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Tackling the Missing Participant Problem

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Missing participants, and the problems they cause, are becoming a more prominent problem for plan administrators, argues ERISA attorney Heather B. Abrigo.

“It’s really come to the forefront,” said Abrigo, a partner at Drinker Biddle & Reath LLP, in a July 16 webcast offered by ASPPA. “Plan sponsors really need to start addressing the issue,” she told attendees. 

It is possible to find missing participants, Abrigo said, although most of the ways that happens are either passive or result from checking records. When checking records, she said, “Consider what is appropriate in light of the employee population the missing participant is part of.” 

Running reports concerning uncashed checks can be especially helpful, Abrigo suggested. “I can’t tell you how many times I start working with a client to develop a written process,” Abrigo said, “and this has not been done.” 

Why This Matters

Missing participants affect all types of plans, Abrigo said, including defined benefit plans, 401(k)s and 403(b)s. “Even the IRS acknowledged that there is a problem with 403(b)s,” she said. So plan sponsors should care for a variety of reasons, Abrigo noted, including: 

Distributions. “Always check what the plan language says about distributions,” Abrigo told listeners. Required minimum distributions (RMDs) must be made, andplans may require that participants with small balances – which she defines as $5,000 or less – be distributed after the participant is no longer working at the employer. Another incentive to make distributions is that the cost of the plan will be lower with a smaller total balance of accounts, and the cost of an audit can be lower with fewer participants. 

Fiduciary Responsibility. This is “the number one reason” for finding missing participants, Abrigo said. ERISA requires that disclosure be made to all participants, including former employees who still have an account balance with the plan. 

Government Agencies. Government agencies, such as the DOL, the IRS and the PBGC, are very concerned about distributions and fulfilling fiduciary responsibility.

“The DOL has really been coming down about missing participants,” Abrigo said. The DOL sends a letter requesting documents before an audit, she said, suggesting that one review documents and correct any problems found if possible. “I look at the fees, documents submitted, notes, records and distributions sent out,” Abrigo remarked, in helping make preparations for a DOL audit. She added that when the DOL investigates a plan concerning missing participants, how rigorous the audit is “almost depends on who you get,” noting that some auditors “are very staunch,” while others are not.

The IRS, Abrigo said, is concerned about plan qualification issues, such as failure to make RMDs. However, she noted, the IRS is following a non-enforcement policy in which it directs its examiners to not challenge a qualified plan for failure to make RMDs as long as fiduciaries do the following: 

  1. Search related plan, company and publicly available records or directories for alternative contact information.
  2. Use one or more of these search methods: a commercial locator service, a credit reporting agency, or a proprietary internet search tool for locating participants.
  3. Attempt contact via USPS certified mail to the last-known mailing address and attempt contact through appropriate means for any other address or contact information (including email addresses and telephone numbers).

Action Steps

Two-part Process. Abrigo suggests that developing a process will help in addressing the problem of missing participants. “All too often, the process has fallen by the wayside,” she said. “I tell plan sponsors, ‘You can’t do this in a vacuum.’ Develop a two-part process.” She suggests developing a written process and a procedure for how to locate missing participants. And, Abrigo said, “If you’re going to put it in writing, make sure it’s followed and can be followed.” And she made it a point to highlight DOL language regarding action to find missing participants: “A plan fiduciary should consider the size of a participant’s account balance and the cost of further search efforts in deciding if any additional search steps are appropriate,” she said.

PBGC Program. One option that can be used by entities with terminated plans in dealing with missing participant accounts is to participate in the PBGC program for terminated plans, Abrigo noted. In that program, which is available to DC plans as well as DB plans, the employer may transfer the accounts of missing participants to the PBGC for future payment, and the names of the missing participants will be included automatically in the PBGC’s searchable online database. But, she added, anemployer transferring accounts must transfer the accounts of all the missing participants in the plan, not just a selected few. “It’s all or nothing – you don’t get to pick,” she remarked. 

Instead of transferring the accounts, Abrigo said, an employer may notify the PBGC of the names and account information for missing participants whose accounts were transferred to IRA providers, federally insured bank accounts or state unclaimed property funds in accordance with DOL rules. 

Forfeiture. It is possible that a plan can forfeit benefit payments if a person to whom benefits are due cannot be located, Abrigo noted. However, she added two caveats: the benefits are subject to reinstatement if the person is later located, and a plan should make it clear if forfeiture is possible. “It is important that the plan document make clear if it provides for this,” she said.

EPCRS.The IRS Employee Plans Compliance Resolution System (EPCRS) includes provisions regarding missing participants, Abrigo said, and cited provisions of IRS Revenue Procedure 2019-19, which concerns EPCRS. Among them: 

  • “Reasonable actions must be taken to find all current and former participants and beneficiaries to whom additional benefits are due, but who have not been located after a mailing to the last known address.”
  • “A Plan Sponsor will not be considered to have failed to correct a failure due to the inability to locate an individual if reasonable actions to locate the individual have been undertaken in accordance with this paragraph; provided that, if the individual is later located, the additional benefits.”

And Abrigo warned that one of the operational failures about which the IRS is concerned is failure to make RMDs on time. She noted that her firm has found such failures in audits, adding: “This is something that plan sponsors should really have on their agenda for 2020.” 

Transfers to States. Abrigo noted that California has asked the DOL for guidance concerning whether active plans may transfer uncashed checks to the states as unclaimed property without violating ERISA. In addition, she said, there are further recommendations concerning such transfers: 

  1. The IRS should work with the Department of the Treasury to consider clarifying whether transfers of unclaimed savings from employer-sponsored plans to states are distributions, what, if any, tax reporting and withholding requirements apply, and when those requirements apply.
  2. The IRS should work with the Department of the Treasury to consider adding retirement savings transferred to states from terminating DC plans to the list of permitted reasons for rolling over savings after the 60-day rollover period, in a form consistent with the rules adopted on the taxation of transfers of unclaimed retirement savings.
  3. The DOL should specify the circumstances, if any, under which uncashed distribution checks from active plans can be transferred to the states. (The DOL has agreed to review its position on this, Bader-Abrigo reported.)