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January 18, 2001
Mr. Carl J. Stoney, Jr.
Dear Mr. Stoney: This is in response to your recent correspondence in which you request
confirmation of the continued viability of the Department of Labor’s views
expressed in Advisory Opinion
97-03A
(January 23, 1997), discussing the application of the Employee Retirement
Income Security Act (ERISA) to the payment of certain plan termination expenses
by tax-qualified plans administered by the Insurance Commissioner of the State
of California in its capacity as liquidator of the companies which sponsored
the plans. Further, you request any other guidance that the Department may be
able to provide on the issue of permissible plan expenses. In this regard, you
indicate that you represent the Conservation and Liquidation Office of the
State of California Department of Insurance in connection with the termination
of, and attendant distribution of assets from, tax-qualified retirement plans
sponsored by now-insolvent insurance companies. Since the issuance of
Advisory Opinion
97-03A, questions have been raised concerning the extent to which an
employee benefit plan may pay the costs attendant to maintaining tax- qualified
status, without regard to the fact that tax qualification confers a benefit on
the plan sponsor. The following is intended to clarify the views of the
Department of Labor on this issue. As discussed in Advisory Opinion 97-03A, a determination as to whether to
pay a particular expense out of plan assets is a fiduciary act governed by
ERISA’s fiduciary responsibility provisions. ERISA provides that, subject
to certain exceptions, the assets of an employee benefit plan shall never inure
to the benefit of any employer and shall be held for the exclusive purpose of
providing benefits to participants and beneficiaries and defraying reasonable
expenses of administering the plan. In discharging their duties under ERISA,
fiduciaries must act prudently and solely in the interest of the plan
participants and beneficiaries, and in accordance with the documents and
instruments governing the plan insofar as they are consistent with the
provisions of ERISA. See ERISA sections 403(c)(1), 404(a)(1)(A), (B),
and (D). With regard to sections 403 and 404 of ERISA, we noted that, as a general
rule, reasonable expenses of administering a plan include direct expenses
properly and actually incurred in the performance of a fiduciary’s duties
to the plan. We also noted, however, that the Department has long taken the
position that there is a class of discretionary activities which relate to the
formation, rather than the management, of plans, explaining that these
so-called “settlor” functions include decisions relating to the
establishment, design and termination of plans and, except in the context of
multiemployer plans, generally are not fiduciary activities governed by ERISA.
Expenses incurred in connection with the performance of settlor functions would
not be reasonable expenses of a plan as they would be incurred for the benefit
of the employer and would involve services for which an employer could
reasonably be expected to bear the cost in the normal course of its business
operations. However, reasonable expenses incurred in connection with the
implementation of a settlor decision would generally be payable by the plan.
In Advisory Opinion 97-03A, the Department expressed the view that the
tax-qualified status of a plan confers benefits upon both the plan sponsor and
the plan and, therefore, in the case of a plan that is intended to be
tax-qualified and that otherwise permits expenses to be paid from plan assets,
a portion of the expenses attendant to tax-qualification activities may be
reasonable plan expenses. This view has been construed to require an
apportionment of all tax qualification- related expenses between the plan and
plan sponsor. The Department does not agree with this reading of the opinion.
The opinion recognizes that, in the context of tax-qualification activities,
fiduciaries must consider, consistent with the principles articulated in
earlier letters,1 whether the activities are settlor in
nature for purposes of determining whether the expenses attendant thereto may
be reasonable expenses of the plan. However, in making this determination, the
Department does not believe that a fiduciary must take into account the benefit
a plan’s tax-qualified status confers on the employer. Any such benefit,
in the opinion of the Department, should be viewed as an integral component of
the incidental benefits that flow to plan sponsors generally by virtue of
offering a plan.2 In the context of tax-qualification activities, it is the view of the
Department that the formation of a plan as a tax-qualified plan is a settlor
activity for which a plan may not pay. Where a plan is intended to be a
tax-qualified plan, however, implementation of this settlor decision may
require plan fiduciaries to undertake activities relating to maintaining the
plan’s tax-qualified status for which a plan may pay reasonable expenses
(i.e., reasonable in light of the services rendered). Implementation activities
might include drafting plan amendments required by changes in the tax law,
nondiscrimination testing, and requesting IRS determination letters. If, on the
other hand, maintaining the plan’s tax-qualified status involves analysis
of options for amending the plan from which the plan sponsor makes a choice,
the expenses incurred in analyzing the options would be settlor expenses. The foregoing views are intended to clarify, rather than supersede, the
views of the Department set forth in Advisory Opinion 97-03A. We hope the
information provided is of assistance to you. This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41
Fed. Reg. 36281, August 27, 1976). Sincerely, Robert J. Doyle 1 See letter to John N. Ernlenborn from Dennis M.
