News & Views

The Department of Labor previously issued Field Assistance Bulletin 2003-3 in which it provided guidance regarding the allocation of plan administrative expenses in a defined contribution plan. The guidance permits a retirement plan to allocate certain expenses, such as distribution and QDRO expenses, to the participant receiving the distribution or obtaining the divorce. The guidance also permits a plan to allocate plan administration expenses to former-employee participants, even though the employer is paying for administration expenses of current-employee participants.

In Revenue Ruling 2004-10, the IRS has issued guidance concerning the allocation of plan administration expenses to former employee accounts. The issue of concern for the IRS is the consent rules. These rules prohibit a plan from making a distribution to a terminated participant without the person's consent if the person's account balance exceeds $5,000 until the later of age 62 or the plan's normal retirement age.

Furthermore, the plan may not impose a detriment on a participant because the participant refuses to provide a consent for the distribution. The issue is whether allocating plan administration expenses to a former-employee's account imposes a detriment to the participant when the employer pays the plan administration expenses of current employees.

In the Revenue Ruling, the IRS ruled that a plan will not impose a detriment if it allocates to former employees' accounts a reasonable, pro rata share of the plan's administration expenses. The allocation of expenses to former-employee accounts is not a detriment because the former employees would have to pay IRS expenses if they rolled over the amounts to an IRA.

Therefore, employers may now allocate to former-employee accounts a reasonable, pro rata share of the plan's administration expenses, but still pay for the administration expenses of current, active employees.

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