Long Lost Dead Participant - what to do next?

[ldr]

Good afternoon to all,

We have a profit sharing plan that accumulated quite a few terminated participants who had not been paid out.  The plan did not have automatic cash-out provisions until we amended them into it last year.  The plan is also very odd in that it has a provision that accounts of terminated participants do not experience gains or losses.  The accounts are frozen at the value as of the end of the plan year preceding the date that the person terminated employment.  So over the last couple of years, I have been working diligently to find as many of these people as I can and get them paid.

One of them has me stumped.  The gentleman only worked for the employer for about a year and a half back in the early 90s.  However, it was just long enough to get a little contribution that has been sitting in the plan ever since.  The amount is just under $400.  The employee quit and moved to CA, whereupon he had a fatal automobile accident which also killed his named beneficiary, his wife.  

We can't find anyone related to him, so far.  They were in their 20s when they died and do not seem to have had children.  The plan document indicates that the money would go first to the spouse (dead), then the kids (nonexistent) and finally the "estate".  It's all very well and good to talk about an estate when a death is recent and the deceased actually had assets.  After 25 years, for a couple that likely had nothing, what kind of an "estate" is there to pay the sum to?  None.

What have the rest of you done with assets under such circumstances?  

As always, your thoughts are much appreciated.

[Larry Starr]

57 minutes ago, ldr said:

Good afternoon to all,

We have a profit sharing plan that accumulated quite a few terminated participants who had not been paid out.  The plan did not have automatic cash-out provisions until we amended them into it last year.  The plan is also very odd in that it has a provision that accounts of terminated participants do not experience gains or losses.  The accounts are frozen at the value as of the end of the plan year preceding the date that the person terminated employment.  So over the last couple of years, I have been working diligently to find as many of these people as I can and get them paid.

One of them has me stumped.  The gentleman only worked for the employer for about a year and a half back in the early 90s.  However, it was just long enough to get a little contribution that has been sitting in the plan ever since.  The amount is just under $400.  The employee quit and moved to CA, whereupon he had a fatal automobile accident which also killed his named beneficiary, his wife.  

We can't find anyone related to him, so far.  They were in their 20s when they died and do not seem to have had children.  The plan document indicates that the money would go first to the spouse (dead), then the kids (nonexistent) and finally the "estate".  It's all very well and good to talk about an estate when a death is recent and the deceased actually had assets.  After 25 years, for a couple that likely had nothing, what kind of an "estate" is there to pay the sum to?  None.

What have the rest of you done with assets under such circumstances?  

As always, your thoughts are much appreciated.

First comment: doesn't your plan have language dealing with this.  I'm out of my office for a few days, but I believe the plan language allows a forfeiture with the requirement to restore it if it is ever necessary.

Second comment: does anyone think it is legal to "freeze" the accounts from gains/losses when someone terminates.  Never heard of such a thing but, not being in the office, I can't research it. Certainly seem like it could be discriminatory.

[david rigby]

Are you sure this participant was vested?

[ldr]

Hi Larry and David,

1. He wasn't originally 100% vested.  He was 20% vested, but after 5 consecutive one year breaks in service, his non-vested money was forfeited, and he really is entitled to 100% of that remainder.

2. The plan document only addresses what to do when there is no beneficiary designation.  It goes to the wife, then the kids, then the estate.  There was a beneficiary designation and the beneficiary was his wife.  She died with him in the accident.  We have not been able to discover any record of any children.  What estate?  An estate has to have an identity and a bank account number.  These were poor people who died 25 years ago.  How would we pay the proceeds to an "estate'?

3. I was 100% in agreement with Larry when I first came to work here and encountered several old pooled profit sharing plans, Trustee directed, where the participants do not experience gains and losses anymore after employment termination.  I, too, thought it was discriminatory and raised a fuss.  We had a conference call with the document specialist at Datair who explained the logic behind this and that my predecessor was correct in the way he did the administration of the plan.  Okay, ours is not to reason why, ours is but to do or die.......

