New ERISA Fee Disclosure Rules

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Background

The exemption under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 ("ERISA") from ERISA's prohibited transaction rules permits a service provider to an employee benefit plan to receive compensation for the services if no more than "reasonable compensation" is paid for "necessary" services under a "reasonable" arrangement. Regulations of the U.S. Department of Labor (the "DOL") promulgated in 1977 elaborated on the circumstances in which the exemption would be available.

The world has changed quite a bit since 1977, and the DOL has now issued long-awaited interim final regulations under Section 408(b)(2) requiring increased disclosure of compensation in the case of certain services provided to retirement plans. Under the new regulations, where applicable, an arrangement for providing services to a retirement plan will be treated as "reasonable" only if the service provider discloses to the plan specified compensation-related information.* The new requirements are subject to a delayed effective date, applying to arrangements entered into on or after, or otherwise in effect after, July 16, 2011. These new regulations do not apply to medical and other "welfare" plans, and the DOL is expected to issue additional rules applicable to those plans.

A failure to meet the requirements for the Section 408(b)(2) exemption could cause the payment of compensation to a provider of services to an employee benefit plan to be a prohibited transaction under ERISA and the corresponding provisions of the U.S. tax code. The consequences of a prohibited transaction can include punitive excise taxes, disgorgement of fees and other potential liabilities on the service provider, and liability for the plan fiduciary. It will be critical for service providers and plan fiduciaries subject to the new rules to make sure they are in compliance with the new regulations, once they take effect.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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