Printer Friendly Version
September 30, 2004
Memorandum For: Virginia C. Smith Director of
Enforcement, Regional Directors
From: Robert J. Doyle Director of Regulations
and Interpretations
Subject: Fiduciary Duties and Missing
Participants in Terminated Defined Contribution Plans
What does a plan fiduciary need to do in order to
fulfill its fiduciary obligations under ERISA with respect to: (1)
locating a missing participant of a terminated defined contribution
plan; and (2) distributing an account balance when efforts to
communicate with a missing participant fail to secure a distribution
election?
All plan assets must be distributed as soon as
administratively feasible after the date of a plan termination in order
to effectively complete a plan termination under Internal Revenue Code
requirements.(1) Prior
to any distribution, the Code requires a plan administrator to contact
all participants for affirmative directions regarding distribution of
their account balances.(2)
This notice requirement extends to all participants, regardless of
their length of service or the size of their account balances, because
all participants vest in their account balances upon termination of the
plan.(3)
In the context of terminated defined contribution
plans, some participants may be unresponsive to written notices from
plan administrators asking for direction regarding the distribution of
their account balances: these participants are commonly referred to as
missing participants.(4)
As a result of participants’ unresponsiveness, plan
administrators often are unable to effectively wind–up the plans’
financial affairs and are confronted with an array of issues related to
their duties under the fiduciary responsibility provisions of ERISA to
search for missing participants and distribute their benefits.
The Department has previously issued guidance to
fiduciaries of terminated defined contribution plans on the handling of
certain missing participant issues. However, Field Offices have, in the
course of their investigations, found that plan fiduciaries use a
variety of methods in searching for missing participants and
distributing account balances when a search proves unsuccessful.
Additional guidance, therefore, has been requested concerning the
obligations of plan fiduciaries that are confronted with missing
participant issues in terminated defined contribution plans.(5)
Consistent with the requirements of section 404(a) of
ERISA, a fiduciary must act prudently and solely in the interest of the
plan’s participants and beneficiaries and for the exclusive purpose of
providing benefits and defraying reasonable expenses of administering
the plan. Also, under section 404(a)(1)(D) of ERISA, fiduciaries are
required to act in accordance with the documents and instruments
governing the plan insofar as such documents and instruments are
consistent with the provisions of Title I and IV. Section 402(b)(4) of
ERISA provides that every employee benefit plan shall specify the basis
on which payments are made to and from the plan. Section 403(a) of ERISA
generally requires that the assets of a plan be held in trust by a
trustee. In the case of plan terminations, fiduciaries must also ensure
that the allocation of any previously unallocated funds is made in
accordance with the provisions of section 403(d) of ERISA.
Under Title I of ERISA, the decision to terminate a
plan is generally viewed as a “settlor” decision rather than a
fiduciary decision relating to the administration of the plan. However,
the steps taken to implement this decision, including steps to locate
missing participants, are governed by the fiduciary responsibility
provisions of ERISA.(6)
Further, in our view, while the distribution of the entire benefit
to which a participant is entitled ends his or her status as a plan
participant and the distributed assets cease to be plan assets under
ERISA, a plan fiduciary’s choice of a distribution option is a
fiduciary decision subject to the general fiduciary responsibility
provisions of ERISA.(7)
It is our view that a plan fiduciary must take
certain steps in an effort to locate a missing participant or
beneficiary before the plan fiduciary determines that the participant
cannot be found and distributes his or her benefits in accordance with
this Bulletin. These steps are identified below under the heading “Search
Methods.” It also is our view that, in determining any additional
steps that may be appropriate with regard to a particular participant, a
plan fiduciary must consider the size of the participant’s account
balance and the expenses involved in attempting to locate the missing
participant. Accordingly, the specific steps that a plan fiduciary takes
to locate a missing participant may vary depending on the facts and
circumstances. This consideration of additional steps is discussed below
under the heading “Other Search Options.” Reasonable expenses
attendant to locating a missing participant may be charged to a
participant’s account, provided that the amount of the expenses
allocated to the participant’s account is reasonable and the method of
allocation is consistent with the terms of the plan and the plan
fiduciary’s duties under ERISA.(8)
Whatever decisions are made in connection with locating of missing
participants or the distribution of assets on their behalf, plan
fiduciaries must be able to demonstrate compliance with ERISA’s
fiduciary standards.
