Finding of Plan Abandonment
A QTA may find an individual account defined contribution plan has been abandoned when either:
|
| |
1. |
no contribution(s) or distributions have been made for at least 12 consecutive months, or |
| |
2. |
other facts and circumstances that suggest abandonment become known to QTA, such as: |
| |
|
a. |
the plan sponsor files for liquidation under the federal bankruptcy laws, or |
| |
|
b. |
the QTA receives communications from participants and beneficiaries regarding the plan sponsor, distributions or plan administration that suggest the plan has or will be abandoned by the plan sponsor. |
| |
|
The examples provided are not all inclusive and indeed natural disasters, such as Hurricane Katrina, may warrant a QTA to not wait 12 months before making this determination.
|
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: |
| |
• |
No longer exists; |
| |
• |
Cannot be located; or |
| |
• |
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. However, if the plan sponsor objects to the plan being terminated based on the QTA's finding of abandonment, the QTA may wish to inform EBSA of the situation and the sponsor’s objection to the plan’s termination.
To demonstrate that reasonable efforts have been made to locate or communicate with the plan sponsor, the QTA is required to:
|
| |
• |
send the "Notice of Intent to Terminate Plan", which is provided in the appendix A of the regulation, to the last known address of the sponsor by certified or registered mail, return receipt requested. |
| |
• |
if the receipt is not returned, the QTA is required to contact the other unrelated service providers of the plan and request the current address of the plan sponsor. If such information is provided, the QTA is to mail the Notification again using a delivery method requiring an acknowledgement of receipt.
|
Deemed Termination
If a QTA determines that a plan is abandoned, the plan will be deemed terminated on the 90th day following the date of the letter from EBSA acknowledging receipt of the QTA's "Notification of Plan Abandonment and Intent to Serve as QTA" (appendix B of the Regulation). (This is a change from the proposed regulation, which started the 90-day period from the date of the Notification being mailed 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. For example, this waiver may be appropriate for plans with few participants or where the facts relating to the abandonment are not very complicated (and it is clear that the proposed termination poses no risk to the participants).
The notice to EBSA must disclose whether the person serving as QTA or an affiliate of the person has been the subject of an investigation, examination or enforcement action within the past 24 months. In response to a commentator, EBSA has narrowed the definition of affiliate to those that a QTA should have no difficulty identifying, i.e. those that are a 50 percent or more owner of a QTA or any person directly or indirectly controlling or controlled by, or under the common control with, the person; or any officer, director, partner or employee of the person.
The Model Notification to EBSA is basically the same as initially proposed. Modifications include that while e-mail or electronic filing is encouraged, it is not required. EBSA will set up a link on its website for this purpose. The final version of the form requires reporting of delinquent contributions that may have been identified by the QTA.
As on the proposed version, the QTA is required to provide EBSA with 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.
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 the benefits payable to each participant and beneficiary under terms of the plan. The procedural steps the QTA must comply with include:
|
| |
a. |
Locating and updating plan records. A QTA is not required to perform these tasks if it determines that it is either impossible or if it involves a significant cost to the plan in relation to total plan assets. |
| |
b. |
Calculating benefits due to participants and beneficiaries under the terms of the plan.
