Are You Giving Good Advice Regarding Uncashed Pension Checks?
How should third-party administrators (TPAs) instruct their plan sponsor clients to handle uncashed pension checks?
Thanks to a lack of guidance from the DOL and IRS, we see a lot of uncertainty around this issue. We also see recommendations from TPAs that don’t support the best interests of plan participants or the plan sponsor. For example:
- Holding on to the funds without depositing them back into the plan
- Depositing the funds into the plan’s forfeiture account
- Rolling over the funds into an IRA account without restoring the taxes
In my opinion, these approaches are a direct result of the failure of institutions to recognize their fiduciary obligations. They have an inherent responsibility to handle unclaimed funds in the best interests of the participant, not the institution. Yet often, such is not the case.
Granted, TPAs and plan sponsors must grapple with many gaps in the current regulations. For example, the DOL has often stated that withheld taxes are still considered qualified plan assets. But where are the regulations supporting this position? And suppose the funds in question came from an employee’s salary deferrals, and the institution places those funds into a forfeiture account. Where does the authority come from to forfeit funds that are 100% vested?
Faced with such ambiguity, many plan sponsors are simply rolling missing participant funds into a Default IRA rather than setting up a taxable savings account. However, if the taxes have been withheld, even more questions arise as to the legality of such a move.
Restoring the Taxes
To arbitrarily ignore or refuse to restore the participant account represents a serious violation of an institution’s fiduciary responsibility. Yet, I have seen cases where institutions return the funds to the plan as forfeitures even when the plan does not contain provisions for how the funds should be managed. In my opinion, this runs the risk of setting up the plan for potential disqualification or intense scrutiny by the DOL, IRS or both.
I also find it disrespectful to transfer the funds to an IRA but not the float earnings from the money. Refusing to restore the taxes puts the participant in a position of losing the tax credit if they don’t file a tax return. And if three years goes by, they are blocked from ever retrieving those deposits.
At PenChecks, we have taken the position that if funds have gone unclaimed for more than 90 days:
- The participant is owed interest on their money
- The issuing institution is not entitled to the float they may have earned on those funds
- If taxes have been withheld, the institution has an obligation to retrieve those taxes, credit them back to the participant, and return all funds to the plan
Others have taken the position that once a distribution has been taxed it is no longer a plan asset (despite the DOL’s statement that it is). However, by restoring the taxes, the assets can easily be returned to the plan.
Are You a Responsible Gatekeeper?
The burden of properly managing unclaimed retirement funds does not fall entirely on the TPA. Plan sponsors, custodians and record keepers also share in this responsibility. This means:
- Acting in a timely manner to ensure the funds don’t sit un-invested
- Making every effort to locate the participant
- Ensuring that the funds are held in trust, secure from loss or forfeiture
The problem of how to handle unclaimed funds can be significantly mitigated when TPAs accept their role as a gatekeeper when managing benefits that have already been paid. In particular, TPAs need to ensure that each benefit payment made from the trust is closely followed until properly negotiated, returned to the plan, or placed into a Default IRA.
When TPAs act as responsible gatekeepers, it protects their clients from possibly violating the law, upholds their fiduciary responsibility, and helps to keep the institution honest.