Restoration of Forfeited Accrued Benefits -- Do Earnings Need to Be Restored Too?

Plan X, is a profit-sharing plan which provides that if a participant cannot be located after a diligent search has been made, his/her account balance shall be forfeited, subject to restoration upon the making of a claim. If a participant's beneficiary makes a claim for the participant's account balance, does the plan need to restore earnings that would have been credited to the account?

This is a questions whose answers has to start with:

What does the plan say? 

Does it stay restore the person or restore with earnings? 

For rocknrolls2’s question, merely reading the plan’s governing documents might be too facile. If rocknrolls2’s client’s document reads like many I’ve seen, it doesn’t unambiguously answer this question.

In my view, the statutes don’t unambiguously answer this question about what a plan must provide to state provisions not contrary to ERISA’s part 2, or ought to provide to get treatment as a tax-qualified plan. ERISA § 203 [29 U.S.C. § 1053]; I.R.C. (26 U.S.C.) § 411 [hyperlinks below].

And the Treasury’s interpretation doesn’t unambiguously answer either question. 26 C.F.R. § 1.411(a)-4(b)(6) [hyperlink below].

When, decades ago, I looked into this question, I found no useful answer.

BenefitsLink mavens, is there some IRS guidance I didn’t find?

Or, did the law or the IRS’s interpretation change after I looked?

ERISA § 203, 29 U.S.C. § 1053 http://uscode.house.gov/view.xhtml?hl=false&edition=prelim&req=granuleid%3AUSC-prelim-title29-section1053&f=treesort&num=0&saved=%7CKHRpdGxlOjI5IHNlY3Rpb246MTA1MiBlZGl0aW9uOnByZWxpbSkgT1IgKGdyYW51bGVpZDpVU0MtcHJlbGltLXRpdGxlMjktc2VjdGlvbjEwNTIp%7CdHJlZXNvcnQ%3D%7C%7C0%7Cfalse%7Cprelim;

I.R.C. (26 U.S.C.) § 411 http://uscode.house.gov/view.xhtml?req=(title:26%20section:411%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section411)&f=treesort&edition=prelim&num=0&jumpTo=true;

26 C.F.R. § 1.411(a)-4(b)(6) https://www.ecfr.gov/current/title-26/part-1/section-1.411(a)-4#p-1.411(a)-4(b)(6).

6 hours ago, Peter Gulia said:

For rocknrolls2’s question, merely reading the plan’s governing documents might be too facile. If rocknrolls2’s client’s document reads like many I’ve seen, it doesn’t unambiguously answer this question.

 

I fully agree the document might not do it on its own.  That is why I said "start" there.  I do find some plans do answer this question.   

I find most do answer the question of earnings if the person pays back their distribution and need their forfeitures need to be restored under that fact pattern.  I would at least consider, but not make it the only factor,  how it treats forfeitures in that situation as part of my decision. 

After that if you still don't have a good answer I would see if the sponsor is willing to get their opinion.  

In the end I have seen plenty of plans to give earnings in this situation but I haven't found a clear rule from the IRS or DOL.  So I go through the process that starts with the document.   

Thanks for all of the very helpful answers. My practice and experience has always dictated that I check the plan document first. In this case, the document did not address whether or not earnings were to be credited. I was reviewing a draft amendment which proposed to state that earnings were not to be credited. I know that with the EPCRS program (I know that this is not a qualification issue in this context), the IRS generally requires amounts to be restored with earnings. I just wanted to get a second set of eyes around the issue of whether it was appropriate for a draft plan amendment to state that earnings would not be credited.

If you’re reviewing a draft amendment, consider too distinctions between whether the provision commands or permits a forfeiture of an unlocated participant’s account.

Some plan sponsors like to provide discretion so the plan’s administrator has choices.

But some plan sponsors, increasingly, prefer to deny or negate discretion—so the fiduciary always has a uniform course of action. That might help avoid exposure to a claim that the fiduciary didn’t exercise its discretion with the right thinking.

When a fiduciary has discretion, the fiduciary must exercise that discretion loyally, prudently, and impartially according to ERISA’s or other fiduciary law’s duties and standard of care.

When a fiduciary lacks discretion, it’s protected in doing what the plan’s governing documents provide (except to the extent that a written provision is contrary to ERISA’s title I).

This is not advice to anyone.

I have seen plan provisions that explicitly say that if the benefit for a lost participant is forfeited and the participant subsequently is found, then the forfeited amount is reinstated and not adjusted for earnings.  This language usually appears today in several of the individually designed plans and in Basic Plan Documents associated with pre-approved plans.  The DOL does not think the benefit could be forfeited in the first place, so they expect that if a plan did forfeit the benefit, then the plan should reinstate the forfeited amount and make the participant whole (i.e., adjust for earnings).  I have spoken with both agencies and this was the feedback I received, but each agency said it was not the responsibility of the other agency and they would have to confirm it in writing (neither did).

FWIW - We recently forfeited the accounts of missing participants (over 20+ years via various M&A transactions) where the plan sponsor had very good reason to believe the SSNs provided for these missing participants were not valid (after years of due diligence trying to locate them).  In which case it would be even more difficult to utilize the cash-out features and/or establish IRAs (or even mail out checks or via escheatment) given the lack of any basic information required to establish such accounts.  After some informal discussions with the DOL, they recognized this situation was not addressed and suggested that the forfeiture route was an option; provided however, that if any of the missing participants were ever located, their account plus earnings had to be restored.  Oh, and they preferred we only forfeited accounts that were less than $1,000. 

 

Paul I alludes to an important point: An IRS opinion or determination letter does not provide an assurance that the written plan comports with an ERISA title I provision, even regarding an ERISA section for which the 1978 Reorganization Plan transferred interpretive authority to the Secretary of the Treasury.

PensionPete, thank you for your helpful information about some EBSA workers’ perceptions.

Did the EBSA people say anything about how a plan’s administrator would estimate an after-forfeiture investment gain of a forfeiture amount that is not invested? Or did your client assume that a claim is so unlikely that one need not prepare for how to administer a restored forfeiture?

If there is a later claim, what evidence would a prudent plan administrator want to satisfy itself that the claimant is the same person as the participant for whom the account was accumulated?

About whether an forfeiture should be only for small balances—whether < $1,000, < $7,000, or under some other some other measure, what if the unlocatable-participant has (following the birthdate in the plan’s records) reached age 75 and also the plan’s required beginning date? What if the plan’s only form of distribution is a single-sum payment of the whole account? May the plan forfeit a $70,000 account? Or is it better to leave the unlocated participant’s balance, undistributed and unforfeited, still in the plan?

The EBSA loves the DOL Online Calculator.  I would bet they would say that is an approved approach for calculating earnings for a reinstated forfeiture.

One of the big issues with handling missing participants is none of the agencies want to let the plan fiduciaries off the hook for trying to find a missing participant, no matter how hard the fiduciaries try to find the participant.  Several times when the EBSA has been asked when the plan can stop searching, the answer effectively has been "Never".

With that in mind, the only way the fiduciaries get off the hook is when the plan terminates, they do one last search, and then deliver transfer the funds and any available demographic information to the PBGC under their program for terminating defined contribution plans. 

It is interesting to note that the PBGC will not credit any earnings in the event they locate the participant.

If you are a fiduciary and have a handful of missing participants, until you terminate the plan, life is not fair.