Redemption Fees - Taxable Amount?

[Guest jvajj]

We are in the process of writing specs for charging a redemption fee (all redemptions within 90 days at 2%) to participants. One of the questions involves the minimum distribution requirement as it relates to the redemption fee.

The fund company has told us that for their own recordkeeping business they have assumed that the redemption fee amount (even though the participant does not receive this amount) is a taxable distribution. Does anyone know for sure whether this is true? This is how they process a minimum required distribution of $1,500 with a $100 redemption fee and $300 in federal and state withholding.

Distribution $1,500

Fee $ 100

Withholding $ 300

Taxable Amount $1,500

Check Amount $1,100

With this logic if a participant requests a $1,000 loan that has a $100 redemption fee the principal amount of the loan would still be $1,000 even though they only received $900.

Any thoughts anyone has on this topic would be greatly appreciated. This fund company always reduces the requested amount, never grossing up to cover the fee.

How are other folks handling redemption fees? If anyone has any cites backing this or any other position, please pass along. Thanks.

[Guest Harry O]

Section 402(a) is pretty clear that only the "amount actually distributed" to the participant is taxable. I would have thought the taxable distribution in this case was $1,400.

[Brian Gallagher]

The way I have seen fees taken, is that they are taken before any distributions or loans. That also determines how much someone has to take a loan also.

For example, if the fee is $100 and the participant has an account balance of $5000, the available loan would be $2450, not $2500.

In the example above, the withholding should have been $280, not 300.

...bg