Remember, it's less than $400.  I can't hire a private eye or go to elaborate lengths to find his relatives.  As it is, I am looking on Ancestry.com and Truthfinder for anyone who might know any of his relatives, and that's more than most people would do.  If I never find a relative, what do I tell the plan sponsor to do?

[Mike Preston]

Datair was wrong if I understand what you are doing. There is some guidance out there somewhere that says plan provisions or the way they are interpreted can not be described as a significant detriment to the terminated employee leaving money in a plan.

[ldr]

Mike, I believe you.  That's why I am anxious to get these people paid out.  I don't think this is right either, but I can't prove it, so the next best thing is to get all these old accounts flushed out of the plan.  

So here's their logic:  The man who had my job before me, who, by the way, NEVER MADE A MISTAKE (much eye rolling here when nobody is looking), filled out the adoption agreement to say that terminated participants would be paid out "As soon as administratively feasible following the date of the distributable event, based on the preceding Valuation Date."  Remember, it's a pooled Trustee directed profit sharing plan and the participant does not direct the investments or even have his own account except as tracked in our records as his portion of the pool.

So this particular participant terminated employment in 1994, the preceding valuation date was 12/31/1993, and his account balance has not changed one penny since 12/31/1993, because Datair and my infallible predecessor determined that this was the way to interpret the language of the document.  They say the person is paid out whatever their account was worth on the valuation date preceding the event (DOT, death, permanent disability) and that is the figure the participant will receive, no matter how long it takes to be "administratively feasible".

My next best move under the circumstances is to quietly get caught up on the payout of the terminated employees as quickly as I can.  

[Mike Preston]

I think the best move is to run the "interpretation" through an ERISA attorney, preferably someone who has read and understands the implications of Rev Rul 2004-10.

[shERPA]

Wow, just wow.  What Mike said.  I would not want to have to justify that interpretation to anyone.

[RatherBeGolfing]

@ldr maybe I missed it somewhere, but is there a reason you are searching on ancestry rather than contracting with someone like Penchex or MT (or others, not pitching a specific company here) to do a records search for participants or beneficiaries?

5 hours ago, ldr said:

"As soon as administratively feasible following the date of the distributable event, based on the preceding Valuation Date." 

So in other words, a typical balance forward valuation.  Your account balance as of the last valuation date.  I'm scratching my head how you (not OP) interpret "preceding valuation date" to mean the valuation date preceding the distributable event rather than the valuation date preceding the distribution. 

How about Rev Rule 80-155?  Emphasis mine

Quote

Because profit-sharing, stock bonus and pension plans of the money purchase type (i. e. , defined contribution plans) are required to provide for distributions in accordance with amounts stated or ascertainable and credited to participants, the funds under such a trust must be allocated to participants' accounts in accordance with a definite formula (although certain exceptions are allowed, such as the use of a suspense account in accordance with the requirements of section 415 of the Code) .
 

Furthermore, if the amounts to be allocated or distributed to a particular participant are to be ascertainable, such plans must provide for a valuation of investments held by the trust, at least once a year, on a specified inventory date, in accordance with a method consistently followed and uniformly applied. The fair market value on the inventory date is to be used for this purpose. The respective accounts of participants are to be adjusted in accordance with the valuation.

In the case of a plan in which trust earnings, unrealized changes in the value of trust investments, and losses realized on the sale of trust assets may be valued and allocated to participants' accounts at infrequent or irregular intervals or different valuation methods may be used for different participants, the plan does not provide a definite formula for allocating and distributing the funds, as required by the regulations. Accordingly, such a plan does not qualify under section 401(a) of the Code.

 

6 hours ago, ldr said:

Okay, ours is not to reason why, ours is but to do or die.......

I disagree, but maybe at some point you have done all you can.

4 hours ago, Mike Preston said:

I think the best move is to run the "interpretation" through an ERISA attorney, preferably someone who has read and understands the implications of Rev Rul 2004-10.

absolutely.  And it scares me to think of how far reaching the problems might be if people have not been credited with earnings for 25 years.  I would not want to rely on a conversation with a document specialist.

