Revenue sharing payments in which plan has beneficial interest could constitute plan assets


Revenue sharing payments received by a life insurance company in connection with investment options offered to a plan may constitute plan assets if the plan has a contractual right to receive the funds, according to an Employee Benefits Security Administration (EBSA) advisory opinion. However, amounts recorded in a bookkeeping account that merely represented revenue sharing payments prior to delivery to the plan would not be plan assets absent a contractual commitment or other intention on the part of the company to grant the plan a beneficial interest in the payments.

Revenue sharing payments credited to plan

A life insurance company provides recordkeeping and related administrative services to ERISA-governed 401(k) and other participant-directed defined contribution plans. The company also makes available to the plans a variety of investment options, including its own insurance company separate accounts and affiliated and unaffiliated mutual funds.

The company receives and retains revenue sharing payments from the investments made by the plans. However, the company may reach an agreement with a client plan to maintain a bookkeeping record of revenue sharing received in connection with the plan’s investments. The bookkeeping account reflects credits to the plan calculated by reference to the estimated revenue sharing payments. In accordance with the terms of an agreement or direction from a plan fiduciary, the company will apply the credits to pay certain plan expenses, such as the costs of services provided by accountants, consultants, actuaries, and attorneys to the plan. Alternatively, the company may agree to deposit an amount equal to the credits into a plan account, periodically or on specified dates.

The company deposits the revenue sharing payments into its general asset accounts and does not establish a special bank or custodial account to hold the revenue sharing payments. In addition, the company’s agreements with its client plans do not require the company to segregate any portion of the revenue sharing payments for the benefit of any plan. Nor does the company make any representations to plan fiduciaries or plan participants that revenue sharing payments will be used for the benefit of the plan or represent a separate fund for the payment of benefits or expenses under the plan.

Beneficial ownership interest in revenue sharing payments

At issue was whether the revenue sharing payments received by the company would constitute plan assets of the client plan. After noting that ERISA does not expressly define plan assets, EBSA applied “ordinary notions of property rights,” under which the assets of a plan include any property (tangible or intangible ) in which the plan has a beneficial ownership interest. A plan generally will have a beneficial interest in particular assets if: (1) the assets are held in trust on behalf of the plan, or in a separate account with a bank or other third party in the name of the plan, or (2) it is specifically indicated in documents or instruments governing the arrangement that separately maintained funds belong to the plan.

Whether a plan has acquired a beneficial interest in specific assets will also depend on whether an intent has been expressed to grant a beneficial interest or a representation has been made sufficient to lead participants and beneficiaries of the plan to reasonably believe that such funds separately secure the promised benefits or are otherwise plan assets. However, the mere segregation of a service provider’s funds to facilitate administration of its contract with a plan, EBSA cautioned, would not in itself create a beneficial interest in those assets on behalf of the plan.

The determination of whether a plan has a beneficial ownership interest in property is a factual inquiry. EBSA did not see evidence indicating that amounts recorded in the bookkeeping account as representing revenue sharing payments would be assets of a client plan before the plan actually receives them. However, EBSA advised that revenue sharing payments received by the company in connection with a plan’s investment could be plan assets, depending on the company’s arrangement and communications with the plan. For example, a plan’s contractual right to receive the amount agreed upon with the company, or to have the amount applied to plan expenses, would be an asset of the plan. Further, if the company failed to make payments required under the contract or arrangement with the plan, the plan would have a claim against the company for the outstanding amount and the claim itself would be a plan asset.

Source: EBSA Advisory Opinion No. 2013-03A.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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