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 the option to use plan assets to pay some plan expenses, as long as you follow the Department of Labor and IRS rules.
Your ability to use plan assets to pay for administrative expenses includes the costs of annual administration, recordkeeping, compliance testing, preparing your Form 5500, and distribution- and loan-processing fees that are paid by your 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. They cannot cover 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 funds from participant accounts, the plan’s forfeiture account, or an ERISA fee account. Let’s quickly look at all three options.
Pay for 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: the fee must be charged against all participants to whom it applies, and the fee must not favor highly compensated employees.
Two common “uniform” formulas are the “pro rata” method and the “per capita” method. A “pro rata” method—also called a “proportionate” method—allocates the fee based on the percentage each participant should share based on their account balance. A simple example of this “pro rata” method is: Sue’s account balance is one hundred thousand dollars. The plan’s total balance is one million dollars. Since Sue’s 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 total fee evenly among all applicable participants. For example: If Sue’s plan has 20 participants, a $500 fee would be divided by 20. That’s $25 per participant.
Pay for plan expenses using forfeitures
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. Those funds are 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 handled each year.
Pay for plan expenses 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 fees 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 help your company pay for plan expenses.