Options for Missing Beneficiary

[EBECatty]

Would appreciate any thoughts on the following.

An ongoing governmental defined benefit plan provides a small death benefit (under $5,000) upon the participant's death in various scenarios. There is an order of payment (spouse; named beneficiary; children; estate). However, in some cases, the sponsor is (1) unable to contact a beneficiary, but believes they have the beneficiary's correct information, (2) is unable to identify the correct beneficiary at all, or (3) is unable to obtain a name, address, valid SSN, etc. for someone they believe may the correct beneficiary.

Assume no relevant state law, no representative has qualified on the estate, and that the sponsor has conducted a diligent and reasonable search under the circumstances.

Under scenario (1), I believe they could forfeit the death benefit subject to reinstatement, force an IRA rollover, or possibly escheat. 

What are valid options under scenarios (2) and (3)? My understanding is a forced IRA rollover would require establishing an IRA in the beneficiary's name, which may not be known (or may be suspected but an SSN not known). Same with escheating, which would require withholding and 1099-R reporting.

Does this leave forfeiture and reinstatement as the only alternative as it requires no taxation, withholding, or reporting? 

[Peter Gulia]

With the advice of their lawyers, actuaries, and certified public accountants, a governmental plan’s fiduciaries might consider these (among other) steps:

1)        If a claimant asks for the death benefit, follow the plan’s claims procedure and decide whether the claim is correct and complete.

2)        If there is no claim, evaluate whether the plan provides an involuntary distribution, whether to meet Internal Revenue Code § 401(a)(9) or otherwise.

3)        If no involuntary distribution is provided, wait until the administrator receives a claim.

4)        If an involuntary distribution is provided, use prudent steps to identify the rightful beneficiary and to find the beneficiary.

(If the involuntary distribution is needed to meet IRC § 401(a)(9), search enough that the Internal Revenue Manual instructs an Employee Plans examiner not to challenge the plan as failing to meet § 401(a)(9).)

5)        If those steps do not result in identifying and finding the beneficiary, pay nothing to anyone and continue the benefit.

If a defined-benefit pension plan does not have individual accounts, is there a need to account for a forfeiture?

Might the fiduciaries maintain the plan’s assets, and pay an outstanding death benefit when a rightful beneficiary submits a proper claim?

Some (not the only) cautions:  For a governmental plan, ERISA does not preempt a State’s abandoned-property law.  Under such a law, a pension plan’s death benefit might not be abandoned until the beneficiary knows that he or she is a beneficiary and, after knowing, ignores the benefit.  However, under some States’ laws, measurement of an abandonment period might begin when a benefit became distributable, which might include the portion of a benefit that became distributable involuntarily.

[EBECatty]

Thank you, Peter. I appreciate your thoughtful response.

I think I am more or less starting at your step 5, i.e., no one can be located with enough precision to make a distribution. I agree there is no particular reason to separately account for a forfeiture, and that the sponsor could simply wait until a claim is made. This has become the issue; they want to find some way to bring an end to the process to avoid trying to determine claims from many years ago.  

The state-law abandonment period does not specifically depend on the claimant's knowledge. It begins to run when the amount is distributable from the plan. It also appears to allow a remittance without a federal tax ID number of the property's owner, but presumably you would need some identifying information. 

However, in either case, my understanding is a remittance to the state's unclaimed property program is considered a taxable distribution subject to withholding and 1099-R reporting. I would think this would need to be reported to the beneficiary, whose information the sponsor does not have. 

If the sponsor does not have valid beneficiary information, even if the amount is accepted by the state unclaimed property program, is there any way to report the distribution to the IRS? 

[Peter Gulia]

Thank you for your kind words.

Not knowing which State’s law (or States’ laws) might govern your situation, my observations about abandoned-property law recognized possible and actual differences in the 50+ laws.

If a particular law’s abandonment period begins when something is “distributable”, consider courts’ and agencies’ interpretations about what distributable means.  Some laws have been interpreted to treat an involuntary distribution as distributable from the required beginning date or other plan-provided date.  But those laws also have been interpreted to treat a benefit not subject to an involuntary distribution as distributable when the claim for the benefit is approved and payable or otherwise distributable.  Under such an interpretation, a would-be beneficiary’s knowledge that he or she has a benefit might be relevant.

Legal research on such a point can be difficult because not all interpretations are in courts’ decisions; some might be in an attorney general’s, treasurer’s, comptroller general’s, or other official’s opinion.  Those opinions might not be officially published.  And even if officially or commercially published, Westlaw, LexisNexis, Bloomberg, or another publisher might not have editorially linked an opinion to the statute it interprets.

Further, an attorney general’s or other lawyer’s interpretation might be unavailable, even under a freedom-of-information law, because the only extant official interpretation was given as privileged legal advice.

Even if your client “want[s] to find some way to bring an end to” an unclaimed death benefit, a fiduciary might be reluctant to treat a benefit as abandoned until applicable law commands that result.  Further, a governmental plan’s fiduciary might consider impairment-of-contract and due-process issues under U.S. and State constitutions.

[EBECatty]

Appreciate the nuance, and I will make sure to check for those items.

Do you (or does anyone else) have thoughts on how this may be reported to the IRS where there is not an identifiable beneficiary to whom the 1099-R would be issued?

I would be hesitant to distribute the death benefit from the plan in a taxable distribution without the means to report.  

[Peter Gulia]

The IRS’s instructions that are general to the many kinds of 1099 reports suggest that a payer may report without a taxpayer identification number if the payer made prudent efforts to obtain, but still lacks, the beneficiary’s number.  However, check the plan administrator’s or its service provider’s software.  In my experience, the software often is designed not to process a distribution if the records lack the distributee’s TIN.

I concur with your reluctance to pay or provide an involuntary distribution of a death benefit when the pension plan lacks enough information to tax-report it (at least to the IRS).  A lack of information suggests the plan’s administrator might not have correctly decided which person is the rightful beneficiary, or that the rightful beneficiary has not abandoned (and should not be treated as having abandoned) the benefit (unless it’s clear that applicable law commands turning over the rights to the abandoned-property administrator).