One of the most common reasons an employer might want to locate former employee is to give them money. Former employees sometimes leave a balance in a retirement plan that goes unclaimed—because the employee has forgotten about it or passed away, or because the employer no longer has a current address on file.
When a plan sponsor terminates a defined contribution plan, all participant balances must be distributed as soon as practical. If participants do not respond, plan administrators often are unable to finish up the plan’s financial business. This leaves various issues related to their fiduciary responsibilities of locating missing participants and distributing their benefits.
Similarly, a plan sponsor might want to clean up its plan by paying out small balances that remain after employees terminate employment. The plan sponsor has an incentive to track down missing participants with unclaimed account balances to eliminate unnecessary administrative fees.
Initial Search Methods
Initially, most companies initially use tried-and-true search methods. First-class mail and electronic notification via e-mail are the two most common and the least expensive techniques. However, if plan sponsors find that by using these methods they are still unable to locate the participant, they must resort to other means. Other common methods include Internet search tools, commercial locator services and credit reporting companies.
A plan is allowed to charge reasonable search expenses to a participant’s account, as long as it agrees with the terms of the plan and complies with the Employee Retirement Income Security Act (ERISA). It's important to take into consideration the size of the individual’s account balance when weighing the costs of the various search methods. These steps, as discussed below, are governed by the fiduciary responsibility provisions of ERISA:
• Certified mail. This is a relatively inexpensive way to determine whether the participant can be located in order to distribute benefits.
• Other plan records. The plan administrator should check with the employer and plan administrator of related plans (health insurance, life insurance, etc.) to search their records for more current information.
• Designated plan beneficiary. Plan fiduciaries should attempt to identify and contact anyone that was named as a beneficiary (spouse, child, etc.) for current information in locating the missing participant.
• Letter-forwarding service. The Social Security Administration (SSA) and the Internal Revenue Service (IRS) provide such services. These are described in more detail below. However, neither will provide confirmation as to whether the participant was located or received the information.
SSA Letter Forwarding
Confidentiality is the No. 1 priority for the SSA letter-forwarding program as well as for the IRS. The SSA will not provide an address of someone without his or her permission. It will, however, perform a letter-forwarding service in an attempt to contact a missing person. The search criteria used by the SSA indicate that the situation must be of great importance, such as a death or serious illness in the missing person’s immediate family or a sizeable amount of money that is due to the individual. The missing person must be unaware of the situation and most likely would want to be informed about it. The SSA program charges a $25 nonrefundable fee to forward letters, which covers the SSA’s costs to inform the missing person of money that is due to him or her.
Any letter sent to the SSA for forwarding must be in a plain, unstamped, unsealed envelope that shows the person’s name and Social Security number (SSN) as well as other personal identifying information. The request must be in writing to the SSA and include the person’s name, SSN, reason for wanting to contact the person, last time the person was seen, and information about other attempts that were made to contact him.
The SSA will not guarantee the searching party that the letter will be delivered, that a reply will be received, or even the outcome of the search.
IRS Letter Forwarding
Like the SSA service, the IRS letter-forwarding program will not give addresses or other information to an employer making a request. Only certain circumstances permit the IRS to forward letters to a taxpayer listed in its database. One of these circumstances occurs when a person is looking to notify the taxpayer that he or she is entitled to assets such as from a qualified retirement plan or other terminated plan from which the taxpayer is entitled to a distribution of benefits. With total confidentiality in mind, this program likewise will not notify an employer as to whether the individual was located or whether the letter was delivered. If a letter is returned to the IRS as undeliverable, it will be destroyed without informing the employer.
There are two pieces to this program: One will forward letters to fewer than 50 individuals; the other will forward letters to 50 or more individuals:
• Small groups. The free program for locating fewer than 50 individuals requires an employer to send a cover letter to the Letter Forwarding Unit indicating the reason for the request. The first piece of information to be furnished is mandatory—a Social Security number of each missing participant. A letter to the individual that requests that he or she contact the plan sponsor or employer to receive a distribution must be included. Samples for the cover letter and the participant letter are provided by the IRS. If the IRS is able to locate an address for the participant, the Letter Forwarding Unit will forward the information in an IRS envelope. However, if no address is found, the letter will be destroyed.
• Large groups. The second program, designed to contact 50 or more missing individuals, is called the “Project 753 Computerized Mail-Out Program.” There is a charge of approximately $1,750 plus 50 cents per record. The IRS has discretion whether or not it will agree to engage in a contract for letter forwarding services with the employer. If a contract is considered appropriate, the IRS will provide a more accurate cost estimate and a timetable as well as specifications for submitting data on computer disks or other magnetic media. It typically takes 90 days from the IRS acknowledgement of the request before the mailing occurs. The program provides the employer with a sample letter to the IRS as well as two samples letters to the missing participant from which to choose.
In the event that plan fiduciaries have tried all available methods to locate a missing participant and are still unsuccessful, they do have the option of following a safe harbor rule to comply with ERISA in certain situations. Plan sponsors can set up a procedure with a financial institution to establish an individual retirement account (IRA) or annuity account and roll over account balances for missing participants to them automatically. Amounts between $1,000 and $5,000 are eligible for rollover into these types of accounts. An investment product that will preserve principal and charge reasonable fees or expenses that are charged to any other IRA investor is required.
Creating this type of account is the preferred method to use as an automatic default rollover option because it preserves retirement plan assets. In addition, it will not be subject to mandatory income tax withholding or to the 10 percent penalty tax for those under age 59½.
In addition, a rollover distribution to an IRA for any amount is allowed under Field Assistance Bulletin 2004-02 for plan sponsors terminating a plan. However, it is best to discuss the plan termination process with an ERISA attorney.
Arrangements other than setting up an IRA or annuity account may be made that include establishing an interest-bearing, federally insured bank account in the participant’s name or transferring the money to state unclaimed property funds. However, these alternatives will be subject to taxation for the individual and do not fall under the safe harbor rule.
If a plan sponsor needs to locate a missing participant for any of the reasons discussed above, it should weigh its options carefully and use the method that best suits its needs.
Patricia Look has been the editor of the BottomLine Benefits & Compensation newsletter for J.J. Keller & Associates since its inception in 2007. She has worked in benefits and compensation management, with a focus on retirement plans and executive compensation, for over 25 years. In particular, her expertise includes 401(k) plans, qualified pension plans, deferred compensation and supplemental plans for executives.
Related External Articles:
Finding Lost Participants, Benefit Resources Blog, February 2013
Finding Missing Participants Without the IRS Letter-Forwarding Program, Buck Consultants, September 2012
Related SHRM Articles:
Retirement Plans: Former Employees Can Be Current Problems, SHRM Online Benefits Discipline, July 2010
Retirement Plan Sponsors Should Keep Track of Former Employees, SHRM Online Benefits Discipline, February 2009
SHRM Online Benefits Discipline