Deceased employee with over $5000 balance. No bene, no kin to be found

[Rocha]

Anyone have an answer to this question? Or is the sponsor stuck with this deceased participant balance indefinitely? Based on balance, he cant be forced out ( over $7000 as well).  I don't think transferring to states unclaimed property division is answer either. Any insight is appeciated!

 

[Lou S.]

Why isn't state unclaimed property the answer?

Is Plan forfeiture an option under the document with restoration if kin can be found?

Is a check payable to the estate an option? That would probably require someone to open an estate.

[Bri]

Plus, death benefits have mandatory timing rules to the payout, so in some way the plan will have to force out the funds.

[Paul I]

Transferring the balance to states unclaimed property division reminds me of the last scene in Raiders of the Lost Ark.  The balance will live forever in a government warehouse never to be seen again.

Unfortunately, the DOL and IRS are not on the same page with how to handle the case where a plan truly has made extraordinary efforts to find a beneficiary and the search has not been successful.  The IRS says the plan can subject the balance to a "contingent forfeiture" which is kind of like a forfeiture of a nonvested amount, but the plan must retain all of the information it has about the participant (and about the search effort).  If the plan gets a legitimate claim for the benefit, then the plan has to restore the account and pay the benefit. 

The DOL, when asked, most often rarely otherwise, says the plan cannot forfeit the balance, and the plan needs to keep searching.  Some DOL investigators are not even aware of the IRS contingent forfeiture provision.

The PBGC will accept balances from defined contribution plans for lost participants, but will do so only in the event of the termination of the plan and if they get all of these lost participants.  The PBGC requires that the terminating plan give them cash equal to the amount of the balances and give them proof that a good-faith effort was made to locate the individuals.  (Does the PBGC own the warehouse where the ark is stored?)

So, where does that leave a defined contribution plan?  Unless and until the agencies can agree on a common solution, the plan can consider periodically including these accounts in a search while keeping the account open (i.e., cash available) along with the search documentation until forever when the plan terminates, and at that point in time dumping this all on the PBGC.  This seems ridiculous, but it pretty much covers what each agency says should be done.

[david rigby]

19 minutes ago, Paul I said:

Some DOL investigators are not even aware of the IRS contingent forfeiture provision.

Um, yes, they are aware, even if they don't admit it.

[Peter Gulia]

About whether one must pay or deliver an involuntary distribution to meet § 401(a)(9):

The Internal Revenue Service instructs Employee Plans examiners not to treat a plan as failing to meet § 401(a)(9) if the plan’s administrator has not found the beneficiary after a search that includes three steps the Internal Revenue Manual specifies.

Internal Revenue Manual 4.71.1.4(15)(d) (Examination Objectives and Development of Issues) (Feb. 25, 2022) https://www.irs.gov/irm/part4/irm_04-071-001.

That guidance tells an examiner to excuse what otherwise might be a § 401(a)(9) failure if the beneficiary is known but not found.

A logical inference is that the IRS ought to excuse the absence of a § 401(a)(9) minimum distribution if the participant named no beneficiary (or all named are deceased or do not exist) and the default beneficiary is not yet known after the plan’s administrator made prudent efforts to find a person who might be the beneficiary under the plan’s default-beneficiary provision.

[Rocha]

Thank you all for the commentary.

 

Best

[EPCRSGuru]

We were audited by the DOL a few years ago.  Our document contains the IRS contingent forfeiture language but the DOL forced us to restore ALL those forfeitures to the plan.  The people we forfeited were deceased for many years, had minimal service (we had immediate entry and vesting pre-1995), had returned to their home countries after their brief employment with us, and survivors were unlocatable after contacting their places of employment, googling their obituaries, etc.  So now we have these funds in our plan being slowly depleted through a quarterly administration fee--after a few decades I guess the problem will solve itself.  

I was advised that ERISA preempts the state escheatment laws although that would not have helped in our case.

For US residents, PBI (for a fee) has a relative search.  You can enter demographic data (including SSN) and a list of relatives will be provided.  

[rocknrolls2]

I have a couple of points that were not raised by the other commenters.

(1) Regarding the cash-out threshold, there is a regulatory exception to that requirement in the case of the participant's death. See Reg. Section 1.411(a)-11(c)(5). One option is to have the plan force out the balance and do an automatic rollover to an IRA.

(2) The SECURE 2.0 Act provides for a retirement savings lost and found. Although it is too early to tell, given the lack of regulatory guidance, it is hoped that plans will be able to pay over those amounts to help beneficiaries receive the remaining account balances.

(3) There is an argument, at least on the retirement plan side, that state unclaimed property laws are preempted by ERISA. However, nothing precludes the plan from voluntarily sending money to a state unclaimed property administrator. As far as the "warehouse scenario," many states participate in websites such as unclaimed money.com, which includes bank account balances paid over pursuant to state unclaimed property laws.

[fmsinc]

Many plans have a list of beneficiaries in none is named, such as: 

(i) Surviving spouse,

(ii) Children in equal shares,

(iii) Surviving parents in equal shares, 

(iv)  Estate.

If the plan does not such a list then the money goes to the estate of the decedent and the probate court will determine who gets it.  

This is not an uncommon event.  

It might be prudent to check and see if the employee was divorced and whether or not a QDRO was issued, or whether the Judgment of Divorce or the Judgment of Divorce incorporation a Marital Settlement Agreement exists. Under the Pension Protection Act of 2006 a post mortem QDRO can be entered.

David

[Peter Gulia]

Rocha’s originating post—“no kin to be found”—suggests the plan’s administrator might have already pursued some effort to find someone who might fit the plan’s default-beneficiary provision.

It might be impractical to pay or deliver any distribution, even an involuntary distribution, if the identity of the distributee is yet unknown.

[Luke Bailey]

3 hours ago, fmsinc said:

Estate.

If the plan does not such a list then the money goes to the estate of the decedent and the probate court will determine who gets it.  

You can usually find someone who is winding up the decedent's affairs, even if there is no will or formal estate, e.g. under state's small estate provisions.