Termination Distribution fees paid by plan participant

[2muchstress]

I'm working with a takeover plan that has over 200 terminated participants that the client wants to force out. When we submitted our invoice to the client for our charges to coordinate the distributions, withholding and federal filings etc., he was very unhappy - to put it mildly.

The prior administrator used to deduct the distribution fees directly from the participant account prior to paying the distribution. It is my understanding that the DOL does not approve of this, but I am not able to find anything that I can use to convince the client of this.

Does anybody have any insight on why distribution fees cannot be paid by the participant?

Thanks in advance.

[E as in ERISA]

I know that there are other posts regarding this. Maybe someone else knows how to link to those.

There is no specific guidance on this issue at the current time. There is guidance saying that a participant's account can't be charged for a QDRO because that is a "mandatory" feature of a plan. The logic of that letter would suggest that participant's can't be charged for distributions either. They can only be charged for "optional" provisions under a plan like loans, etc.

The conservative view is that participants can't be charged for distributions. The expense must be allocated. However, many have noted that doesn't make sense in today's world with individually directed accounts. The DOL still seems to be mulling over the issue.

[KJohnson]

At the ASPA and ABA conferences, there are also DOL Q&A's. Here is their response to this question over the last three years:

QUESTION 8.

Can a retirement plan charge participants' accounts (directly) the cost of issuing a check to the participant?

DEPARTMENT OF LABOR ANSWER.

2000 Answer: Staff is examining this and so is not prepared to answer. We should expect guidance in the not too distant future.

2001 Answer: Staff said it is still working on the guidance. This year, however, staff offered a few clues about its position. Staff observed that the relevant issue in this situation, as in connection with PWBA's published guidance on the costs engendered in a plan's DRO/QDRO review, is whether or not an imposed plan charge to the participant "burdens a statutory right." It is that issue that impedes a positive staff approval of the proposed response.

2002 Answer--The issues raised by this example continue to be under active review by the Department. The Department indicated that, while there was internal agreement regarding many of the issues, a final decision has not been reached.

[rcline46]

There was a post here in the last oh say 6 weeks concerning DOL audits, the this particular item was being especially investigated in the Audit.

Whoever posted it promised to update us when the audit was over.

[Guest hpaine]

I have worked for a couple different TPA's over the last 5 years and we have always been able to deduct a distribution fee directly out of the participant's account. I'm surprised that the DOL has not issued some sort of formal advice on this issue.

[Guest FREE401k]

On a slightly different note, we consider coordinating the payment of terminated participants part of our services. Almost every Plan we take over has a relatively large percentage of terminated participants and we don't charge extra to handle them. In other words, this happens so much that it's not a "special project" and so our regular fee covers it. I can see how a Plan Sponsor would think handling distributions would be part of the normal services and would not be happy to receive a supplemental invoice. I know this doesn't help you now but is something you might think about for the next one...

[dcoderre]

We take the position that a fee cannot be deducted upon death, disability or retirement, but that for other terminations, a fee can be deducted. Our volume submitter plan is approved with this language.

[Kirk Maldonado]

dcoderre:

This is not an issue affecting the tax-qualified status of the plan. The fact that the IRS approved a plan document containing that language is irrelevant.

My belief is that if the DOL had a strong argument against it, they would rule against it. Because they don't, that is evidence that they don't like it, but don't have the requisite authority to prohibit that practice.

[mbozek]

I cannot find any authority in ERISA which prevents a plan sponsor from charging participants for plan costs in a DC plan. ERISA Section 3(34) allows expenses to be allocated to participant's accounts, Section 402(b)(4) requires that the plan specify the basis on which payments are made to and from the plan and 403©(1) provides that plan assets shall be held for the exclusive benefit of providing benefits and defraying the reasonable expenses of administering the plan. The DOL ruling that prevented QDRO costs from being allocated to the participants was issued without any citations to authority under ERISA and may no longer be considered valid by the DOL because there is no legal justificaton for preventing plan expenses to be allocated to a participant's account if it "burdens a statutory right". The only valid basis for restricting the allocation of costs to participants and beneficaries is that the expenses must be reasonable.

[GBurns]

I do not think that this is an issue of "charging" plan costs but more of imposing costs at the unilateral discretion of the Plan Sponsor particulary costs that were not "incurred" or caused by any action of the participant.

I can quite see the DOL taking the position that these are not plan costs but Plan Sponsor costs. Neither the Plan nor the participant has any desire, options, decision or discretion in the matter, it therefore is an arbitrary action that is being done for the benefit of the Plan Sponsor and should be a cost charged solely to the Plan Sponsor.

[KJohnson]

Finally an answer! It is o.k. to deduct these fees from individual accounts. Also some nice guidance saying its o.k. for the employer to pay administrative expenses for active employees but to charge accounts of inactive participants. Also the advisory opinion on expenses for QDROs is

withdrawn.

http://www.dol.gov/ebsa/regs/fab_2003-3.html

[R. Butler]

Thanks for the post. Very beneficial.