Missing Participant IRA's

[austin3515]

Stale dated checks got returned to participant accounts. Let's say we send a letter or two using skip tracing services, but everything turns up a dead end.

Let;s say further that the balance is greater than $5,000. May I set up a missing participant IRA and be done with it?

I thought no, unless it was a plan termination, but I certainly like the idea of making lost participants someone else's problem!

[MoJo]

Over the cash-out threshold and I don't think you even have the right to start a distribution. Under the "facts" you posit - that checks were issued and became stale - apparently there was a valid distribution request. The question I would raise then, is when does that distribution request become stale requiring the whole process to be restarted - which puts you back in the boat of "over the cash-out threshold" you have no options....

[GMK]

http://www.irs.gov/pub/irs-drop/n-09-68.pdf

says that the Your Rollover Options notice must be issued no more than 180 days before the distribution is made.

Don't know if this, in effect, makes the distribution request stale after 180 days, but it prevents making the distribution until after the notice is re-issued.

[My 2 cents]

Doesn't issuing the payment, by itself, stop the clock for all time? Sequence - paperwork with Rollover Options notice is issued, participant makes affirmative election (this being a situation where the amount in question is over $5,000), checks are issued, and then nothing happens. Wouldn't there be nothing more than stopping payment on the stale checks and issuing new ones? The distribution happened when the checks went out. One presumes that a proper 1099-R has been or will have been issued without regard to whether the checks were cashed. Is this not how it works?

Assuming that the money left the fund when the check was originally sent, there would have been no fiduciary duty to invest it pending final cashing of the check, right?

[MoJo]

Doesn't issuing the payment, by itself, stop the clock for all time? Sequence - paperwork with Rollover Options notice is issued, participant makes affirmative election (this being a situation where the amount in question is over $5,000), checks are issued, and then nothing happens. Wouldn't there be nothing more than stopping payment on the stale checks and issuing new ones? The distribution happened when the checks went out. One presumes that a proper 1099-R has been or will have been issued without regard to whether the checks were cashed. Is this not how it works?

Assuming that the money left the fund when the check was originally sent, there would have been no fiduciary duty to invest it pending final cashing of the check, right?

The million dollar question is who "owns" the check? Putting the money in a "common" checking account (usually of the service provider) for convenience in making the distribution does not necessarily effectuate a "distribution." For example, in the DB context, often the "checking account" is in the name of the plan, and hence, the assets remain "plan assets" until such a time as the check is cashed. Why would that be different in a DC plan?

Now, practically speaking, many actually consider the distribution complete when the assets are removed from the INVESTMENTS and placed in the provider's distribution checking account, and in the "good old days" if the check was uncashed, after the prescribed period of time the funds would "escheat" to the state. The DOL has major problems with that - which in my mind indicates the DOL would consider that funds STILL to be assets of the plan. As such, would not the distribution notice - and hence the consent to distribution - become stale at some point?

Indeed, how can one argue that an over the cash-out amount EVER be distributed in a form (rollover) NOT consented to in the first place (which, in the OP was a "cash" distribution - hence the checks being cut)?

[ESOP Guy]

My guess is the plan document says what you are to do with lost participant funds. I can't remember the last time I saw anything other then you can forfeit the money and reallocate the funds. This is with the understanding that if the person is found you have to restore the account with current forfeitures and pay the person.

I don't see how you can do anything other then what the document says for lost participants.

[mbozek]

Why were the checks sent out? MRDs, election by participant?

Can plan check SS death register to see if participant is deceased?

If participant had a designated beneficiary try contacting that person.

Does plan have provision that deems benefits to be forfeited when distributions must commence if participant cannot be located? If participant requests benefits in the future then they must be restored to account.

Default option is to send payments to state abandoned property fund if fund will accept transfers from an ERISA plan.

[My 2 cents]

I think that in the case of DB plans (and most likely DC plans as well) whose assets are maintained in financial institutions, when a check is issued, the plan's funds are charged with the amount of the check and the money moves over to whatever kind of holding account the financial institution itself uses to cover the checks it has issued. So it cannot be said that the money remains in the pension fund pending cashing of the check.

