Hunting for Retirement Plan Participants? New IRS Guidance and the Expanded PBGC Missing Participants Program Should Help

Winter 2018Articles For Your Benefit

Plan administrators might feel it is the participant’s responsibility to keep a plan administrator informed of their address changes; however, it is the view of the Department of Labor (DOL) that a plan administrator’s failure to take reasonable steps to locate its participants is a breach of fiduciary duty. In addition, the IRS may disqualify a retirement plan that fails to make required minimum distributions to its participants or beneficiaries who cannot be located. Missing or non-responsive participants also create issues when trying to terminate a plan and distribute all of its assets.

The DOL has reportedly commenced a national audit campaign targeting plans with missing participants, and just last month, the Pension Benefit Guaranty Corporation (PBGC) issued final regulations expanding its existing missing participant program (previously limited to certain defined benefit plans) to a defined contribution plan.

The DOL has been very aggressive in a number of plan audits, asserting not only breaches of fiduciary duty, but also prohibited transactions where, in accordance with plan provisions, the benefits due to unresponsive or missing participants or beneficiaries are forfeited. Although the IRS routinely approves plan language permitting forfeiture of retirement benefits of missing participants or beneficiaries, subject to reinstatement upon a subsequent claim for benefits, the DOL has the authority to determine a plan administrator’s compliance with the fiduciary requirements of ERISA.

The DOL, in FAB 2014-01, provided some guidance on locating missing participants in connection with the termination of a defined contribution plan. In this situation, the DOL noted that a plan fiduciary must, at a minimum:

  • Check the records of the employer and any related plans of the employer;
  • Check with the designated beneficiary of the missing participant;
  • Use free internet search tools; and
  • If none of the foregoing is successful, then, after considering the size of the account balance and the cost of additional search efforts, consider use of commercial locator services, credit reporting agencies, information brokers, investigation databases, internet search tools and similar services that may involve charges.

Pending additional guidance from the DOL, a plan fiduciary should consider following the steps outlined by the DOL in FAB 2014- 01.

The IRS addressed the issue of locating missing participants when auditing a plan’s compliance with required minimum distributions following a participant’s attainment of age 70½, or death. According to an October 19, 2017 IRS directive to its audit personnel, the IRS will not challenge a plan’s failure to make required minimum distributions to a missing participant or beneficiary if the plan administrator has taken all of the following actions:

  • Searched all of the records of the plan, related plans and the plan sponsor;
  • Searched publicly available records or directories for alternative contact information;
  • Used either a commercial locator service, credit reporting agency or proprietary internet search tool; and
  • Attempted contact via United States Postal Service certified mail to the last known mailing address and through appropriate means for any address or contact information, including email addresses and phone numbers.

Plan administrators should routinely determine if there are missing or non-responsive participants or beneficiaries and attempt to locate them. If a third party performs these services, the plan administrator should review their processes to make sure they are adequate.

The recent expansion of the PBGC program should also be welcomed news for plan sponsors and plan administrators terminating defined contribution plans in 2018 and beyond (the expanded program is generally not available to plans terminated prior to January 1, 2018). The new PBGC program is only available to defined contribution plans that are being terminated. Plan sponsors have two options when going to the PBGC: (1) elect to be a “transferring” plan, which means that the plan transfers all of its benefits to PBGC for distribution to participants; or (2) elect to be a “notifying” plan, which means that the PBGC is simply provided information regarding participants’ accounts. Further, plan eligibility is contingent upon the eligible defined contribution plan conducting a diligent search for each missing participant within the nine month period ending on the date application is made to the PBGC to participate in the program.

In order to take advantage of the expanded PBGC program, plans must file a form with the PBGC (Form MP-200 and either Schedule A or Schedule B, depending whether the plan is a “transferring” or “notifying” plan). There is an administrative fee for accounts in excess of $250, which may be able to be paid from participant accounts and/or the plan’s forfeiture account.

Plan administrators need to be both proactive and creative in their attempts to locate missing or non-responsive participants or beneficiaries. This may include searching social media sites, as well as contacting former employees who worked with the participant. Further, the steps taken to locate a missing participant or beneficiary must be documented and saved as proof of compliance with the administrator’s fiduciary duties under ERISA and the tax law requirements to provide required minimum distributions to participants and beneficiaries on a timely basis. Certainly, if a plan administrator is interested in applying to the newly available PBGC program, this evidence will be necessary to satisfy a plan’s eligibility requirements to participate in the program.