Reimbursement Road Map for Sponsor Services

As illustrated in a recent case, Perez v. City National Corporation, thorough expense documentation is critical when a retirement plan sponsor is reimbursed for administrative services rendered on behalf of the plan.

To Determine Reimbursement

The Employment Retirement Income Security Act (“ERISA”) sets forth certain standards for plan sponsors which they are required to meet when they are reimbursed for administrative services rendered to the plan. The transaction must:

Satisfy the standards for a “prohibited transactions” exemption. As per ERISA standards, the transaction must not be “self-dealing.”

Meet ERISA’s prudence standards for plan fiduciaries. ERISA regulations state that a fiduciary, such as the plan sponsor, can be reimbursed for “direct expenses properly and actually incurred in the performance of such services.” Note that these expenses are also required to be “reasonable.”

These fiduciary standards apply to just about any substantive actions a plan sponsor can take with respect to a plan. Some exceptions to this may include “settlor” tasks, such as changing the level of employer contributions to participant accounts, amending the plan document, or even terminating the plan.

Thoroughly Documenting Expenses

In Perez v. City National Corporation, the U.S. Department of Labor argued — and a court agreed — that City National’s reimbursement for services rendered to its ERISA plan lacked sufficient documentation. The calculation of “direct expenses” was based on average values and estimates.

The court concluded that using such methodology could have resulted in over- or undercharges to the plan. Instead, the court ruled, the company should have “kept contemporaneous time records (such as timesheets) so that it could calculate actual costs” of its administrative services to the plan.

Determining Reasonableness

As discussed, expenses must be sufficiently documented and they must be reasonable. What is meant by reasonable? Generally, courts decide reasonableness on a case-by-case basis.

In conclusion, fees charged to the plan should be reviewed for reasonableness. In addition, the fees reimbursed should be thoroughly documented by the plan sponsor.

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