100% withholding/missingparticipants

[Guest jam10]

We will begin distributing funds to participants of a terminated profit sharing plan. Some participants are missing. Has the IRS or DOL approved the 100% withholding method for missing participants in a profit sharing plan?

The Plan has forfeiture and redistribution provisions for lost participants. But the problem is that such provisions contemplated an ongoing corporation (plan sponsor) and the corporation has dissolved. Thus, an amendment regarding 100% withholding seems an attractive option to remove the fund balances from the Plan without harming the value of a missing participant's account balance. Any problems?

[Guest b2kates]

you do not state what efforts the plan sponsor made to find the lost participants.

There are many companies that do such searches.

I have used the 100% withholding; but only after a search failed to locate the participant.

the 100% withholding could result in the Trustee being sued for breaching his fiduciary duty in not locating the Participant. what if participant is easily findable and then loses the ability to roll over?

[mbozek]

There is a way that the plan can contact missing participants through Social Security- You should check the SS web site. But it takes time. Most of the private searches require payment of a fee by the plan for each search. If a participant does not reply you can use 100% withholding, forfeiture of accounts or escheat of plan benefits to state where employee resides. I am not sure that 100% withholding is a breach of fid duty since the withholding is deposited to the individual's benefit on a tax return and employee can apply for a refund. This is a good reason for employers to pay out involuntary cashouts when employees terminate employment.

[Guest b2kates]

Mbozek

I do not agree that a plan can escheat to the state. That admits that the trustee has lost the participant. I think that may rise to a breach of fiduciary duty.

Yes there is a program through SS and I thought there was an IRS notification program

The fact that a search costs is not a good reason to not undertake such a search.

[joel]

This problem would be alleviated if there was a national registry like there is in the UK and Australia.

[mbozek]

B2: 1. I dont understand your reasoning-- where is it required that a fiduciary has a fiduciary responsibility to keep track of participants. It is the opposite- participants have a responsibility to notify the Plan admin of a change in address. There is no vicarious responsibility of a plan adm to keep track of participants who may not want to be found. Plan communications should remind participants to notify plan admin. of c/a.

2. You seem to be putting too much of a burden on the Plan Admin. Try the flip side-- A plan must dispose of all assets in order to terminate. Termination is expensive enough without having to pay for a search to find missing participants-- ( who pays for the cost of a search? the ER or the Plan?) If a participant cant be located through ss then forfeit the assets to other participants.

3. If the corporation has dissolved and plan has disposed of all assets what recourse does a missing participant have to recover benefits? Only possible claim would be against fiduciary but the statute of limitations is 6 years from date of distribution. Participant would have to pay for the cost of representation.

[Appleby]

Just came across this post while searching for something else, and noticed the $100 percent withholding comments, which was addressed in Field Assistance Bulletin 2004-02 ( which you may have already read) which says in part

100% Income Tax Withholding - We are aware that some plan fiduciaries believe that imposing 100% income tax withholding on missing participant benefits, in effect transferring the benefits to the IRS, is an acceptable means by which to deal with the benefits of missing participants. After reviewing this option with the staff of the Internal Revenue Service, we have concluded that the use of this option would not be in the interest of participants and beneficiaries and, therefore, would violate ERISA’s fiduciary requirements. Based on discussions with the IRS staff and our understanding of the IRS’s current data processing, the 100% withholding distribution option would not necessarily result in the withheld amounts being matched or applied to the missing participants’/taxpayers’ income tax liabilities resulting in a refund of the amount in excess of such tax liabilities.(20) This option, therefore, should not be used by plan fiduciaries as a means to distribute benefits to plan participants and beneficiaries

[R. Butler]

Appleby & anyone else that wants to chime in.

I have a similar situaion as jam10. Plan sponsor went bankrupt & ceased operations 2 years ago. Originally there were about 300 participants & now we are down to 10-15. Just can't find them & we really need to get this wrapped up this year.

I understand that the IRS position is that you should not use 100% withholding. In onoging situations we don't use it. Most, if not all, of our plans have provisions allowing balances of lost participants to be forfeited. However, if the plan is terminating forfeiting is not normally a good option. Do you think that the IRS would maintain that position in this situation?

[mbozek]

Why not forfeit if the participants cant be located? Since the IRS discourages 100% withholding the only other option would be to escheat the funds to the state where the participants reside. But many states will not take q plan funds by escheat because of preemption issues or require that there be a waiting period of 1-3 years after the check is issued. I dont see anything in the reg that prevents forfeiture of accounts in a plan that will terminate since there is no requirement that the plan continue indefinitely until lost participants are located.

[Demosthenes]

To R. Butler

We're from the government and we're here to help!

Here's the URL for the DOL's orphan plan fact sheet which includes a phone number and email address. They may take it off your hands or at least take on the task of finding the last handful of participants.

http://www.dol.gov/ebsa/newsroom/fsorphanplans.html

[R. Butler]

Thanks. This really isn't an orphan plan. The plan sponsor has actually left the country, but he does have an attorney handling the termination for him. We are just trying to locate the last few participants & have not had luck the IRS or commercial locator services. Nonetheless I may try to call the number & see if they have suggestions.

Thanks again.