Guest Article

(From the May 1, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Issues Final Regulations on Abandoned Defined Contribution Plans

The Department of Labor (DOL) has issued a series of comprehensive rules that authorize financial institutions to terminate abandoned defined contribution plans and make final benefit distributions to participants and beneficiaries. 71 FR 20820 (April 21, 2006). The DOL also has provided a class prohibited transaction exemption permitting these financial institutions to use the plan's assets to pay for the services they provide in connection with terminating and winding up these plans. 71 FR 20856 (April 21, 2006). The final regulations and prohibited transaction exemption are effective May 22, 2006.

Background

According to the DOL, each year approximately 1,650 plan sponsors abandon 401(k) plans holding $868 million in assets and affecting 33,000 workers. The financial institutions holding these abandoned (or "orphaned") plans' assets usually do not have the authority to terminate the plans or distribute benefits, and often cannot locate anyone -- such as the plan sponsor, administrator, or other fiduciary -- who has such authority. As a result, participants and beneficiaries cannot access their benefits, which in the meantime are being diminished by ongoing administrative expenses.

The DOL's Employee Benefits Security Administration (EBSA) has, over the last few years, seen an increase in the number of requests for assistance by participants in abandoned plans. The EBSA has responded with a series of enforcement initiatives, including the National Enforcement Project on Orphaned Plans (NEPOP). NEPOP focuses on identifying abandoned plans, locating their fiduciaries, and requiring those fiduciaries to manage and terminate those plans. If a fiduciary cannot be found, the EBSA asks a federal court to appoint an independent fiduciary to complete this process.

In 2002, the EBSA's ERISA Advisory Council created the Working Group on Orphan Plans to study the orphan plan problem. The Advisory Council subsequently issued a report on its findings, including recommendations for "new regulations setting forth criteria for determining when a plan is abandoned, procedures for terminating abandoned plans and distributing assets, and rules defining who may terminate and wind up such plans." That report was the basis for proposed regulations the DOL issued in 2005. The final regulations closely follow the proposed regulations, although the DOL did make some changes based on the 16 comment letters it received on the proposed regulations.

Overview of Final Regulations

The DOL has issued three separate final regulations:

When Is a Plan Abandoned?

Under the regulations, only a QTA can determine a defined contribution plan has been abandoned. The regulations limit QTA status to entities that are eligible to serve as an IRA trustee or issuer (e.g., banks and insurance companies), and that hold the abandoned plan's assets. In many cases, more than one financial institution will hold an abandoned plan's assets. However, there can only be one QTA with respect to an abandoned plan, and any other financial institution holding that plan's financial assets will be expected to cooperate with that QTA. The final regulations clarify that these financial institutions can cooperate with and follow the QTA's instructions without violating their basic ERISA fiduciary obligations, so long as they confirm the QTA's status with DOL. (The DOL is planning to establish an Abandoned Plan section on EBSA's Web site. This section will include a list of abandoned plans that are deemed terminated and the related QTAs.)

The regulations permit a QTA to determine a plan has been abandoned if there have been no contributions to, or distributions from, the plan for a continuous 12-month period, or the QTA is aware of facts and circumstances (such as the plan sponsor being liquidated under Chapter 11 of the federal Bankruptcy Code) suggesting the plan has been, or will be, abandoned. The QTA also must determine the plan sponsor no longer exists, cannot be located, or is unable to maintain the plan after making "reasonable efforts" to find or communicate with the plan sponsor.

When the QTA determines the plan is abandoned, the regulations require the QTA to notify the DOL of its determination and its election to serve as a QTA. (The regulations provide a model notice for QTAs to use for this purpose.) The DOL will acknowledge receipt of this determination in writing, and will have 90-days from the date of this acknowledgement to object before the plan is deemed terminated. (The DOL can waive some or all of this 90-day waiting period.) Once the plan is deemed terminated, the QTA will be permitted to begin winding up the plan's affairs.

Winding Up Abandoned Plans

The final regulations prescribe standards for terminating and winding up abandoned plans, including calculating benefits and notifying participants of the termination. Some of the specific issues the regulations address include --

The final regulations clarify that QTAs do not have to collect delinquent employer or employee contributions on behalf of the plan. However, QTAs must notify DOL of known delinquent contributions owed to the plan.

Also, the regulations provide that, for purposes of ERISA Title I, the terms of abandoned plans are deemed amended to the extent necessary to allow QTAs to wind up their plans in accordance with the regulations. According to the preamble to the final regulations, the IRS likewise takes the position that QTAs do not have to amend abandoned plans at or before termination for tax-qualification purposes if the following three conditions are satisfied:

Fiduciary Protections for QTA

A QTA clearly is an ERISA fiduciary with respect to the abandoned plan, and specifically with respect to the actions it takes to wind up the plan. In order to limit the QTA's potential fiduciary liability, the regulations provide the QTA generally is deemed to satisfy its fiduciary responsibilities with respect to winding up the plan if it follows the regulation's requirements.

This protection does not apply to the QTA's duties with respect to selecting and monitoring service providers and selecting annuity providers. (A QTA may have to select an annuity provider if it determines the IRC §§ 401(a)(11) and 417 survivor annuity requirements apply, and the relevant participant is missing or does not elect a form of distribution.) However, if the QTA satisfies its basic fiduciary obligations with respect to selecting and monitoring service providers, the QTA will not be liable for any service providers' breaches that the QTA does not know about. Also, the preamble to the final regulations clarifies that QTAs do not have to second guess the prudence of the plan sponsor's (or other fiduciary's) prior decision to engage a service provider on the plan's behalf, although the QTA does have a duty to monitor that service provider.

Several commenters on the proposed regulations asked for guidance on whether QTAs have any fiduciary obligation to identify and correct fiduciary breaches committed before they became QTAs (i.e., before the date of the plan's deemed termination). The final regulations include a provision to clarify that QTAs are not required to conduct an inquiry or review to determine whether or what breaches of fiduciary responsibility may have occurred before they became QTAs. Additionally, as noted, the final regulations include a provision to clarify that QTAs do not have to collect delinquent contributions on behalf of plans.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2006, Deloitte.