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© Copyright 2000 Rogers Media. The following article first appeared in the June 2001 edition of
BENEFITS CANADA magazine.
Expensing the pension plan
Sponsors are charging more administrative expenses to the pension plan. But what qualifies as a
reasonable expense is often confusing.
By Deron Waldock and Elizabeth Cheng
Faced with the increasing costs of operating a registered pension plan, employers who both sponsor and
administer registered pension plans increasingly ask the same question--can the company use plan assets to
pay for expenses incurred in maintaining the plan? Sooner or later, this question comes up during a meeting
between an employer and its lawyers, actuaries or consultants. Most employers hope to hear a clear and
unqualified 'yes.' Unfortunately, the answer is not quite so straightforward.
More often than not, the answer begins with 'maybe' or 'that depends.' In the end, an employer will likely
be told that while plan assets may be used to pay reasonable administrative expenses, the assets may not be
used to pay every expense that is somehow related to the plan's existence. To add to an employer's
confusion, a detailed list of permitted expenses that is applicable to all registered pension plans simply
doesn't exist.
The uncertainty surrounding plan expenses leads many employers to question what exactly the rules are that
govern the use of plan assets to pay the costs of administering a pension plan. To begin with, the use of
plan assets under any circumstances will be governed by equitable legal principles. The use of plan assets
will also be governed by applicable pension legislation and the Income Tax Act. In the case of
administrative expenses, the laws of equity and pension legislation apply to hold the employer to a
fiduciary standard when determining whether expenses may be paid from the plan assets.
The key features of a fiduciary relationship are:
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Discretionary power rests in the first person.
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Discretionary power may be exercised by the first person to affect the interests of the second person.
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The second person is vulnerable to the first person.
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The second person relies on the first person.
All four key features are found in a relationship between an administrator and the plan members. Indeed, an
administrator has the discretionary power to affect the legal interests of plan members through its
responsibility for the administration of the plan and the management of the pension fund. The members rely
on the administrator and are vulnerable to the administrator's actions. Plan members rely on the
administrator to protect the plan assets and in turn their benefits. Consequently, employers have been held
to the standard of a fiduciary when acting as the administrator of a pension plan.
As a fiduciary, an employer owes a duty of loyalty to the plan members. A fiduciary must act honestly,
prudently, diligently, even-handedly and in the best interests of plan members. A fiduciary cannot enjoy
unauthorized profits, delegate its responsibilities or place itself in a position of conflict of interest
when discharging its responsibilities. Therefore, in deciding whether an expense may be paid from the plan
fund an employer, in its role as administrator, must decide whether such a payment would be consistent with
its role as a fiduciary.
What this means is that an employer must check the plan's governing documents, such as the pension plan and
the funding agreement, to see if they permit the payment of expenses. In addition, an employer must check
if the particular expense in question is reasonable and related to the administration of the pension plan.
If the expense is unreasonable or unrelated to the administration of the plan, an administrator cannot
legally pay the expense out of plan assets.
While these general principles appear straightforward, their application is often complicated. Here are
some examples of plan expenses and an analysis of whether these costs can be paid from the plan's assets.
ACTUARIAL SERVICES
Assuming that the plan's governing documents allow for administrative expenses to be paid from the plan
assets, no one can question that actuarial services generally qualify as a legitimate administrative
expense. These services are necessary to the continued registration of a defined benefit (DB) pension plan.
Actuarial valuations, after all, are required to be performed and filed with the pension regulatory
authorities and Canada Customs and Revenue Agency. Fees for these services may be paid from the pension
fund provided they are reasonable.
Whether a fee is reasonable is really a question of fact. It's safe to assume that a certain fee is
reasonable if it's within the range of fees quoted by similarly qualified service providers for similar
services. For example, if most actuaries who are qualified to perform an actuarial valuation in a
particular market charge between $350 and $450 an hour, and your actuary charges $400 an hour, the fee is
reasonable.
The general rules become more complicated, however, if the actuarial service is required for a reason
unrelated to legislative requirements. For example, what if an employer requests the performance of an
actuarial valuation in its preparation for the sale of the company? This is a grey area that causes
headaches for many administrators. While actuarial services are generally not a disputed expense, what is a
plan to do in this case?
To deal with this scenario, plan administrators need to go back to the general rules. Specifically, they
need to ask whether the actuarial fees are necessary for the administration of the pension plan. Is the
pension plan's registered status threatened if actuarial services are not provided? The answer to this
question appears to be no. The employer, therefore, would not be entitled to use plan assets to pay the
actuarial fees. However, the answer may be yes if the valuation is necessary to convince the purchaser that
the pension plan should continue to exist following the completion of the sale of the company.
Another way of approaching this example is to ask: In what capacity is the employer incurring this expense?
Is the employer acting as the plan administrator? Or is the employer acting simply as an employer? What is
the true objective behind the employer's request for actuarial services? It appears the objective of the
actuarial valuation is to help facilitate the sale of the company, not the administration of the pension
plan. In other words, the employer is simply acting as an employer, not as administrator. Therefore,
arguably, actuarial fees may not be paid from the pension fund.
