de minimus amounts

[Guest mk2308]

If a terminated participant receives a distribution and there is a small balance remaining in the account afterwards, do you process a second distribution? What if the balance is under $10.00? Under $1.00?

I was reading under EPCRS that there is a de minimus amount of $50 whereby the employer need not made a corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant would exceed the amount of the distribution. Would this apply in this case? Could the small balances be transferred to the forfeiture account instead?

[rcline46]

Neither the DOL or IRS has given us ANY deminimus amounts on accrued benefits, so cut the check.

[FundeK]

From the Reish, Luftman, Reicher & Cohen website:

Technical Tip 119: The following question and answer were from the IRS Q&A Session at the 2002 ASPA Annual Conference:

Profit sharing plan is terminating. Many of the account balances (which include forfeitures, etc.) are under $15. Is there a di minimus amount that the plan administrator is allowed to ignore when going through the distribution process? The postage and handling would be more than the amount of the distribution for many of the participants.

Response: There is no di minimus rule.

[Guest mk2308]

Taken from Rev Proc 2003-44:

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY

(b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $50 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution.

In what situations does this apply?

[ljr]

Unfortunately, there is indeed no de minimus rule, even for small balances of lost participants. A DOL speaker at the American Bankers Association EB meeting in June said some guidance should be coming soon on lost participants. The question about what the IRS would consider de minimus was posed at the ASPA conference last summer if I recall correctly. The IRS agent said the same as the prior posters, cut the check.

[Tom Poje]

mk2308:

the self correction you cite refers to a 'corrective distribution'. I would hold that refers to things like a failed ADP test, rather than a distribution.

[Guest mk2308]

Can you apply 100% withholding to the amounts instead? If you have several participants that have very small balances, i.e. $0.34, $1.74, $0.91, $0.64, and $1.34, can you submit federal withholding in the amount of $4.97 instead of cutting 5 separate checks?

[E as in ERISA]

MK2308's cite is from the EPCRS ruling -- so I think that it applies to corrective refunds relating to operational errors not ADP, etc. So I think that the question is whether you can consider there to be an operational error at some time.... Was there an operational error at the time of the original distribution -- failure to distribute the entire account balance and/or late crediting of contributions or income that resulted in the de minimis amount? Or if you don't distribute, then does it become an operational error at some point down the road? A year? Two? Then at that point can you apply the EPCRS rule and say that you don't have to distribute because its less than $50? Does this justify forfeiting it for now? (Maybe paying it out if the participant comes back and asks for it).

[ljr]

While I like the 100% withholding idea, the DOL does not. Let's just home someone issues some guidance and soon!

[Kirk Maldonado]

ljr:

Be careful what you ask for -- you may just get it. The guidance we get could be so restrictive that everybody wishes that they never issued it.

[ljr]

Kirk - you have a good point there!

[Guest mk2308]

What is everyone's view of a "corrective distribution" under the EPCRS ruling? I cannot find anything to specify what exactly is a "corrective distribution". Has anyone ever used it? If so, in what circumstances?

Taken from Rev Proc 2003-44:

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY

(b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $50 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution.

Also, I was told a couple of years back at a seminar that I attended that you could use the 100% withholding. Where can I find the DOL info that it isn't allowed?

[KJohnson]

I think Tom and Katherine addressed the point. You may want to look at the definition of excess amount rather than looking for the definitiion of corrective distribution. You generally make conrrective distributions of excess amounts. 2003-44 defines excess amount as:

3) Excess Amount. The term "Excess Amount" means (a) an Overpayment, (b) an elective deferral or employee after-tax contribution returned to satisfy § 415, © an elective deferral in excess of the limitation of § 402(g) that is distributed, (d) an excess contribution or excess aggregate contribution that is distributed to satisfy § 401(k) or § 401(m), (e) an elective deferral that is distributed to satisfy the limitation of § 401(a)(17), or (f) any similar amount that is required to be distributed in order to maintain plan qualification

If you had to make an argument I think you would say that a terminated plan generally has to distribute assets within a year to save the tax qualified status. If you don't distribute does the account balance become a "similar amount that is required to be distributed in order to maintain plan qualification?" I think that this may be a stretch. Even if you could use this definition of excess amount woudl you have to wait until the year is up so that you actually had a qualification problem?

[Brian Gallagher]

Going back to the original post:

I don't think mk has corrective distributions to do. And, probably not excesses. mk said that the people terminated and have small balances. Sounds like a reallocation of forfeiture to me.

It sounds like he wants to use the de minimus rules that apply to the corrective distributions to these accounts.

[E as in ERISA]

ljr, the DOL guidance you were seeking? New Field Assistance Bulletin says that 100% withholding violates ERISA:

100% Income Tax Withholding - We are aware that some plan fiduciaries believe that imposing 100% income tax withholding on missing participant benefits, in effect transferring the benefits to the IRS, is an acceptable means by which to deal with the benefits of missing participants. After reviewing this option with the staff of the Internal Revenue Service, we have concluded that the use of this option would not be in the interest of participants and beneficiaries and, therefore, would violate ERISA’s fiduciary requirements. Based on discussions with the IRS staff and our understanding of the IRS’s current data processing, the 100% withholding distribution option would not necessarily result in the withheld amounts being matched or applied to the missing participants’/taxpayers’ income tax liabilities resulting in a refund of the amount in excess of such tax liabilities. This option, therefore, should not be used by plan fiduciaries as a means to distribute benefits to plan participants and beneficiaries.

http://www.dol.gov/ebsa/regs/fab_2004-2.html

[alanm]

This paragraph is in a prototype plan that I received a D letter for:

"If a segregated, participant directed, investment account is closed and distributed at the request of a terminated participant, any residual dividends or interest received from mutual fund companies after the distribution, not exceeding $20, shall not be paid out to the terminated participant but be used to offset plan administration expenses at the discretion of the trustee if the allocation/accounting fee charged by the third party administrator would be greater than the $20 residual earnings."

In July, I asked Robert Doyle in person, the Director of Regulations for the DOL, if it was ok to send in small balances as a tax deposit and he said it was not. In several DOL audits, I have asked whether small balances must be paid out or can they be forfeited and used to pay plan expenses and the auditors said they would not take any position on the matter nor would they pursue restitution. In other words, the DOL has no de minimus policy statement, but they don't enforce the payout of small balances either. If you ask officially, they will say pay it, if they audit they won't say anything.- they know it costs more to issue a check for a few dollars than it is worth. I understand the DOL has a project going to determine a de minimus level in the future, so we will get a regulation on the matter.

[Guest rmyoung]

If a plan has terminated and all participants have received distributions and a small forfeiture balance (< $10) remains, can this be returned directly to the Plan Sponsor rather than being re-allocated?

[FundeK]

Could you use it to pay a fee? Perhaps the recordkeeper forgot about a small <$10.00 fee they need to charge?