Tax withholding before or after check delivery fees?

[bcmom]

The recordkeeper charges distribution fees to participants that is deducted before taxes are withheld. If the recordkeeper is charging an ACH or overnight delivery fee, shouldn't that fee also be deducted before taxes are withheld? Is there a citing I can refer to?

[Lou S.]

I've seen it done both ways by different vendors in the past.

Now with the disclosure rules some vendors/tpas may get around the disclosure by saying it is a fee after the distribution and thus technically not a fee charged to the participant. Though that's just a guess on my part.

[masteff]

It's also appears to be an optional fee deducted at the choice of the participant.

[Tom Poje]

well, what is going to go on the 1099 as the distribution amount?

if there was a balance of 1050

and a fee of 50 I would expect the 1099 to be 1000 and at that point I would expect 200 in withholding.

[ESOP Guy]

I just had this come up this week. I find it a bit funny you worry about withholding. In the end withholding is just that. To me the more interesting question is the one Tom points to. What is the taxable amount?

To use his example is the taxable 1050 or 1000? I lean towards 1000 but the way the bank I was working with said it was 1050. They were consistent they withheld 210.

But like I said why worry about withholding? It is what is taxable that determines what the person owes when the tax return is filed.

Edit to make it a little more readable.

[Tom Poje]

obviously this won't necessarily speak for others, but I was curious, and looking at a Great West Statement it shows

gross distribution = 3112.15

fee = 50

withholding = 612.43 (which would be 20% of gross less fee)

state withholding = 122.49 (which was 4% of gross less fee)

....

the idea of withholding is the govt want to makes sure they get their cut.

I think the ERISA Outline Book says if there was no withholding as required they could go after the one cutting the check to recover the tax if they couldn't get it from the participant.

I guess, lets say as the investment house you cut a check for 100,000 and don't withhold the required 20%. the individual takes the $ and flees the country. so someone is going to have to make up for the missing withholding.

otherwise I agree with ESOP guy, withholding is just that. it is at tax time when everything balance based on the 1099/

[BG5150]

My thought on why the "fee" should not be part of the distribution, nor part of the 1099-R:

This is money that the participant cannot take constructive receipt of; they will never have access to it. It will never be their money. So why tax it?

[masteff]

Keep in mind that is a delivery fee that is in question here.

I think bcmom needs to clarify the original post.

If the delivery fees are optional (meaning the participant can get a check by regular mail at no additional cost or can choose to pay an optional fee to get the money faster), then it is my professional opinion that the participant does have constructive receipt of the money used to pay the optional delivery fee. The participant was able to exercise control over that money by making the election for faster delivery.

If the delivery fee is not optional, then it is my professional opinion that no constructive receipt occurs.

[K2retire]

My thought on why the "fee" should not be part of the distribution, nor part of the 1099-R:

This is money that the participant cannot take constructive receipt of; they will never have access to it. It will never be their money. So why tax it?

I like the thought process, but we are talking about IRS rules that don't necessarily make sense. The same could be said of the tax on excess group term life insurance and it is taxable.

[BG5150]

masteff-- re-reading the thread, I think you are right. A delivery fee is probably optional where a processing fee is not. I was thinking of the processing fee.

I think the delivery fee is taxable. My thought process.

Account balance 20500

Distribution request comes in

50 processing fee taken (participant has no choice)

Balance remaining 2000.00

Participant want the 2000 paid directly.

Taxable amount 2000, w/h 400, net distribution 1600

But wait, participant wants the check overnited.

OK. Carrier takes 20 for the overnite fee.

Participant gets 1580

[BG5150]

But, what if it's a partial distribution, and there is money left in the account after the requested funds are liquidated? Could the o/n fee be taken from the remaining assets?

Using my line of thinking above, probably not. What do the carriers do? I'm not sure.

[Belgarath]

I agree with Masteff. This was my precise thought process as well (which probably isn't comforting to Masteff!)