2018 Report of Recommendations
Notice 2018-24 requests comments by June 4, 2018, as to the specific types of plans
0618 Publ 4344 (PDF) · 2026-10-03 edition · updated 2026-10-04 · United States
and the circumstances (other than initial qualification and plan termination) for which the
IRS might consider accepting determination letter applications during the 2019 calendar
year. The EP Subgroup hopes that this report, along with other public comments, will be
useful in the IRS review process.
II. BACKGROUND
On July 21, 2015, the IRS announced 2 that the staggered five-year remedial
amendment cycle system (the Cycle System) 3 for determination letters would end on
1 Notice 2018-24, IRB 2018-17, 507. 2 Announcement 2015-19, IRB 2015-32, 157. 3 The Cycle System was created under Revenue Procedure 2005-66 (2005-2 C.B. 509, August 26, 2005).
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
11
EMPLOYEE PLANS
January 31, 2017, at the conclusion of the Cycle A submission period. After that date,
sponsors of individually designed plans are able to submit requests for determination
letters only upon initial qualification or termination of a plan, except for limited to-be
specified-later exceptions.
Section 401(b) of the Internal Revenue Code (IRC) 4 provides for a remedial amendment
period during which a plan may be retroactively amended to comply with the IRC
qualification requirements. The IRS used its discretion to establish five-year remedial
amendment periods under the Cycle System based on the assigned cycle for the plan
sponsor. 5 Submissions in the Cycle System had to demonstrate that interim
amendments for items on the Cumulative List of Changes in Plan Qualification
Requirements (Cumulative List) issued for that plan's cycle had been timely adopted. In
general, plan sponsors of individually designed plans that wanted to preserve reliance
on a plan’s favorable determination letter had to apply for a new determination letter for
each remedial amendment cycle during the last 12 months of their plan’s remedial
amendment cycle (in other words, between February 1 and January 31 of the last year
of the cycle). In this way, the Cycle System had allowed plan sponsors or plan
administrators to file for a determination letter every five years to cover plan
amendments made since the issuance of the prior determination letter (both
discretionary and Cumulative List amendments). Plan sponsors were assigned to a
Cycle, lettered sequentially as Cycles "A" through "E," based on the last digit of the plan
sponsor’s federal employer identification number (EIN), with special submission cycles
for governmental, multiple employer and multiemployer plans.
A favorable IRS determination letter verifies that the sponsor has timely amended its
plan document to incorporate all required law and regulatory changes since the
issuance of the immediately preceding determination letter and that all the discretionary
amendments made to the plan were timely and met substantive requirements. The
4 All section references are to the Internal Revenue Code of 1986, as amended, and the regulations thereunder, unless otherwise specified. 5 See Treas. Reg. Section 1.401(b)-1(f); Rev. Proc. 2007-44, 2007-28 IRB 54.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
12
EMPLOYEE PLANS
determination letter only addresses the plan document requirements of the IRC. It does
not address operation of the plan. Nevertheless, because of the protection it offers from
disqualification on the account of document failures, its availability had been viewed as
integral to a plan sponsor’s decision to offer and maintain a plan. 6
After the IRS ended the Cycle System, the IRS issued guidance to clarify that expiration
dates included in determination letters issued prior to January 4, 2016, will no longer be
operative, and that determination letters issued after January 4, 2016, will no longer
include expiration dates. 7 However, IRS guidance continues to indicate that a
determination letter “may not be relied upon after a change in material fact or the
effective date of a change in law [except as specifically provided in Revenue Procedure
2018-4].” 8 Without further guidance from the IRS on what might constitute a “change in
material fact,” plan sponsors are concerned that making any change could jeopardize
the audit protection afforded by having a current favorable determination letter.
While the IRS stated in Announcement 2015-19 that it was contemplating allowing
individually designed plans to apply for determination letters in certain limited situations,
the IRS has not yet specified the parameters for any such limited submissions. In Notice
2018-24, the IRS now has requested comments regarding the types of plans and
circumstances under which such a limited re-opening might occur during the 2019
calendar year. This report provides recommendations regarding parameters that could
be established to allow for implementation by the IRS of a limited re-opening for
determination letter applications for individually designed plans not just for calendar
year 2019, but also more broadly and systematically.
6 If a plan is tax-qualified, employer contributions and earnings on contributions are not included in the employee’s taxable income until such amounts are distributed (even though the arrangement is funded and even if benefits are vested). Additionally, if tax-qualified, many plan distributions can be rolled over to another type of retirement plan or IRA for further deferral of income inclusion. In the case of a taxable employer, the employer is entitled to a current deduction (within certain limits) for contributions even though the contributions are not currently included in employees’ income. The contributions and earnings are held in a tax-exempt trust, which enables the plan’s assets to grow on a tax-free basis until distribution. Loss of tax-qualified status thus involves significant tax risk for all parties. 7 Rev. Proc. 2018-4, 2018-1 IRB 146, Section 23.02(2). 8 Rev. Proc. 2018-4, 2018-1 CB 121, Section 23.02(1).
