For many employers, finding lost 401k plan participants can seem an impossible task. Nevertheless, employers are required to take all reasonable actions to locate a missing participant. Employers have a fiduciary obligation under ERISA to locate or “make a reasonable effort” to find a missing participant of a terminated defined contribution plan. Failing to do so could lead to a plan liability.
The IRS has rules that help determine when terminated participants can or must take distributions of their account balances from their 401(k) plans. Generally, if a participant has a vested balance of at least $5,000 in the plan, they are allowed to keep their funds in the plan as long as they would like, subject to the attainment of age 70 ½ when they must take a Required Minimum Distribution. Participants with balances below the $5,000 threshold can be forced to withdraw their funds from the plan if they are given appropriate notice prior to the payment.
Often a distribution check will be sent to a terminated participant and presumably received, only to never be cashed. Uncashed check proceeds are still considered taxable income to the participants and should be reported on Form 1099-R for the year that the check was issued. However, until the check is physically cashed, the money remains in the plan, and it is the fiduciary responsibility for the plan to manage those funds.
For defined contribution retirement plans, ERISA requires the administrators to distribute the funds to the participants before they can shut down the plan or close the individual accounts. If employers fail to keep updated contact information on the participants, locating them in order to distribute their funds may prove difficult. If the employer is unable to locate the participant, the employer will be forced to absorb the expense of maintaining the funds in the plan.
One of the most effective ways plan sponsors can avoid having lost participants is by distributing the funds to terminated participants as soon as possible after termination. The U.S. Department of Labor (DOL) issued Field Assistance Bulletin No. 2014-01 to assist employers in fulfilling ERISA’s search obligations. Sending notifications via email, certified mail, checking with credit reporting bureaus, and contacting listed beneficiaries are just some of the examples that the DOL recommends employers try with their search.
After conducting a reasonable effort to find the missing participant, the DOL have several options for dealing with the funds. The DOL permits the employer to distribute the participant’s funds into an IRA plan. Another option is to open a federally insured interest-bearing bank account in the missing participants name and deposit the funds. Finally, the DOL allows the employer to distribute the funds to the Pension Benefit Guaranty Corporation’s missing participant program.
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Maintaining regular contact with current staff and keeping contact information updated will be beneficial when employees terminate. If the employee’s contact information is up-to-date it will save a lot of time and effort when attempting to locate them. Furthermore, by adhering to ERISA search requirements and permitted distribution methods, plan administrators are covering themselves from any potential liability.
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