Mandatory rollovers under 2550.404a-2

[Belgarath]

I have one issue I'm finding very confusing on this. If a participant doesn't make an election and you have mandatory cashouts, you have to do the mandatory rollover. So far so good. However, under the "miscellaneous" portion of the overview, it says that issues regarding missing participants are beyond the scope of this regulation.

So how do you know if a participant is merely "nonresponsive" - in which case you do a mandatory rollover, or if they are "missing" and therefore beyond the scope of the regulation?

And what do you do if they are determined to be "missing?"

This may be much simpler than I'm making it out to be.

[E as in ERISA]

Good point. In many cases, the DOL considers an "unresponsive" participant to be "missing." But these rollover rules only apply to "non-responders" so that would not make sense in this context. I assume "missing" means "bad address" for the 402(f) notice?

[mbozek]

How about a missing participant is one who has not given a current address to the Plan admin? If a missing part cannot be located through the IRS why not forfeit the benefit until he appears instead of spending uncompensated time worrying about a mandatory transfer to an IRA where the account will only escheat to the state after a period of 3 years or so. I would think that given the options plan sponsors will prefer to keep the money in the plan.

[Belgarath]

mbozek - While I like your idea of forfeiting from an administrative viewpoint, employers don't like it because once the money has been reallocated, the participant may show up and want their benefit, which the employer must restore. The employers would much rather get them out of the plan. And most employers couldn't care less if the ex-employee's funds escheat to the state eventually.

Can't say as I blame them. As you correctly point out, employer is using uncompensated time to locate these folks, who can't be bothered to update a forwarding address.

Question: while it would seem to be a reasonable approach (except perhaps to the DOL) to treat missing folks with cashout benefits the same as you can under FAB 2004-02 for terminating DC plans, (assuming you follow the mandatory search methods) I'd also think that this is risky. If the DOL wanted to allow this, they could have, but they specifically ducked the issue. So what are your opinions out there as to how this issue must be handled? What guidelines might one use to determine if someone is simply not responsive, or actually "missing?" What is the fiduciary obligation in terms of "searching" to make this determination? Anyone have DOL contacts to whom they might pose this question?

And maybe I'm worrying over nothing. It's apparently permissible, after sending a distribution kit to last known address, to assume that a non-response is consent for an immediate distribution. So maybe the issue of "lost" participants doesn't arise unless the mail is returned with no forwarding address?

[R. Butler]

I haven't thought too much about the issue, but initially I lean towards the mandatory rollover in all cases, assuming you can find an institution to take the rollover. In the recent guidance the DOL specifically stated that the preferred distribution option for missing participants is the automatic rollover. I realize that the guidance was specifically directed at terminating DC plans, but the reasoning they used would seem to apply to ongoing plans also.

If you can't find an institution that will take the rollover then I would agree with mbozek that assuming the plan allows, you can forfeit after exhausting appropriate search methods.

[mbozek]

It has been my experence that missing participants (those who have left no current address and do not respond after being contacted through the IRS) very rarely come back to claim their benefits. Many missing participants are running away from spouses, creditors, the IRS or are illegal residents. Most of the accounts are small so there is little financial risk to paying off the claims if they return. Employers would care if they knew that the funds did not have to fill state coffers or that escheat meant the state was enriched with their money. I am only pointing out the there are better use for accounts of missing participants then to give them to the state under mandatory IRA cashouts. I also dont think the Dol can or should care about forfeiting accrued bendfits of missing participants because the amounts must be restored if the ee or bene show up in the future and forfeiture is expressly permitted under IRS regs which are the basis for applying the vesting rules of ERISA.