As an employer who offers retirement benefits to your employees, you must make sure that you are following applicable guidelines when administering the benefit plans. Both the Employee Retirement Income Security Act of 1974 (ERISA) and the Department of Labor outline certain measures that benefit plan sponsors must follow, but their guidelines can be vague and leave some actions up for interpretation. It’s important that you know how to handle your plan assets during the entire progression, all the way from accepting contributions to distributing the assets. One of the major concerns Plan Sponsors must address is the treatment of unclaimed benefit checks. Please read below to learn more about this issue.
View the glossary at the end of this document should any of these terms be unfamiliar to you.
When a benefit check is to be paid out to a participant, the Claims or Third-Party Administrator typically issues a check and mails it to the participant’s last known address. At the same time, the Claims or Third-Party Administrator will file any necessary tax forms (such as a 1099-R) and withhold applicable taxes from the distribution amount. If the check gets returned or if the check is never cashed, we now have an “unclaimed benefit check.” According to the Department of Labor, benefits remain a part of the plan’s assets until the time when a benefit is cashed out or rolled over to another retirement plan; therefore, the Plan Sponsor continues to have ownership over the uncashed checks and remains accountable to the participants who are due those monies.
The Department of Labor and ERISA are both unclear in how Plan Sponsors should treat uncashed benefit checks. At first glance, there appears to be many options available to Plan Sponsors, ranging from simply retaining the assets in perpetuity, escheating the funds to the state, or transferring the balances to another plan. What is clear, however, is that the Plan Sponsor should develop a policy on what to do with uncashed benefit checks and ensure all associated parties (such as the Plan Administrator, the Custodian, and the Claims or Third-Party Administrator) implement the program. The policy, which should be outlined in the Plan Document, should include, at a minimum, the following details:
Method for Locating Lost Participants
The policy should have concrete guidelines on the timeframe it uses to search for lost participants. For example, the Plan Sponsor may choose to begin searching for lost participants within 90 days of issuing the checks and take action if a participant is not found after another 30 days.
The policy should also state the process it will use to locate the lost individuals and the rationale behind this approach. Since the expenses incurred during a search are typically deducted from the participant’s benefit amount, it is important to keep search expenses reasonable. Search techniques can vary in price and can include methods such as: running an electronic search to determine a better address; sending a letter to the best known address and waiting for a response; outsourcing the project to a third-party search vendor; contacting designated beneficiaries; or, using credit reporting agencies.
Method for Transferring Funds
If plan participants cannot be contacted, the Plan Sponsor must determine what to do with the funds. Typically, escheating assets to the state to remain in Unclaimed Property for perpetuity is not the best method when the plan is still in operation. The Department of Labor and ERISA both appear to find the following two methods acceptable: (1) roll over the funds to an IRA created for the benefit of the participant, or, (2) return the funds to the plan. The policy should be clear as to which method is to be used in each circumstance.
To determine the best method of transferring assets that your plan should adopt, we must first dig a little deeper.
Assets in Limbo
It is very important that the Plan Document state how long a check is to remain uncashed and outstanding before actions are taken to move the funds. While left uncashed, the assets are generating what the industry calls “float” interest that the Custodian charges against the assets as an operating expense. However, if the uncashed checks are allowed to sit for extended periods of time, this interest ultimately belongs to the participant and should be added to the total benefit balance.
Rolling Funds into an IRA
The Department of Labor advises that the preferred method of transferring plan assets is to distribute these assets into individual retirement accounts (IRAs) to benefit the lost participant. As the participant’s fiduciary, it is your responsibility to act in the best interests of the participants, and this option allows for the funds to remain designated for the participant’s retirement while dodging any immediate income tax assessments. Because it places the fiduciary responsibility on another party, however, ERISA only provides a safe harbor from breach of fiduciary responsibility when accounts with $5,000 or less are transferred to an IRA. Amounts with balances above $5,000 that are transferred into an IRA are not above scrutiny from ERISA, and therefore many Plan Documents state that amounts above $5,000 will be reverted back to the plan. By moving the assets back to the plan, the plan sponsor retains fiduciary responsibility rather than passing that responsibility onto an unfamiliar individual retirement plan for which they cannot vouch.
Returning Funds to the Plan
When rolling the assets into an IRA is not a viable option, the next best option is to return the assets back to the plan. When you do this, it is prudent for the Plan Administrator to simply reestablish the participant’s account rather than returning these funds into a general forfeitures account. Reestablishing the participant’s individual account will ensure that the participant can still claim these assets and will make any late-term claims much easier to document. The Plan Administrator must remember to reverse the taxes that were withheld and re-issue the appropriate tax documents to reflect the change.
Escheating Funds to the State
As mentioned above, escheating plan assets to the State is not an acceptable option for ERISA-covered benefit plans. Escheatment should only be considered when a plan terminates and must distribute its assets to complete the termination process.
If any other plan transfers are considered, a discussion with a professional advisor would be in the Plan Sponsor’s best interest.
Plan Participant…A plan participant is an employee or former employee, or the beneficiaries of those individuals, for whom there are accumulated plan benefits.
Plan Document…The Plan Document is a legal document that outlines how a plan is to operate and who are the responsible parties.
Plan Sponsor…The Benefit Plan Sponsor is the owner of a benefit plan, typically the employer, who is ultimately responsible for the plan’s assets.
Plan Administrator or Third-Party Administrator (TPA)…Appointed by the Plan Sponsor, this entity’s job is to ensure the plan complies with ERISA and is responsible for the day-to-day operations of maintaining the plan. The TPA may also perform the functions of the Claims Administrator and the Recordkeeper.
Custodian…Appointed by the Plan Sponsor, the custodian holds the plan assets and generally oversees the plan’s investments.
Investment Advisor…The investment advisor directs the investments of the plan. The custodian will sometimes fulfill this role internally.
Claims Administrator…The Claims Administrator processes the claims and directs the plan to issue payments.
Recordkeeper…The Recordkeeper works with the Custodian to maintain participant account detail for a benefit plan.
If your entity needs help determining how to manage its uncashed benefit checks, contact your WK advisor at (573) 442-6171 or (573) 635-6196.