Can participants be charged a distribution fee upon leaving the plan?

[k man]

Has the question ever been resolved whether or not participants can be charged a distribution fee upon leaving the plan. there seems to be mixed opinions on this. some people contend that the DOL prohibits this cost being charged to participants and that it should be spread evenly among all participants. others say that the participant can be charged.

[Guest]

Why wouldn't this be just another administrative fee charged back to a participants' accounts just like investment management fees?

[david rigby]

I think the point of this is that a distribution is a right guaranteed by law (and the plan). Therefore, charging *directly* for it seems to be something the DOL doesn't like.

Seems to me that if the amount is reasonable, whether charged to the plan or to the individual participant, is the same. Making all remaining participants pay for all distributions is a worse alternative.

[Dave Baker]

Fred Reish's take on this issue:

http://www.benefitslink.com/reish/articles...d_expenses.html

[Kirk Maldonado]

To hold that participants cannot be charged the costs of making distributions to them (where the plan bears the administrative costs) would produce untoward and unjust results, particularly in the case of a dwindling plan population. Basically, it benefits those who quit early, as opposed to those who stay, as illustrated in the following example, where there are five participants, with one of them leaving at a time, where the cost of issuing the check to the departing participant is $72.

ParticipantActual CostNumber of ParticipantsCost Borne by Participant 5 ($72/number of participants)

1$725$14.402$724$183$723$244$722$365$721$72Total Amount Borne by Participant 5$169.40

Thus, if the costs must be borne by the plan, participant 5 ends up paying a total of $169.40, yet participant 1 only paid $14.40. This unequal allocation of the costs serves no rational purpose.

[This message has been edited by Dave Baker (edited 03-10-2000).]

[Wessex]

I do not disagree with the point made in the last message, but it seems unreasonable to me to charge anyone $72 to process a distribution.

[Kirk Maldonado]

I used $72 only because it made the math work out easier.

[Kirk Maldonado]

Could someone explain to me the difference between (1) the plan bearing the cost and (2) the amount being specially allocated to the participant's account if there is only one participant in the plan?

[imchipbrown]

Good question, Kirk.

Not that it's on point, but my experience is that "the last man standing" does quite well. Sure he's bearing distribution costs, but he's also collecting lots of forfeitures. If I'm the last man in the above example, I'm probably the employer. I'll pay out of the company, getting a deduction and preserving my tax-deferred account.

[Kirk Maldonado]

Chip:

Your point about last man standing is well-taken, if there are forfeitures to be reallocated.

However, your point wouldn't apply in the case of a Section 401(k) plan that does not provide for any employer contributions. I have many clients with such plans.

Also, I've had a number of situations where the last man out was not the employer. Basically, they involved a skeleton crew remaining to wind-up (wind-down?) the business. This typically occurs following a sale of assets.

[This message has been edited by Kirk Maldonado (edited 03-12-2000).]

[Dowist]

The issue arises because of the DOL position, originally taken with respect to QDRO costs, that you couldn't charge costs directly to paricipants if they relate to basic plan rights. Some - perhaps the DOL itself - have extended it to payments.

I think the DOL's reasoning on QDROs and other costs is suspect - it's a new concept that has never been formally adopted and it has no basis in the law. My guess is that the DOL just didn't like the idea of charging large fees for QDRO review against a particular participant's account, and rather than doing something positive about it like simplifying the QDRO process (so that it doesn't cost thousands to get one properly reviewed and drafted), they came up with a novel theory - the "basic rights" theory. What is a basic right anyway, and where did the DOL get the theory from?

Everything that is problematic with not charging the individual participant for fees associated with a payment applies equally to QDROs - the only difference being perhaps in magnitude, which in a sense only makes it worse. Suppose that you have a $2000 account that provides for a $1000 QDRO payment, and the QDRO is so poorly done that it takes $5,000 to review and get changed. Is it fair to charge the $5000 to all acccounts? what if the other accounts only total $50,000? Everyone takes a 10% hit because one participant's QDRO is bad?

[Kirk Maldonado]

Dowist:

How would you handle the situation that you posited (where it costs $5,000 to fix up the QDRO, but the account only had $2,000 in it)?

[k man]

i was aware of the QDRO opinion and thought it would be a stretch to extend the foot note to distribution fees. I like the argument about the last man bearing a disproportionate amount of the costs. So long as the DOL does not take a definitive stance on this, that might be the best argument to use.

[Guest kodle]

When the DOL issued its regs on loan procedures, they made some very vague statements about sponsors taking care to be sure that loan fees do not disproportionately impact smaller accounts, so that the availability of loans is discriminatory. Does anyone worry about the same position being taken with distribution fees? For example, a $72 fee (to use Kirk's example, but I have a client being charged $60 so Kirk's example may be right on) for a $2,000 account is a significantly higher percentage than a $60 fee for a $200,000 account.

[MWeddell]

Just yesterday, I heard two DOL representatives at a conference reiterate their enforcement position that a participant cannot be charged a fee for processing a distribution. They sited the 1994 advisory opinion regarding QDROs.

We should be aware that this is the DOL's enforcement position.

[Kirk Maldonado]

I don't think that some DOL officials making a statement in a speech equates an enforcement position. Is anyone aware of the DOL actually taking any enforcement action on this point? I'm skeptical, because there reportedly was a request for an Advisory Opinion on this point a few years ago, and the DOL never responded to it. If they won't announce the position in an Advisory Opinion, I doubt that they would try to enforce that position in litigation.

[MWeddell]

We may not really be in disagreement here.

When I said that the DOL's enforcement position is that participants may not be charged a processing fee for receiving distributions, I meant that that's the word that has spread down to their field investigators. If a plan sponsor wants to continue doing this, it should expect a challenge from the DOL.

On the other hand, the DOL's position in litigation is weak because it's relying on an Advisory Opinion which addresses a somewhat different situation. One can possibly infer into ERISA 206(d)(e)(D)(i) a Congressional mandate that alternate payees should be able to enjoy the same benefits and options that other participants have without having to pay an extra fee (and even in that situation, the DOL position would be MUCH stronger with regulations), but extending to all distributions is questionable. I've not seen or heard about any litigation testing the DOL position.

[Dowist]

Kirk - you asked how I would handle the situation where it cost the plan $5000 to review and process a QDRO for an account of only $2000.

I must admit that it would be difficult to charge the entire amount against the account (sending the participant/spouse a bill for $3000 and a 1099r for $2000 (but no cash) probably wouldn't work). But it seems that the participant should have some greater responsibility for payment of QDRO expenses than the other participants, as the participant is the only one involved with the plan who can affect the quality of the order that is presented (and also the participant could be expected to choose a less costly way to get the spouse assets than through a QDRO).

From a practical standpoint the only thing I can think of is to establish a QDRO procedure in which the plan does the absolute minimum amount of work in reviewing orders. With this approach the attorney or plan administrator's review stops as soon as it's determined that the order is not qualified, (if you determine that there is a defect in paragraph 1 you don't go to paragraph 2), and the plan administrator just tells the alternate payee that the order is not qualified. If you keep doing this, you could have 10 or 15 rejections, and the alternate payee will get frustrated and will either hire a better attorney, decide to go after other assets, and or ask the court to issue some other order to the plan administrator.

[Kirk Maldonado]

What I do for many of my clients is prepare a sample QDRO for the plan, and tell them to try to get all of their participants to use it. It is invariably cheaper for me to draft a sample QDRO, than to review and clean up a single QDRO drafted by a domestic relations attorney.