Kass (March 13, 1986); letter to Kirk F. Maldonado from Elliot I. Daniel (March
2, 1987). 2 The Supreme Court has recognized that plan sponsors
receive a number of incidental benefits by virtue of offering an employee
benefit plan, such as attracting and retaining employees, providing increased
compensation without increasing wages, and reducing the likelihood of lawsuits
by encouraging employees who would otherwise be laid off to depart voluntarily.
It is the view of the Department that the mere receipt of such benefits by plan
sponsors does not convert a settlor activity into a fiduciary activity or
convert an otherwise permissible plan expense into a settlor expense. See
Lockheed Corp. v. Spink, 517 U.S. 882 (1996); Hughes Aircraft Company v.
Jacobson, 525 U.S. 432 (1999).
Pension and Welfare Benefits Administration
In conjunction with investigations involving reviews of plan expenses, a
number of questions have been raised concerning the extent to which plans may
pay certain expenses that might be viewed as conferring a benefit on the plan
sponsor. In this regard, the Department has issued a number of letters which
have attempted to lay out the fiduciary provisions, principles and
considerations relevant to an analysis of this question.1
Nonetheless, it has been determined that further clarification and guidance
will facilitate both compliance and enforcement efforts in this area. In an effort to specifically address the most frequently raised questions,
the Pension and Welfare Benefits Administration has developed a set of six
hypothetical fact patterns in which various plan expense issues are both
presented and addressed.2 Questions concerning this guidance may be addressed to the Office of
Regulations and Interpretations (ORI), Pension and Welfare Benefits
Administration, Room N-5669, 200 Constitution Avenue, N.W., Washington, D.C.
20210, Attention: Settlor Expense Guidance or by calling Louis Campagna, Chief,
Division of Fiduciary Interpretations, ORI, 202-219-8671 (this is not a
toll-free number). During 1997, ACD Inc. agreed to sell a business segment to EFG Inc., a
friendly competitor. The closing date for the sale was January 1, 1998. As a
result of this sale, 1,600 participants and $180 million (the amount of accrued
benefits attributable to the transferring employees) were to be transferred from
the ACD defined benefit plan to the EFG defined benefit plan on the sale
closing date. In December 1997, the companies were forced, through no fault of
the parties, to postpone the sale closing date until May 1, 1998. The following
expenses were paid by the ACD plan as a result of the business segment sale:
Which of the above expenses, if otherwise reasonable, may be paid by the ACD
Plan? The Department has taken the position that there is a class of
activities which relates to the formation, rather than the management, of plans.
These activities, generally referred to as “settlor” functions,
include decisions relating to the formation, design and termination of plans
and, except in the context of multiemployer plans, generally are not activities
subject to Title I of ERISA. Expenses incurred in connection with settlor
functions would not be reasonable expenses of a plan. The Department also has
taken the position that, while expenses attendant to settlor activities do not
constitute reasonable plan expenses, expenses incurred in connection with the
implementation of settlor decisions may constitute reasonable expenses of the
plan. See Letters to Carl J. Stoney, Jr. (2001, Advisory
Opinion 01-01A); Samuel Israel (1997, Advisory Opinion 97-03A); Kirk
Maldonado (1987); and John Erlenborn (1986). Applying the foregoing principles, the $80,000 for a plan design
study clearly constitutes an expense for a settlor activity and, therefore,
cannot be paid by the ACD Plan. The $30,000 to amend the ACD Plan to provide
for the spinoff should, in the view of the Department, be treated as a
settlor/plan design expense inasmuch as the plan fiduciary would have no
implementation responsibilities under the plan until such time as the plan is
actually amended. The $75,000 expense incurred to determine the amount of plan assets to be
transferred to the EFG Plan would be a permissible plan expense if the
expense is attendant to implementing ACD’s decision to spin off certain
participants, rather than for assisting ACD in formulating the spin-off. The
second $75,000 expense incurred to re-compute the amount of the asset
transfer due to the changed closing date also may be a reasonable plan expense,
where, for example, the delay in the closing date was through no fault of the
sponsor and the plan was duly amended to accomplish the merger at the new
closing date. The $25,000 expense related to negotiations with various unions
would be a settlor expense. The described union negotiations typically take
place in advance of plan changes. Activities (such as union negotiations,
benefit studies, actuarial analyses) that take place in advance of, or in
preparation for, a plan change will almost always constitute settlor
activities, the expenses for which would not constitute reasonable plan
expenses. MNOP Corp., a Georgia gold mining company with pharmaceutical operations in
the Miami area, decided to reduce its staff after several years of poor
mining results, falling gold prices, and failed marketing projects in the Miami
area. After exploring several other staff reduction options, MNOP decided to
initiate an early retirement window (window) in their defined benefit plan
(Plan) to induce older workers to retire. The Plan paid the following
expenses related to the window: Which of the above expenses, if otherwise reasonable, may be paid by the
Plan? The expenses incurred in hypothetical No. 2 fall into three
basic categories - plan design, benefit computation and communication expenses.
