IRS Provides Guidance For Recoup Expenses From Ex-Workers

January 30, 2004 (PLANSPONSOR.com) - The Internal Revenue Service (IRS) has provided guidance to plan sponsors for charging a former employee's account for plan expenses, without necessarily charging active employees' accounts.

The IRS, in Revenue Ruling 2004-10, lays the groundwork for plan sponsors to charge plan administration fees for former employees on a pro rata or “another reasonable basis.”   To arrive at this conclusion, the agency looked outside of the defined contribution space, particular at Individual Retirement Accounts (IRA), and found analogous fees were being charged without detriment to the participant.  

Before Revenue Ruling 2004-10, Internal Revenue Code (IRC) Section 411(a)(11) was interpreted to mean a participant’s consent to a distribution is not valid if the plan imposes a significant detriment on the participant for not consenting to a distribution.   In other words, plan sponsors cannot charge former employees if they are not also charging their current workers.   Yet, with the ruling by the IRS, the agency found   “an allocation of administrative expenses of a defined contribution plan to the individual account of a participant who does not consent to a distribution is not a significant detriment,” if it is allocated in a reasonable manner consistent with Employee Retirement Income Security Act (ERISA) mandates.

A word of caution was provided though in the text of the ruling.   The IRS warned plan sponsors that every allocation model might not be reasonable.   As an example, the IRS said that allocating the expenses of an active employee pro rata to all accounts, including the accounts of both active and former employees, yet only dinging the accounts of former employees for former employees expenses would not be prudent, given the former worker would be bearing “most than an equitable portion of the plan’s expenses.”

Perhaps most significant about the IRS’ ruling is the continuity it draws between the agency and the Employee Benefits Security Administration (EBSA).   The EBSA had previously issued Field Assistance Bulletin (FAB) 2003-3, which allowed plan sponsors to charge a former employees’ accounts for reasonable expenses on either a pro rata or per capita basis within the framework of ERISA.  

A copy of Revenue Ruling 2004-10 can be found at  http://www.irs.gov/pub/irs-drop/rr-04-10.pdf .

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