Lost participants create pension plan audit risk
Is your plan keeping track of vested former participants who are owed money? Recent articles have discussed a Department of Labor audit initiative to identify plans that are not paying required minimum distributions to participants, including those for whom they don’t have current addresses. This is an IRS compliance issue as well, as qualified plans that don’t pay required minimum distributions on time are violating Code Section 401(a)(9).
Compliance issues also arise if plan language requires small benefits to be paid out automatically on termination of employment or benefits to commence at normal retirement age. However, the Department of Labor is involved because failure to keep track of participants raises broader fiduciary responsibility issues.
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You might think that former employees who are owed money would keep plans informed of their whereabouts, but every plan administrator knows that they often do not. Many plan notices and a surprising number of plan checks are undeliverable. Plan fiduciaries should resist the temptation to assume that this is only the participant’s problem; fiduciaries have an obligation to use reasonable efforts to locate lost participants and to see that uncashed checks go to the rightful owner of the funds.
They should not wait until a major event such as a plan termination to do a data cleanup and track people down. The law in this area is less clear than we would like, but here are some of the reasons that tracking down those participants who seem to have vanished into thin air is important:
· The Department of Labor has issued authority on the steps that a plan fiduciary should take to track down missing participants in terminating plans, which include using available free internet sources and checking with the beneficiaries designated on forms for any of the employer’s plans. It is hard to justify why these steps would not also be appropriate in an active plan. Failure to take these steps could be a fiduciary breach.
· Forfeiting funds without making reasonable efforts to locate missing participants raises compliance and self-dealing issues, particularly if the plan uses forfeitures to reduce employer contributions. Assuming that forfeiture is permissible, as it appears to be under IRS regulations, and if the participant resurfaces, the forfeitures will still have to be restored, even if the employer has to pay for it.
· Some plans have provisions that benefits will escheat to the state simply because they are unclaimed for a specific period of time. We are seeing these more often in insurance company plans because insurers want to avoid problems with state regulators, who more vigorously enforce escheat laws nowadays as a source of revenue. However, ERISA may preempt the application of these provisions to an ongoing plan. Even if it does not, it is arguably a fiduciary breach to escheat benefits without first using reasonable efforts to find the participant.
Not being able to find people who are owed benefits raises issues in Form 5500 reporting. IRS guidance that explains how to answer whether the plan has failed to pay benefits when due indicates that you should not answer “no” (which is an audit flag) to that question if you are not making reasonable efforts to find missing participants who should get required minimum distributions.
Here are a few steps to minimize risks:
· Use reliable internet services and check with beneficiaries the first time that a check or notice is returned as undeliverable. Although the DOL has not required use of paid search services, many are very reasonable and the cost is smaller than the cost of defending an audit of plan practices. Of course, it may not be appropriate to spend a large fee to pay out $1,000, but some providers make their services available for a flat dollar amount rather than charging on a per-participant basis.
· Check the Social Security death files. If a recipient of life annuity has died, you can clearly discontinue further payments. If there are beneficiaries, you can start notifying them of their rights and options. There is also a national change of address database that may be worth consulting.
· Describe your procedures for dealing with lost participants and uncashed checks in your plan document or written policies and follow those procedures.
· Put language in your plan’s spelling when a vested benefit will be forfeited if the payee can’t be located or dealing with related issues.
· Emphasize in your employee termination package that the employer must be notified promptly of any change in address.
· Make sure that your plan timely applies its automatic rollover provisions. These permit some small lump sums owed to nonresponsive terminated participants to be removed from the plan and placed in an IRA.
Even after applying these steps, there will still be some former employees and beneficiaries who seem to have vanished into thin air, but 100% success in your searches is not required. This is another one of those areas where prudent procedures are the evidence that fiduciary responsibilities have been fulfilled.