PenChecks Q&A

A Default IRA is a concept introduced by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. EGTRRA authorized plan sponsors who maintain an ongoing qualified plan to force a distribution of a non-responsive terminated employee to an IRA so long as the account balance or accrued benefit under the plan is not greater than $5,000 and the plan document permitted doing so. These participants simply refuse to respond to a plan’s request to make a benefit election. PenChecks was at the forefront of the Default IRA initiative, assisted in introducing the concept to the pension industry and helped develop the ensuing Department of Labor Regulations.

A Missing Participant IRA (Auto Rollover) is the transfer of a terminated participant’s account balance from a qualified plan into an IRA because the participant is either non-responsive to requests to take their account balance out of the plan or is missing (i.e. returned or undeliverable mail). The Missing Participant IRA is similar to a Default IRA in that it is a transfer of a participant’s account balance to an IRA due to a non-responsive participant. The difference from a Default IRA is that there is no $5,000 dollar limit for the Missing Participant IRA AND the retirement plan must be terminating. These terminated participants could be non-responsive, but typically they truly are missing or unreacheable due to outdated plan records. The Employee Retirement Income Security Act (ERISA) of 1974 first introduced the idea of a Missing Participant IRA or to establish a separate interest bearing account for the benefit of a missing or unreachable participant when a plan terminates; however, until the introduction of the Default IRA under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, 2001) and the regulations that followed, it was rare to that a banking institution would accept a deposit without an original signature.

There are several reasons why a Plan Sponsor and/or Plan Trustee(s) should consider establishing a Default IRA (Auto Rollover) on behalf of a non-responsive participant:

• Unnecessary Fiduciary Exposure. If a terminated participant leaves their account balance in the retirement plan, the Plan Trustee(s) are charged with a responsibility to manage and oversee the terminated participant’s account balance. So long as the Plan Sponsor/ Trustee provides proper notice to the participants (DOL FAB 2004-02) and the IRA is established according to DOL Safe Harbor Rules (DOL Reg 2550.404a-2), a Trustee’s Fiduciary Exposure ends when the IRA is established.
• Unnecessary Cost. If a terminated participant leaves their account balance in the retirement plan, you probably have additional expenses for the administration of that account. Furthermore, a plan with 100 or more participants will need an independent audit that will be a significant cost to the Plan Sponsor. Lastly, the fees associated with establishing a Default IRA can be assessed to the non-responsive participant account so long as it is properly disclosed.
• Unnecessary Hassle. Have you ever tried contacting a terminated participant 2, 5, or 10 years after they have been terminated? What about trying to contact terminated participants from a plan merger, acquisition, or termination where participants have been terminated for several years? Most likely the contact information is invalid and then the Plan Sponsor bears the responsibility and expense of attempting to locate the participants.
• Unnecessary Taxable Event. The best option in the case of an unresponsive terminated participant with a small account balance is to establish a Default IRA. The main reason is that the funds remain in a tax deferred environment. Alternatives of cutting a lump sum check, withholding the taxes, or escheating the funds are all taxable events and may cause tax penalties and further problems down the road especially when the check is never cashed.

Following the practice of establishing a Default IRA according to Safe Harbor requirements for unresponsive terminated participants will avoid unnecessary plan sponsor expenses, hassle and fiduciary exposure as well as protect the terminated participant account balance from a taxable event.

A Missing Participant (Auto Rollover) IRA is established when a plan is terminating and all plan assets must be distributed out of the plan and terminated participants cannot be located. Although other options may be available in this situation, establishing a Missing Participant IRA is really the most beneficial to Plan Administrators, Sponsors, Trustees, and Participants for the following reasons:

• Eliminate Fiduciary Exposure. Plan Trustees are stuck between a rock and a hard place when a plan is terminating and participants are either non-responsive or unlocatable because their fiduciary obligation to oversee a participant’s account continues regardless of the responsiveness of the participants. So long as the Plan Sponsor/ Trustee attempt to locate the participants (DOL FAB 2004-02) and the Missing Participant IRA is established according to DOL Safe Harbor Rules, a Trustee’s Fiduciary Exposure ends when the IRA is established.
• Reduce Administrative Expenses. So long as the costs to establish, administer, and liquidate the IRA are reasonable and the fees are properly disclosed to the participants, such fees may be assessed to the participant’s account rather than paid by the Plan Sponsor.
• Unnecessary Taxable Event. The best option when a plan terminates and participants are unlocatable or unresponsive is to establish a Missing Participant IRA. The main reason is that the funds remain in a tax deferred environment. Alternatives of cutting a lump sum check, withholding the taxes, or escheating the funds are all taxable events and may cause the participant unwanted tax penalties and further problems down the road especially when the check is never cashed.

