Missing Participants Could Disqualify a Retirement Plan

In a recent Mercer podcast, “Missing Participants—Risks and Remedies,” Norma Sharara, a partner with Mercer, discussed the serious ramifications that sponsors could face if they don’t find missing participants and why the government is more focused on this issue than ever before.

Because of the massive number of Baby Boomers retiring, Congress, the Government Accountability Office (GAO) and the three agencies that regulate retirement plans—the Internal Revenue Service (IRS), the Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC)—are focused on the problem of missing participants.

“With 10,000 Baby Boomers retiring every day, an increasing number of participants in these plans who are turning 65 or 70-1/2 are going to be required to take out benefits from the defined benefit (DB) or defined contribution (DC) plan,” Sharara said. “That’s why it is such a hot topic right now.”

If there are missing participants that plan sponsors have not made a genuine effort to find, “the entire plan could be disqualified under the tax code and the plan fiduciaries may be found to have breached their ERISA [Employee Retirement Income Security Act] duties.”

Most DB plans say that benefits for terminated participants start at their normal retirement age of 65, although the plan could be written to allow deferrals up to age 70-1/2, she said. So if a DB participant is missing at normal retirement age, the plan may be found to be delinquent if the benefit is not paid out, and it could be disqualified, Sharara said.

For both DC and DB plans, the benefits have to be paid on April 1 in the calendar year after the participant has reached age 70-1/2.

If the plan is in the process of terminating and has missing participants, it cannot file its Form 5500 tax return. “Employers that are trying to clear up their balance sheets and get that pension off the books cannot do that until all assets have been distributed,” she said. “If people are missing, that’s a problem.”

Additionally, the DOL has been increasing its audits on when benefits are being paid to terminated and vested participants in DB and DC plans, she noted. “Some DOL agents have told sponsors who are being audited that they have to do whatever it takes to find the missing participants or they will hold them responsible for violating their fiduciary duties under ERISA.” Even if the plan is frozen, sponsors need to find missing participants.

The problem is that the IRS, DOL and PBGC all have their own set of rules on finding missing participants. “Unfortunately, right not it is not clear what actions a sponsor can take to satisfy all three regulators,” she said.

Mercer recommends five things that sponsors can do, she said. First, they should search all of their records, not just their retirement plan records, such as their health care and personnel files. Second, Mercer recommends that they send inquiries by certified mail. Thirdly, the firm says they should use more than one search method, especially if the benefit is large. Fourthly, the government agencies expect plan sponsors to do periodic searches.

Finally, Mercer recommends that sponsors keep meticulous records of what they did to find missing participants so that they will be well prepared if they are audited.

Plan sponsors also need to stay tuned because the DOL is about to release a best practices guide on what sponsors should do to find missing participants, and the IRS and PBGC are expected to do the same, Sharara said.

Additionally, Congress has proposed creating a national lost and found registry that would enable individuals to find and consolidate their plan accounts, she said.