Sometimes, it is more efficient for an employer to pay the expenses of a retirement plan rather than the plan paying for them directly. If the expense paid is otherwise appropriate, the employer can then be reimbursed by the plan from plan assets. This includes payments made to third party providers for necessary services.
Employers may be reimbursed for expenses paid on behalf of retirement plans if:
- 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.
What is a reasonable and necessary plan expense?
The Employee Retirement Income Security Act of 1974 (“ERISA”) is the major law that governs the operation of retirement plans. Its paramount purpose is to protect plan assets so that they are available to pay benefits to plan participants and their beneficiaries in accordance with the terms of the plan. Accordingly, ERISA includes strict provisions, called “prohibited transactions”, that disallow payments and other transactions that might not further that essential purpose of paying benefits.
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.
Why does reimbursing an employer with plan assets raise any concerns?
ERISA also prohibits transferring any assets from a plan to a party in interest as well as lending money or any extension of credit between a plan and a party in interest. An employer, acting as the plan sponsor or responsible plan fiduciary is a party in interest to the plan. Paying expenses in advance and then being reimbursed by the plan might be viewed as a short-term loan from the employer to the plan. Additionally, 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.
So long as the services are necessary and the arrangements for the services and compensation to be paid are reasonable, as stated above, the expenses are appropriate plan expenses and payment for them is exempted from the prohibited transactions. If the employer has a conflict of interest in being reimbursed, however, that is a separate and distinct prohibited transaction.
How can a plan document address reimbursements?
ERISA requires that all plans be operated in accordance with the strict terms of the plan document. 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.
How can the reasonableness of reimbursement arrangements be strengthened?
An argument that being reimbursed is really part of a loan from the employer to the plan can be mitigated by an agreement that the employer will pay certain expenses directly to the provider and that the plan will reimburse the employer. No interest will be charged or received and repayment will be made within 60 days of notification.
Conclusion:
With special care to ensure that any expenses incurred by a plan are necessary and reasonable, an employer should be able to pay those expenses in advance and receive reimbursement from the plan in accordance with the terms of the plan document.
