Distributing Missing Participants - here is what I have

[Basically]

I have 4 missing participants with the following balances:

$95.76     $52.07     $14.90     $39.56

We use Penchecks to process our 1099-Rs  and we also pull the distribution fee that we charge from the participant's distribution.  After all distribution expenses are deducted each of these payouts will have a negative balance. 

Can I zero these accounts out with expenses? or do I need to open missing person IRAs and get the expenses somewhere else?

[Peter Gulia]

Is the distribution-processing fee $100? Or is some other expense charge also involved?

What does the plan’s governing document provide?

What does the summary plan description explain?

What does the most recent 404a-5 communication disclose?

Does the recordkeeper process, and the payer tax-report, a Form 1099-R showing a distribution of $0.00?

For each service provider involved, what does its service agreement provide?

[Gina Alsdorf]

Personally, I would send to Penchecks for a paper-trail showing that the company didn't benefit from assets of the plan.  A third party feeing out is different than a fiduciary zeroing out, and is allowed so long as fees are reasonable.  

[Peter Gulia]

A plan’s administrator or its service provider would not “zero out” a participant’s account unless (among other conditions):

the plan provides an involuntary distribution;

the administrator applies that provision regularly;

the distribution-processing fee is within the service provider’s reasonable compensation the responsible plan fiduciary, after ERISA § 408(b)(2) disclosures, approved;

the distribution-processing is a reasonable charge against the participant’s account;

the distribution-processing fee was sufficiently disclosed to the participant;

the distribution, even if it pays $0.00, is tax-reported; and

the administrator keeps records to prove the distribution was delivered.

This is not advice to anyone.

[ESOP Guy]

18 hours ago, Peter Gulia said:

the distribution, even if it pays $0.00, is tax-reported; and

 

This is not advice to anyone.

We would never send out a $0.00 1099-R.  Our position is the taxable amount is after the fee.    So there wasn't a taxable distribution in this case. 

 

I see what is in effect the fees resulting in the person having no balance after the distribution and got no payment on a regular basis where I work. 

 

Peter, normally I find your insights valuable.  In this case I am going to go on record saying you're over thinking this one.  

 

Back to the original question.  In the case of the smallest balance you listed every place I know that sets up an IRA would change you more to do so than the balance listed.   The choices become keep the money in the plan or pay the person and watch fees eat the whole payment. 

[Peter Gulia]

Sorry if my description was elliptical or confusing.

I too think the distribution’s amount is after applying the distribution-processing fee.

That the service providers’ systems tax-report a 1099-R to show a gross distribution of $0.00 isn’t my idea. People at recordkeepers and trust companies have told me that’s what their systems do. (And some have said programming a system to omit a 1099-R for a distribution smaller than the threshold on which tax law requires reporting is more trouble than it’s worth.)

Also, some welcome having a 1099-R record as convenient evidence for when a former participant gets a Social Security Administration “may” letter.

If not a 1099-R, I suggest a plan’s administrator make and keep some record that the distribution was done.