missing retirement plan participants

Why it’s Dangerous to Ignore Undeliverable Mail Sent by Your Retirement Plan

It always amazes me that there are participants who are owed money by their retirement plans that seem to fall off the radar and go missing.  But almost all plans, or at least large plans, have former participants that they are unable to locate that still have balances or are due benefits under their retirement plans.  They usually find out a participant is missing when a required notice is sent back as undeliverable.  Besides these missing participants creating administrative headaches with undeliverable mail being returned, not being able to locate plan participants is a compliance issue when those participants reach age 70 ½.  The Internal Revenue Code requires all qualified retirement plans, including 401(k) and pension plans, to make required minimum distributions (“RMDs”) to participants when they reach their required beginning date, which is generally the April 1 following the calendar year in which the participant attains age 70 ½.  However, plans are permitted to be drafted to delay the start of RMDs for participants who are still actively working for the employer as long as the participant is not a 5% or more owner.

This provision isn’t new, so why are we writing about it now.   Well both the IRS and DOL have recently made RMD compliance a focus of their audits and investigations.  The IRS recently released a memorandum to its examiners addressing the failure of plan sponsors to timely make RMD payments.  The memorandum told examiners not to penalize employers for failure to make RMDs to a missing participant or beneficiary as long as the plan sponsor took the following steps:

  • Reviewed records of the plan, related plans and employer records for alternative contact information;
  • Used a commercial locator service, credit reporting agency, or proprietary internet search tool to find an updated address for the participant or beneficiary; and
  • Sent certified mail to the participant or beneficiary’s last known mailing address, along with attempting to call or email if that information is available to the plan sponsor.

If a plan sponsor has not taken all of the above steps to find a missing participant or beneficiary, an IRS examiner may challenge the plan sponsor for violations of the minimum distribution rules, which is a qualification issue that could ultimately disqualify the plan.  We have also recently been told by a DOL investigator that the DOL is making RMD compliance an examination priority.  The DOL’s position is that it is a breach of fiduciary duty for a plan sponsor not to take reasonable steps to locate missing participants that are due a benefit.  The DOL has not issued official guidance on what steps would be considered reasonable, but hopefully if the IRS guidelines are followed, the DOL would find that a plan sponsor acted in good faith to find missing participants.  While the IRS is addressing RMDs in all retirement plan audits, the DOL’s focus appears to be more on large pension plans.

If you don’t already have a process in place to ensure that your plan is paying out RMDs when required, we recommend putting steps in place to ensure this deadline is met each year.  If you have participants in your plan that should have already started receiving RMDs and that you haven’t been able to locate, it is important to make sure that you take all of the steps listed above to find those individuals.  Along with taking those steps, it is now also important that you document in your files the steps that you took to find these individuals, especially for those participants whom you are still unable to locate.  This documentation is what the IRS and DOL will expect you to be able to produce on audit.