Employee benefit plans are seeing increased regulation and disclosure of plan fees including new disclosures of compensation paid to covered service providers in July 2012 (https://www.hhcpa.com/blogs/employee-benefits-audit-services/fee-disclosure-regulations-for-covered-service-providers/). The result of the new fee disclosures and oversight by plan fiduciaries is that record-keepers are expanding their offering of expense accounts, typically known as an ERISA Account, to plan sponsors.
The funds in these accounts are generated when the record-keeper provides a variety of investment options to plan participants, and the record-keeper receives payments from these investments, typically in the form of SEC 12b-1 fees or other administrative fees. With an ERISA Account, these payments are typically placed in two account types for the payment of expenses – a bookkeeping account or a plan account.
With a bookkeeping account, the record-keeper receives payments from the investment and establishes an account on their records. The record-keeper will then pay the plan’s service providers under direction from a plan administrator or fiduciary. While in a plan account, the record-keeper receives the payments but then transfers all or some of the payments to the plan. The plan administrator would then be responsible for paying the plan’s service providers and then allocating any excess amounts to plan participants at year end.
In 2013, the Department of Labor (DOL) issued an Advisory Opinion (http://www.dol.gov/ebsa/regs/AOs/ao2013-03a.html) that provides some further insight into these accounts and whether either of these account types should be considered plan assets. The DOL noted that “Title I of ERISA does not expressly describe what constitutes assets of an employee benefit plan”, thus the DOL “has indicated that the assets of an employee benefit plan generally are to be identified on the basis of ordinary notions of property rights”. The DOL notes that the accounts might be plan assets depending on the arrangement and communications between the record-keeper and the plan. But, the circumstance of a bookkeeping account, described above, doesn’t lead the DOL to believe that the account is a plan asset until the plan receives the funds. Based on the wording of the agreement, the plan might have a claim against the record-keeper for the amount owed, which would represent a plan asset. While the plan account, described above, would be considered a plan asset as the payments were received by the plan.
While every agreement is different, the above should provide a general basis of whether an ERISA Account should be considered assets of the employee benefit plan.
By Kevin C. Bach, CPA, CVA