Expenses Borne By Employer
The DOL does not permit expenses which relate to “settlor functions” to be paid from the plan assets. A “settlor function” is an independent business activity or decision of the employer. These activities are thought to primarily benefit the employer. Expenses such as the following cannot be paid from plan assets, although they are deductible as ordinary business expenses:- Plan design expenses, such as studies of the plan’s feasibility and projections;
- Preparation of the initial plan document;
- Preparation of voluntary plan amendments (required amendments due to law changes may be paid from plan assets); and
- Certain plan termination fees.
Administrative Expenses Payable From Plan Assets
If the employer wishes, fees related to the administration of the plan can generally be paid by the plan if they are prudent and reasonable and permitted under the plan document. Reasonable administrative costs that may be charged to plan participants include the following:- Participant recordkeeping;
- Nondiscrimination and top heavy testing;
- Preparation and distribution of benefit statements;
- Preparation of Form 5500 and schedules;
- Accountant’s audit report required for large plans (those with over 100 participants);
- Summary Annual Reports;
- Notices for automatic enrollment, default investments and safe harbor 401(k) plans (where applicable);
- Expenses for computing benefit payments and processing loans;
- Plan amendments/restatements required by law changes or new regulations;
- IRS determination letter requests;
- Purchase of trustees’ fidelity bond;
- Trustee fees;
- Investment management fees; and
- Fees to process participant enrollment and investment elections.
Allocation Methods
Once it’s been established that a fee can properly be paid by the plan, the method of allocating the fee must be determined. There are several alternatives outlined below.Allocate Fee to Specific Participant
The fairest method for allocating certain service fees is to charge them against the account of the participant involved in the transaction or service, although such fees can be allocated to the entire plan. Participants should be informed of the amount of the fee in advance. The following fees are typically charged to the affected participant’s account:- Fees to prepare distribution election and consent forms;
- Hardship withdrawal expenses;
- Fees to prepare participant loan documents and the annual loan administration expenses; and
- Qualified Domestic Relation Order (QDRO) determination and processing fees.
Pro Rata or Per Capita Allocation
Plan expenses that are not being charged to a specific participant’s account can be allocated to all plan participants on either a “pro rata” or a “per capita” basis. A pro rata allocation is done proportionately based on account balances. Per capita means that the amount is allocated equally based on the number of participants in the plan. Here is an example of how a $1,000 fee would be allocated under each method:| Participant | Account Balance | Pro Rata Allocation | Per Capita Allocation |
|---|---|---|---|
| A | $60,000 | $600 | $250 |
| B | 20,000 | 200 | 250 |
| C | 15,000 | 150 | 250 |
| D | 5,000 | 50 | 250 |
| Total | $100,000 | $1,000 | $1,000 |
Using Forfeitures to Pay Expenses
Some plans provide that allowable expenses may be paid from the forfeiture account (accumulated from employees who terminated employment without full vesting). The impact that this will have depends on how forfeitures are treated under the terms of the plan. If forfeitures are used to offset employer contributions, such as matching contributions in a 401(k) plan, it’s as if the employer were paying the expense because the reduced forfeitures will likely result in additional employer contributions. But 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.Defined Benefit Plans
Defined benefit plans may also pay expenses from plan assets, but participants’ benefits will not be reduced as a result. That’s because the benefits are stipulated under the terms of the plan, and paying expenses from the plan would only reduce the assets available to pay benefits, which could increase the employer’s funding obligation. However, where investments have outperformed actuarial assumptions creating overfunding, paying expenses from the plan may be desirable.Plan Document and Disclosure Requirements
Expenses may only be paid from the plan assets if the plan document authorizes plan expense payments or is silent on the payment of expenses. The document may contain specific details for the payment and allocation of plan expenses, although it is not required to provide such detail. Plan documents that specifically prohibit the payment of expenses by the plan may be amended prospectively to remove this provision and allow the plan to pay expenses in the future. However, the expenses of this amendment must be paid by the employer as a voluntary amendment. Participants need to be informed if plan expenses can be deducted from their accounts. Such information should be included in the Summary Plan Description (SPD) which is required to be distributed to each employee upon entering the plan. Specific details including the amount of and method for allocating the various types of expenses should be included.DOL Proposals
Last year the DOL proposed fiduciary disclosure requirements for participant-directed accounts which would require additional information to be provided about investment options and more detailed information about fees. The rules were supposed to have been effective January 1, 2009, but it is now uncertain when, or if, this regulation will be finalized. Another DOL proposed regulation concerns the contracts or arrangements between the plan fiduciary and a service provider. Under the proposal, in order for a service provider’s fee to be paid by the plan without resulting in a prohibited transaction, the contract must be in writing and disclose the fees to be paid. In addition, the service provider must disclose any relationship it has with other parties that could create a conflict of interest. Although it is unclear when, or if, this regulation will be finalized, it may be advisable to adhere to a service provider disclosure policy to prevent violations of the fiduciary and prohibited transaction rules under ERISA. One DOL change that has been finalized is the increased reporting of fees paid to service providers on Schedule C of Form 5500 for large plans, effective for plan years beginning in 2009.Conclusion
Employers have the option of paying certain expenses of a qualified plan from the business or from the assets of the plan, in which case the plan participants share the burden of such costs. The DOL has provided rules to determine which expenses may be paid by the plan and the allowable allocation methods among participants’ accounts. The plan document must allow the plan to pay reasonable expenses in order for it to take place, and the expense policy must be communicated to employees through the SPD. Recent DOL proposals seek to increase disclosure of plan expense information to participants, fiduciaries and the DOL.This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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