Missing Retirement Plan Participants – Employer Risk
Employees leave for one reason or another. Employers know this. It happens. These former employees may move, get married, get divorced, retire, and eventually die.
These former employees will often have account balances or benefits due them under an employer’s retirement plan and are still considered to be participants. As an employer, you might think that collecting these amounts are the responsibility of the former employee. After all, you have provided the former employee with periodic statements of their accrued benefits and/or account balances and clearly informed them that they have an obligation to keep their address updated. The Internal Revenue Service (“IRS”), U.S. Department of Labor (“DOL”) and Pension Benefit Guaranty Corporation (“PBGC”) disagree. Regulatory guidance from these agencies makes it clear that distributing the retirement accounts and accrued benefits of former employees is the employer’s responsibility.
Employers who maintain retirement plans (whether defined benefit pension plans, 401(k) plans, profit sharing plans, 403(b) plans and other types of retirement plans) are required to have procedures in place for finding missing participants.
The most common time when this issue arises is the obligation of a retirement plan to start making distributions (RMDs) to a participant by April 1 of the year following the year in which the participant attains age 70½. This is the case whether the individual was last employed one year ago or decades ago. The IRS has recently issued guidance both for qualified retirement plans and for 403(b) plans that outlines the steps an employer must take in the event that a participant cannot be found. It is highly recommended that employers comply with this guidance.
Department of Labor Guidance
The DOL is also enforcing the obligation to find missing participants. Although there is no specific timing or triggering event under DOL rules (like RMDs are for the IRS), the DOL regulates fiduciary standards for plan sponsors/administrators and has issued guidance detailing a plan administrator’s responsibilities for finding missing participants when a retirement plan (like a 401(k) plan) terminates. The DOL has also raised this issue on examination of on-going plans (despite the fact that the guidance is directed to terminating plans) and has alleged that the failure to locate missing participants is a breach of fiduciary duty. As a result, employers are encouraged to follow the DOL guidance.
If a plan administrator follows the required search steps, but does not find the missing participant or beneficiary, the DOL has stated that duties of prudence and loyalty require the fiduciary to consider if additional search steps are appropriate. A plan fiduciary should consider the size of a participant’s benefit and the cost of further search efforts in deciding if any additional search steps are appropriate. As a result, the specific additional steps that a plan sponsor takes to locate a missing participant may vary depending on the facts and circumstances.
The PBGC has expanded its missing participant program (which previously only applied to terminated defined benefit plans) to be available to terminating defined contribution plans. These types of plans can now transfer missing participants’ benefits to the PBGC instead of establishing an IRA at a financial institution. This is a positive change, but is only helpful in the event a plan is terminating.
One additional consideration is what to do when a former employee or beneficiary has not cashed a plan distribution check. The check will expire after some time period and the plan fiduciary needs to understand how these uncashed check amounts will be tracked and/or managed. A complicating issue here is that the amounts related to these uncashed check can be considered “plan assets,” and thus still subject to trust and fiduciary obligations and in many cases may continue to earn income (“float”) for the service provider, further complicating the fiduciary considerations for the plan sponsor.
As a result of this increased emphasis by the regulatory agencies to find missing participants, employers and plan administrators should ensure that they have regular and ongoing processes and procedures in place for locating missing participants for distributions and handling uncashed checks. Stevens & Lee’s Employee Benefits Group has the experience and expertise to assist you in reviewing these issues, assisting in discussions with vendors or in preparing procedures to ensure compliance.
For more information regarding this client alert, please contact James B. Longacre at 610.478.2293 or the Stevens & Lee attorney with whom you normally consult.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.