PenChecks has the expertise, knowledge, and technology to establish Missing Participant IRAs in a simple, effective, and efficient manner. We are the experts and pioneered the Auto Rollover concept so we have developed a process that simplifies the complicated plan termination process and is beneficial to Plan Providers, Administrators, Sponsors, and Participants. PenChecks Missing Participant IRA (Auto Rollover) program:

• Is Safe Harbor Compliant – funds are invested in
• Follows Department of Labor Regulations
• Reduces unnecessary Plan Sponsor expenses
• Limits Plan Trustee fiduciary exposure
• Makes effective attempts to locate non-responsive / missing participants
• Registers the Missing Participant with the National Registry of Unclaimed Retirement Benefits
• Protects the qualified status of non-responsive terminated participants’ retirement account
• Services the non-responsive participant upon contacting PenChecks to collect their account balance

To read more about PenChecks Missing Participant (Auto Rollover) program or establish a Missing Participant IRA with PenChecks click here.

A Default/Missing Participant IRA is beneficial to Plan Providers, Administrators, Sponsors, Trustees, and Participants because it limits a Plan Trustee’s Fiduciary Exposure, reduces Plan Sponsor’s expenses/overhead in sponsoring a plan, and preserves a participant’s account balance in a tax deferred status. In order to properly establish a Default/Missing Participant IRA, the following regulations must be followed:

Participant Notification Requirements
Prior to establishing a Default/Missing Participant IRA, an exhaustive effort to make contact and/or locate the participant is necessary. These required steps are set forth in Department of Labor (DOL) Field Assistance Bulletin (FAB) 2004-02:

• Check all Plan Sponsor records for more current information (Health Insurance Plan Records)
• Notify Participant via certified mail
• Request and Use the IRS or Social Security Administration Letter Forwarding Service
• Request and use a commercial locator search
• Request the assistance of a designated beneficiary to locate or notify the participant

Once the Plan Sponsor has proof that the participant has been notified (i.e. certified mail) or proof that an exhaustive effort has been made to notify the participant, a Default/Missing Participant IRA can be established. Proper participant notification is one of the requirements that must be followed to establish a Default/Missing participant IRA and eliminate a Plan Trustee’s fiduciary exposure while cutting plan administration expenses. PenChecks Premier IRA Fiduciary Service complies with DOL Participant Notification Requirements.

Safe Harbor Compliant
Eliminating a Plan Trustee’s fiduciary exposure is one of the major benefits in establishing a Default/Missing Participant IRA; however, if the IRA is not established according to Department of Labor Safe Harbor Requirements (Reg 2550.404a-2, Default IRAs & 2550.404a-3, Terminated Plans), then Plan Trustee(s) remain exposed to consequences that may result from the selection of an IRA provider and the investment of such funds. The requirements for both regulations are fairly similar and are summarized below:

1. The participant’s account balance cannot exceed $5,000 (no $ limit for Terminating Plans)
2. The mandatory distribution is to an individual retirement plan (IRA)
3. The fiduciary enters into a written agreement with the IRA provider that requires the following:
   • IRA funds shall be invested in a product designed to preserve principal (i.e. savings, money market, CD) and shall be offered by a state or federally regulated financial institution
   • IRA funds shall earn a reasonable rate of return
   • All IRA fees and expenses (i.e. set-up, maintenance, investment, termination and surrender charges) shall not exceed IRA Provider fees and expenses for comparable services.
   • The participant shall have the right to enforce the terms of the written agreement with the IRA Provider.
4. Participants should be informed/furnished with a summary plan description or modification that describes the plan’s auto rollover process including the funds will be invested to preserve principle, will bear a reasonable rate of return, IRA Provider contact information, and disclosure of all applicable fees.

DOL Regulation 2550.404a-3, “Safe Harbor for Distributions from Terminated Individual Account Plans” A fiduciary will qualify for the safe harbor if:

1. Distribution is made to an IRA or Inherited IRA
2. The fiduciary enters into a written agreement with the IRA provider that requires the following:
   • IRA funds shall be invested in a product designed to preserve principal (i.e. savings, money market, CD) and shall be offered by a state or federally regulated financial institution
   • IRA funds shall earn a reasonable rate of return
   • All IRA fees and expenses (i.e. set-up, maintenance, investment, termination and surrender charges) shall not exceed IRA Provider fees and expenses for comparable services.
   • The participant shall have the right to enforce the terms of the written agreement with the IRA Provider.
3. Proper notice is provided to plan participants (according to FAB 2004-02) which includes a statement explaining that if the participant fails to make a benefit election within 30 days from the receipt of the notice a Default/Missing Participant IRA would be established, disclosure of applicable fees to the participant, explanation that IRA investment would preserve principal and provide a reasonable rate of return, IRA Provider contact info to use if/when an IRA is established.

