Abandoned Individual Account Plan Proposed Regulations and Class Exemption

The Employee Benefit Security Administration (EBSA) of DOL is to be commended for issuing guidance on topics that have needed to be addressed for quite some time. For example, last year the EBSA released guidance on distributions to missing participants and now EBSA has moved on to the issue of how to terminate an abandoned plan and distribute its assets. This has been an area without any formal guidance, and therefore one in which administrators had to proceed with no official guidance to instruct them on proper procedures. When the EBSA proposal is finalized, we will at last have a procedure to terminate these “orphan” plans.

The proposed regulations were published in the March 10, 2005, Federal Register, along with a proposed prohibited transaction exemption. EBSA has asked that written comments on the proposal be submitted no later than May 9, 2005.

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Qualified Termination Administrator

To be a QTA, an individual or other entity must be eligible to serve as a trustee or as an issuer of an IRA, and the holder of the assets of the plan on whose behalf it will serve as QTA.

The determination of whether a plan has been abandoned would be the sole responsibility of a qualified termination administrator (QTA). In addition the QTA would have responsibility for all of the activities involved in winding up the affairs of an abandoned plan.

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Finding of Plan Abandonment

A QTA may find an individual account defined contribution plan has been abandoned when either:

no contribution or distributions have been made for at least 12 consecutive months, or

other facts and circumstances that suggest abandonment become known to QTA such as:

the plan sponsor files for liquidation under Title 11 of the United States Code (the federal bankruptcy laws), or

the QTA receives communications from participants and beneficiaries regarding distributions

The QTA must also make reasonable efforts to communicate with the plan sponsor, and based on its efforts, the QTA determines that the plan sponsor either:

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No longer exists;

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Cannot be located; or

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Is unable to maintain the plan;

A QTA may not find a plan abandoned, if, at anytime before the plan is deemed terminated, the QTA receives an objection from the plan sponsor regarding the finding of abandonment and proposed termination.

To demonstrate that reasonable efforts have been made to locate or communicate with the plan sponsor the QTA is required to:

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send the notice provided in this regulation to the last known address of the sponsor by a method of delivery requiring an acknowledgement of receipt (i.e., certified or registered mail).

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if receipt is not returned, the QTA is required to contact known service providers of the plan, other than itself, and request the current address of the plan sponsor. If such information is provided, the QTA is to mail again using a delivery method requiring an acknowledgement of receipt.

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Deemed Termination

According to the proposal, if a QTA finds a plan to meet the definition of abandoned, the plan will be deemed terminated on the 90 th day following the date that the notice of plan abandonment is provided to EBSA.

During the 90-day period, the EBSA may object to the termination, which will halt the termination until the EBSA indicates that it has withdrawn its objection. As an alternative, the EBSA may waive the 90-day waiting period.

The QTA is required to file information with the EBSA, such as, plan information and contact information regarding the QTA, the QTA’s findings on abandonment, information regarding plan assets, service provider information, and a statement that the information is provided under penalties of perjury.

The 90-day period would be calculated from the time the notice is considered furnished to the EBSA. This is determined as follows:

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Upon mailing – if using United States Postal Service (USPS) certified mail or Express mail.

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Upon receipt by the delivery service, if accomplished using a “designated private delivery service”, or

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For any other service, upon receipt by the EBSA.

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Winding up the Affairs of the Plan

The QTA would be required to undertake reasonable and diligent efforts to locate and update plan records necessary to determine benefits payable under terms of the plan to each participant and beneficiary. The procedural steps the QTA must comply with include:

Locating and updating plan records. A QTA will not have failed this responsibility if it determines it is impossible or if it involves significant cost to the plan in relation to the total assets to the plan.

Calculating benefits due to participants and beneficiaries under the terms of the plan.

Engage service providers to terminate the plan and distribute assets.

Paying reasonable expenses from plan assets what is necessary to carryout the QTA’s function. Such expenses must be comparable to expenses charged to other plans if the QTA provides similar services to other customers.

Notifying participants of benefits due to them and the impending plan termination. The proposed regulation contains details of what must be provided in the notice.

