A New Position on Benefit Distribution Fees
By Sheldon M. Geller
On May 19, 2003, the Department of Labor (DOL) issued guidance significantly changing its position on charging participant accounts for, among other things, the fee to process benefit distributions.
The DOL's new position enables an employer to charge individual participant accounts for all fees, including benefit processing fees, related to their account. An employer is no longer required to allocate such fees to all participant accounts in proportion to their account value (or, alternatively, required to pay these fees).
Under earlier guidance, fees to process benefit distributions had to be charged to all participant accounts or to the employer, and not solely to the affected participant's account. Nevertheless, earlier guidance permitted an employer to charge an individual participant's account for fees to process participant loans and maintain self-directed accounts.
The new DOL position expressly permits the allocation of five common plan-related expenses directly to an individual participant's account. These expenses include the fees to:
The DOL guidance states that an employer may charge the vested accounts of former employees for fees, without regard to whether the employer similarly charges the accounts of active employees. IRS regulations permit an employer to charge reasonable administrative fees to the accounts of former employees (such as a proportion of the fees for an outside third-party plan administrator), provided there is no prohibited discrimination.
For an employer to charge plan expenses to an individual participant’s account, the following documentation is required:
It is also important to note that an amendment to a master plan, prototype plan, or volume submitter plan to permit the allocation of expenses authorized by the DOL Field Assistance Bulletin may cause the plan to cease to contain language identical to that which the IRS has previously approved for the entity issuing this type of plan document. The plan would no longer be able to rely on the determination letter issued by the IRS. Therefore, these amendments should be considered in conjunction with a submission intended to obtain a favorable IRS determination letter.
An employer must amend its qualified plan and revise the summary plan description to take advantage of this new DOL position. An employer will routinely charge participant accounts for distributions, as they likely do now for participant loans. The proposed amendment should empower the employer to charge participant accounts for each of the five aforementioned types of expenses.
An IRS representative expressed reservations about the effect of allocating expenses with respect to plan qualification. It was noted that charging only terminated participants for the maintenance of accounts could represent a “significant detriment” to keeping their money in the plan. Treasury Regulations state that a participant's consent to a distribution (exceeding $5,000) is not valid if the plan imposes a significant detriment on anyone that does not consent to a distribution.
Nevertheless, the IRS has not yet taken an official position with regard to the proposed charges to terminated participants’ accounts. The IRS may take the position that these charges would violate the protected benefits rule under the IRC, unless, for example, there was a nominal annual fee. It appears that the IRS concern relates to charging a terminated participant’s account for a maintenance fee, rather than charging terminated employees as well as active employees a charge to process a distribution.
Employers should take advantage of this new DOL guidance in the absence of a formal IRS position that the proposed practice would violate the IRC provision regarding restrictions on certain mandatory distributions. (This provision deals with the need for a qualified plan to obtain a participant's consent, or the consent of the spouse of a married participant, to receive a distribution exceeding $5,000.) Although it is difficult to predict what position the IRS will ultimately take, it does not appear that the IRS will review this matter until the 2003–2004 work plan.
Sheldon M. Geller, Esq.
Geller & Wind, Ltd.
Mitchell J. Smilowitz
Charles W. Cammack Associates, Inc.
The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.
Visit the new cpajournal.com.