In response to comments, EBSA has added the following clarifications: |
| |
|
1. |
In instances where the plan document is unavailable, ambiguous, or if compliance with the plan document is not feasible, the QTA will be deemed to have used reasonable care: |
| |
|
|
• |
If expenses are allocated on either a pro rata (based on participant balance to total plan balance) or per capita basis (equally to each account). |
| |
|
|
• |
If assets, including forfeitures, are allocated on a per capita basis (equally to all accounts). (Pro rata allocation is not available because it is deemed to favor HCEs.) |
| |
|
|
• |
If account balances (based on the inclusion of estimated forfeitures and any unallocated assets) that are worth less than the anticipated expenses to be charged to the account are forfeited. The QTA must use forfeited account balances to either defray plan expenses or as additional per capita allocations to the other participants. |
| |
|
2. |
Delinquent Contributions |
| |
|
|
|
° |
QTA must notify EBSA of known delinquent contributions on either the Notification of Plan Abandonment or the Final Notice. The QTA is not responsible to collect these amounts, however. |
| |
c. |
Engaging service providers to terminate the plan and distribute assets. |
| |
d. |
Paying reasonable expenses that are necessary to carry out the QTA’s function from plan assets. Such expenses must be comparable to expenses that would “ordinarily” be charged to other plans if the QTA provides similar services to other customers. |
| |
|
|
Note: The word “ordinarily” was added to clarify that the expense to be charged is to be what would ordinarily be charged to a similarly situated customer. If a discount would normally be provided due to volume or relationship, then it should be applied. |
| |
e. |
Notifying participants of the impending plan termination and the benefits due them. The regulations contain details of what must be provided in the notice. |
| |
|
|
The following minor changes were made to the notice to reflect other changes to the regulations. The QTA may either:
|
| |
|
|
|
• |
Provide the account balance and date it was calculated in the notice, or |
| |
|
|
|
• |
Provide an alternative method to receive the balance and date calculated information via telephonic or web-based options. If this method is used, the notice must provide: |
| |
|
|
|
|
1. |
a description of how to access the information electronically, and |
| |
|
|
|
|
2. |
describe how to obtain a paper copy, and |
| |
|
|
|
• |
Provide a 402(f)-compliant rollover distribution notice with the notice to participants. |
| |
f. |
Distributing benefits in accordance with the election of each participant or beneficiary. |
| |
|
|
Spousal consent rules addressed by the final regulations: |
| |
|
|
|
• |
Spousal consent must be obtained, if required under plan terms. |
| |
|
|
|
• |
If participants or beneficiaries fail to make timely election regarding the distribution in a plan subject to spousal consent, the QTA shall distribute benefits: “in any manner reasonably determined to achieve compliance with those requirements.” Thus, in such a case, the QTA is expected to select an annuity provider using the fiduciary standards under ERISA 404 and then buy the annuity. |
| |
|
Distribution of hard-to-value assets. QTAs will be required to evaluate options and costs and make a determination as to what course of action is best for the participant. Liquidating hard-to-value assets is not part of the safe harbor of the final regulations and significant holdings of hard to value assets may mean the plan is not suitable for termination on this regulation. The Department’s National Enforcement Project for Orphan Plans (NESOP) may be more appropriate.
Also new is the requirement for the QTA to report hard-to-value and illiquid assets on the terminal report. The QTA must also report the fair market value and method of valuation for these assets. |
| |
g. |
Filing a special terminal report for Abandoned Plans with the EBSA. |
| |
h. |
Filing a final notice documenting the completion of the winding up process with the EBSA. |
| |
|
|
The final terminal report does not have to be attached to the final notice, although initially they will be.
|
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 associated with to amending the plan.
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.
The final regulations provide that if the QTA discharges its duties to select and monitor service providers in accordance with ERISA 404(a), the QTA will not be liable for the acts or omissions of the service provider, provided the QTA does not have actual knowledge of the act or omission.
The limited liability provisions do not extend to the selection of an annuity provider when the plan is subject to QJSA and the QTA must select an annuity because the participant or beneficiary does not respond.
The QTA is not required to search for breaches of fiduciary duty that occurred prior to it becoming the QTA of the plan. However, if the QTA discovers a fiduciary breach(es), EBSA wants them reported as part of the notice in the Other information section.
Assets Held in More Than One Institution
EBSA’s position is that there is to be only one QTA for a plan. Therefore, any other parties holding plan assets should cooperate with the QTA in the winding up of the plan. EBSA added language to the final regulations to safeguard the other parties holding assets of an abandoned plan who cooperate with the QTA by clarifying that they are not violating ERISA 404(a) by cooperating and following the direction of the QTA, provided the party holding the assets confirms that the QTA is recognized as such by EBSA. This confirmation may be done by contacting EBSA or checking EBSA’s webpage for list of abandoned plans and the identification of the entity electing to be QTA for the plan.
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:
|
| |
1. |
The QTA has reasonably determined the survivor annuity requirements applicable to any benefits payable under the plan and taken steps to reasonably comply with them. |
| |
2. |
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. |
| |
3. |
Participants and beneficiaries have received the rollover distribution notice (which explains distribution rights and options under section 402(f)) with or within the notice of termination.
|
Notwithstanding, the IRS will retain the right to pursue appropriate remedies under the Internal Revenue 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.
Survivor Annuity Requirements. Because of the restriction that limits the QTA to the purchase of a commercial annuity contract where the participant or beneficiary does not respond, the IRS is asking for public comments for suggested additional correction methods under the new EPCRS for the handling of an abandoned plan subject to QJSA rules.