Rev Rul 80-155.pdf

[Peter Gulia]

One wonders whether the plan’s administrator furnished for this account twenty-five ERISA § 105 pension benefit statements for the years ended 1994-2018.

 

And to what address?

[ldr]

Hi to all,

Thank you for your comments, which are helpful to a point.  Remember that my rank is sergeant.  Not major, not general.  I don't get to pick. I get to gather information and make recommendations, some of which get attention and some of which are ignored.

I do as much as I can to find lost participants for free.  When it starts costing more than $3, I have to get someone's authorization.  I am going to seek authorization to spend a little bit of money on a PBI "death search" to see if I can find the deceased person's relatives. I think that's about $35, and for an account with less than $400, that's all anyone is going to be wiling to spend.

As for this "no earnings' situation on terminated participants, all I can do is agree with you.  I understand, I registered my shock and horror already in the first battle and I lost.  I was trumped by the supposed expertise of my predecessor and the wisdom of Datair who backed him 100%.  Think about this too: Datair's software has a box you can check that keeps terminated participants from sharing in gains and losses.  Why would they have such a box, if they were not convinced that they are right?

All I can do is diligently try to pay out terminated people as soon as I can find them ,and hope and pray these 3 or 4 such profit sharing plans terminate in the near future because the sponsors are aging out and will retire or sell their businesses before too long.  All the plans that have been taken on in the last 15 years are vanilla 401(k) plans with no such oddities.

As to the participant statements and where they were delivered?  I am sure they weren't.  We produce participant statements for every account in the plan every year and send the whole batch to the employer.  He distributes the statements to the current employees and sends out the terminated employees' statements to their last known address.  However, I am sure he probably stops after getting them back as undeliverable  as addressed.

[RatherBeGolfing]

17 minutes ago, ldr said:

the wisdom of Datair who backed him 100%

Which isn't a legal opinion (at least very unlikely), and I would be very careful about making operations decisions based on that. Did cite any type of authority for it, or did they just say "Joe TPA did not mess up"?  

 

21 minutes ago, ldr said:

Think about this too: Datair's software has a box you can check that keeps terminated participants from sharing in gains and losses.  Why would they have such a box, if they were not convinced that they are right?

That is not an uncommon feature, I know Relius/FIS has or had it as well.  FTW does not, but I believe that is intentional to avoid mistakes.  For balance forward plans, you would typically "exclude" a participant from earnings because otherwise the software would allocate earnings based on beginning year balance and you would end up with an ending balance of just earnings.

 

[ldr]

@RatherBeGolfing it was a speaker phone conference between the document specialist at Datair - at least the one we always get on the phone - and I do not know if she's an attorney or not.  She explained to my employer and me that my predecessor had followed the logic I gave you above, that this is the correct interpretation of the document provision, and that he was right.  That ended any further discussion.  I was new here at that time and didn't have a leg to stand on, so to speak.  I wasn't in any position to argue with anybody.  I have established a track record now for diligent work and great attention to detail, and it could be that if I brought it up again, I might be listened to.  She did not refer to any particular provisions in the law, as I recall.

[RatherBeGolfing]

19 minutes ago, ldr said:

 it was a speaker phone conference between the document specialist at Datair - at least the one we always get on the phone - and I do not know if she's an attorney or not.

Since they are your document provider, I would ask again, and request it in writing, backed up by some kind of authority. I would also make sure that this comes from the people who actually draft their documents.  This isn't the type of explanation you should get from customer service.

[ldr]

@RatherBeGolfingThat, I CAN do - great idea, and thank you.  Will get on that this afternoon and will update forum on results when I get them.

[ldr]

Update:  The deceased DID have a son.  I found him by sending out a letter to an elderly relative I found on Truthfinder.com.  She turned out to live next door to the kid, and he called in with all of his information.   We do at least have someone to pay!  And yes, I did ask him for a birth certificate so I can prove to myself that he really is the son.  

[shERPA]

Wait til the kid finds out he's due 25 years back earnings!  ? 

[Larry Starr]

On 1/28/2020 at 6:04 PM, Mike Preston said:

I think the best move is to run the "interpretation" through an ERISA attorney, preferably someone who has read and understands the implications of Rev Rul 2004-10.

