United States: Do You Know Where All Of Your Plan Participants Are?

Terminated plan participants often cause plan sponsors to incur additional work — and money — if their balance remains in the plan. One reason the balances of terminated participants often remain in the plan is because these former employees eventually fall off the radar. Plan sponsors are unable to locate the terminated participant and they become a "lost" participant.

Due to the requirements for annual fee disclosures, plan sponsors are responsible for continuing to provide terminated participants with these annual statements. Additionally, what if these terminated participants have vested benefits? The fiduciary duty is on the plan sponsor to make a good faith effort to track them down to ensure they receive or have access to those benefits.

A primary concern of the Department of Labor (DOL) is that people who are entitled to benefits actually receive them. Thus, the DOL pays close attention to how plan sponsors approach locating lost participants when the DOL is conducting routine plan audits.

Recommended Steps

The DOL issued a field assistance bulletin in 2014 that outlined and updated its expectations of plan sponsors with respect to keeping tabs on lost participants. Plan sponsors can charge missing participant accounts "reasonable expense for efforts to find them." Under this field assistance bulleting, to locate missing participants, plan sponsors are encouraged to:

  • Use certified mail;
  • Check related plan and employer records;
  • Check with a designated plan beneficiary, such as a spouse or child; and
  • Use free electronic search tools such as Internet search engines, public record databases, social media and obituaries.

Additional search resources that might be tapped include credit reporting agencies, commercial locator services and information brokers.

Distribution of Funds

Plan sponsors also have options on how to distribute the funds when all reasonable efforts to locate missing participants have come up empty. A plan sponsor can roll the account balance 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;" however, the DOL has a safe harbor rule that automatically satisfies fiduciary standards.

Additionally, in the plan termination context, if a plan sponsor cannot find a willing IRA custodian to receive missing participant funds, a plan sponsor can open an interest-bearing federally insured bank account in the name of the missing participant or beneficiary.

Tax Consequences

The IRS is also interested in the whereabouts of lost participants. When retirees hit age 70½, they must begin receiving their taxable required minimum distributions (RMDs). The IRS does not want lost participants to avoid paying those taxes because they have not received the RMDs. Retirees who do not receive and pay taxes on those RMDs may face an excise tax equal to 50% of the distribution they should have received.

In closing, it is recommended that plan sponsors provide participants with the necessary paperwork to request their distribution immediately upon termination or retirement. This procedure will hopefully reduce the likelihood that a participant will fall off the radar. However, as noted, there are recommended steps on how to track down these "lost" participants.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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