Field Assistance Bulletin (FAB) 2014-01 addresses ways for fiduciaries of terminated DC plans to fulfill their obligations under the Employee Retirement Income Security Act (ERISA) to locate missing participants and properly distribute the participants’ account balances. The DOL notes that under Title I of ERISA, it generally views the decision to terminate a plan as a “settlor” decision rather than a fiduciary one. However, the fiduciary responsibility provisions of ERISA govern the steps taken to implement this “settlor” decision, including steps to locate missing participants. A plan fiduciary’s choice of a distribution option for a missing participant’s account balance also is a fiduciary decision subject to the general fiduciary responsibility provisions of ERISA.
The FAB eliminates the requirement in FAB 2004-02 to use the discontinued IRS letter-forwarding service or the SSA letter-forwarding service. In their place, the required search steps have been expanded to include the use of electronic search tools that do not charge a fee.
Searching for Participants
If routine methods of delivering notices to participants, such as first-class mail or electronic notification, are inadequate, the DOL says plan sponsors should:
- Use Certified Mail. Certified mail is an easy way to find out, at little cost, whether the participant can be located in order to distribute benefits. The DOL provided a model notice that could be used for such mailings as part of a regulatory safe harbor, but its use is not required and other notices could satisfy the safe harbor.
- Check Related Plan and Employer Records. While the records of the terminated plan may not contain current address information, it is possible that the employer or another of the employer’s plans, such as a group health plan, may have more up-to-date information. For this reason, plan fiduciaries of the terminated plan must ask both the employer and administrator(s) of related plans to search their records for a more current address for the missing participant. If there are privacy concerns, the plan fiduciary engaged in the search can request that the employer or other plan fiduciary contact or forward a letter for the terminated plan to the missing participant or beneficiary. The letter would request that the missing participant or beneficiary contact the searching plan fiduciary.
- Check With Designated Plan Beneficiary. In searching the terminated plan’s records or the records of related plans, plan fiduciaries must try to identify and contact any individual that the missing participant has designated as a beneficiary (e.g., spouse, children, etc.) to find updated contact information for the missing participant. Again, if there are privacy concerns, the plan fiduciary can request that the designated beneficiary contact or forward a letter for the terminated plan to the missing participant or beneficiary.
- Use Free Electronic Search Tools. Plan fiduciaries must make reasonable use of Internet search tools that do not charge a fee to search for a missing participant or beneficiary. Such online services include Internet search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media.
If a plan administrator follows the required search steps but does not find the missing participant or beneficiary, the duties of prudence and loyalty require the fiduciary to consider if additional search steps are appropriate, the DOL says. A plan fiduciary should consider the size of a participant’s account balance and the cost of further search efforts in deciding if any additional search steps are appropriate. The specific additional steps that a plan fiduciary takes to locate a missing participant may vary depending on the facts and circumstances, but could include the use of Internet search tools, commercial locator services, credit reporting agencies, information brokers, investigation databases and analogous services that may involve charges.
According to the FAB, a plan fiduciary may charge missing participants’ accounts reasonable expenses for efforts to find them. The amount charged to a participant’s account must be reasonable and the method of allocating the expense must be consistent with the terms of the plan and the plan fiduciary’s duties under ERISA. Plan fiduciaries must be able to demonstrate compliance with ERISA’s fiduciary standards for all decisions made to locate missing participants and distribute benefits on their behalf. If audited, plan fiduciaries could demonstrate compliance using paper or electronic records.
Distributions to Missing Participants
If a plan sponsor is unable to locate missing participants or obtain distribution directions, Section 404(a) of ERISA requires plan fiduciaries to consider distributing missing participant benefits into individual retirement plans (i.e., an individual retirement account or annuity). The DOL says, in its view, in most cases, the best approach in selecting among individual retirement plans will be to distribute the missing participant’s account balance into an individual retirement plan in accordance with the Department’s regulatory safe harbor for terminated DC plans.
