Missing participants in retirement plans can be a burden for plan sponsors. If actions are not taken to locate the participants and payout the benefits, potential (unintended) consequences can include:
- Increased plan administration costs
- Plan compliance issues, e.g. failure to follow the terms of the plan for mandatory distributions, required minimum distributions, death benefits, etc.
- Potential for small plan filers (generally, plans with less than 100 participants) to become large plan filers (generally, plans with 100 or more participants), subject to a costly annual plan audit requirement
- Complications with winding down a plan upon plan termination
- Potential fiduciary risks
What steps should plan sponsors follow to locate missing participants?
DOL guidance outlines the steps plan sponsors should take to locate missing participants. The guidance is specifically for terminating defined contribution plans; however, it would be reasonable to apply this guidance for active plans as well.
- Certified Mail. Send notification to the participant or beneficiary via certified mail to the last known address.
- Other Employer Records. Review other employer records, such as group health plans, for current contact information.
- Participant’s Plan Beneficiary. Contact the participant’s beneficiary to request updated contact information (if there are privacy concerns, the DOL suggests the plan sponsor ask the beneficiary to forward a letter to the participant).
- Free Electronic Search Tools. Use free electronic search tools to attempt to locate the participant such as those for public records (e.g. licenses, mortgages, real estate taxes), obituaries, and social media platforms (e.g. Facebook, Twitter, etc.).
If the plan sponsor follows the steps outlined above but is still unsuccessful in locating the missing participant, the plan sponsor must consider whether additional steps are necessary after considering the cost of the search option (if being paid from the participant’s account) as well as the size of the participant’s account balance. The DOL states further search efforts may include commercial locater services, credit reporting agencies, information brokers, investigation databases and similar services that involve a fee.
IMPORTANT: The DOL notes failure to take such steps would be a violation of the plan sponsor’s obligation of prudence and loyalty to plan participants and beneficiaries. Strictly speaking, the plan sponsor must follow these steps to locate missing participants – it is mandatory
What if the participant cannot be found after using all available search options?
For active plans, it may be possible to rollover the missing participant’s balance to an IRA if (1) provided for under the terms of the plan, (2) the participant’s balance is less than $5,000, and (3) the plan sponsor has sufficient information regarding the participant to be able to facilitate the rollover. If the participant’s balance is $5,000 or more, this generally is not an option.
Alternatively, if provided for under the terms of the plan document, it is permissible to forfeit a missing participant’s (or beneficiary’s) balance provided the balance will be restored in the event the participant (or beneficiary) is later located.
Both options discussed above are optional provisions, so it is important to review the terms of the plan document. If the plan doesn’t include either (or both) provisions, it generally would be permissible to amend the plan to include such features.
Note: Different rules apply to terminating plans since all plan assets must be distributed within a reasonable period following plan termination. For example, one of the available options is to roll the balance of a missing (or unresponsive) participant to an IRA, even if their balance exceeds $5,000.
Can’t we just withhold 100% in taxes and submit to the IRS?
No. The DOL specifically points out that, although this is a practice used by some plan sponsors, this is not acceptable because there is no guarantee the participant will receive their benefits.
To learn more about how to deal with missing participants in your retirement plan, let the experts at EJReynolds help you understand all of the options available to you or your company. For more information, please contact us today.