- Internal Revenue Service Concurs with DOL on Allocation of Plan Expenses to Participants
- March 22, 2004
- Law Firm: Winston & Strawn LLP - Chicago Office
Last May, the Department of Labor issued Field Assistance Bulletin 2003-3, which set forth guidelines on the allocation of administrative expenses among participants in a defined contribution plan. The DOL concluded that, assuming that the expenses were both proper expenses of the plan and reasonable expenses, certain expenses could be allocated pro rata and certain administrative expenses could properly be charged to individual accounts rather than being allocated to all accounts. However, the DOL was only speaking for itself, not the IRS, and there was a concern that the IRS could have a different view on this subject.
This concern was based upon the provision of the Code that provides that if a participant's vested account balance exceeds $5,000, it cannot be distributed without the participant's written consent. The relevant Treasury regulations interpreting this provision of the Code provides that a consent to a distribution is not valid if, under the plan, a significant detriment is imposed on any participant who does not consent to a distribution. Whether or not there is a significant detriment depends upon the facts and circumstances and the concern was that the allocation of the plan expenses to the accounts of former employees, while not charging the accounts of current employees, could be perceived as a significant detriment.
In Rev. Rul. 2004-10, the IRS alleviated these concerns by holding that a plan does not fail to satisfy the Code's vesting requirements merely because it charges reasonable plan administrative expenses to the accounts of former employees and their beneficiaries on a pro rata basis, while not charging the accounts of current employees. The rationale of the IRS for concluding that the detriment imposed by this allocation of plan expenses was not unreasonable was that analogous fees would be imposed in the marketplace, either implicitly or explicitly, for a comparable investment outside of the plan, e.g., fees charged by an investment manager for an I.R.A. investment. The IRS also concluded that the plan would not fail to satisfy the Code's vesting requirements, merely because it charged reasonable plan expenses to former employees (but not current employees) on any other reasonable basis consistent with Title I of ERISA. The IRS provided an example of an unreasonable method of allocation, namely, allocating the expenses of active employees pro rata to all accounts, including the accounts of both active and former employees, while allocating the expenses of former employees only to their accounts. Such a method of allocating plan expenses would not be reasonable, because former employees would be bearing more than an equitable portion of the plan's expenses. As an additional caveat, the IRS also indicated that the method of allocating plan expenses is a plan right or feature that is subject to the Code's nondiscrimination requirements.
Notwithstanding these caveats, with the IRS' acquiescence on the position of the DOL, plan sponsors are now free to allocate defined contribution plan expenses on a reasonable basis to the account balances of former employees.