Steps to Locate Employee Benefit Plan Participants

Do you have an employee benefit plan that is being terminated, which has participants that are entitled to benefits and cannot be located? Do you know what to do with their funds? If you just answered no to either of these questions to locate employee benefit plan participants and what to do, read on.

The Internal Revenue Service has provided the answer to these question in Field Assistance Bulletin No. 2014-01. According to the Bulletin, the plan administrator must distribute all of a plan’s assets as soon as administratively feasible after plan termination. However, before making the distribution, the plan administrator must obtain from each participant instructions on how to distribute their account balance. This is normally done by mailing a notice, either through the U.S. post office or electronically, to the participants. If the participant does not respond to the notice, then the plan administrator must take steps to locate the participant.

The following steps must be taken to locate employee benefit plan participants:

• Use certified mail to send a letter to the participant. This could help determine if the participant is located at the address you have on file.
• Check related plan and employer records. If there is another employer sponsored plan, such as a health and welfare plan, it is possible that plan has the current address for the participant. It is also possible that the employer’s human resource department has the current address for the participant.
• Check with the designated plan beneficiary. Send a letter to the participant’s designated beneficiary to find out if they know where the participant is located.
• Use free electronic search tools. The plan administrator must make reasonable use of the internet search tools that do not charge a fee to search for the missing participant. These free tools include internet search engines, public record databases (such as license, mortgages and real estate taxes), obituaries and social media.

If you cannot locate the participate

If the above steps do not result in locating the missing participant, then the plan administrator must consider if additional steps are appropriate. The factors to consider include the size of the participant’s account balance and the fee associated with the search technique. These additional steps include the use of the following:

• Internet search tools that charge a fee
• Commercial locator services
• Credit reporting agencies
• Information brokers
• Investigation databases

So you have tried all of the above steps and you still cannot locate the participant. Now what do you do? You now have no choice other than to select an appropriate distribution option in order to complete the plan’s termination. Here are your options:

• Individual Retirement Plan Rollovers – The IRS has deemed this to be the preferred distribution option. This option results in the deferral of income taxes, avoids the 20% mandatory federal withholding, and a voids the 10% additional tax on early distributions. The funds in this type of account will continue to grow tax-free and the income taxes do not need to be paid until the funds are withdrawn.

If there are reasons why the funds cannot be transferred to an individual retirement plan, such as the inability to find an individual retirement plan provider to accept a direct rollover distribution for a missing participant, then you will need to consider the following two options:

• Open an interest-bearing federally insured bank account in the name of the missing participant
• Transfer the account balance to a state unclaimed property fund

Because the interest-bearing bank account will result in taxable income to the participant, this will reduce the amount of money available for retirement. Money in an unclaimed property fund will not accrue interest, therefore, this option will also result in a reduction in the amount of money available for retirement when compared to the individual retirement plan rollover option. For these reasons, the individual retirement plan rollover option is the preferred distribution method.

The Bulletin also discusses an unacceptable distribution option, which is 100% income tax withholding thereby transferring the benefits to the IRS. The IRS has concluded that using this option is not in the best interest of the participants and beneficiaries and would violate ERISA’s fiduciary requirements.

Remember, as a fiduciary, you are required to act in the best interest of the participants. Therefore, you need to follow the steps as outlined above in order to ensure you fulfill this requirement.