By Jenny Kiffmeyer, J.D – The Retirement Learning Center
ERISA Budget Accounts
ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in New Jersey involved a question on the use of amounts accumulated in an ERISA Budget Account in a 401(k) plan. The advisor asked: “Can a plan sponsor use the ERISA Budget Account within the company’s 401(k) plan to fund employer contributions?”
Highlights of Discussion
No, an employer cannot use amounts in the ERISA Budget Account (a.k.a., the ERISA Fee Recapture Account or ERISA Account) within the company’s 401(k) plan to fund employer contributions because such assets can only be used to pay plan administrative expenses.
The DOL defines an ERISA Budget Account in Q&A 13 of its Supplemental FAQs about the Schedule C for Form 5500. Plan recordkeepers may receive revenue sharing payments from fund companies in the form of shareholder servicing fees. In some cases, the plan sponsor and the recordkeeper may agree to establish an ERISA Budget Account to hold amounts where the revenue sharing exceeds the fee level negotiated between the recordkeeper and the plan sponsor.
In many cases, the ERISA Budget Account (excess revenue sharing) in a 401(k) plan is viewed as a plan asset that belongs to the participants (Advisory Opinion 2013-03A). ERISA Sec. 403(c)(1) requires plan assets be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries, and for defraying reasonable expenses of administering the plan. Therefore, the ERISA Budget Account may only be used to pay for plan administrative expenses that relate to the day-to-day operation of the plan (e.g., calculating benefits, communicating plan information to participants, plan testing, etc.). The plan sponsor cannot use it to pay for its obligations to the plan (e.g., contributions).
In Advisory Opinion 2001-01A, the DOL has clarified what is considered plan administrative expenses (payable by plan assets) vs. “settlor” expenses, which must be paid by the plan sponsor. The DOL also has described fact patterns regarding the differentiation between Settlor v. Plan Expenses. The plan could not use the ERISA Budget to pay for settlor functions, such as decisions relating to the establishment, design or termination of plans.
Additionally, it is important to check the plan document language regarding payment of plan fees as often the plan will include specific guidelines. Also, check the plan’s recordkeeping service agreement for any language regarding the use of revenue sharing payments.
A plan sponsor may use the 401(k) plan’s ERISA Budget Account to pay for plan administrative (but not settlor) expenses. The ERISA Budget cannot be used to offset employer contributions. Check the terms of the governing plan document for further guidance on the use of revenue sharing payments.