Partial Plan Termination and de minimis distributions

We have a partial plan termination of a pooled profit sharing plan where 69 our of 76 participants have balances under $5,000.  13 of them have less than $200.  Our office uses a popular distribution company that charges $35 per person to prepare a distribution and they do the 1099-R at the end of the year.   We also charge a fee on a sliding scale for processing distributions, although for balances under $200, we usually do not charge.  In this case, we may need to charge something if we have to invest a lot of time in hunting missing people.  That issue aside, for 8 of the 13 people, there isn't even enough money to pay the processor's $35 fee.  My question is this:  are these little balances considered "de minimis" amounts and can they simply be forfeited?  Or must the employer pay the $35 per person so the distribution company can cut a check for as little as $4.26 up to $179.02?

Any advice based upon what you and your firm do in such circumstances will be greatly appreciated. Thank you!

The TPA I work for charges $125 per  distribution regardless of the balance since that is what's  noted in the fee schedule. So if someone has a balance of $100, it all goes to the distribution fee.   Hope that helps.

Of course, the fee must have been previously disclosed to participants, no?

On ‎6‎/‎4‎/‎2018 at 2:13 PM, ldr said:

My question is this:  are these little balances considered "de minimis" amounts and can they simply be forfeited?  Or must the employer pay the $35 per person so the distribution company can cut a check for as little as $4.26 up to $179.02?

Perhaps others can speak to this more directly: in my observation, "can't locate" might be a valid reason leading to forfeiture, but "de minimus" is not.

1 hour ago, david rigby said:

Perhaps others can speak to this more directly: in my observation, "can't locate" might be a valid reason leading to forfeiture, but "de minimus" is not.

I agree, de minimus is not a valid reason for forfeiture.

The IRS allows for forfeiture with reinstatement  for missing participants (Treas. Reg. 1.411(a)-4(b)(6))

The DOL does not expressly allow for forfeiture with reinstatement for missing participants, and may consider it a prohibited transaction.

On 6/4/2018 at 2:25 PM, CEW said:

The TPA I work for charges $125 per  distribution regardless of the balance since that is what's  noted in the fee schedule. So if someone has a balance of $100, it all goes to the distribution fee.   Hope that helps.

How can there be a distribution fee charged to the participant if there is in fact, no distribution to the participant?

32 minutes ago, stephen said:

How can there be a distribution fee charged to the participant if there is in fact, no distribution to the participant?

Good question...

On 6/4/2018 at 2:25 PM, CEW said:

The TPA I work for charges $125 per  distribution regardless of the balance since that is what's  noted in the fee schedule. So if someone has a balance of $100, it all goes to the distribution fee.   Hope that helps.

I am not criticizing your business model, but I am genuinely curious.   How do you justify a distribution fee of $125 when the participant in fact gets no distribution.  Even if the balance was large enough for the participant to get something, let's say an account balance of $199.  At that balance you don't have to give them a rollover option or withhold, you just cash them out and you are done.

What about this... first, "process" the distribution out of the participant's account.  Second, take distribution fee from distribution amount.  Finally, since distribution amount doesn't cover the fee, then nothing to send to participant.  But distribution was "processed" (out of the participant's account) and thus the fee.

14 hours ago, stephen said:

How can there be a distribution fee charged to the participant if there is in fact, no distribution to the participant?

11 hours ago, RatherBeGolfing said:

I am not criticizing your business model, but I am genuinely curious.   How do you justify a distribution fee of $125 when the participant in fact gets no distribution.  Even if the balance was large enough for the participant to get something, let's say an account balance of $199.  At that balance you don't have to give them a rollover option or withhold, you just cash them out 

99% of our documents don't have an auto rollover option- -participants are cashed out if their balance is $200 or less. Our $125 fee is taken out of that. If our fee eats up their balance, they get zero. 

Well, we just made up our own procedure for this case.  Our leader decided that everyone who has less than $35 in their accounts will receive a distribution check of their account balance but that the employer will pay the $70 fees.  Everyone who has more than $35 but less than $300 will pay the $35 fee to the processor and the employer will pay our $35 fee.  Everyone with over $300 will pay both the $35 processor fee and our $35 fee.  The employer is covering the fees, or part of the fees, for those who didn't have enough money and will eventually deduct it as a business expense.

Right or wrong, I don't know, but it seemed fair to him and it works for me.