Missing Participants/Terminating Plan

[Guest Donaldson]

Can anyone offer suggestions as to the following:

A company has liquidated in bankruptcy and is in the process of winding up its business. It wishes to terminate its 401(k) plan but cannot locate some participants (most participants have already withdrawn their account balances). I am aware of the IRS' humane locator program which will attempt to notify missing participants. What if after using this program, some participants still cannot be located? What should be done with the remaining account balances?

Thank you for any suggestions.

[g8r]

The long and short of it is that there is no answer. Eventually you'll get replies from various people indicating what they've done, but the IRS and DOL haven't agreed that any of the methods are acceptable. Then again, I haven't heard of anyone having any problems with the IRS or DOL.

First, I'd go the extra step of hiring a company that specializes in locating lost participants. They aren't expensive and are fairly successful.

If you really can't locate someone, first check the document. Some plans provide that you can forfeit the account of lost participants or that you can let the amounts escheat under state law. If the plan is silent, below are some alternatives. I've heard some people argue that there are ERISA issues with any of these because the money isn't being invested. Of course, the DOL is silent and unless it's a large plan, it's unlikely anyone will bring a cause of action for small amounts. But, that doesn't make it right.

1. Escheat to the state (even if the plan doesn't permit it, the IRC 411 regulations state that escheating it to the state doesn't violate the vesting rules.

2. Send 100% to the IRS as withholding.

3. Rollover the amount to an IRA. It may be difficult, if not impossible, finding an IRA custodian willing to accept this without the signature of the participant so this may not be practical. Maybe once the DOL issues regulations dealing with automatic rollovers for amounts over $1,000 more institutions will be willing to open these IRAs.

4. My favorite, get a cashier's check, mail it the last known address and don't put a return address on the envelope. Just kidding! But, it would certainly be fun to try this one.

There have been letters written to the IRS and DOL requesting guidance and there has been legislation proposed permitting the PBGC to accept amounts from DC plans. But, no guidance has been issued to date.

[david rigby]

This is one of the most frequently discussed topics here. I suggest using the search feature.

[mbozek]

As the posts indicate normally there are only three options: 100% income tax withholding, realloction of accounts among remaining participants and payment of plan termination expenses. In the case of a bankrupt sponsor the bankruptcy trustee may want to recapture the accounts to pay off the debts of the employer. Escheating the assets is not a viable opton because there is usually a time limit of one to three years after the check has been returned to the plan before the money can be turned over to the state and many states will not take distributions from qualified plans because of the legal arguments that escheat laws are preempted by ERISA.

[E as in ERISA]

A bill in the House would possibly resolve this problem by allowing the money to be sent to the PBGC.