Vesting due to partial termination. The Code requires an evaluation to see if a partial termination occurred at any point during the year preceding the year in which the plan is terminated. If the QTA determines that there was a partial termination, then the benefits of affected participants would become 100% vested. However, if the QTA reasonably determines that the cost of determining the partial termination outweighs the benefits that would vest, then the evaluation need not be done.
402(f) Notice. The 402(f) Notice is to be provided at the same time as the termination notice to the participant. It should be 30 to 90 days before the distribution. This will satisfy both the IRS and EBSA.
Restrictions on Mandatory Distributions. If a plan is not subject to QJSA requirements, if the vested account balance exceeds $5,000, and the three IRS conditions above are met, the QTA may make a distribution without the participant’s or beneficiary’s consent.
Continued Liability of Plan Sponsor
The liability of the plan sponsor or any person or entity, other than the QTA, for a violation of ERISA remains unaffected by the orphan plan regulations.
Safe Harbor for Rollovers from Terminated Plans-29 CFR 2550.404a-3
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 three conditions to the safe harbor:
|
| |
1. |
The distribution must be rolled into an IRA (or for a nonspousal distribution, to an account maintained by the entity that is eligible to serve as IRA trustee or issuer). |
| |
|
For amounts of $1,000 or less, there is now an alternative to a direct rollover to an IRA. If the amount to be distributed by the QTA is $1,000 or less, and the minimum amount required to be invested in an IRA offered by the QTA at the time of the distribution is more than the amount to be distributed, the QTA may elect either to: |
| |
|
|
a. |
distribute the amount to an interest-bearing federally insured bank or savings association account in the participant’s name; or |
| |
|
|
b. |
send the amount to the unclaimed property fund of the state in which the participant’s last known address is located; or |
| |
|
|
c. |
if possible, send the amount to an IRA offered by an institution other than the QTAs. |
| |
2. |
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. |
| |
3. |
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.
|
403(a) and 403(b) arrangements included in these regulations. EBSA discussed with the IRS including 403(a) and 403(b) arrangements under these regulations and the IRS agreed. Therefore, these plans are also subject to these abandoned plan regulations.
Terminal Report for Abandoned Plans- 29 CFR 2520.103-13
Annual Reporting Relief
The QTA would be required to file a report with the EBSA within two 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. Until the Form 5500 has been revised to include the special instructions, follow the temporary instructions on the EBSA and the EFAST websites. For now, all terminal reports will be filed as attachments to final notices. It is anticipated that this will be e-filed under the future electronic filing system. As noted above, a new section has been added to the report in which the QTA will list assets for which a fair market value was not readily ascertainable. The QTA will also list the value and how it was obtained.
On May 19, 2006, the DOL issued corrections to the regulations. These corrections provided revised Appendix B and C sample notices.
Proposed Prohibited Transaction Exemption 2006-6
The proposed class exemption, if granted, would permit a QTA of an abandoned individual account plan to:
|
| |
• |
select itself or an affiliate to provide services to the plan in connection with the termination of the plan, |
| |
• |
pay itself or an affiliate fees for those services, |
| |
• |
designate itself or an affiliate as provider of an individual retirement plan or other account; and |
| |
• |
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; provide a federally insured bank or savings association account for small distributions; and pay itself or its affiliate reasonable fees in connection therewith.
|
The Department holds its belief that only establishment fees may be charged against the principal and that all other fees including termination fees may only be charged against the earnings on the account.
EBSA clarified that an IRA owner must be able to transfer his or her account balance to a different financial institution without penalty to the principal. Lifestyle funds do not meet EBSAs definition of a permitted investment under these regulations nor the PTE.
EBSA has added two scenarios in which payment is to be made to QTA for services rendered before becoming the QTA. These scenarios are: |
| |
1. |
Payment for services rendered pursuant to the terms of a written contract previously entered into with the plan sponsor or with an independent fiduciary. This PTE thus provides payment to the service provider for exercising authority or control with respect to the disposition of the plan assets as an acting fiduciary while paying itself fees for the service while knowing there is no plan administrator monitoring those services. |
| |
2. |
Payment for services that were rendered in connection with determining the abandonment of the plan under the QTA regulation.
|