If benefits are distributed into an individual retirement plan, fiduciary judgment must be used to choose a trustee, custodian or issuer to receive the distribution, and to choose an initial investment for the plan. The DOL published a safe harbor regulation for plan fiduciaries to satisfy their fiduciary responsibilities under section 404(a) of ERISA when making certain mandatory rollover distributions to individual retirement plans. In general, this automatic rollover safe harbor applies to distributions of $5,000 or less for participants who leave an employer's workforce without electing to receive a taxable cash distribution or directly roll over assets into an individual retirement plan or another qualified plan.
However, in 2006, the DOL strengthened its policy by publishing the safe harbor in a final regulation that covers distributions from a terminated DC plan on behalf of a missing participant or beneficiary into an individual retirement plan or inherited individual retirement plan. When plan sponsors comply with the conditions of the safe harbor, fiduciaries satisfy their ERISA 404(a) duties in the distribution of benefits, the selection of an individual retirement plan provider and the investment of the distributed funds. The conditions include choosing investment products designed to preserve principal and whose fees and expenses are not excessive when compared to other individual retirement plans offered by the provider.
If a plan fiduciary cannot find an individual retirement plan provider to accept a direct rollover distribution for a missing participant or determines not to make a rollover distribution for some other compelling reason based on the particular facts and circumstances, the fiduciary may consider two other options: 1) opening an interest-bearing federally insured bank account in the name of the missing participant or beneficiary, or 2) transferring the account balance to a state unclaimed property fund. Before making such a decision, however, the fiduciary must prudently conclude that such a distribution is appropriate despite the potential considerable adverse tax consequences to the plan participant.
According to the FAB, unlike tax-free rollovers into an individual retirement plan, the funds transferred to a bank account or state unclaimed property fund generally are subject to income taxation, mandatory income tax withholding and a possible additional tax for premature distributions. Moreover, any interest that accrues after the transfer generally would be subject to income taxation upon accrual. The DOL points out these tax consequences reduce the amount of money available for retirement, and a prudent and loyal fiduciary would not voluntarily subject a missing participant’s funds to such negative consequences in the absence of compelling offsetting considerations. In most cases, a fiduciary would violate ERISA section 404(a)’s obligations of prudence and loyalty by causing such negative consequences rather than making an individual retirement plan rollover distribution, the DOL warns.
Finally, the DOL says 100% income tax withholding is not an option. Withholding 100% of a missing participant’s benefits would in effect transfer the benefits to the IRS. The DOL says it reviewed this matter with IRS staff at the time it issued FAB 2004-02, and concluded that using this option is not in the best interest of participants and beneficiaries and would violate ERISA’s fiduciary requirements.
Concerns About Automatic Rollovers
The DOL notes that fiduciaries have expressed concerns about legal issues that might prevent them from establishing individual retirement plans or bank accounts for missing participants, including perceived conflicts with the customer identification and verification provisions (CIP) of the USA PATRIOT Act. The CIP provisions establish standards for financial institutions to verify the identity of customers who open accounts. The DOL says the Treasury and other federal functional regulators have determined that the act requires that banks and other financial institutions apply their CIP compliance program only at the time a former participant or beneficiary first contacts such institution to claim ownership or exercise control over the account. CIP compliance will not be required at the time an employee benefit plan establishes an account and transfers the funds to a bank or other financial institution for purposes of a distribution of benefits from the plan to a separated employee.
The DOL also notes that some issues caused by the application of state laws, including those governing signature requirements and escheat are beyond its jurisdiction.
According to the FAB, once a plan fiduciary properly distributes the entire benefit to which a missing participant is entitled, the distribution ends the individual’s status as a participant covered under the plan and the distributed assets are no longer plan assets under ERISA. However, if the distributed benefit is reduced due to a fiduciary breach, the individual would still have standing to file suit against the breaching fiduciary under section 502(a)(2) of ERISA.