Distribution Fee Charged to Participant

[nancy]

If a plan charges distribution fees directly to the participant, should the fee be a part of the taxable amount or netted off before?

[Mike Preston]

I suppose there are circumstances where it could go either way, but for my money, I would suggest that the fee be considered a reduction to the account balance prior to the distribution. That is, treat it as any other allocable expense of the account and take it out prior to the point in time that the distribution is made.

The exceptions would revolve around participant choice. That is, if the plan allows for the money to be transferred via a wire transfer and there is an upcharge of the normal distribution expense that comes into effect only at the participant's option, I can see that being subtracted from the account balance prior to the transfer but including that expense in the account balance for tax purposes. That is not to say that a plan might not allow the upcharge as a fee against the account prior to transfer and prior to determining the balance for tax purposes. It would be up to the plan to determine how that is done.

[pmacduff]

FWIW we had client under a DOL audit (a number of years ago) and the DOL was quite specific that their position was that the distribution fee was NOT part of the taxable amount. The DOL then checked each plan distribution/1099-R explicity for this issue.

I realize that's not a formal position, but think it does point to the DOL view under audit...

[Guest TCP]

I do not beleive that would be taxable. As long as the plan is consistent with that charge to each participant, then it would seem that it would be essentially an administrative charge to applicable participants and reduces the distribution and the taxable portion thereof.