Missing Participants: DOL, IRS, and PBGC Speak Up – Agencies Offer Some Clarity in Recent Guidance
With the IRS and Social Security Administration discontinuing access to their letter forwarding programs for retirement plan asset distribution purposes, plan sponsors and the retirement services community have long looked for direction on how to handle missing participant accounts. Over the last five years, this guidance came from three agencies – the Department of Labor (DOL) in August of 2014, the Internal Revenue Service (IRS) in October of 2017, and finally the Pension Benefit Guarantee Corporation (PBGC) in late December of 2017. While their guidance focused on terminating plans, its principles may also be helpful when dealing with missing participant balances in active plans.
Why It’s Important – To put plainly, it’s a fiduciary duty. The DOL has indicated on multiple occasions that it is a plan fiduciary’s responsibility to make a reasonable effort to locate missing participants and beneficiaries. It is also a plan qualification issue; fir instance, a plan may be disqualified by the IRS for failure to make a required minimum distribution to missing participants unless the IRS-endorsed steps are closely followed.
A Roadmap, Imperfect as It Might Be – Guidance from the three agencies demonstrates coordination of approaches. As a whole, its totality may serve as a rough roadmap for plan fiduciaries seeking to conduct their due diligence for location of missing participants with specific facts and circumstances guiding individual searches. Table below summarizes key search steps outlined over the last five years by the regulators.
|Department of Labor||Internal Revenue Service||Pension Benefit Guarantee Corporation|
|Date Issued||August 14, 2014||October 19, 2017||December 22, 2017|
|Document Name||DOL Field Assistance Bulletin (FAB) 2014-01 on Fiduciary Duties and Missing Participants in Terminated Deﬁned Contribution Plans||IRS October 19, 2017 Memorandum. Missing Participants and Beneficiaries and Required Minimum Distributions||Missing Participants. A Rule by the Pension Benefit Guaranty Corporation on 12/22/2017|
|Certified mail contact||Send a notice via certified mail. See a sample notice provided by the DOL.
|Contact via certified mail and other means, including last known email addresses and phone numbers.||DC plans: follow DOL guidance, i.e. send a notice via certified mail. See a sample notice provided by the DOL.|
|Plan and employer records search||Check other plans and employer records: another plan, e.g. group health plan, may have more up-to-date contact information.||Check other plans and employer records: another plan, e.g. group health plan, may have more up-to-date contact information.||DC plans: follow DOL guidance, i.e. check other plans and employer records: another plan, e.g. group health plan, may have more up-to-date contact information.|
|Beneficiary search||Contact the missing participant’s beneficiary: individual’s spouse, children, or other designee may have recent information on the missing participant’s whereabouts. If privacy is a concern, request that the beneficiary contact or forward a letter to the individual.||NA||DC plans: follow DOL guidance, i.e. contact the missing participant’s beneficiary: individual’s spouse, children, or other designee may have recent information on the missing participant’s whereabouts. If privacy is a concern, request that the beneficiary contact or forward a letter to the individual. DB plans: for monthly benefit less than $50, contact beneficiary designated under the plan.|
|Free public records||Use free internet search tools (search engines, public records, or social media) to attempt to locate the missing participant.||Search publicly available records or directories.||DC plans: follow DOL guidance, i.e. use free internet search tools (search engines, public records, or social media) to attempt to locate the missing participant. DB plans: for monthly benefit less than $50, use free internet search tools (search engines, public records, or social media) to attempt to locate the missing participant.|
|Paid record sources and locator services*||When the facts and circumstances warrant, use paid search tools such as internet search tools, commercial locator services, credit reporting agencies, information brokers, investigation databases, and the like.*||Use any of the following methods: commercial locator service, credit reporting agency, proprietary internet search tool for locating individuals.||DC plans: follow DOL guidance, i.e. when the facts and circumstances warrant, use paid search tools such as internet search tools, commercial locator services, credit reporting agencies, information brokers, investigation databases, and the like. DB plans: for fee search is required for monthly benefit greater than $50; it is an optional step for benefits less than $50 per month.|
* The DOL suggests that a plan fiduciary, guided by the duties of prudence and loyalty, must make a call whether use of paid services is appropriate based on account size and the amount of additional expense. Reasonable expenses associated with the search may be charged to participant accounts. On the other hand, use of paid locator service is a requirement for monthly benefits greater than $50 under the terms of PBGC Missing Participant Program.
