The issue of missing participants in terminating defined contribution plans is not a new one. The issue was addressed by the Department of Labor in Field Assistance Bulletin, 2014-01, Fiduciary Duties and Missing Participants in Terminated Defined Contribution Plans (“FAB 2014-01”). FAB 2014-01 provided guidance with respect to search steps and distribution options for terminating defined contribution plans. The Pension Protection Act of 2006 (“PPA”) added ERISA Section 4050(d) which authorized the PBGC to establish a program similar to its existing Missing Participants Program for terminating defined benefit pension plans for plans not subject to Title IV of ERISA, including defined contribution retirement plans and professional service organizations with fewer than 25 active participants. In September 2016, the PBGC issued proposed regulations implementing ERISA Section 4050(d), and on December 22, 2017 it issued final regulations making the program available to defined contribution plans and small professional service plans terminating on or after January 1, 2018 (the “Program”). Although it is an important issue, and acknowledged as such by the PBGC, the final regulations do not apply to ongoing defined contribution plans.
For the time being, participation in the Program is voluntary. However, the PBGC indicated in the preamble to the final regulations that it may reevaluate this after plans and the PBGC have more experience with the Program. Under the Program, a plan can be either a transferring plan or a notifying plan. A transferring plan sends the benefit amounts of missing participants to the Program (instead of establishing an IRA at a financial institution). If the PBGC is able to locate the distributee, it will pay the benefit to him or to her. A notifying plan, on the other hand, will simply inform the PBGC of the disposition of one or more of its missing distributees. Under this scenario, if the PBGC is able to contact the distributee, it will advise him or her how the benefit can be claimed, e.g., advise him or her of the IRA custodian holding the funds. One interesting feature of the Program is that a distributee is treated as missing if the distributee does not accept a lump sum distribution made in accordance with the terms of the plan or, if applicable, any election made by the distributee.
While participation in the Program is voluntary, a participating defined contribution plan that elects to be a transferring plan must be “all in” – that is, it must transfer the benefits of all of its missing participants into the Program. The final regulations contain an “anti-cherry-picking” provision requiring that information about all (and not simply some) missing participants be filed with the PBGC. The PBGC is concerned that the selective use of the Program for certain accounts may lead to abuse. For example, where a plan transfers small account balances to the PBGC and turns over the larger accounts to private sector institutions, the larger accounts can potentially generate larger maintenance fees. The PBGC is seeking comments on the validity of its concerns.
Also, while the PBGC has expressed concerns about its long-term solvency, the Program will not be a vehicle for addressing that particular concern. There is a one-time administrative fee of $35 per participant, there is no fee for benefits of $250 or less, and there are no ongoing maintenance fees or distribution fees that would diminish the value of participant accounts.
Before participating in the Program, the plan administrator of the terminating plan must first conduct a diligent search, the requirements of which are set forth in in FAB 2014-01. The diligent search must be carried on for a nine-month period. The deadline for filing the information specified in the missing participants forms and instructions with the PBGC is 90 days after the last distribution to a non-missing participant, or one year after the plan’s termination date, whichever date is later.
The PBGC coordinated the Program expansion with the IRS and the DOL. The IRS has confirmed that, consistent with its existing treatment of transfers to the PBGC from terminating defined benefit plans, amounts transferred from terminating defined contribution plans to the PBGC under the Program will not be treated as taxable distributions subject to reporting and withholding. The DOL has indicated that it intends to review its existing regulations on Safe Harbor for Distributions from Individual Account Plans and Termination of Abandoned Individual account plans, both of which provide for distributions to individual retirement plans, to consider transfers to the PBGC under the Program as an appropriate action in such circumstances.