Rev. Rul. permits allocation of expenses to former employees.

• Author: Masnik, Robert H.

The IRS issued Rev. Rul. 2004-10, which permits a defined contribution plan to allow an employer to pay administrative expenses for active employees, while charging such expenses to terminated employees' plan accounts.

Facts

In the ruling, a defined contribution plan permits an employee to receive benefits at any time after separating from service. The plan allocates its administrative expenses among employees' accounts based on the ratio of each account balance to total account balances. Expenses not paid by the employer are charged to participants' accounts. The employer pays part of the plan's administrative expenses for active employees, but not for former employees or their beneficiaries.

Law

Sec. 411(a)(11)(A) states that if a participant's nonforfeitable benefit in a qualified plan exceeds $5,000, the plan must then provide that the benefit may not be distributed without the participant's consent. According to Regs. Sec. 1.411 (a)-11 (c)(2)(i), consent to a distribution is not valid if a plan imposes a "significant detriment" on any participant who does not consent to a distribution. Whether or not a detriment is significant is determined by the facts and circumstances.

Reasoning and Decision

According to the IRS, an allocation of administrative expenses in a defined contribution plan to the account of a participant who does not consent to a distribution is not a significant detriment, under Regs. Sec. 1.411(a)-11(c)(2)(i), as long as the allocation is reasonable and satisfies the Title I Employee Retirement Income Security Act of 1974 (ERISA) requirements (e.g., a pro-rata allocation), because, under the regulations, analogous fees would be imposed in the marketplace (either implicitly or explicitly) for a comparable investment outside a qualified plan (e.g., an investment manager's fees for an IRA investment). Thus, whether or not such expenses are charged to current employees' accounts, charging them on a pro-rata basis to the accounts of former employees is not a significant detriment imposed on an employee who does not consent to a distribution.

FAB 2003-3

The Service buttressed its conclusion by referring to Department of Labor (DOL) Employee Benefits Security Administration, Field Assistance Bulletin 2003-3 (issued 5/19/(13), which sets forth guidelines for allocating administrative expenses among plan participants in a defined contribution plan. The DOL explained that, assuming expenses are reasonable, certain administrative...