Dec 15, 2022
Most people don’t plan to stay in touch with their former employer after they change jobs or retire. But employers that lose contact with participants who maintain a balance in the company’s retirement plan risk breaching their fiduciary duties and jeopardizing the tax-qualified status of their plan. A plan sponsor with a “missing” plan participant may not be able to
- Cash out plan balances of $1,000 or less for former employees when the plan requires distribution;
- Provide required plan notices, disclosures, and benefits statements;
- Make required minimum distributions (RMDs); or
- Make timely distributions to complete a plan termination.
A participant is considered “missing” if the plan sponsor no longer has valid contact information for the individual and communications are returned as undeliverable, or communications are delivered but the participant does not respond as requested.
Issues associated with missing participants have long troubled plan sponsors, particularly when plans have a cash-out provision. The legislative requirement to roll over cash-outs between $1,000–$5,000 to an IRA on behalf of missing participants has helped, but issues remain when checks are mailed for balances of $1,000 or less and those checks don’t reach the intended recipients or otherwise remain uncashed. (The law allows for cash-outs of $1,000 or less to be automatically rolled over to an IRA, but some plan documents don’t provide for this.) The plan sponsor retains fiduciary responsibility for these smaller cash-outs and must take reasonable
measures to locate the missing participant.
Both the Department of Labor (DOL) and the IRS have published guidance to help plan sponsors meet their responsibilities associated with searching for missing participants, but the guidance from each agency has limited application. 1 The DOL provided guidance for terminating plans, and the IRS provided guidance related to missing participants who must take a required minimum distribution (RMD). The lack of comprehensive guidance has left plan sponsors unsure of how to fulfill their fiduciary responsibilities at a time when these regulatory agencies are increasing their enforcement focus on missing participant issues. Even though the DOL’s guidance sets search requirements for terminating plans, the guidance can be used by ongoing plans as a best practice template for developing the search procedures the plan will follow.
- Send certified mail to the participant’s last known address
- Check related plan and employer records, such as a group health plan
- Check with the participant’s plan beneficiary to find updated contact information
- Use free electronic search tools, such as internet search engines and public record databases (such as those for licenses, mortgages, and real estate taxes)
If these efforts fail to locate a participant, possible additional steps, if warranted, may include using commercial locater services, credit reporting agencies, information brokers, and investigation databases.
More Guidance & Best Practices
There is hope for more definitive guidance. The DOL continues to explore and address missing participant issues in plan audits and may address plan sponsors’ fiduciary responsibilities for locating missing participants in future regulations. In the meantime, the DOL has published a set of best practices for plan sponsors as part of its initiative to help retirement plans implement effective policies and procedures to locate missing participants and beneficiaries. 2
The DOL’s best practices publication identifies “red flags” that indicate a plan may have a problem with missing or nonresponsive participants.
- More than a small number of missing or nonresponsive participants
- A substantial number of stale uncashed distribution checks
- Inaccurate or incomplete contact information and/or census data (e.g., missing birthdates, partial social security numbers)
- Absence of policies and procedures for handling mail returned, undeliverable emails,and uncashed checks
Preventing the Problem
The DOL has found that plans with low numbers of missing participants typically have staff committed to making sure plan records are complete and up to date. Some suggested practices include
- Contacting participants and beneficiaries on a periodic basis to confirm or update their contact information
- Including requests for contact information in plan communications along with a reminder< to advise the plan of any changes in contact information
- Maintaining and monitoring an online platform participants can use to update contact information; and
- Building steps into the employer onboarding and plan enrollment processes for new employees, and exit processes for separating or retiring employees, to confirm or update contact information
Possible Future Legislation
Numerous legislative proposals, including the pending Enhancing American Retirement Now (EARN) Act, have included provisions that would help plans that have missing participants with small balance accounts. For example, the EARN Act would require plan sponsors to transfer account balances of $1,000 or less that remain unclaimed after six months to a new Office of the Retirement Savings Lost and Found, which would be overseen by the Treasury.
Whether a plan sponsor has been diligent in trying to locate a missing participant and prudent in handling the unclaimed assets will be judged based on facts and circumstances (e.g., size of account balance, costs related to the search efforts). If the plan document does not list search procedures that must be followed, plan sponsors should develop policies and procedures with respect to missing participants that include
Department of Labor (DOL), Field Assistance Bulletin 2014-1, Fiduciary Duties and Missing Participants in Terminated Defined Contribution Plans, August 14, 2014; IRS Memorandum for Employee Plans (EP) Examinations Employees, Missing Participants and Beneficiaries and Required Minimum Distributions, October 19, 2017.
This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Consult your own tax, legal and accounting advisors before making any decisions. Newport and its affiliates do not provide tax, legal or accounting advice. Newport Group, Inc., an Ascensus Company, and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. 20221212-2631413
- Time frames for cashing out former employees after severance from employment.
- Standard procedures for when plan communications are returned as undeliverable or a participant fails to respond, and whether search methods will be implemented before a distribution is made.
- Standard procedures when a distribution check is returned or remains outstanding for a certain period.
- The search methods that will be used to locate missing participants; and
- Steps that will be taken if search methods are unsuccessful.