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Trust Examination Manual
January 18, 2001
Mr. Carl J. Stoney, Jr.
Crosby, Heafey, Roach & May
Two Embarcadero Center, Suite 2000
San Francisco, California 94111-4106
ERISA Sec. 403 - 404
Dear Mr. Stoney:
This is in response to your recent correspondence in which you request confirmation of the continued viability of the Department of Labor’s views expressed in Advisory Opinion 97-03A (January 23, 1997), discussing the application of the Employee Retirement Income Security Act (ERISA) to the payment of certain plan termination expenses by tax-qualified plans administered by the Insurance Commissioner of the State of California in its capacity as liquidator of the companies which sponsored the plans. Further, you request any other guidance that the department may be able to provide on the issue of permissible plan expenses. In this regard, you indicate that you represent the Conservation and Liquidation Office of the State of California Department of Insurance in connection with the termination of, and attendant distribution of assets from, tax-qualified retirement plans sponsored by now-insolvent insurance companies.
Since the issuance of Advisory Opinion 97-03A, questions have been raised concerning the extent to which an employee benefit plan may pay the costs attendant to maintaining tax- qualified status, without regard to the fact that tax qualification confers a benefit on the plan sponsor. The following is intended to clarify the views of the Department of Labor on this issue.
As discussed in Advisory Opinion 97-03A, a determination as to whether to pay a particular expense out of plan assets is a fiduciary act governed by ERISA’s fiduciary responsibility provisions. ERISA provides that, subject to certain exceptions, the assets of an employee benefit plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. In discharging their duties under ERISA, fiduciaries must act prudently and solely in the interest of the plan participants and beneficiaries, and in accordance with the documents and instruments governing the plan insofar as they are consistent with the provisions of ERISA. See ERISA sections 403(c)(1), 404(a)(1)(A), (B), and (D).
With regard to sections 403 and 404 of ERISA, we noted that, as a general rule, reasonable expenses of administering a plan include direct expenses properly and actually incurred in the performance of a fiduciary’s duties to the plan. We also noted, however, that the department has long taken the position that there is a class of discretionary activities which relate to the formation, rather than the management, of plans, explaining that these so-called settlor functions include decisions relating to the establishment, design and termination of plans and, except in the context of multi-employer plans, generally are not fiduciary activities governed by ERISA. Expenses incurred in connection with the performance of settlor functions would not be reasonable expenses of a plan as they would be incurred for the benefit of the employer and would involve services for which an employer could reasonably be expected to bear the cost in the normal course of its business operations. However, reasonable expenses incurred in connection with the implementation of a settlor decision would generally be payable by the plan.
In Advisory Opinion 97-03A, the department expressed the view that the tax-qualified status of a plan confers benefits upon both the plan sponsor and the plan and, therefore, in the case of a plan that is intended to be tax-qualified and that otherwise permits expenses to be paid from plan assets, a portion of the expenses attendant to tax-qualification activities may be reasonable plan expenses. This view has been construed to require an apportionment of all tax qualification- related expenses between the plan and plan sponsor. The department does not agree with this reading of the opinion. The opinion recognizes that, in the context of tax-qualification activities, fiduciaries must consider, consistent with the principles articulated in earlier letters,(1) whether the activities are settlor in nature for purposes of determining whether the expenses attendant thereto may be reasonable expenses of the plan. However, in making this determination, the department does not believe that a fiduciary must take into account the benefit a plan’s tax-qualified status confers on the employer. Any such benefit, in the opinion of the department, should be viewed as an integral component of the incidental benefits that flow to plan sponsors generally by virtue of offering a plan.(2)
In the context of tax-qualification activities, it is the view of the department that the formation of a plan as a tax-qualified plan is a settlor activity for which a plan may not pay. Where a plan is intended to be a tax-qualified plan, however, implementation of this settlor decision may require plan fiduciaries to undertake activities relating to maintaining the plan’s tax-qualified status for which a plan may pay reasonable expenses (i.e., reasonable in light of the services rendered). Implementation activities might include drafting plan amendments required by changes in the tax law, nondiscrimination testing, and requesting IRS determination letters. If, on the other hand, maintaining the plan’s tax-qualified status involves analysis of options for amending the plan from which the plan sponsor makes a choice, the expenses incurred in analyzing the options would be settlor expenses.
The foregoing views are intended to clarify, rather than supersede, the views of the department set forth in Advisory Opinion 97-03A. We hope the information provided is of assistance to you.
This letter constitutes an advisory opinion under ERISA Procedure 76-1 (41 Fed. Reg. 36281, August 27, 1976).
Robert J. Doyle
Director of Regulations and Interpretations