Fees to plan

[Guest jimmybeau]

If a TPA charges $100 to process a distribution and the employer - sponsor wants to pay that fee from the plan, how would the cost be allocated? Could it be netted with gains and losses? That would put more burden on those with larger balances. If it is charged pro rata per participant, someone with $50 in the plan would be more affected than those with larger balances. Since HCEs have the larger balances, I am worried about discrimination. The employer does not want to use forfeitures.

Any thoughts?

Jimmy

[BG5150]

Why don't they just charge the participant doing the distribution?

And how would you net that with gains or losses? It's a fee of $100 and not based on asset value. Sort of like a $1,000 quarterly administration fee--it's a thousand bucks whether the assets go up or whether they go down.

[four01kman]

It sounds to me that it might be a settlor function that can't be paid for by the Plan. Distributions are based on Plan provisions that are established by the Plan Sponsor. I seem to recall a ruling (must be by the DOL) a while back talking about whether a Plan participant may be charged for a "regular" distribution, and the sense was the participant could not be so charged. (sorry I don't have a cite, just my recollection)

[Lou S.]

It sounds to me that it might be a settlor function that can't be paid for by the Plan. Distributions are based on Plan provisions that are established by the Plan Sponsor. I seem to recall a ruling (must be by the DOL) a while back talking about whether a Plan participant may be charged for a "regular" distribution, and the sense was the participant could not be so charged. (sorry I don't have a cite, just my recollection)

This info is old.

The DOL clearly allows charging participants directly for distribution processing under the 2003 published guidence.

[Guest jimmybeau]

The employer wants to charge the participant but if someone has $90 in the plan, the fee would eat up all their funds and still come short. Could this be an accounting expense and charged to the plan just like a trustee fee or other legal expense? The plan allows for that.

[JanetM]

$100 for a distribution? You TPA is overcharging IMHO. Processing DC distributions, contributions, investment transfers etc. should be part of overall administration costs. Now the cost of cutting the check or making wire transfer is different. You can charge the participant for that.

[rcline46]

Janet, on this I disagree with you. Distribution fees are charged per distribution and not as general admin expenses because there is no way to estimate the number of them per year. The distribution process involves checking the paperwork for valid signatures, confirming deposits and settlements of the last deferrals in a 401(k) (and watching for the FInal 415 reg payrolls), tracking the requests until payment date, ordering correct liquidations, and in many cases capturing 1099-R information and producing the 1099-R.

Now if all one does is compliance, and some other organization is doing the 'work', fees can be less. It all depends on what the TPA does. And if the fees are greater than the balance, so be it.

[JanetM]

rcline, I will agree to disagree. You refer to small and micro plans size. For larger plans these are common.

[Guest Sieve]

jimmy --

Based on the amount of the distribution fee, I believe that a distribution request for an amount less than the fee should result in no distribution at all, will cause the TPA to perform no work at all, and, hence, there should be no charge to the plan whatsoever--i.e., either the small account is forfeited, or the fee is reduced to the amount in the account and the TPA receives only that amount.

I would argue that the latter instance--the full amount of the account going to the TPA--would be an overcharge and a violation of ERISA as a payment that would not be reasonable compensation, since the TPA performed no service whatsoever for the fee, and therefore the account should not be paid to the TPA in that situation and it either (i) ought to be considered forfeited (although I don't know on what basis the plan would permit such a forfeiture), or (ii) should be used to pay other plan administrative fees.

[Jim Chad]

When an account is less than the distribution fee, I know some TPA's charge an account termination fee. This is disclosed in the SPD. And it does cover all of the work mentioned above. On occasion all the work is quite time consuming even when you find that the total vested account is quite small.

[Jim Chad]

Jimmy, if you still want to charge the Plan as a whole, (perhaps the employee already received all of his account), I believe the correct way would be the same as for a $1,000 quarterly fee. You should do it pro rata and yes that means the big accounts get hit the hardest.

[K2retire]

Our distribution fee is $50. Our internal policy is that the distribution fee is waived for accounts with balances less than $100 -- even though we are still performing all of the same work, including preparing the 1099-R and 945.

[Guest Tbrown]

Our distribution fee is $50. Our internal policy is that the distribution fee is waived for accounts with balances less than $100 -- even though we are still performing all of the same work, including preparing the 1099-R and 945.

We charge $85 and lose serious $$$ on everyone we process. If the participant pays the distribution fee and their account balance is under $85, we take it as a fee, but have always felt it to be difficult because we aren't performing a specific service for the fee. But we haven't found a viable alternative.

[Guest Sieve]

I agree with you that no service is being performed for the additional $$ in a small account. I think a viable alternative would be to treat the small account as being "forfeited"--i.e., use the small account to reduce a subsequent employer contribution. Or, realize that part of the annual administrative fee includes a few "small account" distributions for which you cannot charge a typical distribution fee, and therefore not charge for some of those small account distributions (as K2 suggests) or charge a reduced fee (of, say, 50% of the account if the account is <$X).

I assume this means that many of those who apply for a 90-day EACA withdrawal will see these same fees apply to that withdrawal.

[J Simmons]

Although not directly on point, it is I think of some interest to the discussion in this thread that section 6.02(5)(b) of Rev Proc 2008-50 (current EPCRS) provides that if the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution.