Paying fees from plan

[Cynchbeast]

We have a PS plan with pooled accounts and several terminated participants with small balances (under $200).  We will be sending to PenChecks for check processing and the fee they charge is $35 per participant.  The sponsor would like to pay the charges from the plan's forfeitures.  Is this a legitimate plan expense?

[C. B. Zeller]

Why are you rolling over the small balances instead of cashing them out? Balances under $200 do not even need to be provided with the special tax notice.

[Larry Starr]

39 minutes ago, Cynchbeast said:

We have a PS plan with pooled accounts and several terminated participants with small balances (under $200).  We will be sending to PenChecks for check processing and the fee they charge is $35 per participant.  The sponsor would like to pay the charges from the plan's forfeitures.  Is this a legitimate plan expense?

Yes, but as noted previously, why aren't you just sending them a check from the plan and not involving PenChecks?

[Cynchbeast]

Re reason for using PenChecks - the plan has assets in a brokerage account and they really don't want to start requesting separate checks for tiny amounts.  Not to mention the fact that they may not be able to locate some of these participants and then they would have to deal with uncleared checks.

[Lou S.]

Without getting into the wisdom of whether or not you should do this or if Pencecks is a good solution for this, the answer should be in your plan document. That is if payment of Plan expenses is allowed from Plan Forfeitures, then yes this would very likley be considered a legitimate reasonable expense that could be paid from Plan Forfeitures.

[Pam Shoup]

You may also want to check with Penchecks as they are able to deduct the fee from the money that they receive.  It is my understanding that the fee is less than $35 for lesser distribution amounts.

[BG5150]

On 11/5/2019 at 12:52 PM, C. B. Zeller said:

Why are you rolling over the small balances instead of cashing them out? Balances under $200 do not even need to be provided with the special tax notice.

Why do you believe that?  I see nothing in 402(f) that says there is a cutoff.

In generalThe plan administrator of any plan shall, within a reasonable period of time before making an eligible rollover distribution, provide a written explanation to the recipient—

If it's an eligible rollover, then they have to get it.

"There's no taxes taken out, so they can just roll over the entire amount" you say.  however, how does the participant know that?  402(f) notice.

The notice is for eligible rollovers, not eligible rollover distributions where there is withholding.

[C. B. Zeller]

I did not say roll over the entire amount, I said cash them out. Rollover does not have to be made available for distributions <$200. If rollover is not available then the notice is not required.

1.401(a)(31)-1 Q-11: Will a plan satisfy section 401(a)(31) if the plan administrator does not permit a distributee to elect a direct rollover if his or her eligible rollover distributions during a year are reasonably expected to total less than $200?

A-11: Yes. A plan will satisfy section 401(a)(31) even though the plan administrator does not permit any distributee to elect a direct rollover with respect to eligible rollover distributions during a year that are reasonably expected to total less than $200 or any lower minimum amount specified by the plan administrator. The rules described in §31.3405(c)-1, Q&A-14 of this chapter (relating to whether withholding under section 3405(c) is required for an eligible rollover distribution that is less than $200) also apply for purposes of determining whether a direct rollover election under section 401(a)(31) must be provided for an eligible rollover distribution that is less than $200 or the lower specified amount.

[digger]

For us, using PenChecks is the most cost-efficient way to handle 1099-R reporting, required for any distribution of $10 or more.

[GBurns]

It might not be payable from Plan Forfeitures but this seems to qualify as a legitimate Plan Expense which would be allowed

I would not look to 1.401(a)(31) which addresses the "offer":

1.401Requirement to offer direct rollover of eligible rollover distributions; questions and answers.(a)(31)-1 

I would instead go by the on point :

1.402distributions; questions and answers. (f)-1 Required explanation of eligible rollover 

https://www.law.cornell.edu/cfr/text/26/1.402(f)-1