Payment Options for Retirement Plan Expenses

Published:

by Stacey Spencer, QKA | Manager, Employee Benefit Services

In this tough economy, many employers are looking for ways to decrease expenses. One option is to pay certain retirement plan expenses from the plan assets. Fees related to the administration of the plan can generally be paid from plan assets if 1) they are prudent and reasonable, 2) permitted under the plan document and 3) the expense policy is clearly communicated to employees through the Summary Plan Description.

Administrative costs that may be charged to the plan participants include:

  • Participant recordkeeping
  • Nondiscrimination and Top Heavy Testing
  • Preparation and distribution of benefit statements
  • Preparation of the Form 5500
  • Accountant’s audit report required for large plans
  • Preparation of the Summary Annual Report
  • Notices regarding automatic enrollment, default investments and safe harbor 401(k) plans
  • Expenses for determining benefit payments and loan processing
  • Plan amendments/restatements required by new legislation
  • IRS determination letter requests
  • Purchase of the Trustees’ fidelity bond
  • Trustee fees
  • Investment management fees
  • Fees to process enrollment and investment elections

Certain fees may be charged to specific participants. For example, fees relating to distributions and loans may be charged directly to the affected participant’s account.

Plan expenses not charged to a specific participant can be allocated to all participants on either a “pro rata” or “per capita” basis. In a pro rata allocation, the fee is divided among the participants based on the value of their account balances. A per capita allocation occurs when the fee is allocated on an equal dollar or percentage basis to each participant’s account, regardless of the value of the individual’s assets. This may be used for allocating certain fixed administrative expenses of the plan. One important factor when deciding whether a fee should be paid from the plan is the amount of the total plan assets and the number of participants relative to the amount of the fee.

Alternatively, plan fees may be paid from forfeitures (the non-vested balances of terminated participants). If forfeitures are used to reduce employer contributions, such as matching contributions in a 401(k) plan, it’s as if the employer is paying the expense. However, if the forfeitures are allocated to remaining participants, then it’s as if the participants are paying the fee, due to the reduced forfeiture allocation.

Each expense situation requires a review of the facts and circumstances, with prudence and reasonableness being the most important consideration.

Finally, remember that expenses that cannot be paid from plan assets are often deductible as ordinary and necessary business expenses by the employer.

For further assistance or guidance with your retirement plan needs, please do not hesitate to contact me at Greenwalt CPAs.