Does amount of distribution affect how you handle a missing participan

[John A]

I'm aware that there have been several threads on missing participants. However, I have looked through several and have not found what I am looking for.

A plan sponsor has one participant left to pay to complete a plan termination. The participant is due less than $25 and the plan sponsor has gone through has exhausted the means of trying to locate the participant.

In this situation, what should the plan sponsor do (try to find a bank that will take the assets)?

Does the amount of the distribution to the missing particiapnt affect what you would tell a plan sponsor to do?

[pmacduff]

I think with this diminimus amount, I would forward 100% of the distribution to the IRS as Federal Withholding and report 100% as distributed and Federal Tax on the form 1099-R. I know that there are those who disagree with this method, however in this instance when there is a plan termination to be completed, it seems to be the cleanest way. We have sent 100% of diminimus (under $100) to the IRS in this manner and have never had a problem.

[Alan Simpson]

Does the document allow you to take TPA fees from the plan assets. If so, charging a distribution fee may work for you. While the DOL position is that you should not charge a participant a fee for taking a distribution, reasonable fees can be taken from the plan for making distributions. In this case the only participant left is the one getting the distribution, but the fee is being charged against the plan assets, not the participant. (I know that this is splitting hairs).

[david rigby]

I would not do the second recommendation, but the first might be useful. I guess we are assuming that this is a DC plan, since there is a program to handle this for DB plans.

[RCK]

The "apply 100% withholding and let the IRS track them down" approach is really clever. There is of course no authorization anywhere for doing that.

If nothing else works, you can do a spinoff/merger and move the assets to an existing plan. This has become our solution of choice--I'm a plan sponsor with a lot of activity, and we've done it twice in the last couple of months.

[John A]

pax, you are correct about it being a DC plan. The PBGC has made handling this situation in a DB plan much better.

RCK, your solution works in some instances, but carries the risk of "tainting" the existing plan with any problems that existed in the terminated plan.

Has anyone treated the money as abandoned property?

[RCK]

John A is correct, but Rev Proc 2001-17 does say that in the case of Audit CAP at least, that the IRS will calculate penalties based only on the predecessor plan that generated the problem. This has given us enough comfort to pursue this.

RCK

[KJohnson]

John A

If you are referring to escheat, the IRS seems not to object to this notion--1.411(a)-4(B)(6)--"...In addition a benefit which is lost by reason of escheat under applicable state law is not treated as a forfeiture"

However, I believe that DOL has stated its views that state escheat laws are pre-empted.

I've always wondered what would be the result if you incorporated the state's escheat law by reference into the plan. You would then be following your plan, not an arguably preempted state law and DOL would have a hard time on the forfeiture issue in light of the IRS reg.

I've also seen people suggest savings bonds in the name of the Participant (and have seen this provision in a plan document). With a savings bond you don't have to worry about finding a bank and don't have to worry about bank fees eating up the distribution amount within the first few months that the account is open. Of course the question is, where do you keep the savings bond in the event the particpant "shows up".

[david rigby]

You also have a potential problem that the former employee is deceased, or will be deceased at the time the beneficiary "shows up". By putting the benefit in the form of an IRA, savings bond, etc. then someone will have to transfer ownership to the beneficiary.