What obligations do retirement plan sponsors owe to participants who have terminated employment?
“For ERISA [Employee Retirement Income Security Act] purposes, they’re still a participant in the plan,” says Jeffrey Capwell, a partner at McGuire Woods and leader of the firm’s employee benefits and executive compensation group. “The employer still has all of the same fiduciary and other ERISA obligations for a terminated participant that has an account balance in the plan as it does for active participants who have an account balance under the plan.”
As they are still participants in the plan, even if not active or contributing ones, they still need to receive regular benefits statements and other plan disclosures.
“One thing that’s very important is, if you’ve got a terminating participant, make sure you’ve got some good records about address and how to get in touch with them,” Capwell tells PLANSPONSOR. His firm encourages employers to confirm at the time of separation that the employment and/or plan records are up to date. If a participant is moving, find out the new address.
Or terminating workers may opt to receive disclosures electronically. “They can opt to [have plan documents sent] to an email address,” he says, but “there are certain procedures that have to be followed under Department of Labor [DOL] regulations about using electronic communication. Plan sponsors need to make sure they step through those guidelines.”
In communication to terminated participants, Capwell suggests requesting a confirmation of receipt—the individual can log onto a website or contact the plan administrator to verify that the contact information the sponsor has on file is current.NEXT: Forcing out assets
Capwell says “there may be distinctions in [terminated participants’] employment capacity and what kinds of obligations outside of ERISA that the employer may have with respect to that person.” Most differences in treatment relate to pushing funds out of the plan. If a terminated participant reaches the plan’s normal retirement age, for example, the sponsor could require him to take a distribution then. Alternate payees, too, such as those under a qualified domestic relations order (QDRO), could be forced to take a distribution.
There are some limited, technical reasons that might allow the sponsor to force the participant to take a distribution of the accumulated benefits, many of which are tied to the individual’s account balance. “You could force them to take a distribution under the plan if their account balance is $5,000 or less,” Capwell says. “If their account balance is between $1,000 and $5,000 and they don’t consent to the distribution, then you have to roll it automatically into an IRA [individual retirement account]. So you can, depending on the size of their account balance, roll them or force them out of the plan.”
“There are some rules that protect the employer from future potential liability for the rollover of that money,” he points out, but most employers do not want that hassle. There’s a relatively small pool of providers that are willing to accept a small rollover, so that provider search can be a complicating factor of using a $5,000 cash-out limit. “As a result,” he says, “many employers use a cash-out limit of just $1,000, in order to avoid that.”NEXT: Inform, don’t coerce
“I don’t think there’s anything wrong with telling people about the fact that they have a right to a distribution, and they can do a direct rollover, and identifying for them that that’s available,” he adds. As there is no automated system for rolling terminating workers’ balances to their new employer’s plan yet, participants likely need the rollover system explained to them, and many will need help from the sponsor to initiate that process.
One point to watch out for, he warns, is that the sponsor not encourage people to take their money out, lest it trigger the “significant detriment” rule under Section 1.411(a)-11(c)(2)(i) of the income tax regulations. “If participants want to leave their money,” Capwell says, “they’re permitted to do so—until you can otherwise legally force it out.”
The “significant detriment” rule states that an ex-employee’s consent to a distribution is not valid if his refusal would have a negative impact on his benefits, such as saying, ‘If you leave, you no longer can direct the investment of your account,’ Capwell explains.
Therefore, Capwell encourages sponsors to simply provide relevant information: “You have this account balance, you can roll this over if you want.” Some people may honestly not know that they have left that money behind, he says.Capwell warns, “There’s one issue out there that is getting some attention, and it’s going to be a big deal”—the redefinition of “fiduciary.” While it has been the DOL’s longstanding position that someone providing terminating participants information about their distribution options, if he is not otherwise a fiduciary with respect to the plan, is not acting as a fiduciary when he gives that information, the new rules would make that a specific fiduciary activity, he says. “That is a massive change that would be a complete reversal of existing positions on IRA solicitations.”