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
13
EMPLOYEE PLANS
The EP Subgroup took multiple steps to determine the views of the EP Community and
to develop its recommendations regarding the limited re-opening of the Determination
Letter Program. The steps included a review of the Comment Letters received by the
IRS regarding the ending of the Cycle System focusing on comments pertaining to the
limited re-opening issue. The EP Subgroup also held discussions with a number of
professional groups and associations within the EP Community. Finally, the EP
Subgroup solicited background information from EP personnel. Robert S. Choi, Director
of EP during the period of the development of this report, generously made himself and
his staff available so that the EP Subgroup could obtain important background
information used in shaping the EP Subgroup's recommendations. EP also provided the
EP Subgroup with pertinent statistical data, which provided valuable insight into the
nature and volume of determination letter application filings, the various types of plans
submitting applications, the status of IRS case processing under the last cycle and other
related information.
The feedback received by the EP Subgroup from the EP Community was uniformly
positive when learning that EP is considering re-opening the Determination Letter
Program for certain situations and that the IRS is receptive to receiving input on
possible approaches.
III. RECOMMENDATIONS
The EP Subgroup continues to believe that an opportunity to receive an updated IRS
determination letter serves as an important adjunct to the IRS audit program, and would
play a major role in encouraging plan sponsors and plan administrators to regularly
review not only their plan documents, but also plan operations, in preparation for
periodic IRS filings. These recommendations are offered in the spirit of encouraging the
IRS to consider providing this service on a limited basis.
- Confirm through easily accessible information sources, such as the IRS website
and IRS presentations to EP Community associations, that the plan sponsor or
plan administrator may continue to rely on a favorable determination letter issued
under the Cycle System with respect to all plan language other than amended
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
14
EMPLOYEE PLANS
language, provided that there has been no change in the law that would affect
the portion of the plan that has not been amended.
- Institute a new procedure to allow for a limited scope determination letter under
which a plan sponsor or plan administrator could ask the IRS to review specified
changes since the issuance of a prior favorable determination letter. Under this
limited scope review process, the plan sponsor or plan administrator would
identify specific language that had been adopted since the last determination
letter, in a format similar to the manner used with Form 5307, Application for
Determination for Adopters of Modified Volume Submitter Plans. This would
result in a “limited scope” determination letter that would cover only the specified
changes that are submitted for review. The prior favorable determination letter for
the plan would continue in effect for any provisions not changed since the prior
favorable determination letter. This limited scope review could be limited to
discretionary amendments, or could also be limited to amendments addressing
items listed in the annual Required Amendments List.
The EP Subgroup recognizes that prior to the introduction of the Cycle System
the IRS had a limited review program using Form 6406, Short Form Application
for Determination for Minor Amendment of Employee Benefit Plan. In our
discussions with EP staff, representatives indicated that there were problems
with this process because amendments that were presented as “minor” could
involve more substantial changes when viewed from the standpoint of the entire
plan document. Some IRS agents found that they had to review the entire plan
document to determine if the “minor” amendments had an effect on other plan
terms. While the EP Subgroup appreciates that there were challenges with the
prior limited review program and a new limited scope review program may raise
some of the same challenges, the EP Subgroup believes that there should be a
way to add appropriate caveats to a new “limited scope” determination letter that
would place the burden on the requestor to identify any such effects or the
requestor could not rely on the limited scope letter.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
15
EMPLOYEE PLANS
- Allow submission of determination letter applications for plan amendments
required by major business transactions, such as plan sponsor mergers and
acquisitions, divestitures, joint ventures and bankruptcy proceedings, as well as
for plan mergers and spin-offs. Without access to the determination letter
process, the parties to these types of transactions likely may require plan
termination as a condition of closing the transaction in order to limit potential
liability for a plan that has an outdated determination letter. While it has been the
case that plan terminations have been required as part of the closing
requirements for transactions prior to the elimination of the periodic determination
letter program, the EP Subgroup is concerned that plan terminations will become
even more common without the ability to obtain current letters for ongoing plans.
More frequent plan terminations would not be in the best interests of plan
participants. Because these transactions are often time sensitive, it is
recommended that an expedited review process be made available in these
cases.
