PenChecks Blog

What to Do with Missing Participants and Required Minimum Distributions

These days, problems related to missing and nonresponsive retirement plan participants are causing more problems and creating more uncertainty for plan sponsors and administrators.

For example, Lines 4l of Schedules H and I of Form 5500 and line 10f of Form 5500-SF ask, “Has the plan failed to provide any benefit when due under the plan?” When retirement distribution checks – including required minimum distributions (RMDs) – are returned uncashed because a participant can’t be found, the plan is deemed to have failed to provide the benefit.

Originally, IRS instructions in connection with the 2015 and 2016 Form 5500 and Form 5500-SF included unpaid RMDs to 5% owners age 70½ and over and non-5% owners age 70½ and over who have retired or separated from service as reportable failures.

But hold your horses. In response to comments received after issuing a Paperwork Reduction Act notice regarding the 2016 Form 5500 and Form 5500-SF, the IRS has since offered clarification. Specifically, the agency announced that in the absence of other guidance, filers do not need to report unpaid RMD amounts (on Lines 4I of Schedules H and I on Form 5500 and 10f on Form 5500-SF) for participants or their beneficiaries who meet the following criteria:

  • Retired or separated from service
  • Cannot be located after reasonable search efforts
  • The plan has begun making reasonable efforts to locate the participants or beneficiaries at the end of the plan year reporting period

Recommended Search Procedures
The Department of Labor’s (DOL) Field Assistance Bulletin (FAB) 2014-01, which outlines recommended search procedures for missing participants, specifically applies to terminated defined contribution (DC) plans. However, the IRS website states that employers and plan administrators of ongoing plans may want to consider periodically using one or more of the search methods described in the FAB, as this can provide evidence of making a reasonable effort to locate RMD-eligible missing participants.

The DOL FAB 2014-01 reminds us that the employer has a fiduciary duty to attempt to locate missing participants, and that 100% withholding is not permitted. Plan administrators and employers should also review their plan documents for written procedures on locating missing participants. The DOL recommends the following steps when searching for a missing participant:

  1. Use Certified Mail. Certified mail is an easy way to find out, at little cost, whether the participant can be located in order to distribute benefits. Do not use the DOL model notice because it states that the funds from the terminating DC plan will be rolled to an IRA, which is not permitted with RMDs.
  2. Check Related Plan and Employer Records. Other types of employer plans, such as a group health plan, may contain more up-to-date information. Plan fiduciaries can ask representatives from other plans to search their records to determine if there is a more current address available. When privacy concerns arise, a fiduciary can ask a provider to forward a letter to the missing participant or beneficiary. The letter would request that the missing participant or beneficiary contact the searching plan fiduciary.
  3. Check With the Designated Plan Beneficiary. A plan fiduciary must try to contact individuals named by the missing participant on his or her beneficiary form to obtain updated contact information. If privacy concerns arise, the fiduciary can request the designated beneficiary contact to forward a letter to the missing participant or beneficiary.
  4. Use Free Electronic Search Tools. Plan fiduciaries must make reasonable use of free Internet search tools, such as search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media. The National Registry of Unclaimed Retirement Benefits, a nationwide listing of unclaimed retirement plan account balances, offers a free search tool for employers, employees and service providers looking to conduct searches.

Keep in mind that the FAB’s concept of rolling terminating DC plan funds to an IRA is not available for the processing of missing participant’s RMDs, as RMDs are not eligible for rollover.

Optional Additional Search Methods
If none of the above result in locating the missing participant, optional search methods are provided in the FAB. Before using these methods, fiduciaries must compare the costs of such services against the value of the participant account, as they may charge reasonable expenses to the account. Optional search methods include commercial locator services, credit reporting agencies, information brokers, investigation databases and analogous services that may involve charges.

Searching for missing participants can be a time-consuming activity that often fails to achieve the desired results. However, it can absolve you of the requirement to report unpaid RMDs for missing participants, and provide evidence that you are making a reasonable effort to uphold your fiduciary responsibility.

Updated IRS Guidance for Employee Plan Examinations Provides a Safe Harbor
In October, 2017, IRS Acting Director of Employee Plans Examinations Thomas J. Petit issued a memorandum that provides much-needed clarification and authoritative relief from a retirement plan’s liability for not paying an RMD for a missing participant,

Entitled “Memorandum for Employee Plans (EP) Examinations Employees,” the memorandum provided similar guidance to the IRS website for EP examiners to rely on when auditing qualified plans. According to the memo, the plan is not subject to a 401(a)(9) violation if it has taken the following steps:

  • Attempted to contact the missing participant (via United States Postal Service certified mail) to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone numbers)
  • Searched through appropriate means for any address or contact information (including email addresses and telephone numbers)
  • Searched plan and related plan, sponsor, and publicly-available records or directories for alternative contact information
  • Used any of these search methods:
    • Commercial locator service
    • Credit reporting agency
    • Proprietary internet search tool for locating individuals

If a plan has not completed the steps above, EP examiners may challenge a qualified plan for violation of the RMD standards for failure to commence or make a distribution to a participant or beneficiary to whom a payment is due. Note that in February 2018, the IRS issued a memorandum with identical safe harbor steps to locate missing participants who are due RMDs from a 403(b) plan.

RMDs and missing participants aren’t going away any time soon, so why run the risk of a 401(a)(9) violation to your plan? Although a bit laborious, these search steps are not difficult. If you don’t have the time or personnel, you can always outsource them to service providers like PenChecks Trust who specialize in missing and nonresponsive participant searches. And the cost of these services can be charged to the account.
As someone who has worked with many plans to defend a 401(a)(9) violation, I consider the ability to avoid this situation by conducting a few simple search steps to be real authoritative relief.

William C. Grossman, ERPA, QPA, APA, MBA is the Managing Member of WCG ERISA CONSULTING, LLC. He assists TPAs and financial institutions in complying with IRS and DOL regulations regarding qualified plans, such as 401ks, as well as 403(b)s and IRAs; and has spoken on a wide variety of retirement plan topics at ASPPA and NIPA national conferences.

As a contributing author to PenChecks Trust, Grossman writes about current retirement plan compliance and implementation issues.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust, its subsidiaries or affiliates.

1https://www.irs.gov/retirement-plans/clarifications-to-instructions-for-lines-4l-of-schedules-h-and-i-form-5500-and-line-10f-of-form-5500-sf?_ga=1.9310389.1096741506.1464117029

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