Notify terminees their tiny accounts are being forfeited?

When terminated participant account balances are under the net fee their distribution would pay to be distributed, their accounts are forfeited.  

Example - account balance = $90 but distribution fees = $100.

I'm curious what kind of notification these terminated participants get?

Also, what if it's a Roth account balance?

Assuming the plan provides an involuntary distribution (and assuming a plan fiduciary had decided to allocate the distribution-processing fee uniformly to accounts involuntarily distributed):

The plan’s administrator might consider no less communication than for a similar distribution that results in a net payment.

That might include a § 402(f) explanation, even if the net amount of an eligible rollover distribution is $0.00.

(Some service providers and plan administrators do not set up a $0.00 net payment as a reason to suppress a § 402(f) explanation that otherwise is called for.)

(Be mindful that the IRS’s 2026 text, unedited, could confuse a reader. The awkwardness begins with the opening sentences: “You are receiving this notice because you are eligible to receive a payment from the [INSERT NAME OF PLAN] (the “Plan”) that you can transfer (roll over) to an IRA or another employer plan. This notice is intended to help you decide whether to roll over the payment (or some portion of it).”)

After the quarter-year closes, an account statement ought to show the charge against the individual’s account and the resulting $0.00 balance.

Beyond statute-prescribed communications, an administrator or its service provider might deliver—before the distribution is made—a one-paragraph explanation that the distribution-processing charge lowers the distributable account balance to $0.00.

Will the payer deliver a Form 1099-R that shows the $0.00 distribution?

To protect fiduciaries regarding later claims, one might consider how to preserve evidence that the involuntary distribution was made, and that it resulted in the distributee receiving the benefit she was entitled to.

This is not advice to anyone.

Have service providers developed a regime I’m unaware of?

If their balance is under $200 we automatically cash them out per the doc and SPD.  Most of it goes to fees.  No special notice to participants. 

10 hours ago, TPApril said:

When terminated participant account balances are under the net fee their distribution would pay to be distributed, their accounts are forfeited.  

Example - account balance = $90 but distribution fees = $100.

I'm curious what kind of notification these terminated participants get?

Also, what if it's a Roth account balance?

Where in the plan doc does it say you are allowed to forfeit the funds instead of paying them out (even if it's all going to fees)?

Why should the employer get use of those vested funds?

BG5150, I guess the situation TPApril describes is about a small-balance (< $7,000) involuntary distribution after a participant is severed from employment.

If so, TPApril asks about situations in which an account might be so small that a charge for a distribution-processing fee depletes the account, resulting in no net payment.

As my note suggests, a plan’s fiduciary (or a service provider helping a plan’s fiduciary) might consider what communication could inform a distributee that the involuntary distribution was made.

41 minutes ago, Peter Gulia said:

If so, TPApril asks about situations in which an account might be so small that a charge for a distribution-processing fee depletes the account, resulting in no net payment.

@Peter Gulia I think its more nuanced than that.  The OP states that if the account balance is less than the distribution fee, the account is forfeited.  So its not that the distribution fee results in no net payment, the balance is forfeited instead of being consumed by the distribution fee.  I share @BG5150 concern here.

I guessed TPApril didn’t intend to describe a forfeiture, at least not in the legal sense that ERISA § 203 (or Internal Revenue Code § 411) uses the constructs of nonforfeitable and forfeitable benefits.

If what’s asked is about a situation in which a benefit is treated as forfeitable because the accrued benefit is small, I too would share BG5150’s question about what the documents governing the plan provide. And that includes interpreting a plan not to provide a forfeiture of a benefit ERISA § 203 commands to be nonforfeitable.

Let’s hope TPApril clarifies which situation is asked about—a forfeiture, or an involuntary small-balance “cash-out” distribution.

I agree in thinking there is a problem with forfeiting the vested balance rather than debiting it for fees. However, does that then create a problem because a fee was charged for a service that was not provided (distribution processing)? Maybe the generation of a (form) letter to the participant stating because your balance was less than the distribution fee (in the words of an angry Willie Wonka to Charlie) "you get nothing!" Hence a service (letter) to substantiate a fee. If forfeitures are used to pay fees then you get to the same place, but when IRS/DOL like you to go A to B to C under their rules, they often don't take kindly to jumping from A to C.

1 hour ago, RatherBeGolfing said:

OP states

Operating Procedure? Was forfeiture a selectable option or written in? These are not in the AA or a formal part of the plan, so are they blessed/pre-approved by IRS? If not, I'd rethink the procedure.

1 hour ago, CuseFan said:

Operating Procedure?

In this case "OP" stands for 'Original Post' (sometimes it refers to the 'Original Poster').

Basically, by 'forfeiting' these funds, the ER is basically taking them for use later for the plan.  Either by reducing their own fee obligation or offsetting their contribution obligation or adding to the contribution.

Side question:  who gets the benefit of the fee(s)?  Often there are two fees, one for the TPA to review the transaction and one for the record keeper to process the distribution.  If the amount does rise to the Toal of one or both of the fees, who is first in the hierarchy:  TPA or R/K?

I might add that the TPA firm is not taking any specific fee for these tiny balances that are sent to the Forfeiture account.  Nor is there an invoice with a line item for these specific (non)distributions.  But it almost sounds like the cleaner approach is for the full balance to be paid directly to TPA and/or recordkeeper for a distribution that does not happen?

Looks like I might have guessed wrong in classifying the situation asked about.

As BG5150, RatherBeGolfing, CuseFan, and I suggest, a benefit is not forfeitable because the accrued benefit is small.

But many plans do what ratherbereading mentions. If the plan provides a small-balance involuntary distribution, the participant is severed from employment, and her account balance is no more than the cash-out level the plan specifies (whether $7,000, $5,000, $1,000, or $200), the administrator obeys the plan and instructs the involuntary distribution.

If the account balance is $199 and the distribution-processing fee charged against the individual’s account is $75, that results in a net payment (before withholding for taxes) of $124.

To follow TPApril’s example, if the distribution-processing fee to be charged is $100, but the account balance is $90, that might result in a net payment of $0.00. But it is a distribution, even if the distributee sees no money.

(Some recordkeepers abate a fee so, as applied regarding a particular distributee, the fee is no more than distributee’s before-charge account balance. Also, some recordkeepers set the charge, if not the fee, so a net payment for the involuntary distribution never is less than $1, $5, or $10. Some do this so routine processing will make records showing that the distribution was paid.)

If the plan’s administrator has segregated a forfeiture merely because an accrued benefit is small, each of the plan’s fiduciaries might want its or her lawyer’s advice.