Non Distributed Benefits for FICA Alternative 401(a)qualified profit

[Guest Ralph Amadio]

The previous third party plan administrator of a governmental plan qualified under 401(a) as a discretionary profit sharing plan and as a alternative to Social Security under 3121(B)(7)(F)has not distributed benefits to terminated or promoted employees for several years. Will the fact that several thousand former employees have not received their benefits, and are now likely non-locatable effect the plan's qualification under either circumstance?

[Carol V. Calhoun]

In theory, IRS could argue that the plan was disqualified, based either on (a) a failure of the plan to follow the terms of the plan document, or (B) if any of the participants are subject to the minimum distribution requirements, a failure to comply with those requirements.

However, in practice (at least so far) the IRS has been concerned about getting governmental 401(a) plans to correct errors, but has not sought to disqualify them based on past conduct. Thus, the primary concern should be correcting the errors as quickly as possible.

The first step would be to try to locate the missing participants, and get them their benefits. IRS has a locator service that you can use for this purpose. There are also various commercial locators.

To the extent that you are unable to locate missing participants after due diligence, you may (depending on state law) be able to forfeit their benefits, subject to reinstatement if and when they show up. Treas. Reg. § 1.411(a)-4(B)(6) permits this even for private plans, and there should be even less question under federal law with respect to governmental plans, which are not even subject to Code section 411.