- Allow submission of determination letter applications for plan amendments
adopted to comply with requirements published annually by the Treasury and
IRS as a Required Amendments List for individually designed plans that
generally applies to changes in qualification requirements that become effective
on or after January 1, 2016. 9 To facilitate the best use of the IRS reviewers' time,
require that the plan sponsor or plan administrator include with the determination
letter application a “redlined” version of the last plan document that was the
subject of a favorable determination letter, marked to show the subsequent
changes responding to the Required Amendments Lists. More generally, the EP
Subgroup recommends that the IRS require that the plan sponsor or plan
9 The annually issued Required Amendments List establishes the date that the remedial amendment period expires for changes in qualification requirements contained on that list. The IRS has indicated that IRS review of determination letter requests for individually designed plans will be based on the applicable Required Amendments Lists and take into account Cumulative Lists issued prior to 2016 under the Cycle System. (Rev. Proc. 2016-37, 2016-29 IRB 136, Sections 9 and 12.)
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
16
EMPLOYEE PLANS
administrator include with any determination letter application a “redlined” version
of the last plan document that was the subject of a favorable determination letter,
marked to show any subsequent changes. 10 This should support a more efficient
IRS review process.
- Issue guidance that makes clear that if the only change in plan provisions is the
name of the plan sponsor and/or the plan name (for example, in the case of an
assumption of an ongoing plan by a buyer or in the case of a spin-off of a
“cloned” plan as part of a divestiture transaction), then the prior favorable
determination letter can be relied upon by the “new” plan sponsor. 11 Since it is
necessary under industry practice in certain situations for the plan to provide a
copy of its most recent favorable determination letter (such as for investment
vehicles, use in establishing tax-exempt status for foreign tax authorities and so
on), the IRS should implement a simple administrative process where a new
determination letter with the new name of the plan sponsor and/or the new plan
name (bearing the date of the original letter) can be issued in these situations.
- Allow submission of determination letter applications in the event of a major
change in the tax law applicable to tax-qualified plans and provide model
language for amendments to facilitate the review process in these cases.
- Allow submission of determination letter applications for any plan that has had
significant changes, including a major design change (such as a change to a
hybrid plan) or a novel qualification issue, that the plan sponsor or plan
10 This would be similar to the process used with Form 4461, Application for Approval of Master or Prototype or Volume Submitter Defined Contribution Plan, and Form 4461-A, Application for Approval of Master or Prototype or Volume Submitter Defined Benefit Plan, under which the requestor must provide a description of each place where the plan for which the application is being submitted is not identical word-for-word to the language of the lead plan (including an explanation of the purpose and effect of each difference), and a certification, made under penalty of perjury by the plan drafter, that the information describing where the plan language is not identical word-for-word is true and complete. 11 The administrative action requested in this recommendation would seem to parallel the action taken in recently issued Revenue Procedure 2018-15 (2018-9 IRB 379). Rev. Proc. 2018-15 provides that a domestic organization exempt from taxation under IRC Section 501(c) is not required to file a new application for exemption under certain corporate restructuring situations where the surviving entity continues to carry out the same purposes as the organization had been before the restructuring.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
17
EMPLOYEE PLANS
administrator believes may represent a “material change” such that reliance on
the most recent favorable determination letter is not appropriate. Allow
governmental plans access under this exception to the extent there are
significant changes in state law significantly affecting the terms of a plan.
- To encourage conversion of individually designed plans to pre-approved plan
documents when feasible, expand IRS instructions for the pre-approved 401(a)
plan and 403(b) plan programs by providing further guidance on the type of
changes that would be considered "minor modifications." 12 The EP Subgroup
also urges the IRS to consider further changes to make the pre-approved plan
programs available as broadly as possible to the EP Community. In reviewing EP
Community comments, the EP Subgroup found many of the changes suggested
by the American Retirement Association in its comment letter to EP dated
February 23, 2016 13 offer practical ways to enhance the usefulness of the
program. For example, adding IRC Section 457(b) plans to the existing pre
approved plan program would be very beneficial to the EP Community.
- In addition, since more plan sponsors are now contemplating conversion to a
pre-approved plan option, the IRS should consider extending adoption deadlines
under the pre-approved plan program. Under current IRS rules, all pre-approved
plan document providers must completely update their pre-approved plan
documents and request new opinion/advisory letters from the IRS every six
years. 14 Generally, plan sponsors operating under the pre-approved plan
document must then adopt a new updated pre-approved plan within two years
after the IRS issues its opinion/advisory letter for the pre-approved plan. If that
process occurs, the plan sponsor may rely on the advisory/opinion letter issued
12 The latest procedures for obtaining IRS approval of pre-approved 401(a) plan documents are provided under Revenue Procedure 2015-36 (2015-27 IRB 20) and procedures for obtaining approval of 403(b) plan documents are provided under Rev. Proc. 2013-22 (2013-18 IRB 985, as modified by Rev. Proc. 2014-28 (2014-6 IRB 944), Rev. Proc. 2015-22 (2015-11 IRB 754), and Rev. Proc. 2017-18 (2017-5 IRB 743).). 13 http://www.asppa-net.org/Portals/2/PDFs/GAC/Comment%20Letter/Enhancements_PreApproved_Plan_Programs_Comment_Letter2-23-16.pdf. 14 See Revenue Procedure 2015-36, 2015-27 IRB 20; Rev. Proc. 2013-22, 2013-18 IRB 985.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
18
EMPLOYEE PLANS
to the plan document provider. 15 Similarly, if a plan sponsor wishes either to
convert from an individually designed plan document to a pre-approved plan
document, or to adopt a pre-approved plan of a different document provider,
those actions must be taken during an IRS-specified time period, generally two
years following the approval of the new plan document. EP Community feedback
indicates that these two-year periods need to be extended or eliminated because
plan sponsors struggle to comply with the relatively short adoption period
currently authorized.
