The IRS recently issued guidance on charging expenses to participants who have terminated employment.
Prior EBSA Guidance. In our May 28, 2003, Employee Benefit Update titled “Allocation of Expenses in a Defined Contribution Plan — QDRO Rule Reversed,” we discussed Field Assistance Bulletin 2003-3 that was issued by the Employee Benefits Security Administration (a division of the
U.S. Department of Labor). The EBSA stated that, even if the plan sponsor generally pays certain administrative expenses of the plan for active employees, those same administrative expenses can be charged to the accounts of individuals that have separated from employment without violating the ERISA fiduciary requirements. These expenses, according to the EBSA, can be charged without regard to whether the accounts of active employees are charged and without regard to whether the separated participant is entitled to a distribution. The IRS, however, has the authority to address whether charging only separated participants causes an impermissible “force out.” Due to this, we stated that a question remained as to whether allocating administrative expenses to individuals who have separated from employment but not individuals who are still active is a violation of the “no force out” rules of Code § 411(a)(11). Early informal guidance attributed to the IRS confirmed that the IRS had not been involved in the preparation of Field Assistance Bulletin 2003-3 and might well hold an inconsistent view of the appropriateness of this practice under § 411(a)(11).
Recent IRS Guidance. On January 29, 2004, the IRS issued Revenue Ruling 2004-10 that provides the necessary formal guidance. The IRS stated that allocation of reasonable expenses to participants who have separated from service, even if the employer pays similar kinds expenses for active participants, is not a significant detriment to participants who have separated from service, within the meaning of Treasury Regulation § 411(a)-11(c)(2)(i). The IRS observed that these fees would be analogous to fees that would be imposed and charged by an investment manager for an IRA investment if the terminated participant had “rolled” the account to an IRA. Therefore, allocating expenses of the plan to individual accounts of participants who do not consent to a distribution is permitted under § 411(a)(11), provided that the allocation is reasonable and otherwise satisfies the requirements of Title I of ERISA (such as pro rata allocation).
You can find the Field Assistance Bulletin 2003-3 at www.dol.gov/.
You can find the Revenue Ruling 2004-10 at www.irs.gov/pub/irs-irbs/irb04-07.pdf.