Distribution Fee for Small Balance

[pixmax]

Participant has an account balance of $70.00 and TPA charges $75.00 for a distribution fee. TPA wants to wipe out account and have the remaining balance sent to them as a fee for distribution. Is their really a distribution fee to be charged? I have found no IRS guidance on this nor a De minimus amount .The distribution was not initiated, no notices to the participant and not disclosed as such in the Fee Disclosure Statement. Under audit would the IRS ask for the money to be put back with earnings? What would be the correction? Or is this the norm and it's ok to process the transaction?

[401king]

We (a TPA) automatically close account balances less than our distribution fee, and send a letter to the participant notifying them of the distribution and explaining why no check is being issued (because it was all withdrawn as a fee), and we take whatever the balance was as a fee. Being that they have no net (after-fee) claim to the funds, it should not raise any flags if the plan is audited, assuming the same practice is applied to all accounts with a balance of less than the distribution fee.

The distribution fee should have been disclosed to the participant at some point throughout their participation; hopefully in the SPD.

Of course, that's just our practice. I guess you don't have to charge a fee for this distribution, but why not charge a fee to the $70 account when you will charge the $80 account? Or, is the TPA expecting the Sponsor to make up the $5 difference in the fee?

[QDROphile]

Some plans provide for the amount to be forfeited rather than appear to pay a TPA for a service that is not rendered. I would prefer to defend a forfeiture that is used for the benefit of participants in some way.

[ESOP Guy]

I am currently working on an ESOP that some how ended up with a large number of very small balances. The sum of our fee and the banks fee exceeds many of these account balances. We are forfiting the balances. I have a hard time with the idea of collecting a fee for a distribution we never processed.

[GMK]

Presumably, the distribution fee covers the TPA and bank costs for processing a distribution. The size of the distribution has little bearing on the amount of record keeping and paperwork (the costs) involved in the distribution, especially for a distribution to close an account, regardless of who gets the distribution. If the fee is reasonable for the work involved, it's reasonable for any distribution amount.

I would think the record keeping for processing forfeitures would increase the TPA's work (costs).

A plan could try to negotiate that the fee for closing an account with a small balance will be a stated fraction of the balance, or that the TPA or bank would waive their fee in certain cases. Or the plan sponsor can pay the distribution fee, rather than taking it out of participant's accounts. But I don't expect our TPA or bank to eat all of their costs for processing a distribution. (I am not a TPA or a bank.)

[Peter Gulia]

Could a recordkeeper seek a fee for processing an individual-account closing?

Would a prudent fiduciary approve such a fee?

[Jim Chad]

I don't call it a distribution fee. I call it a "closing a dormant account fee" and I disclose it in the SPD. FWIW

[GMK]

FGC, your point is well taken. If the recordkeeping were paid a la carte, without a fixed fee, then paying for the costs of closing an account would be appropriate, but that's not how it's done.

All I'm saying is that the costs of processing a distribution get paid somehow, either with a distribution fee or with a bump up of some other fee. Otherwise, the recordkeeper goes broke (or is charging too much to begin with, which appears not to be the typical case with TPA's).

Whether the amount of a distribution fee is reasonable is another, important issue, as you pointed out in another posting.

[BG5150]

This is just a side note:

The $70 account. Is that all there ever was? Or was there a total distribution of something larger and this was just a trailing contribution or dividends or something along those lines.

I usually don't charge the second time around for the small stuff. Especially if I can use the previous paperwork and don't have to send out a subsequent tax notice.

[GMK]

This is just a side note:

... but an important one.

We get this same kind of service and appreciate it.

[Meanwhile, any progress on getting the cape flapping again?]

[BG5150]

[Meanwhile, any progress on getting the cape flapping again?]

I think it's a-flappin' again...

[GMK]

At last.

Now you could make the commute from a residence in Poland from the other thread.

[Bill Presson]

This is just a side note:

The $70 account. Is that all there ever was? Or was there a total distribution of something larger and this was just a trailing contribution or dividends or something along those lines.

I usually don't charge the second time around for the small stuff. Especially if I can use the previous paperwork and don't have to send out a subsequent tax notice.

If it's part of a trailing dividend or a final contribution posting (which we really try to avoid), we will not charge a fee, but we do charge the hard costs (check, etc) for the additional distribution.