Escheat by Annuity Issuer for Terminated Plan

[Carol V. Calhoun]

Has anyone thought about the permissibility of escheat in the context of annuity contracts issued under a terminated defined benefit plan?

Field Assistance Bulletin No. 2025-01 currently permits escheat from a qualified plan only for benefits of less than $1,000 (among other conditions).  However, we are now dealing with a terminating defined benefit plan which is seeking an insurer to provide the annuities required in the case of a terminated plan.  Several of the companies have provisions in their contracts saying that they will escheat benefits of missing participants in accordance with state law (with no cap on the amount that may be escheated).  When questioned, they say that the insurance company is not subject to ERISA and thus need only comply with state law.

My concern here is that even if the insurer is not subject to ERISA, the plan is.  And if the plan cannot directly escheat benefits of missing participants, is the plan violating its fiduciary duties if it signs a contract to purchase an annuity that explicitly states that benefits may be escheated?

What are other plans doing in this situation?

[Peter Gulia]

After a defined-benefit pension plan’s obligation is transferred to an annuity insurer, it is the insurer’s, not the plan’s, obligation.

If the insurer and the annuity contract otherwise are prudently selected, I doubt that transferring the obligations and so allowing applications of States’ abandoned-property laws would (alone) breach a selecting fiduciary’s ERISA § 404(a) duty of loyalty or prudence.

The act of transferring the obligations presumes the obligations exit an ERISA-governed regime and enter a regime governed by other laws, including States’ laws regulating insurance and governing abandoned property.

[Carol V. Calhoun]

I guess my concern is that a plan is not otherwise permitted to take away benefits by annuitization. For example, you can't purchase an annuity contract that eliminates a form of benefits, or that uses interest or mortality assumptions less favorable than the plan had. The Department of Labor has now said that participants have the right not to have benefits escheated except under very limited circumstances. Can you eliminate that right just by annuitizing?

Extreme case: Plan terminates and permits everyone to take a lump sum. It has already taken all reasonable steps to find the missing participants. Everyone except the missing participants takes the lump sum. The plan would not at that point be permitted simply to escheat the missing participants. Can it then turn the money over to an insurer which escheats everyone the next day? That just seems a little too easy. 

[CuseFan]

I would think the insurer would have to perform their own diligent search before doing so. If this is a concern, why not turn those missing participant benefits over to PBGC? 

[Carol V. Calhoun]

17 minutes ago, CuseFan said:

I would think the insurer would have to perform their own diligent search before doing so. If this is a concern, why not turn those missing participant benefits over to PBGC? 

A couple of things: First, the PBGC's missing participants program specifically provides for turning the money over to an insurance company, not the PBGC, so long as you tell the PBGC where it is. 

As to why you wouldn't do this, my concern would be someone who becomes missing after the plan termination and before reaching normal retirement. 

And my question is, if it is not acceptable for the plan to escheat the money if it cannot find the participant after a diligent search, why would it be acceptable for the plan to turn the money over to an insurance company that announced in advance that it would escheat the money after a diligent search? 

The concern is generated by Field Assistance Bulletin No. 2025-01. It makes no sense to me that a plan can never escheat a benefit of over $1,000, no matter how long the person has been missing and no matter what diligent efforts the plan has made to find the person. But with that out there, I am worried about allowing a plan to do indirectly (by purchasing an annuity that will result in escheat) what it cannot do directly. 

[Peter Gulia]

I see the concern you’ve described, that a transfer deprives a former participant, now an annuitant, of an opportunity not to be vulnerable (when an annuity payment becomes due) to a State’s abandoned-property law.

Yet, indulging that concern might make it impossible to terminate a pension plan (absent a turnover to the PBGC).

A decision to terminate a pension plan and transfer its obligations to an annuity insurer is the plan sponsor’s nonfiduciary decision. While discretionary decisions to implement the plan termination the plan sponsor decided are burdened by fiduciary responsibility, a fiduciary selects within what’s available.

I’m guessing no insurer offers a contract that would constrain the insurer’s right to use abandoned-property laws. And a contract could not limit an insurer’s public-law duty to obey abandoned-property laws.

Fiduciary responsibility in selecting a plan-termination annuity contract is serious. But I doubt a fiduciary should be responsible because it fails to obtain a provision that’s at least practically unobtainable.

[Artie M]

I thought a terminating defined benefit plan could send actual dollars to the PBGC.  I just looked at the website and the Overview page for the Missing Participants Program (https://www.pbgc.gov/employers-practitioners/help-finding-missing-participants) states:  

I have not had to look at this in a while so perhaps the website has not been updated.  

[Carol V. Calhoun]

9 minutes ago, Artie M said:

I thought a terminating defined benefit plan could send actual dollars to the PBGC.  I just looked at the website and the Overview page for the Missing Participants Program (https://www.pbgc.gov/employers-practitioners/help-finding-missing-participants) states:  

I have not had to look at this in a while so perhaps the website has not been updated.  

Yes, they can. But that doesn't deal with participants who become missing after the annuity purchase date but before the benefit commencement date. E.g., you have a 30-year-old participant and a benefit that doesn't start until age 65.