The COVID-19 virus is having an unprecedented impact on employers of all shapes and sizes, and many are having to review employee benefit plans to see what steps may be necessary to reduce costs until the economy stabilizes. Plan sponsors have spent the early days of the crisis largely battling settlor issues related to the design of the plan. In retirement plan parlance, settlor expenses are defined as expenses which confer a benefit on the plan sponsor, as opposed to plan participants.
Typically, settlor expenses would include expenses incurred for changes in benefit structure or to model potential changes in the plan. The employer, sitting in the seat of settlor, then has the obligation to pay expenses they incur within this role. In the early days of the pandemic, employers have been reviewing optional CARES Act provisions and reviewing the sustainability of their employer contributions to defined contribution plans. These types of expenses are of critical importance but cannot be paid from plan expenses.
Alternatively, the operating costs of the plan, which in some cases can and have been paid by the employer, can be paid by plan assets. During the 11-year bull market that just concluded, a larger percentage of employers began paying plan expenses directly as a benefit to participants. As employers look to shed expenses, employers have the ability, as long as the plan document provides for it, to have plan expenses paid out of the plan. Generally allowable plan expenses would include costs associated with:
- Recordkeeping
- Administration
- Trust and Custody
- Investment Consulting
- Audit
Even some legal fees may be permissible to be paid by the plan if they have been properly designated by counsel.
The current environment has employers working quickly to address new challenges but familiarizing yourself with the nuances of expenses that are permissible for payment and those that are not can prevent you from running afoul of the rules pertaining to the settlor / fiduciary distinction.
Click here for a Department of Labor resource with some excellent case studies on the types of expenses that can (and cannot) be paid by the plan.
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