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How to handle funds of missing beneficiary; participant died 15 years ago


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#1 PensionNewbee

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Posted 30 September 2003 - 09:19 AM

I have a client with a plan that has been carrying a balance for a deceased participant for some 15 years. The beneficiary form has been lost or destroyed, and the SSN is not valid on the deceased individual. Good faith efforts have been made to find the beneficiary. Client wants to forfeit the money to remaining participants.

What would you all do?

#2 Harwood

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Posted 30 September 2003 - 10:10 AM

Read the Missing Participant clause in the plan document

#3 eafredel

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Posted 30 September 2003 - 12:24 PM

First, the terms of the plan document need to be reviewed. Most retirement plan documents contain provisions regarding the payment of benefits if no beneficiary designation is on file. Plan documents also may contain provisions specifying what will happen if a designated beneficiary is missing. It does not appear from your post that your client knows who was designated as beneficiary since the beneficiary designation (if it existed) is either lost or misplaced. You may want to check with counsel to determine whether there is a failure to comply with provisions of the plan required to comply with Section 401(a)(9) of the Code. Generally, Section 401(a)(9) requires benefit payment be made to a non-spousal beneficiary beginning no later than five years after the participant's death.

Second, you do not state whether the plan document generally permits for the forfeiture of benefits at death. If the plan document does not permit the forfeiture of benefits, I do not think the plan could be amended retroactively to forfeit these benefits and provide for their allocation to other participants.

State escheat laws are not much help since the Department of Labor takes the position that these laws are preempted by ERISA. (Some courts disagree.)

There is no really good answer to this, but the problem will only get worse as time goes by.

#4 GBurns

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Posted 30 September 2003 - 12:31 PM

eafredel,

Why would state escheat laws be applicable? If a participant is deceased should it not be either a will or state intestate laws that are applicable rather than forfieture to the state?

Re the original post: If the beneficiary is not locatable because of lack of a valid SSN there are other means such as through the Probate Court, IRS, SSA etc etc. Have these sources been used?
George D. Burns
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www.costreductionstrategies.com(under construction)
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#5 mbozek

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Posted 30 September 2003 - 12:50 PM

See reg. 1.411(a)-4(b)(6)- benefit which is payable can be forfeited on account of the inability to locate the particpant provided that the benefit will be restored if a claim is made at a later date. If the plan provides for payment after death of a participant then the benefits can be forfeited. Plan needs to be amended to provide for forfeiture. Provision would apply to amounts payable under the plan as of the date the amendment is adopted.
mjb

#6 eafredel

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Posted 30 September 2003 - 02:08 PM

The same regulation that Mbozek cites states that a benefit which is lost by escheat under applicable state law is not treated as a forfeiture. Illinois (and other states) have tried to pursue the escheat of uncashed checks from benefit plans. Here, no check was issued. Part of the reason escheat is not helpful is that the DOL and the IRS are not on the same wavelength.

#7 GBurns

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Posted 30 September 2003 - 05:04 PM

But how would escheat come into play?

I would think that an uncashed check would either have been destroyed, or in the possession of someone who either could not or would not cash the check. How does the state get into it? I understand that bank account balances under certain circumstances fall to the state's possession and if unclaimed eventually is escheated, but this is not such a balance and there is no checl lost or otherwise.

Re Illinois etc,
What is it that caused them to go after uncashed checks? How did the State get possession of these checks? What law empowered them to hold the checks rather than forward them to the Payee or payor and instead knowingly held property to which they had no claim (at time of receival)? After 6 months or so the checks are no longer any good anyhow so how would they be able to negotiate the checks for funds?
George D. Burns
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Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
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#8 eafredel

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Posted 01 October 2003 - 08:52 AM

As for Illinois, the State of Illinois actively (and unsuccessfully) went after unclaimed pension benefits. Judge Posner of the Court of Appeals for the Seventh Circuit ultimately held in 1999 that Illinois was not entitled to unclaimed pension benefits. Judge Posner's decision noted that two other cases uphold the application of state escheat laws to unclaimed plan benefits. Judge Posner distinguished between the application of unclaimed property laws (at issue in the case, which involved Commonwealth Edison) and escheat laws.

If I remember correctly, some states did (maybe some still do) provide in their intestacy laws that the state itself would be the beneficiary if no person in the statutorily-defined chain of intestate beneficiaries survived. The escheat law in this situation, as Judge Posner noted, would make the state "the heir of the heirless."

Of course, in the case of insured benefits, state laws regulating insurance may specify the ultimate recipient of unclaimed benefits. The Department of Labor has noted that such state laws are not preempted. DOL Advisory Opinion 83-39A.