Missing Participants and Patriot Act

[J. Bringhurst]

A client is terminating a money purchase pension plan (on which it has already received a determination letter as to the termination) and is now trying to distribute assets and close out the plan. Unfortunately, there are missing participants who could not be located using either the IRS or SSA locator programs. In trying to set up individual IRA accounts in the participants' names to hold the monies, the client has been told that, under the Patriot Act, they must have participant signatures to set up the accounts. Obviously, signatures cannot be obtained. Any thoughts?

[david rigby]

A couple of the earlier discussions that might be relevant:

http://benefitslink.com/boards/index.php?showtopic=13781

http://benefitslink.com/boards/index.php?showtopic=22497

[E as in ERISA]

Is this answered by question 4 relating to definition of customer at http://www.occ.treas.gov/10.pdf ?

[mbozek]

The best option is to forfeit the benefits of the missing participants who cannot be located and use the funds to pay termination expenses or increase benefits of plan participants. Plan needs to have provision permitting forfeiture. There is no benefit to putting participants benefits into an IRA where the assets will escheat to state after the s/l expires. Note: If MP benefits are not forfeited, plan sponsor must purchase an J &S annuity upon termination, not transfer funds to IRA.

[E as in ERISA]

Does the J&S apply upon termination for amounts less than $5,000? It doesn't otherwise.

[GBurns]

In a similar situation earlier this year it turned out, as is usually the case, that the bank employee had neither support nor basis for having made a similar statement. I also recently had to forward the same OCC link to a branch of a very large bank in VA. Again the VP had no explanation of why she had made similar statements to her client.

It seems that bank and other employees just shoot from the hip and the clients accept whatever is said without question.

Most plan sponsors that I have come across would think that forfeiting other than minor amounts is unethical. They are not in the business of taking that which others worked hard for and would prefer to make reasonable efforts to find missing plan participants especially if the costs can be retrieved from the participant in any way.

As for mbozek's idea, the problem that I have with it, other than it stinks, is what happens if after paying expenses there is still an amount left and the remaining employees feel that it would be unethical to accept any of this "spoils"?

I think that it would be infinitely better to use a locating service and have the located participants pay the fee, if possible. Or after locating as many as possible, forfeit those not founded and use that to pay the locating service.

[mbozek]

GB: Are u saying that the financial institution does not have to comply with Section 326 of the Patriot Act or the CIP regs if the funds are being transferred to open an IRA under 657 of EGTRRA? Considering that the civil penalty is $100,000 and the criminal penalty is a fine of 250k and up to 5 years in jail for violating Section 326 I dont think that financial institutions will disregard the regs or the CIP requirements. One of the requirements for opening an account under the CIP reg is that the customer must provide a residence address which is not possible if the participant is missing.

Additonal comment: Upon further review of the FAQ I agree that the Plan admin is not the customer for whom verification is required at the time of the transfer of the funds to the IRA. However, a plan can retain account balances of $1001-5000 and charge an admin fee instead of rolling over the funds. Also there are issues as to whether the participant's signature and current address in the rollover IRA will still be required under state law and/or rules of regulatory agencies governing custodial accounts and whether state escheat laws apply after the IRA transfer. Upon termination it is better to forfeit the assets of the missing participants and use the funds to pay admin expenses or increase benefits for the remaining participants than to expend effort to comply with the rollover rules which may only benefit the state treasuries.

[E as in ERISA]

The cited FAQs at http://www.occ.treas.gov/10.pdf are intended to provide guidance relating to Section 326. They indicate that there is no "customer" to whom the signature requirement applies until the individual contacts the bank.

4. The CIP rule requires a bank to verify the identity of each “customer.” Under the CIP rule, a “customer” generally is defined as “a person that opens a new account.” If a pension plan administrator chooses to remove a former employee from the plan pursuant to section 657© of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), it is required by law to transfer these funds to a financial institution. In addition, an administrator of a terminated plan may remove former employees that it is unable to locate, by transferring their benefits to a financial institution. Would a plan administrator or the former employee be a bank “customer” where funds are transferred to a bank and an account established in the name of the former employee, in either of these situations?