It is my understanding that the issue the DOL has with escheating funds to a state is more along the lines of the funds, if not actually payable due (for example) to the prior death of the participant, are to be used either to reduce future plan contributions or treated as allocable forfeitures (depending on what kind of plan it is).

[MoJo]

2cents said: "when a check is issued, the plan's funds are charged with the amount of the check and the money moves over to whatever kind of holding account the financial institution itself uses to cover the checks it has issued. So it cannot be said that the money remains in the pension fund pending cashing of the check."

I think you reach the conclusion by stating the conclusion ("So it cannot be said that..." - but some contend that moving the money from "one account" to "another account" simply changes the holding account without changing the character of the money (i.e. it is still "protected" under ERISA). A simple test to prove my point: At what point can a creditor "garnish" those proceeds? Not while it is in transit in that checking account - but only AFTER the actual check has been cashed. Up until that point in time, the funds still have the "spendthrift" protections afforded qualified plan money.

As far as the escheatment issue, I believe the DOL has indicated that they do not believe it is ever appropriate to escheat funds (clearly not while "in trust" as you define it) but also when in a distribution checking account. I'm looking for references to the DOL's position and will post them when I find it (and I don't believe it was a "formal" position - as in an AO, but rather an informal position - guidance, but not directive).

I agree with the "forfeit within plan" option as the "best" but only the best among really bad alternative. One of the "fiduciary obligations" is that the funds must be made "productive." Hard to argue that restoration sans earnings is "productive," although I've seen no case law on that issue (yet.)

[MoJo]

An interesting review of what the various positions are - coming to no real conclusion (but point out the DOL's "waffling" (my term) on the issue of escheatment):

http://www.bakerdonelson.com/an-in-depth-look-at-employee-benefit-plans-and-unclaimed-property-laws-05-26-2010/

Based on "uncertainty" of if/when/how state escheatment is proper, I still advise for forefeiture....

[ESOP Guy]

It is my understanding the DOL frowns on escheatment. It is the firm I work for to always recommend not to do it.

Part of the issue in my opinion is it is unfair to the participant as a practical matter.

For example:

I work regularly with a trust company that issues checks for our clients. They escheat outstanding checks after a few years despite the fact we have asked them to stop. They are located in a SE state. I have a large client located in a SW state. The bank escheats to the state they are located in. Why would someone who has lived and worked all their life in the SW ever check a SE state for lost money.

This is being done for the convenience of everyone but the person due the money and that seems like a problem to me.

I will get off my soap box now.

[mbozek]

2 cents:

If a pension plan writes a check to pay benefits the funds remain as plan assets until the check is cashed. It may be moved to another plan account but the funds are still plan assets. Years ago I reviewed a 401k plan of an employer who filed for bankruptcy which had a segregated account consisting of many thousand $ from uncashed distribution checks that had been mailed to plan participants. Question was who owned the funds.

If plan wants to clear its account of the liability for payment then it should issue a certified check to the participant where the payee is a bank. Payment of the funds from the plan to the bank to purchase the guaranteed check will remove the distribution from the plan's asset account. Plan can hold the check indefinitely if participant cannot be located.

Reason why trust co will escheat checks to state in SE is because Trust Co execs do not want to get on the wrong side of state banking auditors who look for stray assets that can be deposited to state abandoned property account where state can invest the funds. Years ago I had a dispute with an insurance co. attorney over request by state auditors to escheat payments from ERISA plans which had not been cashed. Even though he agreed with me that the funds were exempt from state escheat laws he said that he was not going to give the state auditors an excuse to find other violations in the company's operations.

[ESOP Guy]

deposited to state abandoned property account where state can invest the funds.

Invest the funds so that is what they are calling spending money now?

[Bird]

To the original question - no, I don't think you can do a force-out to an IRA for more than $5000 unless/until the plan terminates.

To the side conversation about what happens to stale checks - yes, the money gets moved from the plan account to a general account, but in my experience, if the check doesn't get cashed, it will eventually get re-deposited into the plan account. Rather unpleasant as a 1099-R has been issued and the participant is off the books. In one case we were able to find the participant and re-issue. Other cases (small amounts) we have forfeited the money...right or wrong, whether the plan says you can or not.