correct amount to report on 1099

[k man]

assume there is a fee charged to participants for distrubutions and the money is netted from the distribution. eg. $5000 - $75 = 4925. what is the correct amount of the distribution that should be reported on the 1099. i belive it is still 5000 even though the participant only receives 4925 because he has dominion and control over the entire amount. any one agree or disagee?

[Guest Hartnett123]

He is taxed on the entire distribution, regardless of the netting effect of the transaction fee. You are right. $5,000.

[Guest death and taxes]

If using that logic, and the distribution is issued as a rollover, you would have to issue 2 forms--one taxable, one exempt.

[Demosthenes]

Of the daily val systems with which I am familiar, they universally deduct the fee, then distribute the assets, generating a check and 1099r for the balance net of the fee.

Look at it this way, a participant cannot take constructive receipt of a fee deducted from the account, and therefore has no tax liability for the fee amount. How can I be taxed on money I never received?

Another way to put it, what makes a term fee different from a maintenance fee? If you deduct an annual maintenance fee from an account, the fees don't accumulate as an accrued tax liability.

[maverick]

I agree with Demosthenes.

Also, if the fee is included on the 1099-R and the person is subject to the early withdrawal penalty, he'll have to pay 10% of the fee to the feds [and 3.33% if a Wisconsin (aka, the tax h*ll) resident].

[k man]

Demosthenes, i cant agree. constructive receipt is about control or use of the money more than physical custody. in this case the participant is using the money to pay a fee. or put another way, but for the money in this account, he would have had to dig into his pocket to pay the fee. why should this fee money come back to the participant tax free. i believe that if the fee comes out of the balance it must be reported. there must be some guidance on this.

[mbozek]

IRC 402(a) provides that employee is taxed on the amount actually distributed to the employee by the trust. If the fee is taken out before the amount is distributed to the employee then the amount actually distributed will be the net amount after the fee is taken out. If the fee is some how taken out after the distribution to the employee then the employee is taxed on the gross amount even athough the fee is paid to the TPA.

[david rigby]

Pardon my simple mind, but a fee is a fee. If it is deducted from an account (or all accounts), then it reduces the account.

[wmyer]

Since we're on this topic, is the 20% withholding on the $5,000 or the $4,925? If the guy is over 70 1/2, and his required minimum distribution is $5,000, has it been satisfied with this withdrawal, or does he need to take out an additional $75?

[Guest ActuaryWannabe]

FWIW here is the ERISA Outline comment:

2.e.3)c) Tax issues. The charging of an account balance for the expenses listed in 3.e.3)a)

above also might raise taxability issues under IRC §§72 and 402. For example, if a

distribution fee is charged (see item (3) under 3.e.3)a) above), is the charge treated as part

of the taxable distribution to the participant? There is a good argument that it should not be

taxed to the participant, because there is no actual receipt by the participant of the amount

so charged, and it is a liability against the participant’s account, not the participant in his/her

individual capacity. However, IRS has not ruled on this issue.

[Demosthenes]

wmyer,

My usual position is that consistency is the hobgoblin of little minds, but in this case I'd have to reverse myself.

For the RMD, I'd reduce the account by 5075 with a net check of 5000 and the 20% would be on the check amount.

[mbozek]

The fee doesnt have any effect on withholding. If the fee is taken from the participant's account then it will not affect the amount of the mrd that is subject to 20% withholding. However participant could assign the fee to the custodian after distribution, eg. mrd of $5,000 and assign $75 to the pay for the cost of the distribution so as to receive a net amt of 4925 with a withholding of $1000.

[TBob]

Since when are RMD's subject to 20% withholding? (a little off the subject but I couldn't resist!)

[k man]

Demosthenes, did i convince you or do you still disagree? the reason i ask is i am still having difficulty convincing someone in my office?

[WDIK]

It also seems that you are having difficulty convincing a number of others (based on my interpretation of their comments), including:

maverick, mbozek, pax, the ERISA Outline, and Appleby. I'll also include myself in this category.

Death and taxes makes an interesting point if a direct rollover is elected and the fee is taxable.

[Blinky the 3-eyed Fish]

or put another way, but for the money in this account, he would have had to dig into his pocket to pay the fee.

With that logic, you could say that every fee taken out of a participant's 401(k) account over its lifetime should then be added onto the distribution amount when it is finally taken from the plan.

I can't state it any better than pax that a fee is a fee.

Add me to the list WDIK.

[mwyatt]

Let's look at another example. You sell stock, and a commission is charged on the sale. You pay capital gains on the net price (sale less commission). Another example: you sell your house and pay a realtor commission fee. Capital gains (if any due to exemptions) is on the sale price less expenses of sale. So I'll fall on the side of $4,925 myself.

BTW, just got back from vacation and ran into an actuary who had a firestorm Friday on his Blackberry concerning the SEC investigation. Any comments (other than the fact why would someone want to take work with them on vacation?).

[Demosthenes]

K man

I remain unconvinced, if I didn't get it, I shouldn't pay taxes on it.

Mwyatt

As for the SEC investigation, is it the pay-to-play one? Having trouble keeping track of who's getting investigated by whom, late trades, market timing, annuities, insurance brokerage, consulting arrangements, fees, and revenue.

Assuming it's the pay-to-play investigation, the outcome will depend on the level and accuracy of disclosure. Even if a fund company is paying for shelf space, it won't be an issue if the payments are disclosed.

I know of many companies, and I'm sure you do too, that have crafted an offering based at least in part on the revenue stream from the funds. All in an effort to keep explicit costs down "If I don't have to write a check, it's not an expense".

Also, it's going to be a major effort to answer all the questions and provide all of the documentation requested.

Good topic for a new thread especially with some input from people who are actually wading through the requests.

[jquazza]

TBOB,

MRDs can be subject to the 20% W/H rule in the case of non 5% owner who are still employed and decided to take the MRDs, since it's an MRD that's not required so to speak.

[WDIK]

In the context of the thread, I took TBob's question to be rhetorical in nature.

Minimum required distributions are not subject to mandatory 20% withholding because they are not eligible rollover distributions. If the plan document language was appropriate, and a currently employed 70-1/2 year old non-owner elected an in-service distribution, I do not think that this qualifies as a minimum required distribution.

[TBob]

WDIK... You assumed correctly. I hadn't intended to derail the original discussion about the distribution fees but 20% W/H and MRD's don't often collide in the same sentence.

FWIW, count me in with Blinky, Maverick, Pax (et al). I do understand that constructive receipt is more about control or use than physical possesion, but I don't buy the argument the participant is in constructive receipt of the fee amount. Accepting the consequences of taking a distribution (the fee) does not equate to constructive receipt. In our little corner of the world, our participants are not given the option to choose to have a fee taken from their account as a result of their distribution.