Administrative Fee re 404(k) Dividend Election - Charge to Participant

[Guest amboyd]

Company gives ESOP participants right to elect to receive dividends on ESOP shares in cash, or to reinvest dividends in the plan. Those who elect cash will be paid quarterly, and TPA will charge a $5.00 fee (per participant) for each check. There are over 300 participants. Any reason why the Company could not require each participant who elects to receive cash to pay the fee (deducted from the amount of the dividend, from account balance, or otherwise)?

AMB

[mbozek]

While a plan can charge participants for certain expenditures,e.g., applicaton fee for plan loan, I thought that it was against DOL policy to charge a participant for the cost of a plan distribution since participants have a right to their money. Plans can't charge a participant for the cost of a QDRO.

If the shares are held in the ESOP then they are plan assets and any payment of the dividends is a distribution of plan assets.

[Guest amboyd]

Thanks for your response. I am familiar with the DOL opinion letter regarding QDRO expenses, but it is my understanding that it is applicable to distributions required under ERISA. In this case, the plan document provides that the employer directs the use of cash dividends on allocated shares, and the employer has discretion regarding the use of the dividends (subject to the requirements for deductibility of the dividends). For example, the Company can decide, rather than making any distribution to participants, to use the cash dividends to repay the outstanding ESOP loan. Therefore, I think this is closer to an application fee for plan loans or a transaction fee than the QDRO situation.

[IRC401]

Could the IRS make the argument that the charge for taking a distribution s so high that some participants don't have a meaningful right to elect to take a distribution, and therefore, the requirements of IRC 404(k) aren't met, and the deduction is disallowed.

[mbozek]

IRC 401: This is consistent with Dol policy that a plan can only charge reasonable fees .... The plan administratror will have to show that $20 a year is reasonable amount. The real queston is what is the actual cost of writing checks under the plan. This usually falls under bundled services. What if $20 a year is 20% or more of the dividends paid to nhces? I don't see how the plan can have discretion to pay some of the funds in cash or reinvest the dividends but if it elects to pay employees in cash they can be charged for the cost of the decision made by the employer.