The Eternal Mystery - Top-Hat Edition

[Guest erisafried]

After bedeviling us since the dawn of time, the DC plan missing participant issue has jumped the fence and infected non-qualified plans as well. What to do?

After reviewing a stack of recent, nominally-409A compliant NQ plan documents, I found a number of approaches:

• The participant's benefit is provisionally forfeited if the employer cannot locate him/her after a reasonably diligent search; benefits can be restored with/without interest if the participant reappears.
  
• The participant's benefit is irrevocably forfeited after some period of time (1 to 3 years) if the employer cannot locate him/her after a reasonably diligent search.
  
• The participant's benefit is paid to his/her representative/beneficiary/surviving spouse after some period of time (1 to 3 years).
  
• If the participant's benefit is subject to escheat, it is paid to the unclaimed property administrator at the appropriate time.
  

Although irrevocable forfeiture is a bit harsh, that potentially seems like a safe approach depending on how it is implemented. The question I have about that approach and all of the others is the fact that the plan may be retaining the money for some period of time (potentially years) beyond the originally-scheduled payment date. One plan weaseled a bit on the subsequent payment to a participant who reappears and allowed for payment only to the extent permitted by 409A (whatever extent that may be, if any). Even the irrevocable forfeiture approach seems to be a little problematic if the diligence process goes beyond the end of the year of distribution. The plans that allow for multi-year delays bother me - I am not sure how the drafters got comfortable with that other than just through the common sense argument (i.e., the IRS is not really going to penalize a delayed distribution where the participant was really missing and not just trying to time the payment).

One solution I devised was to pay out on the originally scheduled date(s) with appropriate reporting and withholding, forward the check to the last known address, and if the check comes back, stick it in the drawer for however long the escheat holding period is and then transfer the check (after tax money at that point) to the unclaimed property administrator.

If anyone has come up with a better solution for this problem or has heard one of the IRS poobahs opine on it, I would be grateful if you could bring some light to this dark corner of 409A.