Until recently, with the realities of America’s mobile society, it was quite possible to lose track of people—former employees included—especially if they didn’t particularly care to be found. However, the advance of modern technology, led by the Internet, first slowed and then reversed this trend—to the point where anonymity and obscurity have become virtually unattainable. Recognizing this fact, the U.S. Department of Labor (DOL) recently issued updated guidance for locating missing participants in terminating retirement plans and for handling their plan benefits until they’re located. 
Background
Under the Employee Retirement Income Security Act (ERISA), the sponsor and the administrator of an employee benefits plan have a fiduciary duty to administer the plan for the exclusive benefit of plan participants and beneficiaries. The Internal Revenue Code imposes a similar obligation on the sponsors of tax-qualified employee retirement plans. Obviously, this duty includes an obligation to distribute benefits to all participants and beneficiaries in a timely and appropriate manner, consistent with applicable law and the plan’s provisions. That obligation applies with equal force when the plan terminates—even if the whereabouts of a participant or beneficiary are unknown.
Over the years, the DOL’s Employee Benefits Security Administration (EBSA) and its predecessors have issued guidance intended to help employers and other plan fiduciaries faithfully discharge their obligations—most recently in a 2004 Field Assistance Bulletin (FAB). In that bulletin, plan fiduciaries were advised to use the following methods to locate missing participants as a matter of course, regardless of the size of the benefit involved:
- Certified mail;
- Cross-checks of the employer’s other plan and personnel records;
- Outreach to the participant’s designated beneficiaries under the plan; and
- Use of “letter-forwarding services” formerly sponsored by the IRS and the Social Security Administration (SSA).
Only after exhausting those methods were fiduciaries obliged to consider more extensive—and potentially costly—search methods, including the retention of a professional search firm, weighing the costs involved against the size of the benefit, the potential for success in locating the missing participant, and similar factors.
Simply FAB-ulous
On August 14, 2014, the EBSA issued FAB 2014-01, updating the DOL’s 2004 guidance in a number of ways. First, since the IRS and the SSA have both discontinued their letter-forwarding programs, citing cost constraints and privacy concerns and recognizing the ubiquity of the Internet, using that tool for locating missing participants is no longer required. Instead, the EBSA recommends that after exhausting the first three techniques (certified mail, crosschecking other records, and attempting to contact beneficiaries), fiduciaries use online search tools that don’t charge fees as an economical and effective alternative to professional search firms.
The EBSA takes the position that a fiduciary’s failure to avail itself of these resources amounts to a per se breach of its fiduciary duty. If the search proves unavailing, as in the 2004 guidance, plan fiduciaries must balance cost and other considerations in determining whether further search steps, including the retention of a professional search firm, are required in a given case.
In 2006, Congress threw a potential wild card into the deck, directing the federal Pension Benefit Guaranty Corporation (PBGC) to expand its missing participant program for terminating insolvent defined-benefit pension plans by making the program available to defined-contribution plans such as 401(k)s. Eight years later, however, the PBGC has yet to implement that mandate or even propose rules for doing so. Eventual expansion of this program to defined-contribution plans could significantly affect how such plans will be expected to deal with missing participants and beneficiaries.
Plan distribution options for missing participants
Despite a fiduciary’s best efforts, even aided by modern technology, it will occasionally prove impossible to locate a missing participant or beneficiary within a realistic time frame and without unreasonable cost or effort. If that is the case, different considerations apply for an ongoing plan as opposed to one being terminated.
If the plan is ongoing, presumably it can continue to hold the participant’s benefits indefinitely while more protracted search efforts are undertaken or simply wait until the participant (or his or her beneficiaries upon the participant’s death) eventually turns up to claim the benefits—unless the plan is terminated in the meantime. However, if a plan is terminating, both legal and practical considerations require that the plan be wound up and all benefits distributed as soon as practicable, particularly if the employer itself is ceasing operations.
Note that the recent guidance, like its predecessors, technically applies only to locating and distributing benefits to missing participants and beneficiaries in terminating plans. That said, the same search and distribution techniques (particularly the former) are presumably relevant to searches for missing participants in ongoing plans as well.
FAB 2014-01 contains extensive guidance on distribution options available to fiduciaries of terminating plans. The EBSA deems the rollover individual retirement account (IRA) the gold standard in this regard because it keeps the benefit in a tax-deferred retirement vehicle indefinitely—or at least until the IRA owner reaches age 70 ½, when penalty taxes begin to apply if sufficient distributions aren’t made. Here’s the problem: When a missing participant isn’t available to select his or her IRA, how does the fiduciary make a prudent choice of IRA custodian and investment vehicle(s) in the participant’s stead?
