Withholding & Distributions

[Guest stevena1]

Participant takes a hardship. The TPA charges a $60 fee to process the hardship.

Is the fee taxable to the participant?

I would think the gross amount withdrawn is taxable, some of it goes to pay a fee, some goes to the participant directly...but all of it is taxable and goes on the 1099.

But then others think perhaps the fee is a "loss" in the account, and is not part of the gross distribution.

??

[JanetM]

YIKES that is high. Does the TPA charge $60 for all distributions? Seems draconian.

If the fee is included in gross distribution it is taxable to participant. If they deduct from the account before issuing payment it isn't.

[Guest stevena1]

Thank you Janet.

$60 is actually discounted...the TPA normally charges $90. But I dont think it seems high...although I know this board does not allow that discussion.

[John Feldt ERPA CPC QPA]

Perhaps the fee includes the cost of the 1099-R too? (not that we're discussing fees, of course). Or maybe other ongoing fees in the plan are lower on average and the distibution fees make up for that somehow ... (not that we're discussing fees)

[RCK]

Back to the original question, I don't have a cite but agree with your position. The participant received a distribution of $XXX, some of which (s)he used to pay the fee, and some of which (s)he used for the hardship.

The interesting question is the followup: if the participant has a $1,000 hardship and has to pay the $60 fee to get it, can they get a hardship for $1,060?

[Guest stevena1]

It does include the 1099, not that we are discussing fees. When the custodian charges $5 for the check and $10 for the 1099, the $60 is really $45 net to the TPA. Not that we are discussing fees.

What do you think of the view that the document will actually decide this answer: if it says that the plan will deduct a fee from the participants account, it is actually a plan expense, and therefore not taxable; however, if the document says that the participant pays directly, then it is part of the taxable distribution.

Not sure what the document says, but this is what someone else came up with... I have gotten so many different views on this...

[Guest stevena1]

TAG says a distribution fee is never taxable to the participant because its a plan expense charged to a participant's account.

[Bird]

I think it depends on how it's processed; the document may also have something to say but I think it's unlikely.

If the participant gets a cash distribution of $1,000 and an additional processing fee is deducted from the account, directly or indirectly, then the fee is simply an expense or loss, not a taxable distribution. (You can change the numbers to 940 and 60.)

If the participant gets a distribution of 1000 and then uses 60 to pay the fee, I'd say that 1000 is taxable. The person preparing the 1099 doesn't necessarily know that 60 came from the distribution and shouldn't have to wonder about it.

[Blinky the 3-eyed Fish]

I am waiting for the guy with a $60 account balance to get nothing but a 1099 showing his $60 taxable distribution. The ensuing phone call should be interesting.

What Bird said is correct, although it should be worked that in each instance the fee is paid from the account and not included in the taxable distribution amount. To do otherwise would be uncivilized.