In either situation, the administrator has no ownership interest in or other right to the funds, and therefore, is not the bank’s “customer.” Nor would we view the administrator as acting as the customer’s agent when the administrator transfers the funds of former employees in these situations. A customer relationship arises and the requirements of the rule are implicated when the former employee “opens” an account. While the former employee has a legally enforceable right to the funds that are transferred to the bank, the employee has not exercised that right until he or she contacts the bank to assert an ownership interest. Thus, in light of the requirements imposed on the plan administrator under EGTRRA, as well as the requirements in connection with plan terminations, the former employee will not be deemed to have “opened a new account” for purposes of the CIP rule until he or she contacts the bank to assert an ownership interest over the funds, at which time a bank will be required to implement its CIP with respect to the former employee. This interpretation applies only to (1) transfers of funds as required under section 657© of EGTRRA, and (2) transfers to banks by administrators of terminated plans in the name of participants that they have been unable to locate, or who have been notified of termination but

have not responded, and should not be construed to apply to any other transfer of funds that may constitute opening an account.

[E as in ERISA]

Without that rule, it may be impossible for plan administrators to comply with the rollover requirement. Cashouts would have to be removed from plans.

[Kirk Maldonado]

mbozek:

Do you feel that it is clear that state escheat laws would not be pre-empted by ERISA?

I've not looked at this issue for a long, long time, but I thought that the DOL had issued two Advisory Opinions saying that those laws are pre-empted. Furthermore, I could have sworn that there were at least some court decisions that have held that the state escheat laws are preempted.

[mbozek]

I thought that escheat laws were preempted regarding retirement benefits held in a plan subject to ERISA such as assets held in a trust subject state banking law could not be forceable transferred under a state abandoned property law but not funds held in an IRA. If the participants assets are transferred to an IRA are you saying that the IRAs are holding plan assets exempt from escheat laws?

[Kirk Maldonado]

mbozek:

Please ignore my last remark; it was off-base. Those arrangements wouldn't be subject to ERISA.

I was thinking about a situation involving a client that had set up and contributed to an IRA on behalf of each of its employees. That is very different than this situation.

[E as in ERISA]

Speaking of EGTRRA 657....

http://www.dol.gov/ebsa/newsroom/pr092704.html

[jevd]

Here is the PTE & Regs

DOL Class Exemption PTE for transferring small balances to IRA plans in the employers institution or affiliate.

PTE

DOL REGS on Automatic Rollovers from QPs

REGS

[E as in ERISA]

There seem to be problems with the pdf version of the safe harbor? Here is the html version: http://a257.g.akamaitech.net/7/257/2422/06...04/04-21591.htm

[E as in ERISA]

New field asistance bulletin on missing participants and terminated DC plans:

http://www.dol.gov/ebsa/regs/fab_2004-2.html

[mbozek]

Under the DOL FAB the ultimate recipient of the missing participant's funds will be the states since all of the places for depositing the funds of missing participants are subject to state escheat laws.

[E as in ERISA]

And that is why EGTRRA's auto rollover rules are so ridiculous. Ultimately the money is all going to be escheated. And with financial institutions merging, companies being in multiple locations, and people changing jobs and moving, the money is going to be escheated to states where the participants have never lived. They'll never find it.

I agree the best answer is eliminate cashouts and charge term'ds fees for their accounts.

[mbozek]

States will reduce the period of time for escheating dormant accounts to scoop up this money. In NJ IRAs are deemed abandoned property three years after the date of distribution. Most financial insitutions will not open an account for an individual without a current address or signature on the application.

