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EMPLOYER TAX BRIEF
A reimbursement roadmap for retirement plan sponsors
When retirement plan sponsors perform administrative services on behalf of the plan, they can be reimbursed by the plan for those services. However, meticulous attention to detail is essential to staying on a safe path with regulatory authorities. Here’s a brief roadmap to getting back some dollars for your hard work — and keeping them.
Satisfying ERISA
For a plan sponsor to receive reimbursement for services it has provided to the plan, the sponsor must satisfy regulations under the Employee Retirement Income Security Act (ERISA). This means that the transaction must, first, satisfy the standards for a “prohibited transactions” exemption. The basic ERISA-prohibited transaction that must be avoided is “self-dealing.”
In addition, the transaction needs to meet ERISA’s prudence standards for plan fiduciaries. Regulations allow a fiduciary like the plan sponsor to be reimbursed for “direct expenses properly and actually incurred in the performance of such services.” They also must be “reasonable.” Generally, courts decide reasonableness on a case-by-case basis.
Fiduciary standards are applicable to just about any substantive actions a plan sponsor can take with respect to a plan except “settlor” tasks, such as changing the level of employer contributions to participant accounts, amending the plan document or terminating the plan.
Documenting expenses
When disputes arise, fiduciary standards are further defined by the courts. For example, in Perez v. City National Corporation, the U.S. Department of Labor argued — and a court agreed — that City National’s reimbursement for services rendered to its ERISA plan didn’t provide sufficient documentation. Its calculation of “direct expenses” was based on averages and estimates.
That methodology, the court concluded, could have resulted in over- or undercharges to the plan. Instead, the court ruled, the company should have “kept contemporaneous time records [such as timesheets] so that it could calculate actual costs” of its administrative services to the plan.
Being mindful
If you intend to seek reimbursement from the retirement plan that your organization sponsors, be mindful of the journey ahead. To avoid discrepancies and meet your fiduciary burden, thoroughly and properly document any expenses incurred, and assess the reasonableness of any fees you charge to the plan. Our firm can offer further information and assistance.