(b)lines Ask the Experts – Forfeiting Missing Participant Balances
“Can we forfeit the account balances of participants who cannot be located?”
Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
Excellent question! Though not a common feature of retirement plans, the Experts have come across plans that contain language in their documents that would permit benefits that are payable to indeed be forfeited. This language is based on Treas.Reg. 1.411(a)(4)(b)-6 which permits such forfeitures, provided that the benefit can be reinstated should a participant or beneficiary make a claim for the forfeited benefit in the future.
However, the reason that the provision is uncommon is that are a lot of practical and regulatory difficulties associated with the administration of this provision, as follows:
1) The Department of Labor, as far as the Experts are aware, have not explicitly endorsed the forfeiture provision, which is obviously problematic for ERISA plans. They had the opportunity to do so in a Field Assistance Bulletin (FAB 2004-02) which discussed addressing missing participants in terminating defined contribution plans (but also clarifies guidance relative to active plans), and failed to do so. Of course, they DOL did not explicitly state that account balances for lost participants could not be forfeited, as was the case with another common “solution” that plan sponsors were using at the time to address this issue: withholding 100% of the distribution for payment of taxes (though another common solution, escheatment to state unclaimed property funds, was upheld by the DOL for terminating plans; it should be noted that escheatment would be a viable option for active plans as well that are not subject to ERISA). However, there is sufficient ambiguity here that should concern ERISA plan sponsors who would consider a forfeiture provision for benefits of participants who cannot be located.
2) In the same Field Assistance Bulletin, the DOL stresses the importance of making every effort to locate the participant via a myriad of method specified in the FAB including using certified mail, checking other employee benefit records, checking with the named beneficiary(ies), using letter forwarding services (though the IRS letter forwarding service has since been eliminated as an option), commercial locating services, credit reporting agencies and internet searches. Thus, since there are so many methods of locating participants, a forfeiture provision might be viewed as unnecessary.
3) In 403(b) plans, participants often have the right to leave their account balance on deposit in the 403(b) plan once a triggering event, such as a termination of employment, occurs. Thus, when a benefit is actually “payable” for purposes of forfeiture for a lost participant, may be subject to question. The provision may only be practical for the relatively small group of plan participants who have passed their annuity start date (e.g. normal retirement age).
Thus, it would appear that the forfeiture provision is not the best solution to the lost participant issue. However, as listed above, fortunately there are many viable methods of locating participants that, if fully explored by plan sponsors, should result in the location of the vast majority of participants with undeliverable addresses. In the Experts’ experience, the starting point in the location of participants is with the plan recordkeepers. Most plan vendors utilize locator services to update address, either automatically or upon request of the plan sponsor. Thus, plan sponsors should be proactive in working with their vendors in this regard.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.