PLEASE: follow Mike's advice (same as mine).  Your client has a problem; you have identified it.  If they don't believe you, hire an ERISA attorney who will explain why you are right. They need to change the process.

I would read that language as follows:  Plan year = calendar year. Participant terminates 6/15.  You can pay him out on his PRIOR 12/31 balance.  Once you pass the next valuation date (12/31 of the year he terminated), that account get's updated.

It is exactly the way we do it, except we pay them out AFTER the year is over in which they terminate and the work is done for that year end. There are safe harbor allocations that often have to be done and can't be done until the end of the year so the payout is not known until the year end work is done. And if they go another  year, it gets updated again, and again, and.... you get it!

[Larry Starr]

6 hours ago, ldr said:

Hi to all,

Thank you for your comments, which are helpful to a point.  Remember that my rank is sergeant.  Not major, not general.  I don't get to pick. I get to gather information and make recommendations, some of which get attention and some of which are ignored.

I do as much as I can to find lost participants for free.  When it starts costing more than $3, I have to get someone's authorization.  I am going to seek authorization to spend a little bit of money on a PBI "death search" to see if I can find the deceased person's relatives. I think that's about $35, and for an account with less than $400, that's all anyone is going to be wiling to spend.

As for this "no earnings' situation on terminated participants, all I can do is agree with you.  I understand, I registered my shock and horror already in the first battle and I lost.  I was trumped by the supposed expertise of my predecessor and the wisdom of Datair who backed him 100%.  Think about this too: Datair's software has a box you can check that keeps terminated participants from sharing in gains and losses.  Why would they have such a box, if they were not convinced that they are right?

All I can do is diligently try to pay out terminated people as soon as I can find them ,and hope and pray these 3 or 4 such profit sharing plans terminate in the near future because the sponsors are aging out and will retire or sell their businesses before too long.  All the plans that have been taken on in the last 15 years are vanilla 401(k) plans with no such oddities.

As to the participant statements and where they were delivered?  I am sure they weren't.  We produce participant statements for every account in the plan every year and send the whole batch to the employer.  He distributes the statements to the current employees and sends out the terminated employees' statements to their last known address.  However, I am sure he probably stops after getting them back as undeliverable  as addressed.

What you can do is share all of this thread with the powers to be. If the likes of some of the participants on this board don't make them think about what they are doing, find another firm to work for! ? 

[ldr]

Thank you all for the advice and suggestions.  I am investigating the interpretation of how to handle gains and losses to the terminated participants' accounts, following RatherBeGolfing's suggestion.  Once I get a response, I will be able to see what to do next.

This is a fine place to work and I am not going anywhere.  One incident is not representative of the normal flow of everyday business and there will be a way to resolve this.  You can't blame the powers that be for not listening at first.  They were relying on a combination of a departed partner's interpretation who had been widely respected as the absolute go to expert on everything, and the document provider's advice.  Weigh that against the opinion/misgivings/gut reactions of a new employee, no matter how smart or experienced that employee might be.  I am not an ERISA attorney, just an administrator who has been around the block more than a few times.  

However, with the citations you have all given, I have more arguing power now, and I will find a solution to this.

[Larry Starr]

On 1/30/2020 at 1:11 PM, ldr said:

This is a fine place to work and I am not going anywhere.  One incident is not representative of the normal flow of everyday business and there will be a way to resolve this.    

However, with the citations you have all given, I have more arguing power now, and I will find a solution to this.

My comment about finding a new place to work was a joke, and there was a smiley face at the end (which some have told me don't come through when they look at the posting, even though it was created by the system itself).  I was certainly not serious about that and hope you understand.  I'm glad to hear your firm sounds like it is willing to confirm what is the correct approach and open up the prior guidance that you received to make sure you are on sound footing. Good luck.

[Kevin C]

Back when we used Datair prototype documents, the language requiring each participant's accounts to be credited with investment returns as of each valuation date was in Section 3.1.2 of the base document.  That part of the document was titled "Accounting".  There should be similar, if not identical, language in their current document.