This is another in a series of articles on interesting issues presented under the 408(b)(2) regulation and its disclosure requirements.

It has become fairly common for plans to have expense recapture accounts (which are also known as ERISA budget accounts, PERAs—plan expense recapture or reimbursement accounts, and by a variety of other names). Typically, those accounts are established within a plan when a service provider (most often the recordkeeper) receives compensation through revenue sharing in excess of its reasonable charges. For example, if a reasonable charge for the recordkeeping/TPA services was $50,000 and the recordkeeper received $60,000 in revenue sharing, the excess amount would be deposited into the expense recapture account—thereby avoiding the prohibited transaction issue of excess compensation.

However, sometimes the recordkeeper/TPA places the money in its corporate account and tells the plan sponsor that the money can be spent for the benefit of the plan . . . at the direction of the plan sponsor. While that presents a number of fiduciary and prohibited transaction issues, it also presents an interesting, and problematic, 408(b)(2) compliance issue for service providers.

For example, when an accounting firm audits a 401(k) plan, it is usually compensated by the plan or the plan sponsor . . . and in that context, the accounting firm is not a “covered” service provider for 408(b)(2) purposes. Since the accounting firm is not covered by the 408(b)(2) regulation, it is not required to make the disclosures under the regulation. However, when an accountant receives “indirect compensation” (which, generally stated, is a payment from anyone other than the plan or plan sponsor), the accounting firm becomes a “covered” service provider and thus must make the required disclosures. Since a payment from a recordkeeper/TPA is not from the plan or the plan sponsor, it is “indirect compensation,” and as a result the accounting firm has become a covered service provider and must make the 408(b)(2) disclosures. But, what happens if the accounting firm hasn’t made those disclosures? The answer is simple . . . the arrangement is a prohibited transaction and the compensation belongs to the plan and not to the accounting firm. But, what if the accounting firm didn’t realize that it was being paid from an account of the recordkeeper/TPA? Unfortunately, there doesn’t seem to be any relief from the prohibited transaction consequences.

Similar issues exist for attorneys, actuaries, consultants and others who receive indirect payments.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.