Plan Sponsor want to reallocate money from lost participants

[Guest JimJ]

We have a plan sponsor who wanted to sell and reallocate participant account balances under $5k to active plan participants because they can not be located. What guidance can I find to let this guy know that this is not a possibility. I discussed forcing them out of the plan, and escheating those balances to the state if we cannot locate the participant. Can anyone think of anywhere I could look on the web to see this in writing, or have some insight on this issue. Thanks,

Jim J.

[Guest MTransue]

Have you attempted to locate any of these lost participants through the Social Security Administration Program, the IRS Program, or a private locator service?

[Guest JimJ]

I personally have not. We are not the recordkeeper, but rather a consultant for other business with the client. But let’s say hypothetically that we have exhausted all efforts in locating the participants. Is it true that he would not be able to keep the balance within the plan by reallocating to current participants? Would the process to escheat begin? Do you know where I can find further documentation to support this? Thanks again,

Jim J.

[Guest death and taxes]

The plan document may discuss what to do with "lost" participants. I believe it is possible to forfeit the balances of the lost participants as long as the Plan Administrator keeps track of the amounts in case someone is found. If a claim is made after forfeiture, the Plan Sponsor may have to make a contribution to cover the claim if current forfeitures are not sufficient.

[Guest JimJ]

Thanks D&T,

OK, I'll look... I am surprised that the benefit can be taken away and forfeited. A few reasons for this:

1) What if forfeiture is used to reduce ER contributions? The employer gets the benefit of another deduction using the same funds?

2) What if the participant was invested aggressively, how can the ER properly keep track of the account if the participant were to resurface?

3) Are there not laws in place to protect participants or their beneficiaries?

4) When does the escheat process begin, and why wouldn't all plans simply adopt language to forfeit the funds of lost participants?

I am sure there are many other valid points to be raised. Thanks again for any help.

Jim J.

[rcline46]

In 2002, plans may be amended to place $ in an IRA account in participant's name without participant's signature thereby protecting the assets.

Personally, if a participant abandons his account I think they should lose it. You could get into trouble but send it all to the IRS as tax withholding.

However, it not 'distributed' in some fashion, the employer will always be on the hook for it.

[david rigby]

There are some earlier discussions that might be useful:

http://benefitslink.com/boards/index.php?showtopic=4359

http://benefitslink.com/boards/index.php?showtopic=9963

http://benefitslink.com/boards/index.php?showtopic=3754

Especially note the link to Rev. Ruling 2000-36.

[Richard Anderson]

1) What if forfeiture is used to reduce ER contributions? The employer gets the benefit of another deduction using the same funds?

Forfeitures that reduce the employer contribution are not deductible. The amount actually contributed to the trust by the employer (contribution - forfeitures) is deductible.

[Guest JimJ]

Thanks Richard - nice to learn new things and certainly makes sense.

rcline46 - actually another suggestion of mine, but the sponsor wants the money and doesn't want to distribute. I agree, and find it hard to understand why some folks leave $ behind, but should a greedy sponsor benefit due to participant's ignorance.

pax - I was also surprised to know that the DoL frowned upon turning the money over to the state. Wouldn’t this be the simplest and cleanest way to handle in a DC plan?

I would like to find good documentation to get to the sponsor in order to eliminate forfeiting the money and reallocating to the plan. (if this is even an option?) Of course based on a comp to comp reallocation, he would benefit the most.

Appreciate the comments, keep em coming.

Jim J.

[Belgarath]

Assuming the plan allows it, take a look at 1.411(a)-4(B)(6). With account balance of less than 5,000, after doing all the diligent searches, etc. that folks have discussed, you can treat these as forfeitures. If more than 5,000, it's a little murky, but I'd say that you cannot do it until it could be paid out without participant's consent. Since the advent of 411(a)(11), I'd say that this would usually be normal retirement age.