Insights

When retirement plan sponsors perform administrative services on behalf of the plan, they can be reimbursed by the plan for those services. However, meticulous expense documentation is essential, as a recent case illustrates.

Determining reimbursement

For a plan sponsor to receive reimbursement for services it has rendered to the plan, the sponsor must satisfy ERISA regulations. This means that the transaction must:

Satisfy the standards for a “prohibited transactions” exemption. The basic ERISA prohibited transaction that must be avoided is “self-dealing.”

Meet ERISA’s prudence standards for plan fiduciaries. Regulations allow a fiduciary like the plan sponsor to be reimbursed for “direct expenses properly and actually incurred in the performance of such services.” They also must be “reasonable.”

Fiduciary standards are applicable to just about any substantive actions a plan sponsor can take with respect to a plan, except “settlor” tasks, such as changing the level of employer contributions to participant accounts, amending the plan document, or even terminating the plan.

Documenting expenses

What these standards mean is defined by courts when disputes arise. In Perez v. City National Corporation, the U.S. Department of Labor argued — and a court agreed — that City National’s reimbursement for services rendered to its ERISA plan didn’t provide sufficient documentation. Its calculation of “direct expenses” was based on averages and estimates.

That methodology, the court concluded, could have resulted in over- or undercharges to the plan. Instead, the court ruled, the company should have “kept contemporaneous time records [such as timesheets] so that it could calculate actual costs” of its administrative services to the plan.

Finding reasonableness

Even when expenses are meticulously documented, they must be reasonable. But how is reasonableness determined? Generally, courts decide reasonableness on a case-by-case basis.

To avoid discrepancies and meet your fiduciary burden, be sure to properly document any expenses you intend to seek reimbursement for from the plan, and review any fees you charge to the plan for reasonableness.

BPM is one of the largest California-based public accounting and advisory firms, ranked as one of the 50 major firms in the country. With six offices across the Bay Area – as well as offices in Oregon, Hong Kong and the Cayman Islands – we serve emerging, mid-cap, and closely-held businesses as well as high-net-worth individuals in a broad reach of industries. Our Employee Benefits team consists of professionals with extensive knowledge of ERISA guidelines and deep expertise performing employee benefit plan audits. We can help you craft a smooth-running plan that serves your employees while mitigating associated risk. For more information or for a free expert consultation, contact Jenise Gaskin at (925) 296-1016, Michelle Ausburn at (707) 524-6588 or visit us at bpmcpa.com/ebp.