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Procedure & Checklist for Missing Participants in Terminated DC Plan

Employee Benefits Law Alert Alyssa D. Dowse

This Procedure & Checklist is meant to assist a plan fiduciary in meeting its fiduciary obligations under the Employee Retirement Income Security Act (“ERISA”) with respect to missing participants of a terminated defined contribution plan. Issues arise when a participant fails to respond to the plan fiduciary’s communications regarding benefit distribution directions upon plan termination or when such communications to a participant are returned to the plan fiduciary as undeliverable. The plan fiduciary has an obligation to make reasonable efforts to locate all missing participants following termination of a defined contribution plan, consistent with Field Assistance Bulletin No. 2014-01 (“FAB 2014-01”) issued by the Department of Labor (“DOL”). FAB 2014-01 can be found here.

For purposes of this Procedure & Checklist, the term “missing participant” will include beneficiaries of a deceased participant and alternate payees under a qualified domestic relations order who are entitled to benefits under the terminated plan. This Procedure and Checklist does not apply to defined benefit plans, defined contribution plans that provide annuity options, or employers that maintain other defined contribution plans within the corporate group to which account balances from the terminating plan could be transferred.

For more information regarding this Procedure & Checklist, contact Charlene Kelly at (312) 715-5178 / charlene.kelly@quarles.com, Alyssa Dowse at (414) 277-5607 / alyssa.dowse@quarles.com, or your Quarles & Brady attorney.

Procedure

The plan fiduciary of a terminated defined contribution plan should complete the Checklist below for each missing participant. If the plan fiduciary reasonably determines that a missing participant cannot be located after completing the “Required Search Steps” and “Additional Search Steps” (if required), then the plan fiduciary may distribute the missing participant’s benefit in accordance with the “Distribution Steps.”

If the plan fiduciary properly distributes the missing participant’s benefit, the individual will no longer be covered under the plan, and the benefits will no longer constitute “plan assets” that are protected under ERISA. However, if the plan fiduciary breaches its fiduciary duties during the search or distribution process, then the missing participant may be able to bring a lawsuit against the plan fiduciary for breach of fiduciary duty under ERISA.

The plan fiduciary may charge a missing participant’s plan account for any reasonable expenses incurred attempting to locate the individual. The summary plan description for the plan should notify participants of this potential charge.

Checklist

**The plan fiduciary should retain a copy of the completed checklist for each missing participant with its records for the terminated defined contribution plan.**

Required Search Steps Instructions: The plan fiduciary must take all of the following steps before determining that a missing participant cannot be located. The DOL allows fiduciaries to take the following steps in any desired order. Failure to take all of the following steps before distributing a missing participant’s benefit will constitute a violation of the plan fiduciary’s obligations under ERISA.
1. Use Certified Mail Send notice via certified mail. Plan fiduciary may use DOL model notice or may create own form of notice. (See DOL model notice below.) Description of Actions Taken/Notes:
Attach: __ Returned letter and envelope
Date Taken:
Actor:
Located Participant? __ Yes* __ No *If yes, no further attempts to locate required.
2. Check Related Plan and Employer Records
Check other records (e.g., employment, other benefit plans) for more current contact information. NOTE: If there are privacy concerns (e.g., under HIPAA), the plan fiduciary may ask that the employer or other plan fiduciary contact or forward a letter for the terminated plan to the missing participant.
Description of Actions Taken/Notes:
List Other Records Checked:
Attach: __ Returned letter and envelope
Date Taken:
Actor:
Located Participant? __ Yes* __ No *If yes, no further attempts to locate required.
3. Check with Designated Plan Beneficiary
Identify and contact any individual designated as the missing participant’s beneficiary to find updated contact information. NOTE: If the beneficiary is concerned about the missing participant's privacy, the plan fiduciary may ask that the beneficiary contact or forward a letter for the terminated plan to the missing participant.
Description of Actions Taken/Notes:
Attach: __ Beneficiary Designation Form(s), if any __ Letter sent to designated beneficiary
Date Taken
Actor:
Located Participant? __ Yes* __ No *If yes, no further attempts to locate required.
4. Use Free Electronic Search Tools Online services could include Internet search engines, public record databases (e.g., for licenses, mortgages and real estate taxes), obituaries and social media. Description of Actions Taken/Notes:
List Search Tools Used:
Attach: __ “Screen Shot” of results pages generated from search tools
Date Taken:
Actor:
Located Participant? __ Yes* __ No *If yes, no further attempts to locate required.
Additional Search Steps (May be Required) Instructions: If the plan fiduciary is unable to locate the missing participant using the above “Required Search Steps,” the plan fiduciary must consider if additional search steps should be taken. In deciding whether to take additional search steps, the plan fiduciary should consider (1) the size of the missing participant's account balance, and (2) the cost of further search efforts. Size of Account Balance: $

Anticipated Cost of Further Search Efforts: $

Will Fiduciary Take Additional Steps?