[sloble@crowleyfleck.com]

Katherine/MBozek: I agree the new auto rollover regs are ridiculous. I like your idea of eliminating cash-outs instead of following the DOL's 3-ring circus. Could you please expand on your approach? Do you mean totally eliminate cah-outs or just allow cash-outs of 1,000 or less? Katherine, what do you mean by "charge term'd fees for their accounts"? How do you think keeping the sums in the plan is a better use of the funds, a better approach for getting the funds back to missing participants, and/or a better way to avoid escheat? THANKS

[g8r]

One point regarding the DOL guidance on missing participants in terminating DC plans. It only applies to amounts not subject to the J&S rules. So, for amounts of $5,000 or less, the new gudiance should be followed (noting that the IRA rollover is the DOL preferred method).

For amounts in excess of $5,000, you're still in the same old quandry that everyone has been dealing with for years.

On the automatic IRA rollovers, eliminating mandatory cash-outs is certainly a consideration. But, unless you think a plan will be continued forever (I know that's what you are supposed to intend when establishing a plan), you are just delaying the inevitable. And, many years down the road it may even be harder trying to locate a missing participant.

[mbozek]

Under IRS regs, if the participant cannot be located after benefits are payable the plan can provide for forfeiture of benefits, regardless of the amount of the accrued benefit. The plan is better off eliminating cashouts for amounts between 1k and 5k and charging the accounts for admin costs- it beats giving the money to the states through escheat of IRAs.

[doombuggy]

I was just going to post about the FAB 2004-02, but I see someone already beat me to it. Missing participants are a pain in the butt. How about trying an outside service?

[GBurns]

I cannot beleive that the vast majority of "missing participants" would not be found using the methods outlined in the FAB.

By the way, for some reason, the USPS address correction service was not listed in the FAB. It would be much more effective than Certified Mail by itself.

Also, there are reportedly, some very good private search services that are available.

I would have thought that it would be the more moral and ethical thing to use any and all means necessary to locate these "missing participants" especially if the costs can be charged to them, rather than forfeiting that which the participant earned and contributed. I cannot find it within me to so casually be willing to waste people's hard earned money.

Thinking that escheat to the state is the only eventual result seems narrow minded ans short sighted. Even if in NJ IRA funds escheat 3 years "after distribution" it appears that such would still be a long way off because it is not the opening of the IRA account that starts the tolling for escheat but the "after distribution" FROM the IRA. How long this whole process would be is speculative but it still is a long time, and then before escheat notices etc are given.

[david rigby]

Although I have no statistics on this, it seems likley that most of those not found will be either deceased or out of the country. If deceased, the search may not be over, since a spousal benefit may exist.

[E as in ERISA]

Ashley L:

The problem with the new rules is that they may actually promote inertia. From purely a fee standpoint, a participant may feel that he is as good/better off with a safe harbor IRA (where the fees can't be higher than ANY comparable IRAs, I believe) than doing his own rollover. He might not be considering the benefit of actively managing the IRA assets, etc. But eventually he is very likely to be separated from the IRA (the financial institution is merged, the participant moves, etc.) He won't even know what state's escheat rolls to look at. He will lose the entire 1000 to 5000.

If you eliminate the 1000 to 5000 cashouts, then you encourage action as opposed to inertia. The fee benefit goes away. Based on the recent guidance from DOL (summer 2003) and IRS (early 2004), terminated participants can be charged for their share of plan expenses. That charge would likely be higher than the safe harbor IRA (no dollar limits on the plan fee provided it is reasonable, etc.) The participant will be motivated to take ownership of his account and to consider both the fees and the investments. And where appropriate, he will presumably roll to an IRA with a financial institution in his state and provide the necessary signatures, etc. It is less likely to get lost. He'll end up with the retirement funds.

[Belgarath]

Does anyone know if there exists some sort of a state by state survey of whether state law allows an IRA to be set up without a signature? Let's say hypothetically that New York won't allow it. Doesn't matter what the DOL regs say, the plan administrator cannot comply. So the only choice available would be to amend plan to NOT require mandatory cashouts of 1,000 - 5,000.

I don't know if any or all states have such restrictions. If none do, does anyone know of a nationwide IRS provider or providers that will be willing to accept this business in all states?