EBSA updates guidance on finding missing participants of terminated DC plans and making final distributions

The Employee Benefits Security Administration (EBSA) has updated its guidance for fiduciaries that want to make final distributions from terminated defined contribution (DC) plans that have missing participants. EBSA explains that the guidance has been updated to reflect important changes that have occurred in the last ten years since the publication of Field Assistance Bulletin (FAB) No. 2004-02. These changes include the discontinuation of the IRS and Social Security Administration (SSA) letter-forwarding services, and the expansion and improvement of Internet search technologies. The update also reflects the Department of Labor’s (DOL’s) codification of its enforcement safe harbor for distributing missing participants’ benefits to individual retirement plans and suggestions from the 2013 ERISA Advisory Council.

To comply with the Code’s requirements for termination of a qualified plan, a plan’s assets must all be effectively distributed as soon as administratively feasible following a plan termination. The EBSA guidance aims to help fiduciaries properly discharge their responsibilities to missing participants of terminated DC plans when the fiduciaries have been unable to find or receive a response from participants concerning the final distribution of their benefits.

Changes to required search steps

EBSA explains that after FAB No. 2004-02 was issued, the IRS and the SSA announced that their letter-forwarding services were no longer available to plan fiduciaries that were searching for missing participants or beneficiaries. However, free or low cost Internet search services and tools have become much more broadly available and accepted, and, in some cases, have become more effective at locating missing participants than either the IRS or SSA letter-forwarding services. Therefore, the updated guidance eliminates the requirement in FAB No. 2004-02 to use the discontinued IRS and SSA letter-forwarding services. In place of the letter-forwarding services, the required search steps have been expanded to include the use of electronic search tools that do not charge a fee, including Internet search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries, and social media.

Additional search steps

If the required search steps have been followed, but a missing participant or beneficiary has not been found, the duties of prudence and loyalty require the plan fiduciary to consider if additional search steps are appropriate. 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. EBSA explains that the specific additional steps that a plan fiduciary takes to locate a missing participant may vary depending on the facts and circumstances. EBSA has expanded the list of possible additional search steps (Internet search tools, commercial locator services, and credit reporting agencies) to include information brokers, investigation databases, and analogous services that may involve charges.

Distribution options

EBSA notes that when fiduciaries of terminated DC plans have been unable to locate missing participants or obtain distribution directions, despite the use of the listed search steps, the plan fiduciaries will have no choice but to select an appropriate distribution option to complete the plan’s termination. Rollovers to individual retirement plans (i.e., individual retirement account or annuity) continue to be the preferred distribution option, according to EBSA.

EBSA notes that, in 2006, the DOL strengthened the enforcement safe harbor for terminated DC plans provided in FAB No. 2004-02 by publishing the safe harbor in a final regulation, ERISA Reg. Sec. 2550.404a-3. In the Pension Protection Act (P.L. 109-280), Congress directed the Pension Benefit Guaranty Corporation (PBGC) to expand its defined benefit missing participants program to include distributions from terminated defined contribution plans. EBSA states that the DOL intends to reevaluate the updated guidance after the PBGC publishes final regulations permitting a distribution to its missing participants program.

As in FAB No. 2004-02, the two alternative distribution options to use when a plan fiduciary cannot find an individual retirement plan provider to accept a direct rollover distribution for a missing participant are: (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. EBSA states that, before making such a decision, the fiduciary must prudently conclude that such a distribution is appropriate despite the potential considerable adverse tax consequences to the plan participant. EBSA adds that 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 fact, in most cases, a fiduciary would violate ERISA Sec. 404(a)’s obligations of prudence and loyalty by causing such negative consequences rather than making a rollover distribution to an individual retirement plan.

EBSA continues to believe that using 100% income tax withholding is not in the best interest of participants and beneficiaries, and would violate ERISA’s fiduciary requirements.

Source: EBSA Assistance Bulletin No. 2014-01.
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