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Case of the Week: ERISA Budget and Matching Contributions

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in New Jersey is representative of a common inquiry related to the use of amounts accumulated in an ERISA recapture account in a 401(k) plan (a.k.a., an ERISA budget, ERISA bucket, revenue sharing or excess revenue account, to name a few). The advisor asked:

“Can an employer use its excess revenue account to fund the employer’s matching contribution to the 401(k) plan?”

Highlights of Discussion

• Just as the old Magic 8 Ball would say, “My sources say no.”
• The DOL defines an ERISA recapture account in Q&A 13 of its Supplemental FAQs About the Schedule C for Form 5500.
• In many cases, the ERISA recapture account (excess revenue) in a 401(k) plan is viewed as a plan asset that belongs to the participants (Advisory Opinion 2013-03A).
• ERISA Sec. 403(c)(1) requires plan assets be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries, and defraying reasonable expenses of administering the plan. Therefore, the ERISA fee recapture account may only be used to pay for plan administrative expenses that relate to the day-to-day operation of the plan (e.g., calculating benefits, communicating plan information to participants, plan testing, etc.). The plan sponsor cannot use it to pay for its obligations to the plan (e.g., contributions).
• In Advisory Opinion 2001-01A the DOL has clarified what is considered plan administrative expenses (payable by plan assets) versus “settlor” expenses, which must be paid by the plan sponsor. The DOL also has described fact patterns regarding the differentiation between settlor versus plan expenses. The plan could not use the ERISA budget to pay for settlor functions, such as decisions relating to the establishment, design and termination of plans.
Apex Logo• It is important to check the plan document language regarding payment of plan fees as often times specific guidelines are stated therein.
• Also check the plan’s record keeping service agreement for any language regarding the use of revenue sharing payments.

Conclusion

A plan sponsor may use the 401(k) plan’s ERISA recapture account to pay for certain plan expenses, but not all of them. Financial advisors who know which plan costs are legitimate charges against the ERISA recapture account and which are not are better positioned to support their plan sponsor clients.

The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.

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