As long as the 401(k) did not meet the minimum size, your former employer was not obliged to keep the account, so they would have closed it and mailed it to you (less the taxes). It is legal. I don't recall if the minimum is 3000 or 5000.

You will not incur a "fee" for this, but you might incur a 10% tax penalty unless you roll that money into an IRA within 60 days of the check date. The kicker with this is that you want to put into the IRA all that came out of the 401(k) -- if your 401(k) was $2000, but the employer withheld $400 for taxes so you only got $1600, you still want to put $2000 into an IRA within sixty days to avoid all taxes. If you can't do that, put in as much as you can, to minimize the taxes and penalties.

The 1099-R that you will receive will show the withholding, which you'll take a credit for on your tax return.

They would have sent you a withdrawal packet giving you the option to roll it or take it in cash, with a date that it had to be completed by (usually they give you 60 days. $5000 is the amount for most plans, that they cannot make an automatic distribtution.
If you did not respond by that date, they disperse the funds to you, valued as of that date, minus federal tax and distribution fee. (20% federal, some states have mandatory withholding as well. ) Fee varies by company.
If under 55 you will be charged an additional 10% penalty when you file your taxes.