Profit Sharing Plans - Forfeiture of Small Balances

[Guest Peter Riggins]

In a Profit Sharing Plan where there are many terminated participants with very small balances (i.e., under $1 to just under $20) and the cost assessed by the investment manager to process a distribution is $40 per distribution, can the small balances be forfeited instead of processed as distributions?

[rcline46]

Exactly what will the investment manager do when you order a distribution on an under $40 (that seems a bit high) account? If the trustee gives the order, or the participant requests distribution, the investment manager must act, or I would report them to the DOL and/or IRS.

Second option is to 'distribute' all of the money to a local cash account (bank account) in the plan name and then write checks from the bank account. Recordkeep the distributions from the investment account.

[RCK]

Doesn't this depend in part on who is paying the distribution cost?

If the plan is paying it, then I'd be hard pressed to say that you can forfeit even small amounts. I do think that there is guidance somewhere that the IRS will view an account balance under $5.00 as deminimus and forfeitable. I can't recall where we encountered that though.

If the participant is responsible for the payment, then I see this as a completely different situation. (My prior employer charged me $50 for taking my account balance, and that is legitimate). Assuming that you force out all amounts under some threshhold, then force out the $20 accounts,and their net distribution is $0.