WASHINGTON -- The Labor Department quietly has begun asking some employers to reimburse their retirement plans for thousands of dollars in expenses paid for with plan assets.
The action was initiated by officials in the Kansas City, Mo., region of the Labor Department's Pension and Welfare Benefits Administration.
Now, Labor Department officials are deciding whether to extend that enforcement project to other regions, or to take it nationwide.
Among the expenses at issue are those associated with converting a plain-vanilla defined benefit plan into a cash balance plan.
The Labor Department's Kansas City office also is questioning:
* the cost of giving investors information about pension liabilities in annual financial statements, as required under accounting rules;
* the cost of legal and other expenses to file government paperwork for obtaining tax-favored status for defined benefit and 401(k) retirement plans;
* costs associated with shutting down a pension plan, as well as preparing for and conducting union negotiations, and examining the impact of proposed legal or regulatory changes on the plans and their administration; and
* the costs of outsourcing the administrative functions of a plan.
Under the proposal the Kansas City region is examining, employers would be able to split some expenses with their pension and retirement plans, usually down the middle. These would include annual costs of maintaining and administering the plans, including non-discrimination testing, according to a list circulated by Robert L. Webber, deputy regional director of the Labor Department's Kansas City office at meetings and at forums with plan sponsors and their advisers.
The items on Mr. Webber's list typically cost between a few thousand dollars a year for small plans, with 100 or so participants, to around $20,000 a year for plans with thousands of participants, according to Sherwin S. Kaplan, of counsel at the Washington law firm of Piper Marbury Rudnick & Wolfe and, until recently, at the Labor Department.
Mr. Webber was on vacation and could not be reached.
But, Alan Lebowitz, deputy assistant labor secretary for program policy, suggested the Kansas City regional office's examination is an outgrowth of an earlier Labor Department initiative from 1997 that focused on whether employees were paying too much in 401(k) plan administrative expenses.
Mr. Lebowitz also indicated that Mr. Webber's critical examination upholds the regulator's position on plan expenses.
"This is not new, so there ought not to be any surprises here," he said.
He was referring to guidance issued in January 1997 by the Labor Department to the California Insurance Commissioner's office.
The commissioner had shut down several pension plans when it liquidated the sponsoring insurance companies and wanted to know what expenses related to the termination could be picked up by the plans.
The 1997 California opinion clearly articulates that expenses related to setting up a plan should be borne by the employer.
But employer representatives and groups are crying foul.
The Kansas City office's enforcement project "is catching a lot of people off-guard," said Janice M. Gregory, vice president at the ERISA Industry Committee, a Washington trade group representing large corporations. Ms. Gregory confirmed she knew of a company audited as a result of the initiative, but she declined to identify it.
A contrary stance
"They have taken a stance in audit that is contrary to past practices," added Edward Ferrigno, vice president in the Washington office of the Profit Sharing/401(k) Council of America.
"It's like changing the rules of the game after people have been playing the game for 25 years," said Mr. Kaplan, until recently deputy associate solicitor in the Labor Department's plan benefits security division.
The Labor Department's position that the employer should pick up a portion of a plan's costs because of the tax break it gets for maintaining it is "nonsense," he observed.
"To an employer, it makes no difference if the money is paid as a contribution to a plan or as wages to employees because both are tax deductible," said Mr. Kaplan.
Moreover, many new companies that have set up 401(k) plans are still in the red and do not need a tax deduction to shelter their income, noted Bob Gallagher, a partner at the Groom Law Group, a Washington-based law firm. Some older companies with pension plans also don't need the tax deduction because their previous losses are more than sufficient to shelter current income.
Mr. Kaplan also decried the Labor Department's position in recent audits that employers must pick up part of the tab for amending plans to comply with changes in the law. "It doesn't makes sense, especially since the only reason you are doing it is to maintain the tax (favored) status of the plan," he said.
Mr. Kaplan was among those who met with Mr. Lebowitz and other Labor Department officials on July 20 to discuss their concerns over the Kansas City regional office's audits. Present at the meeting were representatives of the ERISA Industry Committee, the Association of Private Pension and Welfare Plans and the Profit Sharing/401(k) Council and Valerie Grace, a consultant with William M. Mercer Inc.
Attendees wanted to know what expenses the regulator might be scrutinizing and to gain reassurances that the Kansas City regional office's enforcement project would not be extended nationwide, something Labor Department officials could not do since they have not yet made a decision.
Mr. Kaplan, whose government office at the time approved the Labor Department's position in the 1997 opinion, faults the regulator for failing to publicize that guidance, since doing so would have kept employers from being caught off-guard.
"It never was given any publicity, and most people assumed it did not affect the way they were operating their plans. Obviously, if people had started paying attention to it in 1997, they would not have been as surprised," he said.