What If No Luck? If the search process does not result in finding the missing participant, then – according to the DOL – plan fiduciaries may choose a distribution method:
Direct rollover into an IRA in the name of the participant, a.k.a. a default rollover IRA. This is the DOL’s preferred method; the Agency provided a fiduciary safe harbor for selection of investment products for this purpose. When a fiduciary is unable to find a provider to accept a direct rollover or otherwise determines not to make a direct rollover based on other compelling reasons, two other options are available:
Deposit assets into an interest-bearing federally insured bank account in the name of the participant. OR
Transfer or escheat to the state: transfer the property to the state’s unclaimed property fund.
The DOL reiterated prior guidance that the 100% income tax withholding, which in essence is transferring the missing participant’s account balance to the IRS against that participant’s tax liability, is not an acceptable distribution method and would result in fiduciary breach. This position had been articulated before – in coordination with the IRS – in FAB 2004-02.
For terminating defined benefit plans, the PBGC rule significantly overhauled procedures that guide the plan sponsor in determining the appropriate amount of funds to transfer to the agency on behalf of a missing participant or beneficiary. It is worth noting that this program is mandatory for PBGC-covered defined benefit plans; it is optional for non-PBGC covered defined benefit plans.
Effective for terminations occurring on or after January 1, 2018, this option is available for 90 days after the last distribution is paid to participants who were not missing or, when later, one year after the plan termination date. Plan sponsor has an option to transfer the benefits for all missing participants to PBGC or to purchase annuities and simply notify the agency about the identity of the missing participants and benefits due to them. Applicable forms are then filed with PBGC and a one-time $35 fee per missing participant is paid. The fee is waived for transfer amounts of less than $250 or for plans that choose the option of notifying PBGC of where the benefits are held, e.g. annuity contracts or Rollover IRA accounts.
The PBGC missing participant program is also open to terminating defined contribution plans. A plan may choose to notify PBGC of location of balances for missing participants, e.g. using one of the distribution options outlined by the DOL, or transfer balances to PBGC. For plans that choose to transfer missing participant balances, balances of all missing participants must be transferred not just for a subset of missing participants. DC plan specific forms are also required to be filed with PBGC and applicable fees are due.
PBGC will accept small account balances. It also will specify default payment options for amounts in excess of $5,000 transferred into its care – annuity or joint and survivor annuity for married participants. If pension plans allowed lump sum payments, that option will also be available to transferred amounts. Lump sum payouts are similarly extended to defined contribution plans and transferred balances of $5,000 or less.
Congress Contemplates Retirement ‘Lost and Found – Recently, Senators Elizabeth Warren and Steve Daines, have reintroduced a 2016 piece of legislation which aims to help address the missing participant problem. Called The Retirement Savings Lost and Found Act of 2018, it seeks to set up an online lost-and-found database that would use the data employers are already required to report. This database would assist individuals in locating retirement accounts from plans of their former employers. It would allow individuals to view contact information for the plan administrator of any plan where an individual is reported a participant or a beneficiary. The bill offers safe harbors, including a fiduciary safe harbor, for plan sponsors who would follow a prescribed set of attempts to locate participants. In addition, it would increase the auto-rollover threshold by $1,000 to $6,000 and give plan sponsors an option to transfer balances of $1,000 or less to the Director of the Retirement Savings Lost and Found or a designated provider when a participants fails to make an election or receive funds within six months following notification. Whether the bill becomes law is to be seen, but it has received wide industry support.
Steps to Consider – The opening remarks of the PBGC rule indicate that the DOL and the IRS expect to issue additional guidance for dealing with missing participants in the future, so it is likely that we will see further evolution and, hopefully, synchronization of these compliance requirements. Based on sentiments expressed in PBGC’s Participant and Plan Sponsor Advocate 2017 Annual Report and given increased DOL audit activity aimed at how plans handle missing participant balances, it may be prudent to consider the following steps:
- Review the procedures historically taken to locate missing participants. Adjust them to align with the latest guidance.
- Document your attempts to locate missing participants.
- Stay tuned for more guidance in this important compliance area.
For discussion purposes only and in no way represents legal or tax advice. For advice regarding your specific circumstances, the services of an appropriate legal or tax advisor should be sought.