IRS TAKEN BY SURPRISE WITH DOL FAB 2003-3
Prepared
By: Patricia K. Keesler
Benefits
Law Group
Atlanta,
Georgia
In May of 2003, the Department of Labor (“DOL”) issued a Field Assistance Bulletin (FAB) relating to the allocation of plan expenses among participants. Reversing a prior position, the DOL provides in the FAB that ERISA does not preclude a plan from allocating certain plan expenses directly to plan participants’ accounts in defined contribution plans. DOL also expressed the opinion that, depending on the circumstances, plan expenses could be allocated to participants on a pro rata or a per capita basis. The DOL warned however, that any such allocation must be provided for in the summary plan description.
The FAB lists specific examples of plan expenses that, if charged directly to the participant, would not be precluded by ERISA. Those examples are expenses for hardship withdrawals, the calculation of benefits options, benefit distributions, accounts of separated vested participants and qualified domestic relations orders.
Initially, this guidance was greeted with enthusiasm by practitioners and considered quite a change from the prior DOL position. However, the Internal Revenue Service dampened that enthusiasm when Paul Schultz, IRS Director of Employees Plan Rulings and Agreements, indicated that the IRS had no advance knowledge of the FAB and that the IRS is not necessarily in agreement with it. In fact, is has been reported that Mr. Schultz has warned plan sponsors not to act on the FAB until the IRS has had time to study the issue and provide some guidance of its own.
One issue of concern to the IRS arises under Treasury Regulation section 1. 411(1)-11 (c). That regulation provides that a participant’ s consent to a distribution in excess of $5000 is not valid if there is a “significant detriment” on the participant. There is concern at the IRS that charging an individual participant for the expenses incurred in processing a distribution would impose a significant detriment on that participant’s right to receive a distribution. This violation of the regulations could also potentially disqualify the plan.
Therefore, the initial enthusiasm for the FAB has waned and it appears that employers are waiting for IRS guidance before acting on the FAB and changing the way they allocate plan expenses.