Spare No Expense

That is surely welcome news for plan sponsors with HR employees who devote long hours to pension plan administration. But, as with all things pension-related, the devil—and the litigation risk—is in the details.

On the issue of plan expenses, the Supreme Court was clear: plan expenses that are reasonable and necessary for the administration of the pension plan are payable from the plan fund unless the plan explicitly prohibits the practice. However, the Supreme Court went further and was more generous to sponsors than any previous court, calling the distinction between expenses charged by a third-party service provider and those incurred in-house by the employer “artificial.” The Supreme Court essentially reasoned that what must be considered when determining if plan expenses can be paid from a plan fund is the legitimacy and reasonableness of the costs incurred, not to whom the amount is owed.

With a Supreme Court blessing in hand, it may be tempting for DB plan sponsors looking to charge the time spent by their employees and other in-house costs incurred in plan administration to simply forge ahead. However, there are a few practical steps that a plan sponsor should take in order to properly apply this aspect of the Kerry decision.

Step 1. Determine what, if anything, the plan documents say about the payment of plan expenses.
Plan sponsors seeking to recoup in-house expenses—or indeed, any expenses—incurred in the administration of the plan should start with a review of the plan documents (both current and historical) to determine what, if anything, the plan says with respect to payment of plan expenses. In light of the Kerry case, it would be arguably remiss of a plan sponsor paying expenses out of the plan fund, whether they are third-party or in-house expenses, not to undertake such a review.

Where plan documents expressly permit, and have always expressly permitted, the payment of plan expenses out of the pension fund, the analysis is simple: proceed to Step 2. However, where an historical text strictly prohibits such payments, requires the employer to pay some or all of the expenses, was drafted in an ambiguous manner, making it difficult to determine exactly who should pay, or is entirely silent on the matter, the analysis is more complicated.

In these situations, an examination of the amendment powers under the plan is necessary to determine if a subsequent amendment can be validly made to the plan to enable plan expenses to be paid from the fund. Recall that in the Kerry case, amendments allowing administrative expenses to be paid from the plan fund were held not to be inconsistent with the plan or trust documents, thus enabling the plan sponsor to pay such expenses from the fund.

Step 2. Ensure that expenses being charged to the pension fund are administrative expenses.
In most Canadian jurisdictions, the plan sponsor of a single-employer pension plan wears two hats: its employer hat and its administrator hat. Where a sponsor performs many of the administrative functions in-house and wishes to recoup the costs from the plan fund, it is vital that the sponsor recognize which hat is being worn and when. Often, this is not a simple task.

Plan expenses are generally considered administrative expenses when the task is undertaken for the continued registration or the proper administration of the plan. Examples of such tasks include periodic actuarial valuations, legal advice sought on the continued compliance of plan provisions following a change in legislation, investment management and printing of member annual statements.

Tasks that would generally not be considered administrative in nature include actuarial valuations performed for the purposes of collective bargaining or the sale of a business, legal opinions procured on surplus ownership or the permissibility of contribution holidays and communications encouraging the uptake of early retirement.

Of course, some tasks may not be easily identified as employer-related or administrative. While this is a problem regardless of whether these tasks are performed by a third party or done in-house, the added dynamic of the sponsor seeking reimbursement from the plan adds a level of sensitivity to the analysis that is not present when a third-party provider does the work. Similarly, sponsors looking to pay salaries out of the plan fund may find that employee time is not easily apportioned between administrative and non-administrative functions.

Given the difficulty in characterizing certain services and functions—and the potentially awkward dynamic inherent in the sponsor seeking reimbursement from the plan fund—sponsors should tread lightly where there is any doubt that employee time or a certain expense is truly administrative. To take the opposite approach is to invite a dispute.