What to do with missing participants' money -- balances are less than

[Guest CL]

We are having trouble locating several terminated employees with account balances below $5000. We would like to complete forced distributions. Any suggestions on how to find current addresses, other than going through the Social Security Admin? What about turning those balances of to state government?

[KJohnson]

IRS says that state escheat statutes are o.k. to use--DOL disagrees.

Check your Plan. Usually Plans provide that such benefits are forfeited subject to reinstatement if a claim is made at a later date. You could use this method as long as you are not terminating the plan. See 1.411(a)-4(B)(6)

Finally the IRS has a "letter forwarding" program that can be very effective and is free if you do not have a number of names.

[david rigby]

Two suggestons:

Have you tried internet searches, or private locator services? IRS forwarding program is pretty good.

Although some may call this "style", I suggest you avoid the term "forced distributions". May have negative public relations overtones. An alternative perspective is to view the $5000 as the limit which defines the "involuntary distribution" threshhold.

[Guest GregSelf]

At an ERISA seminar recently, I heard an interesting idea being thrown around as a solution to this problem (after all other efforts have failed). The suggestion was to process a distribution with 100% withholding. Has anyone seen this in practice? Specifically, any negative consequences?

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[david rigby]

I think there are negative consequences, and the 100% withholding does not solve any problems.

First, on what authority do you withhold 100%?

Second, you still have to mail the 1099R somewhere. Where are you going to send it?

[Guest GregSelf]

pax:

Could you be a little more specific? What "authority" do you need if you're cashing out a (lost) participant w/o his consent? And, haven't you satisfied your 1099-R obligation just by mailing it to the last known address....regardless of whether or not it's returned? I would agree this is a pretty aggressive approach, but I can't see anything obviously wrong with it.

Thanks for your comments.

[Brenda Wren]

We agree that the 100% withholding is a very agressive approach, but have used it reluctantly in the past. We have limited the use to distributions under $50. No negative consequences yet. For larger amounts we have been using Info Solutions. They have been very quick and reliable, only charge $25 and don't require it up front. Fax # is 602-678-5361. There may be an internet source called 1800Search or something, but I think they charge $40.

[david rigby]

I'm bothered by mailing something as important as the 1099 to the "last known address" when you already know that it is incorrect. Of course, that may still be OK as far as the IRS is concerned, but you will probably get the form returned by the USPS and will need to store these forms (and remember where they are stored!).

I'm also bothered by doing a 100% withholding on an amount where the participant is supposed to be given the opportunity to elect out of withholding (that is, a direct rollover).

[Guest Reneeg]

We use Pension Benefit Information at P O. Box 111, 1110 Mar West, Tiburon, CA 94920. Phone number is 415-435-9611 They charge $15 per name. They have been very successful for us when we have missing participants. All you need to furnish them is Name, SS# and Former Employer Name. They send a generic letter indicating they have a vested balance. As they find people, you (the ER) will receive a report.

[Guest SuperMan]

Follow-up question: When you incurr the $15-$40 fee to locate the person, can you deduct it out of the distribution when you cut the check to them?

[Guest ptpnthr]

I would not try the 100% withholding tactic. An IRS agent once told me if a company wihthholds more than it is supposed to, then the employee (or, in this case, the former employee) will have a cause of action against the company. He gave me no support for that, but if I'm a former ee and that stunt was pulled on me, and if I wanted to sue anyway because my money is lost, or if I got fired, or if I generally were the litigating type, I would put it in my complaint. Even if there is no support in the IRC, most (if not all) states require you to pay what is due unless you have proper authority to withhold, garnish, etc. The DOL also makes you pay ees and former ees what you owe them. I know missing participants is a tough area, but 100% withholding is not a good solution, or even a solution at all.

[Guest GregSelf]

Okay, there seem to be definite opinions on both sides of the issue. Thanks for the input.

In my own defense, however....

ptpnthr: First, it was a former "IRS agent" (an atty) who tabled this idea at an ERISA workshop I attended in Houston a couple months ago. If you're interested in his name, please feel free to e-mail me.

Secondly, if all the conditions regarding your hypothetical termination were true, then you would most likely be LOOKING for your distribution. That's not what we're talking about here.

Third, this isn't a 'garnishment' either. The amount withheld is applied toward the payee's income tax debt. The remainder is refunded.

Finally, I think everyone is losing sight of the fact that this was just an idea. And based on the input so far, I'm still not convinced it's a bad one. I agree with all who say it's very aggressive. But I'd be willing to use it (ala Brenda Wren)on smaller distribution amounts.

BTW: My profile should be included. If anyone else is interested in this ERISA Workshop topic, just let me know.

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[Kirk Maldonado]

I hate to sound like a lone voice in the wilderness, but I think that people are overlooking the obvious; you simply can't find the person. If you can't find them to pay them their benefit, the likelihood of them contacting you to ask for it is extremely slim (to say the very least). Thus, if you effect 100% withholding, the person gets the immediate benefit of the withholding (in the form of a tax refund). They haven't lost anything, because (in all likelihood) they never would have received a penny from the plan.

On another contrarian note, this approach was run by an IRS auditor here in California. While he (quite understandably) did not want to endorse it, he admitted it is a very efficacious approach to a difficult situation. Given the vast number of IRS employees, I'm sure that you could find somebody at the IRS that endorses or rejects any conceivable position.

Don't get me wrong, I think that 100% withholding should only be used as a last resort. But if you can't contact the person any other way, I think it's the way to go.

[Wessex]

How would the participant get the benefit of a tax refund if he did not know that the amount had been sent to the IRS? Even if the IRS on its own initiative refunds excess taxes (would it?), that presumably would not happen for a couple of years or more. In addition, because the participant would not know about the distribution, the participant would also unknowingly file an incorrect income tax return. Most often the participant would have paid more taxes than were actually due, but there may be situations where the distribution would put the participant in a different tax bracket or ineligible for a deduction that had been taken.

Although I don't think it is permissible to do 100% withholding, as a practical matter Brenda Wren's approach seems to be reasonable.

Finally, wouldn't most plan language require distribution to be made to the participant and thus preclude payment to anyone other than the participant?

[Guest mo]

I too have used 100% withholding sparingly as a last resort. In some states, escheatment is difficult to accomplish and generally takes years. Most of the time there is some time constraint to get the plan shut down, such as cessation of the employer's activities. My feeling has been that because it falls under the automatic cashout rules, the distribution would have been taxable anyway, and yes, the individual does end up with a refund if their withholding is otherwise adequate. I am a LITTLE bit bothered that the person loses the opportunity for a direct rollover. But not enough to lose that much sleep over it. Ultimately I feel that I only picked the lesser of the available evils.

[Guest FREE401k]

I know this discussion is several months old, but I just read it for the first time and want to agree with pax's comment about terminology. I totally agree that terminology has a big impact on perception. Our firm refers to these distributions as what they really are: "automatic rollouts" or "automatic withdrawals." If a 401(k) Plan participant with a balance under $5,000 leaves the employment of the Plan sponsor, they are automatically (no action required on their part) paid.

Using this same philosophy, we refer to the automatic enrollment of new employees into a 401(k) Plan (which, by the way, we have done for our clients for years) as "automatic enrollment" or "positive enrollment" instead of the industry standard term of "negative enrollment."

[Guest DWARD]

PAX:

I have run into this problem with a few Plans that have terminated. I have used a credit bureau to track the last known address for people. If you have access to one you should be able to track the participant by their social security number.

[Guest AEA]

My understanding is that you can't deduct it from the participant's distribution or otherwise charge them for it. However, it may be a general plan expense.