The U.S. Department of Labor (DOL) publicized last year its stepped up enforcement efforts inquiring about procedures used by larger defined benefit plans for locating, and then beginning payment of benefits to, terminated vested participants who have reached the age when the plan mandates benefits must begin. Those audit activities are continuing. For years, the Social Security Administration (SSA) has tracked retirement plan reporting of terminated participants with deferred vested benefits, and used those reports to notify SSA old-age benefit payment recipients that they may be entitled to an employer based pension benefit. Many retirement plan administrators are familiar with participant benefit eligibility inquiries based on these SSA reports.
The DOL reportedly has experienced an increase in retirement benefit inquiries based on these same SSA statements. In response, DOL began investigating larger defined benefit plans to determine if they are paying benefits to their retirement-eligible participants when the plan requires payments to begin. DOL’s focus appears to be primarily on those participants who terminate employment prior to normal retirement age with a deferred vested benefit, and particularly those who are past their mandatory age 70 ½ required beginning date. The DOL found that many plans had inadequate procedures (including lapses in following existing procedures) for locating participants when benefits are required to begin. The DOL has expressed the view that these failures could amount to a breach of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended (ERISA).
Pension Issues Affecting Benefits for Missing Participants
Defined benefit plans can have various provisions mandating the latest date when participants must commence payment of benefits. For participants who terminate with a vested benefit prior to normal retirement age (e.g. age 65), defined benefit plans commonly require benefits to begin at normal retirement age. Under the “minimum required distribution” rules, benefits must begin no later than April 1 following the end of the calendar year during which occurs the later of the participant’s reaching age 70 ½, or separating employment.
ERISA and the Internal Revenue Code (Code) also mandate that vested benefits for terminated participants must be nonforfeitable at normal retirement, which means the “value” of that benefit must be preserved. For example, if a terminated vested participant reaches normal retirement age, but the plan does not locate the participant to begin payment until three years later, the plan must “restore” the value of the benefits the participant did not receive for those three years to avoid an impermissible forfeiture. The actual cost for restoring that lost value can result in additional actuarial cost for the plan.
However, plans may and generally do require that a participant must apply for benefits as a pre-condition for payment to begin. This is a procedural requirement necessary to protect the plan.
Retirement plans may also include terms for forfeiting benefits after participants have been missing for some stated time period. Notice requirements may apply, and forfeited benefits must be restored if the participant is later located. These forfeiture clauses can be useful to defend against State authorities asserting claims for lost pension benefits under State escheat laws, without having to resort to complex ERISA preemption legal arguments.
Form 5500 reporting for both large and small plans has included a question since 2009 asking, “Has the plan failed to provide any benefit when due under the plan?” In the absence of other guidance, the IRS informally stated late last year that plans do not need to report “unpaid required minimum distribution amounts for participants who have retired or separated from service, or their beneficiaries, who cannot be located after reasonable efforts or where the plan is in the process of engaging in such reasonable efforts at the end of the plan year reporting period.”
Locating Participants When Benefits Are Due
The challenges and costs of meeting ERISA and Code compliance and reporting requirements for missing terminated vested participants and retirees entitled to benefits can be significant and difficult, for example when attempting to pay required nonforfeitable lifetime benefits to a missing retiree who is identified as deceased. Defined benefit plans increasingly include an older participant population approaching retirement age, and maintaining effective procedures for communicating with these participants as they approach retirement age is both good fiduciary practice and provides protection in the event of a government agency audit.
The demise of IRS and SSA programs for locating missing participants, has caused pension plan sponsors to increasingly rely on their plan record keepers to locate missing participants. Many of these vendors use their own locator services. Other independent locator services are also available such as the National Change of Address Registry (maintained by the U.S. Postal Service), various credit service bureaus, and subscription services.
Key Plan Sponsor Takeaways
Defined benefit plan sponsors can minimize the above complexities associated with compliance by adopting and implementing procedures for maintaining contact with participants and timely commencing payment of benefits. Steps employers might wish to take include:
• Determine when plan benefits are required to commence under the terms of the Plan, including payments to:
Terminated vested participants over normal retirement age, where a plan provides that these participants must commence at that time;
Participants who are required to receive automatic payments under the terms of the plan, but who have not yet paid; and
Beneficiaries who should have commenced receiving payments under the terms of the plan, but who have not yet commenced receiving payments;
• Determine if participant date of birth data is available to identify when payment must begin;
• Review procedures with financial institutions for uncashed stale checks, plan forfeiture provisions, role of state escheat;
• Implement addressing procedures, including use of return addresses, address updating, other security measures when annual plan mailings such as Annual Funding Notices are returned undeliverable;
• Within a reasonable period prior to the required benefit start date:
Verify participant addresses;
Notify participants of requirement to begin receipt of benefits;
Verify role of record keeper and review administrative service agreements;
Maintain logs to demonstrate practices and failed attempts.
The above are a few of the “best practices” developed by record keepers and advisors that help plan sponsors minimize issues arising in connection with missing participants.