Unanswered Questions About Uncashed Checks

Speaking at the 2013 American Society of Pension Professionals & Actuaries (ASPPA) Annual Conference in National Harbor, Maryland, Susan M. Halliday, senior benefits law specialist with the U.S. Department of Labor (DOL), said her agency has little guidance out about these issues. Field Assistance Bulletin (FAB) 2004-02 addresses only missing participants from terminated defined contribution (DC) plans. However, she mentioned an advisory opinion letter in which an attorney argued that, once a distribution is made from the plan, the money is no longer considered plan assets. The DOL disagreed, implying it considered benefits plan assets until a check is cashed or a wire transfer is successfully made.

Janice M. Wegesin, president of JMW Consulting Inc., told conference attendees that plan document language may address many issues, such as timing of distributions, what to do with accounts of less than $1,000 and whether rollover accounts are included in the calculation of involuntary cash out amounts. However, questions remain.

For example, she said, when a plan document says a distribution of the account of a terminated participant with less than $5,000 will be made “as soon as administratively feasible,” when is that? After providing notices to participants that, if they do not make an election for distribution, their accounts will be automatically rolled into an individual retirement account (IRA), how long should plan sponsors or recordkeepers wait for a response? Wegesin contended that alerting participants to a default action could actually encourage the participant not to respond. If a participant or beneficiary cannot be found, how long should plan sponsors or recordkeepers look for them?

Wesegin pointed out that, according to the Internal Revenue Service (IRS)’s Employee Plans Compliance Resolution System (EPCRS), reasonable actions for trying to locate participants or beneficiaries include sending a certified letter to the last known address, using the Social Security Administration (SSA) letter forwarding program (for a $35 fee), hiring a commercial locator or credit reporting agency and using Internet search tools.

Halliday noted that plan sponsors or recordkeepers can charge participants’ accounts for fees incurred in their search for missing participants and beneficiaries. Wegesin said this raises the question of whether these fees should be included in 404(a)(5) participant fee disclosures.

Other unanswered questions, according to Wegesin, include: Should uncashed checks be accounted for in Form 5500 filings? She said she did an informal survey of recordkeepers and none reported this was happening. In addition, since it is becoming more common for plan sponsors to treat uncashed benefits or accounts of missing participants as forfeitures, should these amounts be reported on Form 8955-SSA?

If plan sponsors are forfeiting such amounts, how is the account reinstated when the participant or beneficiary shows up; is lost interest applied to the account? Are taxes recaptured? In her survey, respondents said they are not recapturing taxes. If not, would the reinstated balance be considered an after-tax account?

Wegesin said this is not a small problem, since estimates show that the highest average uncashed benefit check amount is around $42,000. So, with a lack of guidance, it is a good idea for plan sponsors or recordkeepers to establish written procedures for handling uncashed checks. Perhaps annually, plan sponsors or recordkeepers should make sure they have updated addresses.

Other best practices include:

• Require beneficiary contact information on beneficiary designation forms;
• Provide required distribution notices upon termination of employment;
• Request a personal email address/cell phone number during the exit process; and
• Require direct deposit/wire transfer whenever possible.

In the meantime, Halliday noted, the Pension Benefit Guaranty Corporation (PBGC) has issued a request for information relating to missing participants in terminating individual account plans (see “Groups Make Suggestions for PBGC Missing Participants Program”). She said some commenters, such as the American Benefits Council and the Investment Company Institute, mentioned issues for ongoing plans. She urged attendees to use any opportunity to comment, to bring up issues of concern. Halliday added that the ERISA [Employee Retirement Income Security Act] Advisory Council held a hearing about the subject in June, and recommendations are being developed.