Distributing benefits in accordance with the election of each participant or beneficiary.

Filing a special terminal report for Abandoned Plans with the EBSA.

Filing a final notice documenting the completion of the winding up process with the EBSA

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Plan Amendments

The regulation provides that the plan shall for purposes of Title I of ERISA, be deemed to be amended to the extent necessary to allow the QTA to wind up the plan in accordance with this regulation. This permits the QTA to do what is necessary under this regulation without costs attendant to amending the plan, such as, hiring or replacing service providers and paying expenses attendant to winding up and terminating the plan.

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Limited Liability of QTA

If QTA follows the fiduciary prudence requirements in regard to selecting and monitoring service providers, the QTA will not be held liable for the acts or omissions with respect to which the QTA has no knowledge.

If the QTA carries out its responsibilities with regard to winding up the affairs of the plan, in accordance with the regulation, the QTA is deemed to satisfy any responsibilities it may have under ERISA 404(c) except for selecting and monitoring service providers.

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Internal Revenue Service

The EBSA and the IRS have discussed the impact of a termination under this proposal on the plan’s qualification requirements under the Tax Code. The IRS has advised the EBSA that it would not challenge the qualified status of a plan terminated under this procedure, provided the QTA satisfies three conditions:

The QTA has reasonably determined the survivor annuity requirements applicable to any benefits payable under the plan.

Each participant and beneficiary has a nonforfeitable right to his or her accrued benefit as of the date of deemed termination, subject to income, expenses, gains, or losses between that date and the distribution date.

Participants and beneficiaries have received the rollover distribution notice (which explains distribution rights and options under section 402(f)).

Notwithstanding, the IRS will retain the right to pursue appropriate remedies under the Code against any party who has responsibility for the plan, such as the plan sponsor, plan administrator or owner of the business, even in its capacity as a participant or beneficiary.

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Continued Liability of Plan Sponsor

Nothing in the proposed regulation limits the liability of the plan sponsor or any person other than the QTA that is the result of a violation of ERISA.

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Safe Harbor for Rollovers from Terminated Plans

If a participant or beneficiary fails to elect a form of distribution, the QTA would be required to make a direct rollover into an IRA. This is a fiduciary safe harbor, relieving the QTA of liability if the conditions of the safe harbor are met. There are 3 conditions to the safe harbor:

The distribution must be rolled into an IRA (or for a non-spousal distribution, to an account maintained by the entity that is eligible to serve as IRA trustee or issuer).

The QTA and the IRA provider must enter into a written agreement that provides that the funds rolled in be invested in an investment product designed to preserve principal, and maintain dollar value.

If the QTA designates itself as the transferee of the rollover proceeds, the designation must be exempt from the restrictions of prohibited transaction self-dealing rules of ERISA 406.

The EBSA has asked for comments from practitioners and industry organizations as to whether this safe harbor should also be extended to 403(b) plans.

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Annual Reporting Relief

The QTA would be required to file a report with the EBSA within 2 months after the month in which all of the plan’s affairs have been wound up. This report would provide information on the plan’s total assets, termination expenses paid by the plan, and the total amount of distributions, along with other relevant information. This report would be filed using Form 5500 based on special instructions for abandoned plans.

Proposed Prohibited Transaction Exemption
The proposed class exemption, if granted, would permit a QTA of an abandoned individual account plan to:

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select itself or an affiliate to provide services to the plan in connection with the termination of the plan,

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pay itself or an affiliate fees for those services,

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designate itself or an affiliate as provider of an individual retirement plan or other account; and

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select a proprietary investment product as the initial investment for the rollover distribution of benefits for a participant or beneficiary who fails to make an election regarding the disposition of such benefits; and pay itself or its affiliate reasonable fees in connection therewith.

Abandoned Individual Account Plan Proposed Regulations and Class Exemption

Proposed Prohibited Transaction Exemption The proposed class exemption, if granted, would permit a QTA of an abandoned individual account plan to:

Proposed Prohibited Transaction Exemption
The proposed class exemption, if granted, would permit a QTA of an abandoned individual account plan to: