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Paying Fees From Plan Assets
COVID-19 is obviously causing financial stress and when it comes to your qualified retirement plan, you may be looking for ways to reduce expenses. You have an option to use plan assets to pay some plan expenses as long as you follow Department of Labor and IRS rules.
You can use plan assets to pay for administrative expenses
You can generally use plan assets to pay for administrative expenses. This includes the costs of annual recordkeeping, compliance testing, preparing your Form 5500, and it includes distribution and loan processing fees that are paid by the company.
Administrative expenses also include costs for plan amendments that are mandated by the IRS and the cost of CPA audits for larger plans.
There are some expenses you cannot pay for with plan assets. These include business costs for designing and drafting your plan document, installing a new plan or the fees associated with drafting discretionary amendments. You also cannot use plan assets to pay for IRS correction program fees or fees associated with a plan termination.
When it comes to paying fees from plan assets, the choice is to draw from participant accounts, the plan’s forfeiture account, or an ERISA fee account. So, let’s quickly look at all three options.
1. Paying Plan Expenses from Participant Accounts
The rules say that if you choose to pay plan expenses from participant accounts, you need to do so in a way that doesn’t discriminate and with a formula that’s uniform. That means a fee must be charged against all participants to whom it applies, and the fee must not favor highly compensated employees.
A proportionate or pro rata method allocates the fee based on the percentage each participant should share based on their account balance.
A simple example is Sue whose account balance is $100,000 of the plan’s total $1,000,000 balance. Since her account balance is 10% of the total, her proportionate or pro rata share of a $500 fee would be $50.
A per capita method divides the fee by the number of applicable participants in the plan and divides the total fee.
If Sue’s plan has 20 participants, a $500 fee would be allocated $25 per participant.
2. Using Forfeitures to Pay Plan Expenses
Your plan may make some employer contributions subject to a vesting schedule. If an employee terminates before being fully vested in such contributions, they forfeit the non-vested portion of their balance back to the plan. That amount is held in the plan’s forfeiture account.
Forfeiture accounts can be set up to reallocate money to other participants, to reduce employer contributions or to pay administrative expenses. Your plan document spells out how forfeitures are to be handled each year.
3. Using an ERISA Budget Account
If you have a 401(k) or a similar plan, you may have an ERISA Budget Account for revenue sharing fees paid by mutual funds. 12b-1 and sub-transfer agent fees are tracked in this separate account within the plan. The balance in this account may be distributed to plan participants or it may be used to pay plan expenses.
Reach out to us talk about your plan and your company’s needs. We’re here to help.