Well, What Do We Do Now?

Posted by Saaib Uppal

In my blog post titled Mind Watching My Stuff for a Minute? I went over how to go about finding a participant who is unresponsive to communications from the plan fiduciary. As I mentioned, to terminate a plan, a sponsor must distribute all account balances. But, what if the plan sponsor seems to be searching for a ghost and the search methods I discussed in my previous blog entry lead nowhere? The EBSA Field Assistance Bulletin (FAB) 2004-02 offers several alternatives:

  1. Individual Retirement Plan Rollovers – This option will result in a deferral of income tax consequences for the missing participant. The plan sponsor must select a prudent investment alternative for the rollover funds, since preservation of principal is an important goal for the fiduciary in connection with distributions to missing participants. Safe harbors for selection of IRA providers and initial investments will be discussed in the next blog. Through our bankrupt-sponsor plan audit practice, we have found that Chapter 7 trustees have no trouble locating IRA providers willing to accept rollover distributions on behalf of a missing participant.
  2. Federally Insured Bank Accounts – Plan fiduciaries may set up a bank account in the missing participant’s name that is both interest-bearing and federally insured. They must also ensure that the participant has the unconditional right to withdraw from the account.
  3. Escheat to State Unclaimed Property Funds – Some states in the U.S. will accept distributions on behalf of missing participants and store them as state unclaimed property funds. The same states will often provide an online database in which property owners can search using their name. In our bankrupt sponsor plan audit practice, we have never seen a trustee have to transfer terminating distributions to a participant’s last state of domicile’s unclaimed property funds. However, in connection with some small plans for which we do not perform audit or administration services, we used to use a practice that would violate ERISA’s fiduciary requirements as follows:
  4. 100% Income Tax Withholding – Contrary to many practitioners’ beliefs, there is no guarantee that the IRS’ matching program would apply the withholding of an entire distribution to a terminated participant’s tax liability, resulting in a refund. Since a plan sponsor has no way of knowing whether a participant files an income tax return, and the IRS has stated that there is no guarantee that the funds will ultimately reach the participant, this formerly popular option seems to have been discontinued, since the FAB has indicated that this option should not be used as a means to distribute benefits to participants and their beneficiaries .

Many of our ongoing retirement plan audit clients verify terminated participants’ contact information on an annual basis and update their personnel records to avoid headaches later. For those who don’t, there is Tylenol and FAB 2004-02 to ensure a healthy body and mind.

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