Distribution Fees

[Guest Midas]

How are distributions handled when the amount to be distributed is less than the distribution fee?

[JanetM]

IMHO you have two options. First, you can opt that the account doesn't cover the fee and you can't do the distribution or second, you can take 100% of the balance and write the remainder off.

How do you handle the 1099? Is the gross amount listed the distribution and the processing fee or just the distributed amount? Seems to me if you use the amount distributed and fee as gross amount then you have to issue a 1099 if you do make distribution (and take it all as fees).

Wouldn't it be easier to just take a small monthly fee from all and eventually eat up the small accounts?

[Archimage]

There is no guidance in this area. My position is that you do not issue a 1099 to the participant because they never received a benefit.

I also charge the clients the difference in the amount of the fee. For example, if the distribution expense is $50 and the participant balance is $25, I charge the client the difference of $25.

[Guest Midas]

Thank you both for the input.

[Guest Big Al]

My understanding is that you need to mention in your SPD that you are passing on distribution fees to the participants and what you are going to do if account balance is less than distribution fee.

[Guest TAG]

Midas,

I used to work for a TPA firm that charged 50% of the account balance if the account balance was less than their distribution fee-about $125.00-$175.00. 1099-R gets cut for net amount to participant as that is all they received. RMDs get interesting as distribution must be grossed up by fees. The main thing is that there is a policy in place that is followed consistently.

Personally (and this is my personal opinion only)I think distribution fees to a participant should be illegal. The tpa is getting paid for administration and distributions should be part of that fee. Why not let payroll companys charge us to process our W-2 at year end? They could simply deduct it out of our last check. Wait a minute, don't they get paid by the employer to administer our payroll?

TAG

[david rigby]

The tpa is getting paid for administration and distributions should be part of that fee.

Because many plan sponsors have taken advantage of their ability to have expenses paid by the plan. If the plan participants pay this cost, then the last one standing will bear a significant cost.