It is not uncommon for previously active employed plan participants to go into “hiding.” They include retirees and former employees that move away without informing the company. Before the plan sponsor or the administrator realizes it, the individuals become missing participants. The following is what employers should know about these participants.
DOL Considerations for “Hidden” Benefit Plan Participants
If any such plan participants have vested benefits, then the burden — and fiduciary duty — is on the company to make a good faith effort to track them down to help ensure that they receive or have access to those benefits.
In fact, the DOL has announced that, when it conducts routine plan audits, it will pay close attention to how plan sponsors handle (or plan to handle) locating missing participants. The DOL’s primary concern is that people who are entitled to benefits receive them.
Steps for Tracking Participants’ “Home Base”
A 2014 DOL field assistance bulletin (FAB) outlines and updates the agency’s expectations of plan sponsors with respect to keeping track of participants of terminated plans. Plan sponsors can charge missing participant accounts “reasonable expense for efforts to find them.” Even though the FAB was written to outline steps required in the event of a plan termination, it currently serves as the best guidance on what to do if a plan is still active.
To locate missing participants, plan sponsors are encouraged to follow the below steps.
- Use certified mail. Certified mail provides an easy way to locate participants to distribute benefits at little cost.
- Check related plan and employer records. If the retirement plan administrator lacks a current address for a former participant, then the employer or another of the employer’s benefit plans may have updated information. If these other potential sources decline to provide an address due to privacy concerns, then it is best to ask them to contact the individual and relay the retirement plan administrator’s message.
- Check with a designated plan beneficiary. It might be possible to find the missing participant by way of a spouse or child.
- Use free electronic search tools. These resources include Internet search engines, public record databases, obituaries, and social media.
What if a company takes these steps but fails to locate the participant? According to the FAB, the fiduciary’s required efforts might not stop there, depending on the facts and circumstances.
Tagging Additional Measures
In deciding which additional measures to take and expenses to incur, plan fiduciaries can consider the size of a participant’s account balance. A fiduciary could not be faulted for abandoning the search if the added cost would approach the size of the missing participant’s account balance.
Otherwise, additional search resources that might be tapped include:
- commercial locator services,
- credit reporting agencies,
- information brokers,
- investigation databases, and
- analogous services that may involve charges.
When all reasonable efforts to find missing participants come up short in the case of a plan termination, a sponsor has some choices in how to distribute the funds. For example, the sponsor can roll funds into an IRA in the missing participant’s name, assuming an IRA custodian can be found that is willing to receive them. The choice of such a custodian, as well as how the funds are invested, “requires the exercise of fiduciary judgment,” but the DOL has a safe harbor rule that automatically satisfies fiduciary standards.
Finally, in the plan termination context, if an employer cannot find a willing IRA custodian to receive missing participant funds, then it can open an interest-bearing federally insured bank account in the name of the missing participant or beneficiary. In the past, plans would transfer the account balance to a state unclaimed property fund. However, the IRS frowns on this route now that there are so many more options to locate missing participants.
The IRS to Retirees: “You’re It!”
The DOL is not the only agency with an interest in missing participants. The IRS is also concerned with the fate of these individuals, but from a different perspective: When retirees hit age 70½, they must begin receiving their taxable required minimum distributions (RMDs). The IRS does not want missing participants to avoid paying those taxes because they have not received the RMDs.
The penalty for retirees who do not receive and pay taxes on those RMDs is severe: an excise tax equal to 50% of the distribution they should have received. Retirees who are aware of this fee will take steps to avoid it, including keeping the plan sponsor informed about where they live. However, not all retirees may be aware of these consequences.
Seek CRI’s Guidance for Finding Missing Benefit Plan Participants
The DOL’s guidance in this FAB provides a blueprint of the procedures you must follow when faced with a missing participant scenario related to a terminated plan. However, as noted, for now the guidance is the best available for ongoing plans, as well. Consult with CRI to make sure you have the proper steps in place. In case of a plan audit, being able to show the auditor that you have such procedures in place should be satisfactory.