Safe Harbor Diminimus?

I have a client with a former employee who worked a half day in 2024 as a substitute.  The employee was eligible and they have a safe harbor non-elective provision.  The 3% contribution would be ~$15.  My understanding is the letter of the law so to speak requires the $15 deposit.  I have an ethical issue asking the client to make this deposit when the force out distribution will generate a fee from the record keeper (or us the TPA) that exceeds the balance of the account.

Me:  Client you need to make this deposit.

Also Me:  Thanks that is my money now as a fee.

Is there a standard practice for how to handle these types of situations?

yeah, the plan is compliant and the recordkeeper makes the bucks.

Most plans and/or recordkeepers are able to specify that distributions of less than (x) won't be charged a fee, etc., etc. - perhaps you could look into this for future distributions.

But, I have a slightly different take on things. You are being paid a negotiated fee as a TPA to do a job - among your functions is to make sure the client complies with the plan provisions, IRA and ERISA, etc.

The recordkeeper has to do just as much work to process a distribution of $50 as they do for $5,000 (well, maybe not quite - no mandatory withholding, for example). But, the service costs money, and it seems reasonable to me to charge for it. Honestly, some of the very small distributions to participants turn out t be a ton of work, because the checks sometimes go uncashed, whereas the larger check rarely go uncashed.

Having said all that, I do understand your feelings on the issue. And I think many TPA's (us included) often undercharge for our services. Sometimes a tricky balancing act.

Further, it was the responsible plan fiduciary that decided the plan’s allocation of plan-administration expenses among participants’, beneficiaries’, and alternate payees’ accounts.

A fiduciary might allocate all plan-administration expenses only as a uniform percentage of an individual’s account balance. Some say that results in higher-balance participants subsidizing lower-balance participants. And longer-service participants bearing more expense than shorter-service participants. Reasonable minds differ about whether that, or any other allocation, is fair or unfair, equitable or inequitable.

rjterpstra19, about the ethics issue you describe, did your personal interest in earning compensation motivate you to provide advice different than the advice you would provide if you had no personal interest? There is a conflict; but is it trifling? Even if one isolates the distribution-processing fee—rather than consider the whole of the service provider’s compensation, isn’t your profit (or loss) on a distribution-processing fee the difference between that fee and your cost to perform the service? If you knew you would have a loss on the distribution-processing fee, would you advise your client that it need not pay the plan-provided contribution?

I often bill a client less than the fee the client agreed on. Some work I bill at zero. But I can’t remember doing that because I felt a retirement plan’s provision was inapt or uneconomic.

2 hours ago, Peter Gulia said:

Further, it was the responsible plan fiduciary that decided the plan’s allocation of plan-administration expenses among participants’, beneficiaries’, and alternate payees’ accounts.

A fiduciary might allocate all plan-administration expenses only as a uniform percentage of an individual’s account balance. Some say that results in higher-balance participants subsidizing lower-balance participants. And longer-service participants bearing more expense than shorter-service participants. Reasonable minds differ about whether that, or any other allocation, is fair or unfair, equitable or inequitable.

rjterpstra19, about the ethics issue you describe, did your personal interest in earning compensation motivate you to provide advice different than the advice you would provide if you had no personal interest? There is a conflict; but is it trifling? Even if one isolates the distribution-processing fee—rather than consider the whole of the service provider’s compensation, isn’t your profit (or loss) on a distribution-processing fee the difference between that fee and your cost to perform the service? If you knew you would have a loss on the distribution-processing fee, would you advise your client that it need not pay the plan-provided contribution?

I often bill a client less than the fee the client agreed on. Some work I bill at zero. But I can’t remember doing that because I felt a retirement plan’s provision was inapt or uneconomic.

Ultimately, the fee isn't being paid by the client.  It is being paid by the participant.  I don't necessarily see the sense in waiving a fee for our time when it still takes time as others have suggested.  Then where do you keep the fee in place?  A $50 fee on a $55 deposit?  Waive it below $50?  Then you're not consistently following the engagement letter and that opens up other questions in event of an audit.  Anyhow I appreciate everyone's feedback.  It's more or less what I expected, but figured I'd ask to see if there was any sort of guidance I might have overlooked.