On August 14, 2014, the U.S. Department of Labor (DOL) provided new guidance to plan fiduciaries of terminated defined contribution plans for locating missing and unresponsive participants in order to distribute their benefits. The guidance comes in the form of Field Assistance Bulletin (FAB) No. 2014-01, which replaces FAB No. 2004-02. As discussed below, the guidance may also prove useful in finding missing and unresponsive participants in other circumstances as well.
FAB 2004-02 instructed fiduciaries terminating defined contribution plans to attempt to locate missing participants through, among other search methods, Internal Revenue Service (“IRS”) and Social Security Administration (“SSA”) letter-forwarding services. The IRS and SSA, however, have since discontinued those services. FAB 2014-01 therefore provides much-needed guidance.
In general, FAB 2014-01 provides that, regardless of the size of the participant’s account balance, plan fiduciaries must employ “low-cost” steps to locate missing and unresponsive participants. However, the size of the participant’s account balance must be weighed against the efficacy of higher-cost methods when deciding whether to pursue a more expensive approach when the lower-cost methods fail.
The following low-cost steps are required to be taken before determining that a participant cannot be located, but may be performed in any order:
- Certified Mail. Fiduciaries must attempt to contact a missing participant through certified mail. Fiduciaries may use the DOL’s model notice to locate missing participants, or other appropriate form of notice.
- Check Related Plan and Employer Records. Fiduciaries must cross-reference a missing participant’s information with other employer plan records, such as a group health plan. To counteract privacy concerns, a plan fiduciary can request that an employer or other plan fiduciary contact the missing participant directly or forward correspondence on behalf of the plan.
- Check with Designated Plan Beneficiary. Fiduciaries must attempt to locate the missing participant through his or her beneficiary. Again, to counteract privacy concerns, the fiduciary can ask the beneficiary to get in touch with the plan fiduciary or to forward correspondence on behalf of the plan.
- Use Free Electronic Search Tools. Fiduciaries must make reasonable use of no-cost internet search tools in order to find a missing participant or beneficiary, including search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media.
In the event that these low-cost methods are not successful in locating the participant, fiduciaries must consider the size of the participant’s account balance and determine whether it is appropriate to take additional steps, such as paid internet search tools, commercial locator services, credit reporting agencies, information brokers, and investigation databases.
In the event that a plan fiduciary determines that a missing participant cannot be located, the fiduciary must decide what to do with his or her benefit. FAB 2014-01 provides that the preferred option is to roll over the missing participant’s account balance to an individual retirement plan, such as an individual retirement account (IRA) or annuity. However, if the fiduciary cannot find an individual retirement plan provider to accept such rollover, or determines that such rollover is not appropriate under a “compelling reason based on the particular facts and circumstances,” the fiduciary may: (i) open an interest-bearing, federally-insured bank account in the missing participant’s name and transfer the account balance to the account; or (ii) transfer the account balance to a state unclaimed property fund.
Because these two alternative options will entail adverse tax consequences to the participant that are not incurred in a trustee to trustee transfer, the plan fiduciary must prudently conclude that the distribution to a bank account or state is the most appropriate option. If the fiduciary opts to open a bank account, he or she must ensure that the participant would have an unconditional right to withdraw funds from the account, and must consider other information including the interest rate and bank-imposed charges on the account. If the fiduciary opts to escheat the account balance to a state unclaimed property fund, he or she must consider whether a searchable database is provided by the state and any interest payable by the state on such escheated funds.
FAB 2014-01 provides that 100% income tax withholding is not an acceptable method of distribution in the case of a missing participant. Some plan fiduciaries have historically withheld 100% of a missing participant’s distribution, in effect turning the benefit over to the IRS. The DOL has now clarified that this method is unacceptable, as it does not necessarily result in an offset to the participant’s income taxes and can deprive a participant of his or her benefit.
The DOL further clarified a Patriot Act issue that had been of concern to plan fiduciaries attempting to open a bank account in the name of a missing participant. The customer identification and verification provisions of the Patriot Act require that financial institutions verify the identity of a customer who opens an account. The DOL reports that, in the case of employee benefit plans, this verification will only be required when the participant contacts the financial institution to claim the account or exercise control over it, and not when the plan initially establishes the account in the missing participant’s name.
View From Proskauer
Although FAB 2014-01 applies to the location of missing and unresponsive participants in the case of defined contribution plan termination, plan fiduciaries may also find the guidance helpful when determining appropriate procedures for locating missing participants and distributing their benefits in other circumstances where no guidance exists. The methods described under FAB 2014-01 reflect the growing ability to locate a missing participant through free internet searches and other electronic databases that were not as comprehensive in 2004 when FAB 2004-02 was released. Plan fiduciaries should ensure that they follow all of the steps required by FAB 2014-01 when attempting to locate missing and unresponsive participants in a defined contribution plan termination, and consider whether additional steps are necessary in order to fulfill their fiduciary obligations.