In the context of a defined contribution plan
termination, one of the most important functions of the plan’s
fiduciaries is to notify participants of the termination and of the plan’s
intention to distribute benefits. In most instances, routine methods of
delivering notice to participants, such as first class mail or
electronic notification, will be adequate. In the event that such
methods fail to obtain from the participant the information necessary
for the distribution, or the plan fiduciary has reason to believe that a
participant has failed to inform the plan of a change in address, plan
fiduciaries need to take other steps to locate the participant or a
beneficiary. In our view, some search methods involve such nominal
expense and such potential for effectiveness that a plan fiduciary must
always use them, regardless of the size of the participant’s account
balance. A plan fiduciary cannot distribute a missing participant’s
benefits in accordance with the distribution options discussed below
unless each of these methods proves ineffective in locating the missing
participant. However, a plan fiduciary is not obligated to take each of
these steps if one or more of them are successful in locating the
missing participant. These methods are:
-
Use Certified Mail.
Certified mail can be used to easily ascertain, at little cost,
whether the participant can be located in order to distribute
benefits.
-
Check Related Plan Records.
While the records of the terminated plan may not have current
address information, it is possible that the employer or another
plan of the employer, such as a group health plan, may have more
up-to-date information with respect to a given participant or
beneficiary. For this reason, plan fiduciaries of the terminated
plan must ask both the employer and administrator(s) of related
plans to search their records for a more current address for the
missing participant. If there are privacy concerns, the plan
fiduciary that is engaged in the search can request the employer or
other plan fiduciary to contact or forward a letter on behalf of the
terminated plan to the participant or beneficiary, requesting the
participant or beneficiary to contact the plan fiduciary.
-
Check With Designated Plan
Beneficiary. In connection with a search of the terminated plan’s
records or the records of related plans, plan fiduciaries must
attempt to identify and contact any individual that the missing
participant has designated as a beneficiary (e.g., spouse, children,
etc.) for updated information concerning the location of the missing
participant. Again, if there are privacy concerns, the plan
fiduciary can request the designated beneficiary to contact or
forward a letter on behalf of the terminated plan to the
participant, requesting the participant or beneficiary to contact
the plan fiduciary.
-
Use A Letter-Forwarding Service.
Both the Internal Revenue Service (IRS) and the Social Security
Administration (SSA) offer letter-forwarding services. Plan
fiduciaries must choose one service and use it in attempting to
locate a missing participant or beneficiary. The IRS has published
guidelines under which it will forward letters for third parties for
certain “humane purposes,” including a qualified plan
administrator’s attempt to locate and pay a benefit to a plan
participant.(9)
The SSA’s letter forwarding service may be
used for similar purposes, and is described on the SSA’s Web site.(10)
It is our understanding that to use either the
IRS or SSA program, the plan fiduciary/requestor must submit a
written request for letter forwarding to the agency, and must
provide the missing participant’s social security number or
certain other identifying information. Both the IRS and SSA will
search their records for the most recent address of the missing
participant and will forward a letter from the plan
fiduciary/requestor to the missing participant if appropriate. In
using these letter-forwarding services to notify a missing
participant that he or she is entitled to a benefit, the plan
fiduciary’s letter should provide contact information for claiming
the benefit. This notice may also suggest a date by which the
participant must respond, as neither the IRS nor the SSA will notify
the plan fiduciary as to whether the participant was located.
Other Search Options
In addition to using the search methods discussed
above, a plan fiduciary should consider the use of Internet search
tools, commercial locator services, and credit reporting agencies to
locate a missing participant. Depending on the facts and circumstances
concerning a particular missing participant, it may be prudent for the
plan fiduciary to use one or more of these other search options. If the
cost of using these services will be charged to the missing participant’s
account, plan fiduciaries will need to consider the size of the
participant’s account balance in relation to the cost of the services
when deciding whether the use of such services is appropriate.
