ERISA Spending Accounts
An ERISA (“Employee Retirement Income Security Act of 1974”) spending account, sometimes referred to as an ERISA budget account is an account used to pay for eligible plan expenses. (Click here for further information on eligible plan expenses.) ERISA spending accounts are typically seen in 401(k) plans. The spending accounts are funded from a portion of the revenue sharing with a pension plan’s record keeper that is typically generated from the administrative fees that are charged by the mutual funds offered under the plan.
The way that the revenue sharing works is as follows. The plan’s record keeper receives payments from the mutual funds in the plan. These payments are based upon a predetermined number of basis points. A basis point is one-hundredth of one percent of the total assets in the pension plan. The record keeper will determine a specific dollar amount that they need to be paid for their services. If the fees paid to the record keeper by the mutual funds, exceeds the amount that the record keeper needs to receive for compensation for their services, the excess amount received by the record keeper is returned to the pension plan. If a pension plan receives revenue sharing payments, the plan sponsor needs to decide what to do with the payments. There are three options. The entire amount received can be given to the plan participants. The entire amount received can be used to pay eligible plan expenses. A portion of the amount received can be given to the participants and the remaining balance can be used to pay plan expenses. If the plan sponsor decides to use revenue sharing funds to pay for plan expenses, then those funds are deposited into an ERISA spending account.
Once the pension plan can use the funds in their ERISA spending account for the benefit of the plan and its participants without any limits or restrictions, the funds in the ERISA spending account become plan assets, and therefore, these accounts must be included in the plan’s audited financial statements and reported on Form 5500. In addition, plan expenses paid out of the spending account may need to be reported on Schedule C of Form 5500.
ERISA Spending Accounts represent a relatively new concept for plans and can create an opportunity to reduce the total cost charged to the plan. Initiating a dialogue with the plan’s service provider to determine whether there might be an opportunity to negotiate a spending account with the plan is the best practice for all plan fiduciaries.
Author: Lisa Galinsky, CPA, CVA | [email protected]
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.
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