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What do you do with a recalcitrant participant?


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Much has been said and written about missing or unlocated participants.  But much less has been discussed about what some describe as recalcitrant participants—those who decline to deposit or negotiate the check that pays a distribution.

 

Imagine this situation.  A profit-sharing plan (with no 401(k) arrangement) permits a distribution after a participant has severed from employment and attained age 60.  The plan requires a distribution after a participant has severed from employment and attained normal retirement age.  After the participant severed from employment, about 40 mailings—including disclosure notices, revised summary plan descriptions, summary annual reports, and benefit statements—were sent to the participant’s address, and nothing came back as undelivered.  After this participant’s normal retirement age, the plan’s administrator mailed the participant a check for her required distribution.  The participant is not missing; rather, the administrator has solid proof that the distributee accepted delivery of the plan’s mailing.  After eight months, the payee has not deposited or negotiated the check.

 

What steps should the plan’s administrator take next?

 

What are the big recordkeepers doing with problems of this kind?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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What does the plan say?  (Sorry about that).  Our VS document specifically says that the automatic rollover rules apply to "a distribution that may be made without Participant consent upon attainment of age 62 or Normal Retirement Age".  The plan document may have the answer you need.

While FAB 2014-01 only applies to plan terminations, it does include a reminder that "...under section 404(a)(1)(D) of ERISA, fiduciaries are required to act in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of Titles I and IV of ERISA."  It also says that rollover is the preferred distribution option and that "Section 404(a) of ERISA requires plan fiduciaries to consider distributing missing participant benefits into individual retirement plans. ...".  The FAB includes unresponsive participants in the term "missing participants".  It seems to me that a mandatory distribution at NR Age is similar enough to a mandatory distribution on plan termination that the same reasoning would apply.

 

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Thanks for elaborating on recalcitrant.  I had to look up the definition as I forgot what it meant.  I then had to listen to the pronunciation.  I was pronouncing it recalc...like a calculator.

This is a great question. It sounds like it was sent certified mail.  Was his entire account liquidated?  It was triggered due to severance and NRA and not because of an RMD, so its an eligible rollover.  I’ve heard of some (above 5k) sending to an IRA provide with plan sponsor consent.  This is after the attempts of the IRA provider to reach the participant before money is rolled.  Of course subject to the plan document.  

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Kevin C and Madison71, thank you for the good ideas about a default rollover.

 

The plan’s governing document lacks such a provision.  I suspect the sponsor would not want to add the provision because the administrator would not want fiduciary responsibility for selecting a distributee’s IRA.  The safe-harbor protection under 29 C.F.R. § 2550.404a-2 can apply only if the benefit is no more than the maximum amount under IRC § 401(a)(31)(B).  The amount declined is much more.

 

Other suggestions?  What else are people doing?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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If you are making a required payment under the terms of the plan and do not need participant consent to do so, make the payment, withhold the taxes and inform the recipient that (s)he has received a taxable distribution in accordance with the terms of the plan, it will be (has been) reported to the IRS as a taxable distribution and failure to endorse the check will not change or delay the timing of this taxable event. In other words, put the fear of God - er, IRS - in them!

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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CuseFan, I like your idea very much.

If, by a year or more after the distribution, the distributee has borne tax on the payment, one hopes she'd then decide to request (and deposit) a reissued payment.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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By the way, I used the word "recalcitrant" the way the ERISA Industry Committee used it in a recent comment letter--as a coined term to distinguish between those who are missing or unlocated and those for whom the plan's administrator has a good address but the participant, beneficiary, or alternate payee doesn't communicate (often in circumstances for which there is no obligation to communicate).

ERIC letter to Assistant Secretary Rutledge rmissing participants July 2018.pdf

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I'm assuming it has been established that the retiree is literate and understands what he has received.  Or that he is not suffering from dementia?

Is there no one associated with the Plan Sponsor who could reach out to the man?

Kristina

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Kristina, thank you for that idea.

Direct conversation, when feasible, often is productive.

For some plans and employers, direct conversation might be impractical.

Also, the longer ago that a participant left the employer, the more likely it is that neither the recordkeeper nor human resources has a good telephone number.

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I feel your pain.  This is something that the HR professionals should really nail down at the exit interview, 'What method of contact do you want us to use to provide you with important information about possible benefits in the future?'  And 'Are you willing to let us know if you make a change in that method of contact?'  (A No would be recalcitrant.)

Kristina

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I'm with Kristina on this one, at least partially.  Sure it may be described as PITA, but don't overlook other factors.  Those factors are beyond the control of the PA, but consider the possibility they are also beyond the control of the participant.  If possible, this might be a time when the PA might consider going beyond reliance on technology and deadlines, and look for someone (such as a current employee) who might be able to reach out with a human touch.

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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Couple of thoughts I had...

We heard of a situation where they actually drove up to the participant's home and got the distribution done.  They knew the address since all mailings were not returned as undeliverable.  But this may come with "risks"...

Exit interviews are nice, but we had a couple of clients tell us that the employee just doesn't show up to work one day, and never contacts them after that, and essentially "disappears".  Sometimes, co-workers can help, but not always.

 

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I thought FDG's conundrum was a non-last participant who simply would not deposit a check?  How do you solve that problem by driving to his house unless you also throw him in the trunk of your car and drive him to the bank?

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If the payer tax-reports a normal distribution on Form 1099-R and the distributee does not put the income (or a rollover) on her Form 1040, does the IRS's matching catch the inconsistency?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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2 hours ago, Fiduciary Guidance Counsel said:

… does the IRS's matching catch the inconsistency?

Eventually, yes.

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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  • 7 months later...
On 8/7/2018 at 11:41 AM, Fiduciary Guidance Counsel said:

Any experience or guess on how long the IRS takes?

If there is a 1099-R, by the summer following the April filing date.  That assumes the 1040 was filed and no extension.  It takes them just months, not years, to compare 1040s to the W-2s and 1099s they get for people.  It is one of the few computer systems the IRS that does its job mostly well. 

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