Plan design expenses clearly constitute settlor expenses and, therefore, are
not payable by the plan. Typically, plan design expenses are incurred in
advance of the adoption of the plan or a plan amendment. In the case at hand,
the $150,000 for plan design study and the $80,000 for cost
projections to determine financial impact of the plan change on the sponsor
are settlor expenses and may not be paid by the Plan. Similarly, the $10,000
for FASB Statement No. 88 expense relate to the Plan sponsor’s
financial statements and are not payable by the Plan.
Calculating the actual benefits to which a participant is entitled under the
plan is an administrative function of the plan and, accordingly, reasonable
expenses attendant to such calculations may be paid by the plan. Thus, the
$50,000 expense for calculating the benefits of those opting for the
retirement window may be a reasonable expense of the Plan. In addition, the
$90,000 paid to compute the potential benefits for all eligible
employees may be a reasonable expense of the Plan, if the fiduciary
determines that such an expenditure is a prudent use of plan assets. Even
though providing such information to all eligible employees might be viewed as
furthering the objectives of the company, this benefit to the employer would
not prevent the Plan from incurring the expense.3
HIJ, Inc. is a major retailer in Boston, Chicago and San Francisco. During
the last two years, it was determined that HIJ’s defined benefit plan
(Plan) was amended to offer a participant loan program and an early retirement
window for management employees. The Plan is intended to be maintained as a
tax-qualified plan. HIJ normally maximizes its tax-deductible contribution to
the Plan. Upon review of the Plan’s financial records, it was determined
that the following expenses were paid by the Plan:
Which of the above expenses, if otherwise reasonable, may be paid by the
Plan?
In Advisory Opinion 97-03A, the Department expressed the view
that the tax-qualified status of a plan confers benefits upon both the plan
sponsor and the plan and, therefore, in the case of a plan that is intended to
be tax-qualified and that otherwise permits expenses to be paid from plan
assets, a portion of the expenses attendant to tax qualification activities may
be reasonable plan expenses. The Department further clarified its views on
tax-qualification expenses in Advisory Opinion No. 01-01. In that opinion, the
Department expressed the view that a plan fiduciary is not required to take
into account the benefits a plan’s tax-qualified status confers on an
employer in determining whether the expenses attendant to maintaining a
plan’s tax-qualified status constitute reasonable expenses of the plan.
The Department further noted that any such benefit should be viewed as an
integral component of the incidental benefits that flow to plan sponsors
generally by virtue of offering a plan.4
In the context of tax qualification activities, it is the view of the
Department that the design of a plan as a tax-qualified plan clearly involves
settlor activities for which a plan may not pay. On the other hand,
implementation of the settlor decision to maintain a tax-qualified plan would
require plan fiduciaries to undertake activities relating to maintaining the
plan’s tax-qualified status for which a plan may pay reasonable expenses
(i.e., reasonable in light of the services rendered). Implementation activities
might include drafting plan amendments required to maintain tax-qualified
status, nondiscrimination testing, requesting IRS determination letters.
Applying the above principles, the $50,000 to amend the Plan to comply
with tax law changes and the $20,000 for routine nondiscrimination
testing may constitute reasonable expenses of the Plan. The
$25,000 to amend the Plan to establish a participant loan program would
be a plan design/settlor expense inasmuch as the plan fiduciaries have no
implementation obligations under the Plan until such time as the Plan is
amended. Subsequent to the Plan amendment, however, expenses attendant to
operating the established loan program would be implementation expenses with
respect to which the Plan may pay reasonable expenses.
The single charge of $100,000 includes expenses for plan
design/settlor activities (i.e., amending the plan to establish an early
retirement window) and implementation activities (i.e., obtaining an IRS
determination letter). Inasmuch as fiduciaries may pay only reasonable
expenses of administering the plan, the fiduciaries of the Plan would be
required to obtain from the service provider a determination of the specific
expense(s) attributable to the fiduciaries’ implementation
responsibilities (i.e., obtaining an IRS determination letter) prior to payment
by the Plan.
