Do You Have Missing Participants in a Retirement Plan? And No IRS or Social Security Letter-Forwarding Program to Turn to!

Tip of the Day

By Stephanie Reagan

Locating missing participants is a fiduciary duty.  Therefore, action must be taken to locate these participants.

FAB 2014-1, issued August 14, 2014, discusses what fiduciaries should do regarding missing participants of a terminating defined contribution plan.  We believe that even for active plans, fiduciaries should also revise their procedures to reflect the FAB.

According to FAB 2014-1, the bottom line of what plan fiduciaries must do at a minimum to attempt to locate a missing participant, in no particular order and regardless of the amount of the account balance, is as follows:

  1. Use Certified Mail to try an locate the participant

  2. Check related plan and employer records (like health plan records, etc.)

  3. Check with the designated plan beneficiary on file

  4. Use free electronic search tools such as online services include Internet search engines, public record databases (like those for licenses, mortgages and real estate taxes, obituaries and social media)

If you are unsuccessful in locating the participant after trying the above 4 steps, consider taking additional actions to locate the participant if the account balance amount or other factors warrant additional actions. The additional actions steps could involve the use of:

  • Other internet search tools,
  • Commercial locator services,
  • Credit reporting agencies,
  • Information brokers,
  • Investigation databases and
  • Similar services that may involve added charges.

If the above attempts fail to locate the participant, the following distribution options can be considered under the FAB:

  • Direct rollover distribution to a IRA - this is the preferable option because it results in the deferral of income tax, avoids the 20% mandatory withholding, and avoids any 10% additional tax for early distributions that might otherwise apply based on the participant's age and related facts. Funds in the individual retirement plan continue to grow tax-free and income taxes do not need to be paid until funds are withdrawn. Thus, rollovers into individual retirement plans are more likely to preserve funds for retirement than any other option.
  • If a direct IRA rollover option is not available based on the facts and circumstances, there are two options available under the FAB to consider:

 1) Opening an interest-bearing federally insured bank account in the name of the missing participant or beneficiary, or

2) Transferring the account balance to a state unclaimed property fund.

However the FAB cautions plan fiduciaries on the use of one of these distribution options. It states that -

"A prudent and loyal fiduciary would not voluntarily subject a missing participant's funds to such negative consequences in the absence of compelling offsetting considerations. In fact, in most cases, a fiduciary would violate ERISA section 404(a)'s obligations of prudence and loyalty by causing such negative consequences rather than making an individual retirement plan rollover distribution."

The FAB states that the distribution option of distributing to the IRS 100% of the account balance as income tax withholding for missing participant is not an acceptable distribution option.


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