In that regard, the FAB indicates that fiduciaries can rely on 2006 DOL regulations primarily intended to cover involuntary distributions made to terminating participants whose plan benefits are valued at $5,000 or less. While a detailed discussion of those rules is beyond the scope of this article, they generally provide a “safe harbor” for fiduciaries transferring plan accounts to IRA investment vehicles designed to preserve principal (e.g., fixed-income funds) and with fees that are not excessive relative to the provider’s other IRA products.
The FAB goes on to discuss two other possible options open to plan fiduciaries that, for “some . . . compelling reason based on the particular facts and circumstances,” can’t or choose not to arrange a rollover IRA to accept the missing participant’s benefit. The first option involves opening an interest-bearing federally insured bank account in the name of the missing participant or beneficiary. That would, of course, involve relinquishing the benefit’s tax-deferred status, generally rendering it fully taxable in accordance with the usual rules pertaining to such distributions.
In addition, if the participant is below age 59 ½, additional penalty taxes could apply to the involuntary premature distribution. The missing participant could thus be exposed willy-nilly to immediate taxation on his or her benefits. While a 1099 or W-2 would be issued to notify the participant of that fact, because the participant is missing, he or she may or may not learn of it—at least not until the IRS locates the participant and seeks to impose taxes, interest, and penalties on the unreported taxable distribution.
Some plan fiduciaries have also expressed legal and practical concerns about such accounts, arguing that banks may be reluctant to open accounts in the name of absent individuals given the new restrictions imposed in the name of privacy and antiterrorism efforts (e.g., the USA Patriot Act). In the FAB, the EBSA sought to alleviate some of those concerns, noting that in general such restrictions apply only when the account holder eventually appears to claim the account or take control of it. However, given these issues, and the EBSA’s further statement that “in the absence of compelling offsetting considerations,” distributions into a taxable bank account rather than a rollover IRA would violate ERISA fiduciary requirements, plan fiduciaries should avoid this alternative if possible.
The second option discussed in the FAB would be to apply state laws and procedures that address abandoned property. The bulletin notes that since 1994, the DOL has ruled that federal law supersedes, or “preempts,” such state laws’ applicability to benefits of missing participants under employee benefits plans regulated by ERISA. However, the FAB suggests that even if ERISA preemption applies, plan fiduciaries may still have recourse to state-law procedures (including the possibility of “escheat” (forfeiture) of abandoned benefits to the state) on a voluntary basis, if otherwise they’re consistent with the fiduciary duties of prudence and loyalty under ERISA. Given the EBSA’s strongly stated preference for rollover IRAs, however, this may be a difficult standard to meet in all but the most exceptional cases.
Finally, the 2014 FAB, like its 2004 predecessor, rules out one distribution option entirely: 100 percent income tax withholding on the distribution. From the plan fiduciary’s perspective, this is a seemingly neat solution because it permits the plan to wash its hands of the funds while ensuring that they will ultimately inure to the benefit of the participant, as a credit to the participant against income taxes due, on the distribution and otherwise. Since—as Ben Franklin reminded us—taxes are as certain as death, the problem is solved. Not so fast, says the EBSA.
Somewhat obscurely, the FAB states, “We do not believe that 100% withholding would necessarily result in a crediting of the withheld amount against the missing participants’ income tax liabilities (for example, the amount withheld may exceed a missing participant’s income tax liabilities).” Of course, in the latter case, the participant would presumably be eligible for a refund—just like the one most taxpayers receive every year. In any case, given the EBSA’s adamant and long-standing opposition to the technique, 100 percent withholding clearly is not a viable option, even for small benefits for which the time and expense involved in establishing a rollover IRA or bank account (with potentially applicable fees and minimum balance requirements) would otherwise make this an attractive and practical alternative.
Bottom line
Regardless of whether a retirement plan is ongoing or being terminated, plan fiduciaries need to account for the possibility that they may not be able to locate all participants and beneficiaries with accrued plan benefits and make 
distributions to them in a timely manner. While it’s clearly not a panacea and it leaves certain issues unresolved, FAB 2014-01 provides valuable guidance to plan sponsors and administrators seeking to discharge their ERISA fiduciary duties to all participants and beneficiaries in a prudent and responsible manner.
Douglas R. Chamberlain is an attorney with Sulloway & Hollis, P.L.L.C. in Concord, New Hampshire. He may be contacted at dchamberlain@sulloway.com.