The QRS Corp. is a world-wide shoe manufacturer with plants in the
Cincinnati and Detroit areas. A review of the financial records of the QRS
Corp. defined benefit plan (the Plan) reflected the following expenses:
Which of the above expenses, if any, may be paid by the Plan?
The expenses presented in this hypothetical raise some of the
same issues as those raised in hypothetical No. 3 - the extent to which
expenses relating to maintenance of tax-qualification may constitute reasonable
plan expenses. Applying the principles set forth in the answers to hypothetical
No.3, the $5,000 expense to amend the Plan, the $5,000 expense for a
determination letter and the $50,000 for nondiscrimination testing
may be necessary to maintain the Plan’s tax-qualified status and,
therefore, may constitute reasonable Plan expenses. The fact that the $50,000
discrimination testing was necessary because of a union-negotiated plan
amendment does not affect the expense being treated as a permissible plan
expense. On the other hand, if the $50,000 was incurred as part of the Plan
sponsor’s negotiating with the union - in advance of adoption of the Plan
amendment giving rise to the testing - the expense, as discussed in the Answer
to hypothetical No. 1, would be viewed as a settlor, rather than plan, expense.
The $60,000 for consulting fees to analyze the Company’s options for
compliance with USERRA and SBJPA would constitute plan design/settlor
expenses that may not be paid by the Plan.
Similar to a fiduciary’s implementation responsibility with regard to
maintaining the tax-qualified status of a plan, fiduciaries have an obligation
to ensure that administration of their plan comports with the requirements of
ERISA, as well as other applicable Federal laws. Accordingly, the $5,000
expense to amend the Plan to comply with the requirements of Title I of ERISA
would be a permissible plan expense, assuming that the amount is reasonable in
light of the services rendered.
The public relations firm, TUV (the Firm), has offices in Philadelphia,
Dallas, Los Angeles and New York. The Firm operates a defined benefit plan
(Plan). From 1993 to 1996, the Plan, in addition to distributing a Summary
Annual Report (SAR), distributed an individual benefit statement to each
participant. The total preparation and distribution costs for the benefit
statements were approximately $50,000 annually.
In 1996, the Firm decided it would be a good idea to make sure its
employees were aware of all of the benefits provided by the Firm.
Accordingly, for 1996 and subsequent years, the individual benefit information
was incorporated in a twelve page booklet that included summary information
about all the Firm’s benefit plans (health, dental, vision), as well as
one full page devoted to other Firm benefits (e.g., the physical fitness
center, limousine services) and activities (e.g., annual picnic, Holiday party,
etc). The booklets are prepared by the Plan’s actuarial consultant. The
booklet costs approximately $125,000 to prepare and distribute annually.
What, if any, of these expenses may be paid by the Plan?
The issues presented by this hypothetical involve the extent to
which a plan can pay expenses related to the disclosure of plan information.
Clearly, plans may pay those expenses attendant to compliance with ERISA’s
disclosure requirements (e.g., furnishing and distributing summary plan
descriptions, summary annual reports and individual benefit statements provided
in response to individual requests). As indicated in the Answer to hypothetical
No. 2, communicating plan information to participants and beneficiaries is an
important plan activity. The Department notes that there is nothing in Title I
of ERISA that precludes a plan fiduciary from providing more information than
that specifically required by statute. Whether or not a particular
communication related expense should be incurred by a plan is a fiduciary
decision governed by the fiduciary responsibility provisions of Title I of
ERISA.
Accordingly, the $50,000 to produce and distribute individual benefit
statements would be a permissible plan expense to the extent that the
actual costs of preparation and distribution are reasonable. Similarly, a
portion of the $125,000 for preparation and distribution of the benefit
booklets may also be a permissible plan expense. Clearly, the plan sponsor
should pay that portion (1/12) of the costs of the booklet that relates to
non-plan matters (i.e., physical fitness center, limousine services, picnic,
etc.). In addition, a plan may pay only those reasonable expenses relating to
that plan, and therefore, each of the plans should pay their proportionate
share of the expenses of the booklet. While plan administrators and fiduciaries
should be given considerable deference with regard to their disclosure
decisions, plan administrators should be able to explain their disclosure
decisions and justify the costs attendant thereto.