There will be circumstances when, despite their use
of the search methods described above, plan fiduciaries will be unable
to locate participants or otherwise obtain directions concerning the
distribution of their benefits from terminated defined contribution
plans. In these circumstances, plan fiduciaries will nonetheless have to
consider distribution options in order to effectuate the termination of
the plan.(11) We
have set forth below the fiduciary considerations that are relevant to
the various options available to plan fiduciaries in the context of
missing participants of terminated defined contribution plans.
Individual Retirement Plan Rollovers - In our
view, plan fiduciaries must always consider distributing missing
participant benefits into individual retirement plans (i.e., an
individual retirement account or annuity).(12)
Establishing an individual retirement plan is the preferred
distribution option because it is more likely to preserve assets for
retirement purposes than any of the other identified options.
Distribution to an individual retirement plan
preserves retirement assets because it results in a deferral of income
tax consequences for missing participants. A distribution that qualifies
as an eligible rollover distribution(13)
from a qualified plan, which is handled by a trustee to trustee transfer
into an individual retirement plan, will not be subject to immediate
income taxation, the 20 percent mandatory income tax withholding
requirement, or the 10 percent additional tax for premature
distributions that may be required based on the participant’s age and
related facts.(14)
As we have noted in other contexts, the choice of an
individual retirement plan also raises fiduciary issues as to the
particular choice of an individual retirement plan trustee, custodian or
issuer as well as the selection of an initial individual retirement plan
investment to receive the distribution.(15)
By regulation, the Department established a safe harbor for plan
fiduciaries to satisfy their fiduciary responsibility under section
404(a) of ERISA when selecting individual retirement plan providers and
initial investments in connection with the rollover of certain mandatory
distributions to individual retirement plans.(16)
In general, this regulation applies to distributions of $5,000 or
less for separating participants who leave an employer's workforce
without making an election to either receive a taxable cash distribution
or directly roll over assets into an individual retirement plan or
another qualified plan.
In our view, the circumstances giving rise to relief
under this safe harbor regulation are similar to those confronting
fiduciaries of terminated defined contribution plans. Therefore, in the
context of making distributions from terminated defined contribution
plans on behalf of participants who are determined to be missing or
otherwise fail to elect a method of distribution in connection with the
termination, fiduciaries who choose investment products that are
designed to preserve principal should, as an enforcement matter, be
treated as satisfying their fiduciary duties in connection with such
distributions, when the fiduciary complies with the relevant
requirements of the automatic rollover safe harbor regulation, without
regard to the amount involved in the rollover distribution.(17)
Alternative Arrangements - If a plan fiduciary
is unable to locate an individual retirement plan provider that is
willing to accept a rollover distribution on behalf of a missing
participant, plan fiduciaries may consider either establishing an
interest-bearing federally insured bank account in the name of a missing
participant or transferring missing participants’ account balances to
state unclaimed property funds. In this regard, fiduciaries should be
aware that transferring a participant’s benefits to either a bank
account or state unclaimed property fund will subject the deposited
amounts to income taxation, mandatory income tax withholding and a
possible additional tax for premature distributions. Moreover, interest
accrued would also be subject to income taxation. Plan fiduciaries
should not use 100% income tax withholding as a means to distribute plan
benefits to missing participants.
Federally Insured Bank Accounts - Plan fiduciaries may consider establishing an
interest bearing federally insured bank account in the name of a missing
participant, provided the participant would have an unconditional right
to withdraw funds from the account. In selecting a bank and accepting an
initial interest rate, with or without a guarantee period, a plan
fiduciary must give appropriate consideration to all available
information relevant to such selection and interest rate, including
associated bank charges.
Escheat To State Unclaimed Property Funds - As an alternative, plan fiduciaries may also consider
transferring missing participants’ account balances to state unclaimed
property funds in the state of each participant’s last known residence
or work location. We understand that some states accept such
distributions on behalf of missing participants. We also understand that
states often provide searchable Internet databases that list the names
of property owners and, in some instances, award minimal interest on
unclaimed property funds.