__ Yes

__ No


Reasoning: _____________________________________________________
_______________________________________________________________
_______________________________________________________________

5. Use Paid Electronic Search Tools, Commercial Locator Services, Credit Reporting Agencies, Information Broker, Investigation Databases Description of Actions Taken/Notes:
List Additional Tools/Services Used:
Attach: __ Information received using additional search tools/services
Date Taken:
Preparer:
Located Participant? __ Yes* __ No *If yes, no further attempts to locate required
Distribution Steps (Only Permitted if Unable to Locate Missing Participant) Instructions: If the plan fiduciary is unable to locate the missing participant after taking the Search Steps above, the fiduciary has no choice but to select a distribution option for the missing participant in order to complete the plan termination. The DOL prefers that plan fiduciaries distribute benefits for a missing participant into an individual retirement plan (i.e., an individual retirement account or annuity). The choice of an individual retirement plan provider and choice of an investment option for the distributed amounts requires a fiduciary decision. However, the DOL provides a safe harbor for plan fiduciaries that meet the conditions in steps 6-9 below. For more information regarding the safe harbor, see 29 C.F.R. §2550.404a-3. If the plan fiduciary cannot find an individual retirement plan provider to accept a rollover distribution for the participant (or determines not to make a rollover, for a compelling reason), the plan fiduciary may move to Step 10.
6. Search for Individual Retirement Plan Provider (preferred method of distribution) Provider must be one of the following (check applicable provider): __ Individual retirement plan under; or __ If for a non-spouse designated beneficiary, to an inherited individual retirement plan established to receive the distribution on behalf of the beneficiary.
List selected provider: _ **If plan fiduciary is unable to find individual plan provider or determines not to make rollover for compelling reason, move to Step 10.
Date:
Actor:
7. Enter into Agreement with Selected Individual Retirement Plan Provider Agreement with provider must provide the following (check as confirmation that provisions are included in agreement): __ Distributed funds for missing participant will be invested in an investment product designed to preserve principal and provide a reasonable rate, whether or not guaranteed, consistent with liquidity. The investment product must:
  • Seek to maintain (over the term of the investment) the dollar value equal to amount invested in product by IRA.
  • Be offered by certain state or federally regulated financial institutions.
__ All fees and expenses to the new plan or account, including investments of plan, must not exceed fees and expenses charged for comparable plans established for reasons other than termination distributions.

__ Missing participant must have right to enforce terms of agreement with regard to transferred account balance against provider.

Notes:
Attach: __ Copy of agreement
Date:
Actor:
8. Confirm that Neither Plan Fiduciary’s Selection of Provider or Investment of Funds Results in a Prohibited Transaction under ERISA Check one: __ Confirmed no prohibited transaction results from distribution __ Prohibited transaction results, but actions are exempted under ERISA § 408(a) (List exemption: _)

**If prohibited transaction results without a permitted exception, plan fiduciary should select a different individual retirement plan provider.

Notes:
Date:
Actor:
9. Send missing participant notice of plan termination at least 30 days before plan fiduciary makes distribution to individual retirement plan. Plan fiduciary may use DOL model notice or may create own form of notice. (See DOL model notice below.) Notes:
Attach: __ Copy of notice
Date:
Actor:
10. If plan fiduciary cannot distribute benefit to an individual retirement plan, fiduciary may consider two other options.
Options: 1. Open interest-bearing federally insured bank account in missing participant’s name, or

2. Transfer balance to state unclaimed property fund.


** Plan fiduciary recommended to obtain advice from legal counsel before making distribution to account other than an individual retirement plan. The DOL advises that, in most cases, a plan fiduciary would violate ERISA by distributing a missing participant’s benefits to any account other than an individual retirement plan.

Must consider the following when determining whether to make distribution to bank account or state unclaimed property fund (check to confirm considered): __ Consider whether distribution is appropriate despite potential adverse tax consequences to participant. For Federally Insured Bank Accounts:

__ Account must be interest-bearing, federally insured and held in name of missing participant.

__ Missing participant must have unconditional right to withdraw funds from account

__ Must give appropriate consideration to all available information about bank and interest rate (including bank fees, such as charges for establishing or maintaining account, and interest payable on funds)

For State Unclaimed Property Fund:

__ Consider availability of searchable database maintained by state which may help participants find funds, and interest payable by state (if any)

__ Should use fund in state of missing participant's last known residence or work location

__ Distribution must comply with state law requirements

Selected Method of Distribution:
Details (e.g., bank or fund information):
Notes:
Date:
Actor:

**The plan fiduciary should retain a copy of the completed checklist for each missing participant with its records for the terminated defined contribution plan.**

DOL Model Notice of Plan Termination

[Date of notice ]

[Name and last known address of plan participant or beneficiary]

Re: [Name of plan]

Dear [Name of plan participant or beneficiary]:

This is to inform you that the [name of plan ] (Plan) has been terminated and we are in the process of winding it up.

We have determined that you have an interest in the Plan, either as a plan participant or beneficiary. Your account balance on [date] is/was [account balance]. We will be distributing this money as permitted under the terms of the Plan and federal regulations. {If applicable, insert the following sentence: The actual amount of your distribution may be more or less than the amount stated in this notice depending on investment gains or losses and the administrative cost of terminating your plan and distributing your benefits.

Your distribution options under the Plan are {add a description of the Plan's distribution options}. It is very important that you elect one of these forms of distribution and inform us of your election. The process for informing us of this election is {enter a description of the election process}.

If you do not make an election within 30 days from your receipt of this notice, your account balance will be transferred directly to an individual retirement plan (inherited individual retirement plan in the case of a nonspouse beneficiary). {If the name of the provider of the individual retirement plan is known, include the following sentence: The name of the provider of the individual retirement plan is [name, address, and phone number of the individual retirement plan provider].} Pursuant to federal law, your money in the individual retirement plan would then be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity. {If fee information is known, include the following sentence: Should your money be transferred into an individual retirement plan, [name of the financial institution] charges the following fees for its services: {add a statement of fees, if any, that will be paid from the participant or beneficiary’s individual retirement plan }.}

For more information about the termination, your account balance, or distribution options, please contact [name, address, and telephone number of the plan administrator or other appropriate contact person].

Sincerely,

[Name of plan administrator or appropriate designee]