Charging Administrative Fees to Terminated Vested Participants

[Randy Watson]

I'm looking for comments on charging terminated vested participants an account maintenance fee. Does anyone have any practical experience with this? Are the fees typically paid directly from the plan to the administrator? Would these amounts be placed in an escrow account or something? Could the fees be applied however the sponsor sees fit (for example, dividing the fees amongst a number of vendors)? Any advice/tips on this would be appreciated. Thanks.

[No Name]

I think you need to disclose that fees will be charged before actually charging them. Something in the form of a SMM.

[QDROphile]

Charges should be applied according to well considered and documented policy that is formally adopted. Appropriate disclosure should be made in the SPD and it would be a good idea to remind participants at termination. Competent professional advice is part of "well considered" and "well documented."

Although imprecision in language is tolerable when discussing the matter informally, analytically you start from the position that an account maintenance fee applies to all accounts. Check the Department of Labor release on the subject.

[Randy Watson]

Thanks for the tips, but I was actually looking for comments on the operational side of things. Perhaps there is a TPA who could comment on how a typical arrangement works...do the amounts typically get placed into an escrow account, are they paid directly to the TPA, generally how often are amounts deducted from participant accounts etc...?

[Guest JimChad]

I have been thinking about charging a dormant account fee, also. I am also struggling with how to do it. The process of collecting it on a quarterly basis is too time consuming to be worth the bother since many of my Plans will only have one or two terminated Particiapants. Does anyone know how to make Relius admin help with this? John Taylor if you have time to respond, I'm talking specifically about pooled accounts at a mutual fund with quarterly certs by me.

[Guest Pensions in Paradise]

Hold on folks. Before you start talking about the mechanics of collecting your fee, you should confirm that its even allowable. My understanding is that you cannot charge a special fee to terminated participants. Would someone kindly point out to me where the DOL and/or IRS say this is allowable.

[austin3515]

Both the DOL and IRS came out endorsing fees to terminated participants on the grounds that if they rolled to an IRA, they would be paying fees anyway. DOL had a field assistance bulleting, and the IRS had a something... Google it with "fees to terminated participants IRS and DOL" and I bet you'll find it.

We use Corbel documents and I asked them their thoughts on the need for plan amendment and the document specialists felt that the document was vague enough intentionally such that no amendments were necessary to charge only termed participants a fee. I'd check with your document provider or the drafting attorney for more support.

If doing it quarterly is too burdensome, just do it annually? Also, the money does not need to be escrowed. Just have the money sent directly to a service provider without being tainted by the sponsor's grubby paws!! We charge $18/TV/Yr., so we would just deduct that $18 from the part's account and have it sent directly to us. Mind you we have never done this in the past, but have looked into it in the future, particularly with lower cash-out limits.

[Randy Watson]

I believe the Service came out with a Rev Ruling shortly after the DOL's FAB 2003-3, both of which permit this.

[Guest Pensions in Paradise]

DOL's FAB 2003-3 states that plans "...may charge vested separated participant accounts the account's share (e.g. pro rata or per capita) of reasonable plan expenses..." My reading of the FAB is that its clarifying the fact that the plan sponsor may pay the administrative expenses for active participants, while the terminated participants' accounts are charged a proportionate share of the same expenses. I don't read the FAB to say that you can charge a special fee (above and beyond the normal administrative fee) to terminated participants.

I couldn't locate the Revenue Ruling. Can anyone tell me which one it is. This issue may be addressed there.

[Guest jdw]

Rev. Rul. 2004-10

[Guest gerry326]

We currently charge a quarterly fee to all participants (active and termed). The fee is pulled from accounts the last business day of the quarter, and a check is cut for the amount and is payable to us. We passed all of it by attorneys and updated all Plan documents.

[alanm]

Pensions in Paradise:

YOur quote of DOL FB 2003-3 stopped at the comma; the whole sentence reads:

"plans may charge vested separated participant accounts the account's share of reasonable plan expenses, without regard to whether the accounts of active participants are charged such expenses............" I think this has been interpreted by most as meaning you can have a different charge for terminated employees that are participants versus active employee- participants.

[QDROphile]

Count me with Pensions in Paradise. Maintaining accounts involves expenses. Expenses may be charged to accounts on a reasonable basis. It is unlikely that it costs more per capita to maintain the account of a participant that is not an employee than for a participant that is an employee. Per capita is not the only way of allocating expenses, but let's keep the discussion simple.

The employer can cover some or all expenses of accounts of employees and not cover expenses of accounts of former employees. From the perspective of the participant, accounts of former employees are charged per capita while accounts of employees are not charged, but that does not allow the expenses of accounts to be allocated differently to former emplyees. The difference is that the employer picks up the expense, not that there is a different expense.

[KJohnson]

I assume that everyone who is doing this (chargng terminated vesteds a fees but not actives) is retaining evidence of their BRF testing. The method of allocating expenses is a BRF.

I am still not completely sure how to do the testing. I assume it would be looking at the TV's who are receiving the charges and determinig who are HCEs and who are NHCEs. Then you would compare this group to the actives who are not receiving the administrative charges again determining who are HCEs and who are not. For a plan with any size, I don't suppose this would ever be an issue. But with a smaller plan (and with cashouts in many plans dropping to $1,000) I suppose it could be.

[Randy Watson]

I was wondering why everyone thought I was going to impose a "special fee" on terminated participants and then realized that it was most likely because I used the phrase "account maintenance fee." That was my bad...I had no intention of charging a special fee. Nevertheless, these were informative replies. Thank you.

[Beltane]

We have a plan that over the years a number of separated participants have left their balances as is. The participants currently are not charged any adminstration fees, nada, so it currently is a good deal for those terminated, investments are sound and inexpensive - that's why they have not moved the balances.

Now the plan is getting close to the 100 participant level issue on having to have an audit expense and file as a large plan on the 5500 for 2008. Given the language of FAB 2003-3, it appears a terminated vested participant account maintenance fee can be charged. If we do not implement such a change, we run the risk of significantly increasing the annual adminstration fees for the employer via the audit requirement. They have the option of rolling the assets to an IRA with the same custodian, same share class, and the only expense the IRA would have is a $ 10 setup fee and $ 10 annual maintenance fee [standard for IRA's]. Does anyone see a problem with implementing an annual fee, payable in December to the TPA, against terminated participants, say of $ 20 each, amend the SPD [document allows for it, no amendment needed] with an SMM well ahead of time, and giving terminated participants plenty of notice intially to make arrangments to get their balances transferred out?