carol@cohenbuckmann.com
Nowadays any IRS or DOL auditor may ask plan administrators about the steps they take to find participants who don’t cash checks or whose mail is returned undelivered. These obligations don’t end when a plan is being terminated.
Fiduciaries of terminating defined contribution plans have new options for handling benefits of missing participants under final PBGC regulations issued on December 22. This is welcome news, but fiduciaries of ongoing plans also need help, so hopefully this is a first step in providing all fiduciaries with assistance in dealing with this difficult problem.
New Relief for Terminating Defined Contribution Plans.
PBGC has been running a program to permit terminating insured defined benefit plans to transfer benefits of missing participants to the PBGC. (Alternatively, they can purchase an annuity on behalf of the participant.) PBGC will hold the benefits until claimed by the participants. Effective January 22, 2018 for 2018 terminations, fiduciaries of terminating defined contributions plans (and defined benefit plans not covered by Title IV of ERISA) will have the same option, as well as an option to just notify the PBGC of relevant information for the missing participants for inclusion in a searchable database.
Field Assistance Bulletin 2014-01 and the Safe Harbor.
The current Department of Labor guidance establishing a "safe harbor" for fiduciaries in terminating defined contribution plans and Field Assistance Bulletin (FAB) 2014-01 should be revised to reflect the availability of the PBGC options. Currently, this guidance permits fiduciaries of terminating defined contribution plans to establish an IRA on behalf of the participant with a financial institution, and, in limited circumstances, to set up an interest- bearing bank account in the participant’s name, or to voluntarily escheat the benefit. None of these are ideal; the last two options may result in tax liability without the participant even receiving the benefits, and the balance in the IRA created for a participant may be eaten up by annual maintenance fees over time.
What Is New and Valuable?
Here are the benefits of the new PBGC option:
There is no tax liability when the benefits are transferred to the PBGC.
PBGC will pay interest on the amounts at the IRS mid-term rate, eliminating concern about how to invest the assets.
PBGC will maintain a comprehensive searchable database as a resource for participants.
PBGC will even make annuity payouts available to participants whose accounts exceed $5000, even if the plan did not provide for annuity options.
There is a one-time administrative fee for benefits over $250 that are transferred under the program, but no recurring or distribution fees.
What Are the Limitations?
There are some limitations, one very significant:
Plan fiduciaries can’t cherry-pick the benefits they transfer-if they elect this option, it is “all or nothing.”
Plan fiduciaries must have made diligent efforts to find the participant within the last 9 months, so the new program is a last resort, not a substitute for having missing participant procedures and exercising proper diligence.
Most important, unlike discontinued IRS and Social Security Administration letter forwarding programs, the PBGC options are not available for ongoing plans, whose fiduciaries have been struggling with how to fulfill their responsibilities when participants can’t be found and also need additional guidance and options.
Where Can We Go From Here?
The PBGC says that it coordinated with the DOL in issuing the guidance, but more guidance from both the DOL and the IRS regarding ongoing plans is needed. They don’t manage assets like the PBGC does, but a true master database, perhaps maintained jointly with the Social Security Administration, would also help unite participants in ongoing plans with their forgotten benefits. In addition, consideration should be given to expanding the PBGC program to include at least some ongoing defined contribution plans. The largest plans and frozen plans are examples of limited groups of additional plans that could be covered.