Are Surrender Charges Permissible? (Posted August 31, 2001) Technical Tip 19: The following question and answer are from the DOL Q&A Session at the 2000 ASPPA Annual Conference: What is the Department's view on surrender charges for termination of insurance agreements? When are they permissible and when not? What if the purpose of the surrender charge is to pay for commissions? ERISA section 408(b)(2) permits reasonable arrangements, but that implies the charge can't be in the nature of a penalty. Is there a cause of action against the fiduciary for signing the insurance agreement on behalf of plan? DOL Response: A reasonable compensation provision in a contract for the early termination of the contract is permissible. DOL Regulation Section 2550.408b-2(c) states "A provision in a contract or other arrangement which reasonably compensates the service provider or lessor for loss upon early termination of the contract, arrangement or lease is not a penalty. For example, a minimal fee in a service contract which is charged to allow recoupment of reasonable startup-costs is not a penalty." A fiduciary who is entering into an insurance agreement or any other contract on behalf of a plan needs to be fully aware of, and understand, termination fees or surrender charges under the contract when the fiduciary is considering the agreement. The fiduciary must make a determination that these charges would be reasonable if incurred. Caveat: The answer was drafted by Fred Reish and Brad Huss, the program moderators, based on their understandings of discussions with four senior officials of the Pension and Welfare Benefits Administration (PWBA) of the U.S. DOL. As a result, it does not represent a formal or binding position statement by the PWBA. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.