In prior guidance, the Department concluded that, if
a state unclaimed property statute were applied to require an ongoing
plan to pay to the state amounts held by the plan on behalf of
terminated employees, the application of that statute would be preempted
by section 514(a) of ERISA.(18)
However, we do not believe that the principles set forth in Advisory
Opinion 94-41A, which dealt with a plan fiduciary’s duty to preserve
plan assets held in trust for an ongoing plan, prevent a plan fiduciary
from voluntarily deciding to escheat missing participants’ account
balances under a state’s unclaimed property statute in order to
complete the plan termination process.
Additionally, we believe that a plan fiduciary’s
transfer of a missing participant’s account balance from a terminated
defined contribution plan to a state’s unclaimed property fund would
constitute a plan distribution, which ends both the property owner’s
status as a plan participant and the property’s status as plan assets
under ERISA.(19)
In deciding between distribution into a state
unclaimed property fund and distribution into a federally insured bank
account, we believe that a plan fiduciary should evaluate any interest
accrual and fees associated with a bank account against the availability
of the state unclaimed property fund’s searchable database that may
facilitate the potential for recovery. In any event, transfer to state
unclaimed property funds must comply with state law requirements.
100% Income Tax Withholding - We are aware that some plan fiduciaries believe that
imposing 100% income tax withholding on missing participant benefits, in
effect transferring the benefits to the IRS, is an acceptable means by
which to deal with the benefits of missing participants. After reviewing
this option with the staff of the Internal Revenue Service, we have
concluded that the use of this option would not be in the interest of
participants and beneficiaries and, therefore, would violate ERISA’s
fiduciary requirements. Based on discussions with the IRS staff and our
understanding of the IRS’s current data processing, the 100%
withholding distribution option would not necessarily result in the
withheld amounts being matched or applied to the missing participants’/taxpayers’
income tax liabilities resulting in a refund of the amount in excess of
such tax liabilities.(20)
This option, therefore, should not be used by plan fiduciaries as
a means to distribute benefits to plan participants and beneficiaries.
Miscellaneous Issues
Fiduciaries have expressed concerns about legal
impediments that might hinder the establishment of individual retirement
plans or bank accounts on behalf of missing participants. These
impediments include perceived conflicts with the customer identification
and verification provisions of the USA PATRIOT Act (Act).(21)
With regard to this problem, we note that Treasury staff, along
with the staff of the other Federal functional regulators,(22)
has issued helpful guidance for fiduciaries that are establishing an
individual retirement plan or federally insured bank account in the name
of a missing participant. This guidance was published in a set of
questions and answers on the customer identification and verification
provision (CIP) of the Act, “FAQs: Final CIP Rule,” on the
regulators’ Web sites.(23)
The Federal functional regulators advised the
Department that they interpret the CIP requirements of section 326 of
the Act and implementing regulations to require that banks and other
financial institutions implement their CIP compliance program with
respect to an account (including an individual retirement plan or
federally insured bank account) established by an employee benefit plan
in the name of a former participant (or beneficiary) of such plan, only
at the time the former participant or beneficiary first contacts such
institution to assert ownership or exercise control over the account.
CIP compliance will not be required at the time an employee benefit plan
establishes an account and transfers the funds to a bank or other
financial institution for purposes of a distribution of benefits from
the plan to a separated employee.
With regard to the application of state laws,
including those governing signature requirements and escheat, we note
that such issues are beyond the Department’s jurisdiction.
Actions taken to implement the decision to terminate
a plan, including the search for missing participants, and if search
efforts fail, the selection of a distribution option for the benefits of
missing participants, are governed by the fiduciary responsibility
provisions of ERISA. In fulfilling their duties of prudence and loyalty
to missing participants, we believe there are certain search methods
which involve such nominal expense and potential for effectiveness that
fiduciaries must always use them, regardless of the size of the account
balance, as discussed in detail above.
We also believe that these duties require that
fiduciaries consider establishing individual retirement plans as the
preferred method of distribution for the benefits of missing
participants. In this regard, the selection of an individual retirement
plan provider and the initial investment for an individual retirement
plan also constitute fiduciary decisions. If plan fiduciaries are unable
to locate an individual retirement plan provider that is willing to
accept a rollover distribution, fiduciaries may consider distributing a
missing participant’s benefits into a federally insured bank account
or transferring a missing participant’s benefit to a state unclaimed
property fund; the factors to be considered in choosing between these
options are discussed more fully above.
