Cash Balance Distribution Fees

[MGOAdmin]

In a 401k plan, I know you are allowed to charge the participant a fee directly for taking a distribution. Are we also permitted to also charge the participant of a defined benefit plan a fee as well, or if a fee is to be charged, does it have to be charged to the plan?

Thanks for your thoughts.

[Lou S.]

You can't reduce the participant's accrued benefit. So no you can't bill the participant for the CB distribution. You can bill the Plan or the Sponsor.

[Mike Preston]

There must be an avenue for a fee free distribution. If there are options available other than a fee free distribution the plan may charge for the enhanced distribution option. Think "check" and "wire transfer". Fees must be communicated in advance. Best if in the SPD.

[Peter Gulia]

But could a plan's document provide that the benefit is the otherwise determined notional account balance minus a specified amount?

[david rigby]

Hybrid plan reg (Internal Revenue Bulletin 2014-41, 10/06/14).
http://www.irs.gov/irb/2014-41_IRB/ar07.html

Scroll down to Reg. 1.411(a)(13)-1(b)(2)(ii) to see a list of permitted reductions. There is no "fee" or "expense" included in this list.

[Peter Gulia]

David Rigby, thank you for pointing us to the rule. (It's especially helpful to me because all of my experience with a cash-balance plan was before the 2006 Act.)

While to me it's unwise for an employer to try to do what MGOAdmin describes, could a plan's formula for a participant's account balance specify that it is (at all times, not only after retirement age but also before) the result of applying the contribution credits, the interest credits, and a subtraction of $100 (not referring to some described "fee" or "expense", but rather a specified amount)?

[Mr. T]

Sorry, but this kind of conversation really bugs me. Can we please stop trying to figure out ways to nickel and dime the lowest paid people in our society in order to save the people who need it least?

Take your creative energy and try to figure out a way to explain to the owner why this is a bad idea. If the plan pays the fee it is spread among everyone. It doesn't really "cost" the owner very much to let the plan cover the fee.

I know the DC world charges participants for everything, but you have to see this is bad practice. People with the smallest account balances, who need the money the most, get dinged constantly just to get it.

Here Sally is $150 contribution for you - aren't I great. Oh, you spent $5 more on coffee this month, so your fired. Lets see, $100 to process your distribution, $10 to prepare the 1099, $2 to liquidate the account. Here is your check for $38. Now be a doll and bring me my new driver before you leave.

P.S. Peter - no disrespect to you intended. I think your idea would probably be fine, assuming it can still pass the non-discrimination rules, but consider how is the really different than just letting the plan pay the fee. Granted, it is $100 that stays in the plan that otherwise would have been paid to the slacker who got canned, but it isn't really $100 back into Big Wigs pocket.

[MGOAdmin]

Thanks for all the input.

Just so we are clear. The participant has to have a minimum balance for us to charge any kind of fees on the distributions. We are no longer going to charge the particiapnt of a DB plan for a distribution - we will charge the plan.

[david rigby]

We are no longer going to charge the particiapnt of a DB plan for a distribution - we will charge the plan.

If "we" is a TPA/recordkeeper, I'm not sure that you get to decide who to charge. Doesn't the plan and/or Plan Administrator make that decision?

[Mr. T]

We are no longer going to charge the particiapnt of a DB plan for a distribution -

Glad to hear you are going to stop an illegal practice. Another injustice prevented, with the help of the A-team.

[My 2 cents]

A cash balance plan is a defined benefit plan, no ifs ands or buts. And participants in defined benefit plans cannot be required to pay any costs of plan administration. Example: Participant A is being divorced and a Qualified Domestic Relations Order has been submitted to the plan. Participant A need not absorb any of the cost of administering the QDRO, which must be borne by the plan or the sponsor. Remember, the plan defines the value of the participant's benefit. There is no direct correspondence between the account balance and the assets held by the plan. So, unlike a defined contribution plan where the expenses are generally borne either by the specific participants or the participants as a whole, if the plan/sponsor has to pay $10,000 to administer a complicated QDRO, it all comes out of the plan or the sponsor's pocket and neither the individual participant nor the participants as a whole have to absorb any of that cost. The only exception would be special arrangements for such things as payment by wire transfer.