SURVEY SAYS: Finding Lost Participants

‘Lost participants are not something that the government has really addressed. After a plan sponsor does address searches through various channels, what are they doing with the money of those still lost?’

We noted that the PBGC offers a solution for DB plans (if you’re not familiar with the program, check out their website ), but as for those defined contribution participants…

‘My favorite remedy for lost
participants in a DC plan is
100% federal tax withholding.
However, my Compliance
Department won’t let me do it.’

Well, one reader summed up the sense of most respondents – ‘Unfortunately we continue to carry them as participants. I’m very anxious to see what others are doing. This was a great question.’

Still, as usual, we got some great responses. Several noted existing services available through the IRS, DOL and Social Security. As one noted, ‘ We try searching through the IRS first because it is free. Then we try searching through the DOL, which charges. Meanwhile, the account accrues interest. Our plan does allow for a default into forfeitures if we can’t find the person in over 5 years, but the default has never been needed. The disclosure office will send your letter on if they have an address and it is up to the participant to contact you. Also, there is a website that I check to see if they are dead,www.ancestry.com’

Another was kind enough to outline the IRS procedure in more detail, ‘Send a letter to the IRS explaining that you are trying to find lost participants who have benefits available to them. You will need to include the participants’ names and social security numbers in the letter to the IRS. You should include letters addressed to the participants that the IRS can forward to the address that they have on file. The address that you would need to send the letters to is: Internal Revenue Service, Disclosure Office, P.O. Box 1818, Room 7019, Cincinnati, OH 45202-3222.’

And then, of course, there is this week’s Editor’s Choice : ‘My favorite remedy for lost participants in a DC plan is 100% federal tax withholding. However, my Compliance Department won’t let me do it.’

Thanks so much to everyone who took the time to share your experience and ideas. We’ll do a follow-up on this issue in the weeks ahead – and if there are other suggestions, ideas or questions – please let me know.

The question was: Lost participants are not something that the government has really addressed. After a plan sponsor does address searches through various channels, what are they doing with the money of those still lost?

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There are 2 things that we have done in the past to get rid of balances in a dc plan.  Probably the most popular way is for us to withhold 100% as federal withholding payable to the IRS. We all know that the IRS is generous and will give back most of the funds when the participant files their tax return.  In a few instances, we have also escheated the funds to the state in which the participant lived.

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We try searching through the IRS first because it is free.  Then we try searching through the DOL which charges.  Meanwhile, the account accrues interest.  Our plan does allow for a default into forfeitures if we can't find the person in over 5 years, but the default has never been needed.

The disclosure office will send your letter on if they have an address and it is up to the participant to contact you.

Also, there is a website that I check to see if they are dead, www.ancestry.com

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The money is either redeposited in the plan in a separate account, sent to the new trustee or sent to the company if they have left.  The company is notified before hand.

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Our defined contribution plan calls for unclaimed (3 year unsuccessful search of the participant) assets to be distributed to the remaining plan participants. Our plan is over 10 years old and I don't know that we've ever had to do this.

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Our prototype document dictates that the Plan Administrator will use one or more specifically-named methods for locating a lost participant, including use of the IRS letter-forwarding program under Rev. Proc. 94-22, use of the Social Security Administration System search program or other commercial locator service.  If a participant remains unlocated for 6 months following the date of the Plan Administrator's first attempts to locate, the participant's balance is forfeited.  If the participant later makes a claim for the account, the balance has to be restored.

In real practice, we use the commercial locator service, which is significantly faster than the other options.  However, plan sponsors are hesitant to forfeit anything other than a very minor dollar balance due to the possibility that a future forfeiture restoration may come out of their pockets.   The document provisions create  additional work by requiring us to maintain a record of these forfeited balances and why they were forfeited.

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This technique had fantastic results.  Send a letter to the IRS explaining that you are trying to find lost participants who have benefits available to them. You will need to include the participants' names and social security numbers in the letter to the IRS. You should include letters addressed to the participants that the IRS can forward to the address that they have on file. The address that you would need to send the letters to is: Internal Revenue Service, Disclosure Office, P.O. Box 1818, Room 7019, Cincinnati, OH 45202-3222.

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Our 401(k) investment and administrative provider did a lost participant search for us and was able to get checks out to all lost participants except 6.  I then took over and did a quick internet search and located only 1.   For the remaining 5 I called the IRS' EP Customer Account Services at 877-829-5500 to ask about Rev Proc 94-22 (lost participant letter forwarding service).   The IRS indicated I should send a cover letter to a local IRS Disclosure Office (and they gave me that
address) to describe the situation and enclose the letters I wished to forward.  I did that on March 14th of this year and have not yet heard from the IRS or any of the participants.  I was going to give it 8 weeks before calling the local Disclosure Office as a followup.   If the benefits do not get paid at that point our plan allows the Committee to forfeit the benefits (forfeitures are used to offset future employer contributions) but if the participant ever shows up with a valid claim, then we must reinstate an account balance for them (using the current year forfeiture account) equal to the amount originally forfeited with no investment gain/loss calculated for the "lost" period of time.

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Our auditors gave me information on locating "lost" employees.  Write a letter to the "lost" person and place it in an open envelope.  Send the letter, along with another letter to the SSA with the person's SSN, and the SSN will find the person and forward the letter to them.  You have to leave the envelope open so the SSA can review what is being sent; making sure it's indeed related to locating someone in order to notify them that they have money available in the plan.  If you have a large volume there is a charge for the service.  The SSA should be able to supply information on charges for excess searches.

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After the 6 month period when the check can no longer be cashed, we have the plan trustee move the uncashed check amount into a special "holding account" within our own DC Plan.  We keep a list of name, social security number, the date and amount of the uncashed check.  If the participant ever contacts us in the future, we simply pull the appropriate amount from this holding account and reissue the check. No tax record is created when the check is reissued, because a 1099-R was created when the original check was issued. The holding account allows our plan to realize the earnings from this account, rather than the service provider.  We use our stable value fund as the investment vehicle for these assets.  We search every possible avenue to locate the participant (last place worked HR rep. to check local phone directory for a listing, internet search sites, medical benefits dept., and so forth).  On an annual basis we go through the IRS to try to contact these individuals. 

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L ost members on DC plans, after exhausting all available resources to locate them, are eventually turned over to the State of last known residence.  Each state has a process for advertising names of current or former residents who have funds due them and available for claiming.

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Fortunately, I've only seen a few "lost" participants over time.  With most cases, the 401(k) committee has been too nervous to do anything but let those accounts do anything but sit - just in case someone came back to claim the account.  Some type of standard needs to be set - for example, if you cannot make contact with a participant after reasonable attempts for "x" number of years, their account will be distributed to a forfeiture account. . .  If the MIA participant suddenly reappears, some standard should be set to make him whole without causing an actuarial/administrative nightmare.

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I have found lost participants through the Social Security Administration.  It took 7 months for them to follow through and I thought it was a lost cause, but it turned up more than half of those who were lost at that time.

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My question is somewhat different......for lost funds (for ex outstanding benefit disbursments, uncashed benefit checks, etc.) do plan sponsors ultimately escheat the $ to the states (based on their Abandoned Property Laws) or does ERISA take over, and the $ is returned to the plan, or Other?