The aging of the Baby Boomer generation has increased the level of scrutiny with which the Department of Labor’s Employee Benefits Security Administration (EBSA) will review the efforts of retirement plans to locate missing plan participants who did not receive reported benefits. EBSA’s focus, which began with a review of the efforts of defined benefit plans to find and pay benefits to participants, has now expanded to include defined contribution plans.
Specifically, EBSA is reviewing efforts of those plans to locate participants who reached age 70 ½ and failed to take a required minimum distribution (RMD) as of April of the year after which they turned 70 ½.
There are three areas of review by EBSA:
- Locating missing participants.
- Informing terminated, vested participants that a retirement benefit was due to be taken.
- Beginning benefit payments when the participant attained the age of 70 ½.
The increased interest in retirees over the age of 70-1/2 began in the Philadelphia regional office because Social Security had advised new recipients in the region of their entitlement to possible benefits from long-forgotten retirement plans. Those individuals were primarily terminated participants who had left employment after vesting. More than half a billion dollars of unpaid retirement benefits were discovered in only six defined benefit plans.
The discovery of these long-forgotten pension entitlements was also a victory for the Internal Revenue Service. Distributions over the age of 70 ½, known as required minimum distributions (RMD’s), are subject to taxation. Failure of a participant to take RMDs can expose that participant to penalties in addition to taxation.
EBSA is intent on policing efforts to locate those participants. Ironically, despite the initiative, EBSA, the PBGC and the IRS have been reluctant to issue guidelines for locating participants. Plan Sponsors have been left to their own devices to structure these programs.
Programs which seem to have the greatest probability of approval are those that can demonstrate formal procedures, maintenance of accurate participant data, and continued efforts to find participants.
A plan must send a letter to a participant at age 70 ½ and each year thereafter until the participant takes a distribution. EBSA is demanding proof that employers are sending the letters every year.
A plan must demonstrate efforts to use all available data tools. Several companies specialize in research services, databases for postal services, obituary searches and Social Security death index. A plan must use those services regularly to reflect that the plan is moving in a pro-active manner.
It is important to understand that liability does not end with the participant. Recent efforts by EBSA have resulted in the opening of investigations against trustees, plan administrators and third party administrators. The focus is on the efforts made at age 70 ½ and each year thereafter until the participant takes the RMD. The proof must consist of “hard proof,” such as the address of participant and proof of mailing that communications were regularly sent to terminated, vested participants.
Investigations by EBSA are cumbersome because of a lack of guidance, thereby requiring an enormous amount of work by the plan and forcing the plan to incur professional fees.
The initiative, which began on the east coast with the Philadelphia office, has now migrated to west coast offices. Trustees, plan administrators and TPAs should take these investigations seriously.
Paul A. Friedman is an attorney in the White Plains, N.Y. office of law firm Jackson Lewis P.C. He has tried more than 35 jury trials and hundreds of arbitrations and bench trial on all aspects of ERISA. © 2019 Jackson Lewis. All rights reserved. Reposted with permission.
Related SHRM Articles:
Keep Track of 401(k) Participants So They Don’t Go Missing,
SHRM Online, April 2018
DOL Is Stepping Up ‘Missing Participant’ Retirement Plan Audits,
SHRM Online, October 2017