Account balance less than check processing plan expense

[Guest JVH]

Has anyone researched the proper treatment of distributions that are less than the charge imposed on the account balance (i.e., not paid by the employer or by the plan generally) by the recordkeeper or custodian to cut the distribution check? For example, a participant has a $12.00 vested account balance (resulting from a small forfeiture reallocation) and the recordkeeper/custodian charges the individual account $15.00 to cut the check. Do you have the recordkeeper keep the $12.00 and issue a $0.00 check, or do you forfeit what actually is non-forfeitable money? Do you issue a 1099R for $12.00, or is the taxable amount net of the processing fee? I've seen "some" of this type of discussion below, but I can't find any IRS or DOL guidance. The employer does not want to pay the fee for small accounts just to make the problem go away.

My guess is that since the amount is vested, there is no basis to reallocate that money to other participants, so the plan expense avenue would be the best grounded approach. Also, my guess is that the plan expenses come off the top before the distribution, and the taxable distribution in my example would be zero.

[Guest FormsRmylife]

We are a TPA also contemplating this issue. The $15.00 charge for the check is charged by the corporate trustee. Because the charge exceeds the account balance, you never direct the trustee to issue the check. If handled this way, how do justify zeroing the account when the charge was never incurred? Or, do we direct the trustee to issue the check for $0.00, in which case would it charge $3.00 it could not collect from the account?

I join your plea for guidance or how we may all hang together (rather than separately).

[Appleby]

In the name of customer service, surely the custodian can consider waiving the fee under the circumstances. To answer your question though, amounts paid for fees are not treated as distributions and should not be included on the 1099-R (can’t find this in the 1099-R instructions, but confirmed in the Pension Answer Book) ...Technically, $3 should be added to the account so that the fee can be collected and the account closed…or maybe the custodian could make an exception and charge only $12??.

[ljr]

I posed this question to an IRS representative at an EB conference last year and learned there is no answer to the question of balances less than the cost to make the distribution.

Here's hoping someone out there has learned something since then!

[Harwood]

If the balance is from deferrals, the IRS offers no hope. Ten cents is the amount in Question 77 at: http://aspa.org/archivepages/gac/1999/99irsq&a.htm

Reish Luftman has some comments at: http://www.reish.com/practice_areas/Techni...ps/IRStip79.cfm

[rcline46]

In cases like this, participant is charged $12, plan or sponsor the add'l $3. Don't even think of asking the processing party to cut fees.

[Kirk Maldonado]

Isn't there a problem with complying with the terms of the plan document if the employer just makes the contribution? I've never seen a plan that authorized such a contribution.