The QT, P. C. (QT) is a law firm with satellite offices in most major U. S.
cities. QT operates a defined benefit plan (Plan). Until 1997, the Plan was
administered by a ten lawyer benefits committee. In 1997, the Plan fiduciaries
decided to out-source the administration. Following an in-depth search, the
Plan’s fiduciaries selected Firm, Inc. and agreed to pay $1 million in
start-up fees. The start-up fees were paid from the Plan and were used to set
up data bases and transfer data to Firm that was necessary to administer the
Plan. The new system operated by Firm provides Plan participants with a
significantly enhanced level of service than was previously provided by the
staff of ten lawyers. Once the Plan’s administration was transferred to
Firm, the Plan paid all of Firm’s administration fees.
To what extent may the expenses associated with outsourcing the Plan’s
administration be paid by the Plan?
Section 404(a)(1)(A) specifically contemplates the payment of
reasonable expenses by an employee benefit plan. Where a plan sponsor has
assumed responsibility for the payment of plan expenses and later prospectively
shifts that responsibility to the plan, the plan may pay those expenses to the
extent reasonable and not otherwise precluded by the terms of the plan.5
To the extent that the services provided by Firm are necessary for the
administration of the Plan, the $1 million start-up fee and ongoing
administrative fees may constitute reasonable expenses of the Plan if they
are reasonable with respect to the services provided, and not otherwise
precluded by the Plan.
1 See Letters to Carl J. Stoney, Jr. from Robert J.
Doyle (Advisory Opinion 01-01A, January 18, 2001); Samuel Israel from Robert J.
Doyle (Advisory Opinion
97-03A,
January 23, 1997); Kirk Maldonado from Elliot I. Daniel (March 2, 1987); John
Erlenborn from Dennis M. Kass (March 13, 1986).
2 The expense information set forth in the following
hypotheticals are for illustrative purposes only and are not intended to
reflect a determination by the Department on the reasonableness of an expense.
3 The Supreme Court has recognized that plan sponsors
receive a number of incidental benefits by virtue of offering an employee
benefit plan, such as attracting and retaining employees, providing increased
compensation without increasing wages, and reducing the likelihood of lawsuits
by encouraging employees who would otherwise be laid off to depart voluntarily.
The mere receipt of such benefits by plan sponsors does not convert a settlor
activity into a fiduciary activity or convert an otherwise permissible plan
expense into a settlor expense. See Lockheed Corp. v. Spink, 517 U.S.
882 (1996), Hughes Aircraft Company v. Jacobson, 525 U.S. 432 (1999).
4 See footnote no. 3.
5 The Department has taken the position that where a plan
document is silent as to the payment of reasonable administrative expenses, the
plan may pay reasonable administrative expenses. Where a plan document provides
that the employer will pay any such expenses, and if the employer has reserved
the right to amend the plan document, ERISA would not prevent the employer from
amending the plan to require, prospectively, that the relevant expenses be paid
by the plan. The Department believes that the prohibition against self- dealing
in section 406(b)(1) precludes an employer from exercising fiduciary authority
to use plan assets to pay for an amendment that would (retroactively) relieve
the employer of an obligation to pay plan expenses. See
Advisory Opinion
97-03A.
DOL List of Plan Expenses
DOL Kansas City Office lists items to be paid by the plan sponsor or allocated between the sponsor and the plan.
1. Plan design for new plan or amendment not required to comply with ERISA (e.g. cash balance redesign)
2. Expenses related to maintenance of tax qualified status (allocated between plan and sponsor based on benefit to plan and sponsor)
3. Determination of FASB 87, 88, 106 and 112 liabilities and expenses for financial accounting purposes
b. FASB 88 - Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits
c. FASB 106 - Employers' Accounting for Post-retirement Benefits Other Than Pensions
d. FASB 112 - Employers' Accounting for Post-employment Benefits
5. Study to decide plan termination
6. Analysis of assets recoverable on plan termination
7. Consultation on establishment and design of successor to terminated plan
8. Asset/liability forecasting relating to plan design or financial accounting issue
9. Financial forecasting - financial liability - tax implications
10. CAP, DOL and IRS sanctions or penalties
11. DOL delinquent filer program fee
12. Nondiscrimination testing (allocate between plan and sponsor)
13. Developing and defining employer's benefits/health care strategies (e.g. benefit design, employer contribution policy)
14. Modeling the impact of proposed legal/regulatory changes on benefit plans and their administration
15. Preparing for and conducting union negotiations
16. Any expense for which an employer could reasonably be expected to bear the cost in the normal course of the employer's business or operations
17. Expenses for which there is more than an incidental benefit to the employer (allocate expense to employer to the extent of the employer's benefit)
This paper is for discussion purposes only and does not represent the official position of the Department of Labor. This list may not be all inclusive of all potential settlor type fees.
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