The DOL Regulations 2550.404a-2 and 2550.404a-3 set forth the safe harbor conditions relating to satisfying fiduciary duties when an automatic rollover of a mandatory distribution is made from a pension plan. If the conditions below are met, the current Fiduciary will satisfy his or her duties with respect to both the selection of an IRA provider and the investment of the funds rolled over. These conditions are: (1) Ongoing plans limit of Mandatory Distribution Automatic Rollover is $5,000; No limit for terminating plans. (2) The Fiduciary enters into a written agreement with the IRA provider that provides the following: a. Rolled over funds shall be invested in a product designed to preserve principal and provide a reasonable rate of return. b. The investment product selected for the rolled over funds shall seek to maintain, over the term of the investment, the dollar value that is equal to the amount invested in the product by the IRA. c. The investment product selected for the rolled over funds shall be offered by a state or federally regulated financial institution. d. All fees and expenses attendant to an IRA shall not exceed the fees and expenses normally charged by the Custodian. e. The participant on whose behalf the fiduciary makes an automatic rollover shall have the right to enforce the terms of the contractual agreement establishing the IRA. (3) Plan Participants have been furnished a summary plan description that describes the plan’s automatic rollover provisions. (4) The selection of an IRA and investments would not result in a prohibited transaction. The selection of the custodian bank is determined by PenChecks, Inc. Said custodian must meet and maintain very specific financial standards to qualify as a Custodian Bank for this program. The administrator of these unique IRAs is a third party administration firm, called, Alpha and Omega Financial Management Consultants Inc, who is under contract to PenChecks and Custodian Bank. Their responsibility as it relates to these IRAs is the following: production and mailing of year-end 5498 statements, adjudicating and processing located missing participant benefit election forms, providing periodic individual statements, and general accounting or tracking of account balances. As the administrator of the program, Alpha and Omega does not make any investment decisions relating to this program. PenChecks and Alpha and Omega have some common ownership.

The Default / Missing Participant program follows the safe harbor guidelines prescribed by Labor Reg 2550.404a-2 and 3. One of the safe harbor requirements is that the funds rolled over must not be subject to risk to principal; therefore, the funds remain invested in a no-risk savings account. A reasonable rate of return varies depending on a variety of factors. We currently take the average return for a savings account from the 4 largest banks in California and then adding 40 basis points. This rate of return is calculated every quarter.

No official approval is required; however, in order to maintain the safe harbor guidelines, the Custodian and IRA investments must comply with the DOL regulations. PenChecks oversees that the Custodian and investments follow the safe harbor guidelines.

The contractual assurance, between PenChecks and the Plan Sponsor, is sufficient to satisfy the DOL requirement that the Plan Sponsor has taken the proper steps to comply with its fiduciary duty as it relates to mandatory automatic rollovers.

PenChecks, Inc. – PenChecks was formed by fourteen well-established pension administration firms, with an average of over forty years worth of experience per firm. Their mission is to alleviate the burden of complex and time-consuming qualified plan distribution requirements for their clients while delivering premiere plan distribution services in a highly cost-effective and efficient manner. Pooled resources and a strict focus on distribution services allow PenChecks, Inc. to provide exceptional expertise in participant distributions and other related distribution services.

Custodial Banks – PenChecks has partnered with regional banks to serve as Custodian for the Missing Participant & Default IRA Rollover Programs. Plan Sponsors / Trustees agree that all funds submitted will be deposited into either an FDIC insured money market account or certificate of deposit for the benefit of the missing/default participant and/or their beneficiary.

Alpha & Omega Financial Management Consultants, Inc. - Alpha & Omega was founded in 1975. It is a Regional Employee Benefit Consulting firm, specializing in trust and IRA administration. In addition, it is an Investment Advisory firm.

PenChecks, Inc: Serves as the exclusive marketing agent for the Missing Participant & Default IRA Rollover Programs. PenChecks, Inc. also acts as the conduit between the Custodial Banks, the plan sponsor / trustee(s) and Alpha & Omega. PenChecks, Inc. assists plan sponsors and trustees by completing the necessary participant notification requirements and to establish a Missing Participant/Default IRA Rollover account at participating Regional Banks and by rolling these funds over to the newly created IRA.

Custodial Banks: Serve as the custodians for the Missing Participant & Default IRA Rollover Programs. Funds deposited are FDIC insured.

Alpha & Omega Financial Management Consultants, Inc: is under contract to PenChecks, Inc and the Custodian Banks serving as the exclusive administrator of the Missing Participant & Default IRA Rollover Programs. Alpha & Omega adjusts all account records on a monthly basis to reflect current earnings and expenses of the individual participant account. Alpha & Omega is responsible for issuing and mailing IRS Form 5498 for each Missing Participant & Default IRA account on behalf of the Custodial Banks. During the year, it provides the Custodial Bank with specialized reports to meet the requirements of the bank regulators. Finally, Alpha & Omega is responsible to adjudicate each IRA claimant, to process them through the Patriot Act and issue benefit election forms.