Guidance on Missing Participant
Rev. 10/05/07, E-mail Alert 2007-13

October 21, 2004
PPA Updates Added to the End on October 5, 2007

The Department of Labor (DOL) has just issued guidance on how missing participants in a defined contribution plan should be handled. The guidance, a follow-up to the final regulations on automatic rollovers that the DOL recently released, provides solutions to this long-standing problem.

Background
We addressed this topic exactly one year ago in our January-February 2004 issue of Retirement Plan News. Until now, there was little official guidance on the handling of missing participants and what existed existed only applied to terminating defined benefit plans, which were able to deliver associated assets to the Pension Benefit Guarantee Corporation (PBGC). Therefore, it is very welcome news that the Department of Labor (DOL) has issued guidance (Field Assistance Bulletin 2004-2) on missing participants for defined contribution plans. The guidance emphasizes that the employer has a fiduciary responsibility under ERISA to attempt to locate missing participants when the plan is either being terminated, or when an involuntary cash out of under $5,000 is about to be made and a distribution election cannot be secured.

Required Methods of Searching for Lost Participants
The DOL provides four mandatory search methods that must be used by all fiduciaries. These are considered efficient and relatively inexpensive methods. The mandatory methods are:

1. Certified Mail – This mail can easily ascertain, at little cost, whether a participant can be located for distribution purposes.
   
2. Check Related Plan Records – Thus, an employer must review its other retirement and welfare benefit plans for more up-to-date information on the missing participant’s address. If privacy issues arise (a common concern with health plans), a letter may be forwarded that asks the participant to contact the plan administrator of the retirement plan.
   
3. Check with the beneficiary designated by the participant.
   
4. Make use of either the IRS or Social Security Administration letter-forwarding services. The IRS has published guidelines (also on the IRS website www.irs.gov) as well as the SSA (www.ssa.gov).

Optional Search Methods
Additional search methods may be considered by the fiduciary. Such optional methods include Internet search tools, commercial locator services and credit reporting agencies. Whether such methods are used will depend on the existing facts and circumstances. Thus, the employer may take into consideration whether the cost of the optional search will outweigh the value in the participant's account.

Distribution Options
Once the mandatory searches have been completed and any optional searches performed, the employer will have to consider distribution options. The options are as follows:

1. Automatic Rollover to an Individual Retirement Account
The IRS provided guidance on a safe harbor method of automatically rolling over missing participants' accounts of $5,000 or less to an IRA. See our related article on this. In a plan termination situation, the DOL states that “as an enforcement matter” fiduciaries should use the criteria for investment products provided in the safe harbor for cash-out amounts under $5,000 when providing for automatic rollovers on behalf of missing participants with balances of more than $5,000. This will permit avoidance of fiduciary liability for future performance of such IRA investments. However, prohibited transaction exemption 2004-16 which permits an institution to directly roll the amount into an IRA in the same institution does not address amounts over $5,000.

2. Alternative Arrangements
If a plan fiduciary is unable to locate an IRA rollover provider, the fiduciary may consider certain alternatives. However, the fiduciary should be aware of the immediate tax liability for the participant.

a. Federally Insured Bank Accounts
Consideration must be given to all available information and restriction on such accounts. For example, such details as the interest rate, guarantee periods, and associated bank charges should be reviewed. The participant must have an unconditional right to withdraw funds from the account upon resurfacing.

b. Escheat to State Unclaimed Property Funds
Depending on whether the relevant state law permits this, a fiduciary may transfer the missing participant’s funds to the state’s unclaimed property fund. Some states provide searchable Internet databases that list the names of unclaimed property owners. Some but not all states pay minimal interest on unclaimed funds. This alternative represents a major change in the position the DOL took in 1994 when it stated that ERISA preempts state escheat laws and thus forbids the application of state escheat laws to an ERISA plan. The new DOL guidance states that a plan may choose to transfer money to an unclaimed property fund; however, a state cannot force an ERISA plan to transfer unclaimed accounts to the state fund.

c. 100% Withholding Not Permitted
Some employers previously attempted to deal with the missing participant problem by depositing 100% of the account with the IRS. The DOL reiterates the position it first took last year, that the 100% income tax withholding method is an unacceptable means of distributing a missing participant’s account.

USA Patriot Act Issue
As with the automatic rollover rules, the customer identification information required under this law need only be supplied upon the participant making contact with the bank or other IRA provider.

Annuity Option Plans
The foregoing DOL guidance applies only to those plans that do not provide for an annuity payment option and to employers that do not maintain another qualified retirement plan (other than an Employee Stock Option Plan). Thus, defined contribution plans that may not eliminate a joint and survivor annuity as its normal form of payment, such as a terminating money purchase pension plan, will have to wait for Congress to change the law and perhaps permit transfer of benefits attributable to lost participants to the PBGC.

Conclusion
This guidance regarding the treatment of lost participants, albeit limited, is more than welcome. It is anticipated that the IRS will issue model plan amendment language to implement these changes. In addition, a Summary of Material Modifications or an updated Summary Plan Description will be required to put plan participants on notice. We will contact you when these items become available.

Pension Protection Act Updates
Section 410 of the Pension Protection Act of 2006 (PPA) extends the Pension Benefit Guaranty Corporation (PBGC) missing participant program to terminated defined contribution plans. PPA has directed the PBGC to write the regulations to extend their program to accomodate these plans. Thus, this new PPA option that may be used as an alternative to the above choices.

In February 2007, the DOL amended the the above rules for terminating plans to add the PPA provision for an inherited nonspouse beneficiary IRA, that requires the establishment of an inherited IRA for a missing beneficiary of a deceased participant. Click here for this amendment to these rules.

Bill Grossman, QPA