Involuntary rollovers from terminated 401(k) plan to IRA established w

[Guest Norma Sharara]

Does anyone know of a financial institution that will accept an involuntary rollover from a terminated 401(k) plan to an IRA, where the participant does not sign anything establishing the IRA (either because the participant can't be located or doesn't respond to requests to take his/her distribution). The 401(k) plan has the individual's name, address, Social Security number, etc, but doesn't have a signature authorizing the establishment of the IRA. The IRS issued guidance in 2000 permitting the concept of involuntary rollovers to IRAs, but we are having difficulty locating a financial institution that will create an IRA without the owner's signature. Any references would be appreciated. Thanks.

[Guest James Osterhaus]

I don't know of any institution but the following may be interesting to you.

The American Society of Pension Actuaries (ASPA) provided a number of pension-related questions to James E. Holland, Chief, Actuarial Branch 1, and Richard J. Wickersham, Chief, Projects Branch 3, both of the IRS’s National Office in Washington, D.C. Wickersham and Holland provided the answers to ASPA for presentation at the ASPA’s 1997 Pension Actuaries and Consultants Conference in Washington, D.C., on October 9, 1997.

ASPA: Lost participant issue for a terminated plan. If an escrow account is set up for a lost participant, can a transfer between the plan and an escrow/IRA account occur without participant or spousal consents.

IRS: We believe that you must do what is reasonable (unless subject to the PBGC specific rules for defined benefit plans). Due diligence is what we would expect, but we do not believe the Service would challenge a reasonable approach. We recognize that there is a need to make the terminated plan go away and that this may be the only approach available.

Reasonable efforts to locate a missing participant include mailing a notice to the last known address, searching internal and union records, publishing a general notice, and contacting the IRS or the Social Security Administration to request assistance in notifying the missing participant of the vested interest. If these efforts fail to locate the participant, the trustee can set up a special bank account to hold the money for the missing participant plans. However, the terms of the plan would have to allow such a distribution. Additionally, the participant would have to have an unconditional right to withdraw funds from the account. Finally, to the extent the transfer to the bank account constitutes a distribution, the assets of the bank account are not subject to ERISA trust requirements (Rev. Proc. 94-22 , I.R.B. 1994-9).

I dealt with a plan a few years ago that had 500 lost participants with account balances of less than $200. We cashed all of them out and withheld 100% for taxes. We then forward the withheld amounts (which will be the full distribution) to the IRS. When the participants filed their 1040s, IRS informed them that they had underreported income, and that they underreported the withheld amounts, as well. The participants got the money due them, and your client’s plan got rid of the lost participants. While there is no statutory provision for this technique, there is not a prohibition against it either.

There is a firm in California that specializes in locating lost participants. The contact information is listed below.

Pension Benefit Information

Paula LeRoy 415-435-9611

inquiry@pbinfo.com

[Earl]

I asked Schwab if they would set up such IRAs and was told yes. I have not done it with them, however. All my lost people have been small $ and we have used the 100% withholding technique.