In the context of final regulations concerning abandoned defined contribution plans (so-called “orphan plans”), the Department of Labor (“DOL”) has also clarified its 2004 guidance on the permissible means of distributing accounts of participants and beneficiaries who cannot be located at the time of a plan’s termination. Although these orphan plan regulations are primarily of interest to banks, insurers, and mutual fund companies that hold assets of abandoned plans, plan sponsors and administrators will also benefit from the regulations’ “missing participant” provisions.
The 2004 guidance on distributions to missing participants came in the form of the DOL’s Field Assistance Bulletin (“FAB”) 2004-02. In general, this FAB provided a “safe harbor” from ERISA’s fiduciary rules if accounts of missing participants were transferred to IRAs and invested in accordance with the standards that apply to “automatic rollovers.” (For a more complete discussion of FAB 2004-02, please refer to our January 2005 issue of Benefits in Brief.) These recent regulations largely formalize that earlier guidance, but they also clarify certain key points. Application To 403(b) Plans
For instance, many Code Section 403(b) plans are subject to ERISA’s fiduciary requirements. The final DOL regulations expand the earlier safe harbor (which had been limited to Section 401(a) plans) to apply to such ERISA 403(b) plans, as well.
As the DOL points out, however, the IRS has yet to finalize its proposed regulations that would allow for the distribution of 403(b) assets on plan termination. Until those regulations are finalized, this DOL fiduciary relief is effectively unavailable to such plans. Account Balances Of More Than $5,000
Any defined contribution plan that is subject to the survivor annuity requirements (such as a money purchase pension plan) may not transfer an account balance of more than $5,000 to a rollover IRA without first obtaining spousal consent. Accordingly, assuming the spouse of a missing participant is also missing (as seems likely), the administrator of such a terminating plan would have to purchase an annuity contract with the participant’s account balance. And, in doing so, the administrator would have to comply with the usual fiduciary rules that apply to an annuity purchase.
A similar problem applies to account balances of over $5,000 if the plan’s sponsoring employer – or any other employer within the same controlled group – maintains another defined contribution plan (other than an ESOP). Absent the missing participant’s consent to receive an immediate distribution, such an account balance must instead be transferred to that other DC plan. Account Balances Of Uunder $1,000
Unlike the “automatic rollover” rules developed by the IRS, the DOL’s fiduciary safe harbor for distributions of account balances attributable to missing participants contains no exception for account balances of less than $1,000. Thus, even these truly small account balances must be transferred to a rollover IRA in order to avoid potential fiduciary liability. (Interestingly, the DOL’s orphan plan regulations do contain an exception to the rollover IRA requirement for account balances of under $1,000. These amounts may be transferred to a regular bank account or a state agency responsible for unclaimed property.)
Because the IRS’s automatic rollover rules allow for alternative means of distributing account balances of less than $1,000, an administrator who is unable to locate a participant with such a small account balance may well decide to forego the fiduciary relief provided by the DOL. Only small amounts of money would be at stake, and it seems unlikely that a “missing” participant would ever file a fiduciary lawsuit against the administrator. Thus, so long as the applicable tax withholding and reporting obligations are met, an administrator who is unable to locate an IRA provider for account balances of under $1,000 might opt for the regular bank account or unclaimed funds alternatives. Non-Spouse Beneficiaries
If an account balance is payable to a beneficiary who is not the participant’s spouse, the rollover option is not available. The DOL regulations therefore allow for the transfer of such an account balance to a non-IRA account maintained by a financial institution that is eligible to offer an IRA. Because such a transfer would be a taxable event, all applicable tax withholding and reporting rules must be followed. USA Patriot Act
In response to proposed regulations on this subject, the DOL received a number of inquiries from banks and other financial institutions concerning the customer identification and verification procedures required under the USA PATRIOT Act. These institutions were concerned that they could not comply with that Act without obtaining the signature of any participant or beneficiary in whose name an IRA or other bank account was to be established.
The DOL has now explained, however, that the PATRIOT Act’s identification and verification procedures do not apply at the time money is transferred to the IRA or other bank account, but only when the former participant or beneficiary first contacts the financial institution to assert control over the account. Accordingly, this Act should not impede a plan administrator’s compliance with the DOL safe harbor regulations. Orphan Plan Guidance
As noted above, these recent regulations are primarily directed to financial institutions. The regulations refer to institutions that are eligible to serve as IRA custodians as “qualified termination administrators” (or “QTAs”). The regulations provide detailed guidance as to how a QTA may make a finding of plan abandonment, provide required notices to plan participants and the DOL, and then distribute all of the plan’s assets. Several different model notices are supplied for these purposes.
At the same time, the DOL has finalized a proposed class exemption allowing a QTA to select itself as either a plan service provider or the recipient of transferred plan assets. Any financial institution holding assets of a defined contribution plan that it believes to have been abandoned by the plan’s sponsor will want to familiarize itself with these orphan plan regulations so that it can properly wind up the plan’s affairs.