LEGAL SERVICES
Like actuarial services, legal services are generally regarded as a legitimate administrative expense of a
pension plan. It is clear that legal fees may be paid from the plan assets if they are incurred for the
purpose of drafting plan amendments required because of changes to pension legislation or the Income Tax
Act.
What, however, should an employer do with legal fees related to an opinion on surplus ownership or the
right to take a contribution holiday? This is another grey area that causes plan sponsors grief.
Going back to the general rules, administrators must first determine the objective of the legal opinion.
The objective, in either case, is most likely to allow the employer to gain access to the surplus or take a
contribution holiday. It appears that the taking of a contribution holiday or gaining access to surplus is
not necessary for the continuation of a pension plan. Therefore, an employer may not pay legal expenses in
those circumstances from plan assets.
Another common legal expense relates to the conversion of a pension plan from a DB to a defined
contribution arrangement. The Canadian courts have ruled on this special example and have found that such a
conversion is undertaken by the plan sponsor in its capacity as employer for business reasons which may or
may not benefit plan members. In fact, the British Columbia Court of Appeal disallowed the payment of the
legal fees associated with this type of conversion in Hockin vs. The Bank of British Columbia.
Finally, legal fees incurred in connection with a legal action may not be payable out of the assets of the
pension fund. For example, if a legal action results from an employer's business decision to take a
contribution holiday or access surplus, the costs to legally defend the employer are not required for the
continued registration of the pension plan. Again, Canadian courts have held that such legal fees are
incurred by an employer in an attempt to defend a business decision made in its capacity as employer and
not as the plan administrator.
COMMUNICATION EXPENSES
Another common area of administrative expenses is communication with plan members. Mandatory plan
communications, such as summary plan descriptions, annual statements, information about plan amendments and
retirement statements, are required by pension legislation and are necessary to the continued registration
of a pension plan. Fees invoiced by printers or other service providers may be paid from the pension fund
if such fees are reasonable.
It's less clear, however, whether costs associated with extra communication that are helpful, but not
legally required, may be paid from plan funds. For example, communications relating to early retirement
options may further an employer's objective to induce employees to opt for early retirement, thereby
enabling the company to restructure its workforce. On the other hand, it's arguable that communication of
plan information to members and beneficiaries under any circumstance is an important plan activity that
serves the best interests of the members first, and not the employer. As such, the costs and expenses
associated with such communications can be paid out of the plan assets provided the expenses are
reasonable.
While an employer may pay plan-related communication expenses out of the plan assets, it may not subsidize
extra or non-plan related communications. In other words, if a communications piece includes both
plan-related and non-plan related information, an employer must pay for the portion of the publication that
does not relate to the plan with corporate monies.
If an employer normally publishes an internal company newsletter and the newsletter includes pension
information, plan assets may be used to pay for a percentage of the costs of the newsletter. The exact
percentage will depend on the portion of the newsletter devoted to pension information. Additionally, if an
employer communicates information about several plans in a single communication, the expense associated
with the production of the material must be fairly allocated among the various plans.
OUTSOURCING COSTS
Employers are also choosing to outsource plan administration to third parties more frequently. While the
decision to outsource helps an employer, the expenses charged by outside service providers relate to the
operation of the plan. Accordingly, start-up fees and the ongoing administrative fees charged by
third-party service providers may generally be paid from plan assets provided those fees are reasonable.
IN-HOUSE ADMINISTRATION COSTS
While many employers are moving towards outsourcing benefits administration, many others still use their
own employees to perform administration services for the plan. Can an employer receive reimbursement from
the plan assets for these costs?
Based on the general rules, employers would be able to pay in-house administration costs out of plan
assets. Again, employers would only be able to charge that portion of an employee's salary or other expense
to the plan that relates directly to the administration of the plan.
Just how direct that relation has to be is still subject to debate. In the U.S., the Department of Labor
regulations and advisory opinions under subsection 408(c)(2) of the Employment Retirement Income Security
Act suggest that employers must satisfy what's known as a 'but for' test by showing that it would not have
incurred an expense had it not provided the services to the plan.
To meet this requirement, American employers must show that they would either eliminate the employee's
position entirely or reduce the employee's compensation if the employer decided not to provide services to
the plan. Put another way, U.S. employers are prohibited from charging their in-house expenses to the plan
if it is likely that the employer would continue to pay the employee the same salary and the employee's
non-plan duties would simply expand to fill their workday if the work was outsourced.
Ultimately, the question of whether administrative expenses can be paid out of a pension plan's assets must
be answered on a case-by-case basis. What employers should remember is that the decisive factors are
whether the costs incurred are necessary to the administration of the plan and whether the activities are
carried out by the employer in its role as an administrator.
Deron Waldock is a pension and benefits lawyer with Borden Ladner Gervais and Elizabeth Cheng is a pension
lawyer with Hewitt Associates in Vancouver.
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