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Terminating plan with unresponsive beneficiary


K2retire
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We have a terminating plan with one deceased participant. There is a valid beneficiary designation naming the spouse. The account balance is in the 5 figure range. The spouse is not responding to requests for distribution instructions. The plan requires full distribution within 5 years of the death. I'm checking to see if the 2006 termination date in our files is the date of death, or if he actually terminated and passed at a later date.

 

The record keeper claims that IRS regulations prohibit forcing out the account of a death beneficiary and the plan must stay open until she eventually decides to withdraw the balance. I've never heard of such a rule. Is that correct?

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If the participant didn't begin a distribution before the participant's death and the designated beneficiary didn't begin a distribution within one year of the participant's death, what would preclude the plan's administrator from applying the plan's provision that "requires full distribution within 5 years of the death"?

A related question for BenefitsLink mavens:  If the plan pays the distribution but the beneficiary does not deposit or negotiate the check, must the plan's administrator continue filing Form 5500 as long as the plan has some asset?  Or is there another reporting treatment practitioners are comfortable with?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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ERISA § 203(e)(1) states:  “If the present value of any nonforfeitable benefit with respect to a participant in a plan exceeds $5,000, the plan shall provide that such benefit may not be immediately distributed without the consent of the participant.”

 

It might require a little imagination for a plan’s administrator to obtain the consent of a decedent.

 

Is a plan’s IRC § 401(a)(9) minimum-distribution provision an exception to ERISA § 203(e)?  26 C.F.R. § 1.411(a)-11(c)(4).

 

Does a plan’s termination obviate the ERISA § 203(e)(1) provision?  26 C.F.R. § 1.411(a)-11(e)(1).

 

K2retire, is there anything about the distribution that needs the recordkeeper’s cooperation?  Or is the plan’s administrator free to ignore what the recordkeeper says?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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The OP said the plan is terminating.  A participant can't hold a terminating plan hostage, much less a beneficiary, even a surviving spouse.  I don't get it.   

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jpod is correct, there are two issues in the original post:

1.  How to handle the 5-year rule, and what to do if it has been "violated".

2.  The termination of the plan is/will be a distributable event.  The Plan Administrator may wish to be a little creative in getting the beneficiary to respond (have you confirmed this person is still alive?), by sending certified mail.  Such letter might strongly suggest the account will be distributed by X date.  The PA might also consider how to proceed if no response is received: check? default IRA? etc.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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  • david rigby changed the title to Terminating plan with unresponsive beneficiary

If it is an annuity plan, purchase an annuity.

If it is a non annuity plan, send a check less the withholding to the beneficiary if they are non-responsive. Send them a cashiers check if you have to by registered mail or some other service that has a record of delivery.

 

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If the spouse is the designated beneficiary they have until the participant would have attained age 70 1/2, so the 5-year rule doesn't apply unless the plan simply had that requirement without the spousal exception. Regardless, as stated above, this unresponsive person cannot hold the plan termination hostage.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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K2retire doesn't say if this is a DC plan, but if so, see  FAB 2014-1. I agree with jpod. The DOL says if participant is missing or fails to provide distribution instructions on a plan termination, the fiduciary can distribute to an IRA or if unable to find an IRA custodian willing to accept the rollover, a bank account in order to complete the termination of the trust.  this would solve the disqualification issue for failure to distribute within the 5 year requirement.

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Some quick comments.

  1. Consent of a beneficiary is not required for a death distribution under the 411(a)(11) regulations.
  2. If a spouse, 401(a)(9) would not require distribution within one year of participant's death for application of the life expectancy rule, so an annuity would remain a viable option.
  3. It is unlikely that the record keeper has the authority to control distributions under the plan.  Also, not sure sure why they opine on such issues.  It can be interesting to ask service providers generally if they think exercising control over plan assets makes them a fiduciary.
  4. Take a look at RR 89-87 before waiting five years to distribute.  There may not be a terminated plan.
  5. FAB 2014-1 is useful guidance for a defined contribution plan.  (If a PBGC defined benefit plan, the PBGC missing participant program would be available.)  Not sure an annuity purchase should be used absent applicable plan provisions.  Note that the automatic rollover rules do not apply to spouse distributions.
  6. In the way distant past, saw money orders purchased for very small termination distributions to clear the trust check register.
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Thanks for confirming what I thought was correct. 

 

This is a DC plan. The document requires distribution within 5 years of death. Neither the record keeper nor TPA (me) was aware that the participant had died until 11 years after the fact. Previously we only had a "termination" date for this participant.

 

The record keeper is saying that they will not transfer the balance absent a direction from the beneficiary. We are still working on getting the beneficiary to respond, but will pursue changing the record keeper's plans if necessary.

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