Charging Participants

I am sure we have all run into the scenario before.

You complete the annual valuation and find there are a high number of former employees who just leave their benefits in the plan despite benefit elections being sent to them. For example, suppose you have a 50 participant plan and 20 participants are former employees who terminated more than 2 years ago. Of the 20, 15 have vested benefits of more than $7,000.

We generally have the plan send those who are not cooperative with vested benefits of less than $7,000 to a default IRA custodian. For those with higher vested benefits, we contact them year after year and provide them with benefit elections. Generally we get no cooperation.

The plan sponsor wants us to notify these former employees, let them know that they can leave their benefits in the plan but then they will be charged $450 per year starting this October 31.

Has anyone had experience with this?

The Internal Revenue Service has published guidance on allocating plan-administration expenses with charges applied only against the accounts of severed-from-employment participants. Rev. Rul. 2004-10, 2004-7 I.R.B. 484-485 (Feb. 17, 2004).

Among several conditions, the charge must be no more than the proportionate share, counted as if a charge applied to all individuals’ accounts, of the proper plan-administration expenses.

Does the plan you describe have at least $22,500 a year in plan-administration expenses?

If so, is the amount proper in the sense that the plan pays only for necessary services and pays no more than reasonable compensation for each service particularly and considering the combination of services?

This is not advice to anyone.

I'll just say that $450 per year seems to be excessive.

Agreed. That won't fly and will be considered a detriment to a valid election for the distribution. Similarly, if there was investment direction you could not remove that and force them into a low-yielding money market, for example.

I have seen documents and participant disclosures written where the employer pays active participant charges, both TPA and recordkeeping and terminated participants pay those charges.  Of course, they are usually written that they pay for the year following the year they terminate.