Can an employer directly pay for the expenses of a company sponsored retirement plan, and then be reimbursed by the plan? Yes, say ERISA attorneys–as long as certain conditions are very carefully met. It is essential to ensure the services are necessary, the fees are reasonable, and that payment protocols align to the plan document. Additional precautions are wise. Read on for the ins and outs of reimbursements for plan expenses.
Necessary Services, Reasonable Fees
Because the whole purpose of ERISA’s high legal standards is to make sure the assets of an employer sponsored retirement plan, like a 401k, are available for participants and beneficiaries, any payments drawn out of plan assets must be treated with great diligence. All procedures related to securing and paying for plan services must be executed with care and carefully documented. Importantly, before any payments are made, plan fiduciaries, such as sponsors, are responsible for ensuring that services are necessary and fees are reasonable, as Kim Shaw Elliott of Wagner Law Group explains:
In what at first seems like monumental overkill, ERISA prohibits providing any services to a plan. It then, however, provides exemptions from those prohibited transactions that permit running the plan’s operations. Those arrangements must be reasonable in nature, necessary for establishing or operating the plan, and no more than reasonable compensation may be paid for those services. Additional rules require full disclosure of the services to be provided and the compensation to be paid. With that information, a plan fiduciary can assess, prior to approving any arrangement, if it is reasonable. Plan fiduciaries are encouraged to carefully review any proposed arrangement with a plan and to understand the marketplace so that only reasonable and necessary expenses will be paid from a plan. This includes contracts to provide essential administrative services.
Alignment: The Plan Document and Operations
Assuming that decisions about retirement plan services and fees are carefully made and well documented, the employer can then pay the expenses and be repaid from plan assets. Doing so is often more convenient than making payment directly from the plan. However, experts at Wagner Law Group underscore that “employers may be reimbursed for expenses paid on behalf of retirement plans,” only after these criteria are carefully attended to:
- The expense meets other tests for being reasonable and necessary,
- The payment is consistent with the terms of the plan document, and
- An agreement between the plan and the employer permits reimbursement. While no authority requires this, a payment agreement will help protect the plan fiduciaries.
To fully understand the significance of their accountabilities to the high standards of ERISA, retirement plan sponsors should review the Department of Labor’s booklet, Fulfilling Your Fiduciary Responsibilities, which emphasizes the necessity of:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
- Carrying out their duties prudently;
- Following the plan documents (unless inconsistent with ERISA);
- Diversifying plan investments; and
- Paying only reasonable plan expenses.
The Department of Labor further reminds retirement plan sponsors: “Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.” Note that an error that is frequently made with retirement plans is failure to precisely operate the plan in accordance with the plan document. That’s why when it comes to the question of employer reimbursements for plan expenses, ERISA attorneys caution:
A plan fiduciary may not deal with the assets of the plan in his own interest or for his own account so any payment from a plan to a fiduciary must be strictly scrutinized for any self-dealing…. If the plan document states that all expenses will be paid by the employer, and nothing more, then reimbursement is a direct violation. If the plan specifies that all expenses will be paid by the plan and leaves the details open, reimbursement might be acceptable. A clearer approach would be for the plan to specify that expenses of the plan shall be paid from the plan assets unless paid by the employer and that the employer may advance expenses and benefits on the plan’s behalf and be reimbursed from the plan’s assets for those advances….
An Ounce of Prevention
Despite diligence, mistakes happen, and as a retirement plan sponsor, you are a fiduciary, and can be held personally responsible for:
- Decisions: Do you have the right advisor, and investment options?
- Cost control: Are the plan fees reasonable and services solid? Have you monitored?
- Compliance: Do operations adhere to the plan document, and government regulations? Are you up to date with all cybersecurity protocols?
Mistakes and misunderstandings can result in being personally named in a lawsuit, with your own savings and assets on the line. Courtroom victories on behalf of employees have made copycat lawsuits against fiduciaries easy–and plentiful. Even if you have done nothing wrong, securing ERISA legal defense is likely to cost you upwards of $350,000. Right now, you are shouldering all this risk alone.
Here’s help: Colonial Surety Company offers an efficient and affordable bundle to protect retirement plan sponsors. For a few dollars a day, you’ll be armed with:
- $1,000,000 for Defense and Penalties if you are faced with alleged or actual breaches of fiduciary duty.
- Cybersecurity Coverage for the business and plan, which includes expert response services to curtail damage after an incident.
Protection’s just a few clicks away:
Obtain Fiduciary With Cyber Liability Insurance Right Here
Serving customers since 1930, Colonial Surety is the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time. Colonial Surety Company is rated “A Excellent” by A.M. Best Company, US Treasury listed and in business all across the country.