plan document and any plan communications.

    Employers wishing to charge former employees for expenses should review plan documents and communications and discuss the matter with their plan advisors.