Questions concerning the information contained in
this Bulletin may be directed to the Division of Fiduciary
Interpretations, Office of Regulations and Interpretations,
202.693.8510.
-
See Rev. Rul. 89-87, 1989-2 C.B. 81.
-
Under Internal Revenue Code (Code)
§402(f), a plan administrator is required, prior to making an eligible
rollover distribution, to provide the participant with a written explanation
of the Code provisions under which the participant may elect to have the
distribution transferred directly to an IRA or another qualified plan, the
provision requiring tax withholding if the distribution is not directly
transferred and the provisions under which the distribution will not be
taxed if the participant transfers the distribution to an IRA or another
qualified plan within 60 days of receipt.
-
Under Code §411(d)(3), a plan must
provide that, upon its termination or complete discontinuance of
contributions, benefits accrued to the date of termination or discontinuance
of contributions become vested to the extent funded on such date.
-
The Department notes that this guidance
applies only in the context of terminated defined contribution plans. For
rules governing the Pension Benefit Guaranty Corporation's missing
participants program, which applies to terminated defined benefit plans
covered by Title IV of ERISA, see ERISA § 4050 and 29 CFR § 4050.
-
This guidance assumes that the terminated
plan does not provide an annuity option and that no other appropriate
defined contribution plans are maintained within the sponsoring employer’s
corporate group to which account balances from the terminated plan could be
transferred..
-
See Advisory Opinion 2001-01A (Jan. 18,
2001); see also Letter to John N. Erlenborn from Dennis M. Kass (Mar. 13,
1986).
-
See Rev. Rul. 2000-36 where the Department
stated that the selection of an IRA trustee, custodian or issuer and of an
IRA investment for purposes of a default rollover pursuant to a plan
provision would constitute a fiduciary act under ERISA.
-
See generally Field Assistance Bulletin
2003-3 (May 19, 2003) for the Department’s views with respect to expense
allocations in defined contribution plans. See also Rev. Rul. 2004-10,
2004-7 I.R.B. (Jan. 29, 2004).
-
See Rev. Proc. 94-22, 1994-1 C.B. 608; IRS
Policy Statement P-1-187.
-
The Social Security Administration’s Web
site is found at www.ssa.gov.
-
See supra footnote 1.
-
Code §7701(a)(37) defines an
"individual retirement plan" to mean an individual retirement
account described in Code §408(a) and an individual retirement annuity
described in Code §408(b).
-
An "eligible rollover
distribution" is, subject to certain limited exceptions, any
distribution to an employee of all or any portion of the balance to the
credit of the employee in a qualified trust. See Code §402(c) and
(f)(2)(A).
-
Code §402(a), §3405(c), and §72(t).
-
See supra footnote 6.
-
See 29 C.F.R. §2550.404a-2.
-
It should be noted that Class Exemption (PTE
No. 2004-16) generally provides relief from ERISA’s prohibited transaction
provisions for a plan fiduciary’s selection of itself as the provider of
an individual retirement plan and/or issuer of an investment in connection
with rollovers of missing participant accounts for amounts up to $5,000.
-
Advisory Opinion 94-41A (Dec. 7, 1994).
-
Prior Departmental Advisory Opinions
addressed distributions from ongoing plans. See, e.g., Advisory Opinion
94-41A (Dec. 7, 1994); Advisory Opinion 79-30A (May 14, 1979); Advisory
Opinion 78-32A (Dec. 22, 1978). We note, however, that this memorandum
addresses only distributions that complete the termination of defined
contribution plans.
-
See, e.g., Code section 6511 (regarding
the time limitations for taxpayer refunds).
-
Pub. L. No. 107-56, Oct. 26, 2001, 115
Stat. 272.
-
The term “other Federal functional
regulators” refers to the other agencies responsible for administration
and regulations under the Act.
-
See “FAQs: Final CIP Rule” at: www.occ.treas.gov/10.pdf
www.fincen.gov/finalciprule.pdf
www.fdic.gov/news/news/financial/2004/FIL0404a.html
|