Charging DB Participants For Distributions

[Guest Grumpy455]

A DB plan wants to make participants pay for their own distribution fees. The Plan's lawyer has already amended the plan document and the SPD to accomplish this goal. How are other TPAs adjusting a participant's benefit to reflect the fee payment? We can see two different ways of doing it (perhaps there are others). One way would be to determine the present value of a participant's benefit (using the plan's assumptions), subtract the distribution fee (say $200) and then recompute the monthly payments. A second way would be to simply have the participant repay the distribution fee from some number of annuity payments. For example, if the benefit is $100 a month and the distribution fee is $200, the participant would have to use the first two payments to pay the distribution fee. How are other TPAs adjusting a participant's benefit to reflect distribution fee payments? Thanks!

[mbozek]

What is the participant being charged for that is not a plan or settlor expense? I would think this is an alienation of benefits that is prohibted under ERISA as well as a cut back in accrued benefits if payments are not recieved. What was the legal rationale for this reduction in benefits. Vested benefits cannot be forefeited.

[Guest Grumpy455]

Thanks for your response. I am not sure what the legal rationale is but I suspect that it stems from the DOL's position in Field Assistance Bulletin 2003-3 that participants may be charged reasonable distribution fees, a portion of which reads as follows:

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"Calculation of Benefits Payable under Different Plan Distribution Options. Some defined contribution plans may charge participants for a calculation of the benefits payable under the different distribution options available under the plan (e.g., joint and survivor annuity, lump sum, single life annuity, etc.). ERISA does not specifically preclude the allocation of reasonable expenses attendant to the calculation of benefits payable under different distribution options available under the plan to the account of the participant or beneficiary seeking the information.

Benefit Distributions. Some plans provide for the imposition of benefit distribution charges on the participant to whom the distribution is being made. These charges may be assessed for benefit distributions paid on a periodic basis (e.g., monthly check writing expenses). ERISA does not specifically preclude the allocation of reasonable expenses attendant to the distribution of benefits to the account of the participant or beneficiary seeking the distribution."

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I guess the rationale is that if a DC plan may charge a fee (thereby reducing a participant's vested account balance) and avoid an impermissible cut-back, why not a DB plan. I'm just not sure. Do you have any other thoughts or suggestions?

[mbozek]

IRC 414(i) defines a DC plan as a plan in which each participant has an individual account based solely on the amount contributed to the plan as adjusted for income, expenses, gains, losses or forfeitures. There is no similar authorization for deducting expenses from accrued benefits in DB plans under IRC 414(j). Reducing plan benefits for the cost of distribution expenses could disqualify the plan. Is the lawyer going to request a determination letter from the IRS?

That said, I think that some DB expenses such as loan processing fees can be paid by the participant since a plan is not required to provide loans.

[Effen]

I agree, that ruling applied only to DC Plans. The IRS was very clear about this at the 2004 EA meetings. I don't believe you can charge db participants a processing fee.

[Guest beccafaith]

I agree with mbozek. I work in a DB plan and we do not charge for processing distributions.