- Allow submission of determination letter applications upon the expiration of a
stated period of time since the last favorable determination letter (for example, 10
or 15 years). There is a concern that the industry may require a more recent
letter to establish tax-qualified status because a prior letter, although not
technically expired, will be considered too stale to be relied upon (such as for
investment vehicles, use in establishing tax-exempt status for foreign tax
authorities and so on). An alternative would be to allow submissions upon the
earlier of a stated period of time (for example, 10 years) or the adoption of 10 or
more amendments to the plan. The EP Community indicated that any reasonable
limitations on how many times a plan sponsor could utilize this process, such as
no more than once in every five years, would be acceptable.
- Allow access to determination letters for certain plans that cannot currently fall
within the pre-approved program limitations, such as multiemployer plans,
governmental plans with statutory structures, hybrid plans and complicated
employee stock ownership plans.
- If IRS workload management is a concern, the EP Community is receptive to
rules that stagger the deadline to submit determination letter applications that are
not based on a transaction date (for example, last determination letter date more
15 See Revenue Procedure 2016-37, 2016-29 IRB 136.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
19
EMPLOYEE PLANS
than 10 or 15 years ago). There are a number of methods that could be used to
stagger the application deadlines more evenly throughout the IRS fiscal year. For
example, this could involve imposing deadlines based on the type of plan (in
other words, January 1, 2019 - June 30, 2019 filing period for defined benefit
plans with material changes; July 1, 2019 - December 31, 2019 filing period for
defined contribution plans with material changes; January 1, 2020 - June 30,
2020 filing period for multiemployer defined benefit plans with material changes;
July 1, 2020 - December 31, 2020 filing period for multiemployer defined benefit
plans with material changes; January 1, 2021 - June 30, 2021 filing period for
governmental defined benefit plans with material changes; July 1, 2021
December 31, 2021 filing period for governmental defined contribution plans with
material changes). Alternatively, this could involve six-month staggered filing
periods for submissions by plan sponsor EIN, or any other similar methods that
could be used to produce six-month staggered filing periods. The comments
received by the EP Subgroup indicate that the EP Community would be willing to
use any type of staggered filing program that might assist the IRS in its workload
management, so long as access to the determination letter process was provided
in some manner.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
20
ADVISORY COMMITTEE ON
TAX EXEMPT AND GOVERNMENT ENTITIES
(ACT)
Employee Plans Subgroup
Recommendations Regarding Missing Participants
Susan E. Bernstein, Project Leader
Judith W. Boyette
Andrew G. Lipkin
June 7, 2018
RECOMMENDATIONS REGARDING MISSING PARTICIPANTS
I. EXECUTIVE SUMMARY ................................................................................... 23
II. BACKGROUND ................................................................................................. 24
III. RECOMMENDATIONS ..................................................................................... 34
EMPLOYEE PLANS
I. EXECUTIVE SUMMARY
The Employee Plans Subgroup (EP Subgroup) of the Advisory Committee on Tax
Exempt and Government Entities (ACT) examined compliance concerns for tax
qualified retirement plans with respect to participants and beneficiaries who cannot be
found or are not responsive (Missing Participants). The challenges affect plans of all
sizes. Plan sponsors may lose touch with participants over time for several reasons.
Participants may have moved without providing forwarding information or, in many
cases, the plan sponsor may have had bad data from the outset. Sometimes
participants provide the plan sponsor with erroneous information or data such as dates
of birth, Social Security numbers or ZIP Codes. Further, participants and beneficiaries
can lose track of plans in which they previously participated as they transition between
jobs in their working career, a common occurrence due to the nature of today’s mobile
workforce. This is further complicated as companies go out of business, declare
bankruptcy, are acquired, spin-off or merge with other companies. As plans are
terminated or merged as a part of corporate restructuring, it is difficult for plan sponsors
and participants to keep track of one another. 16
Missing Participants present significant challenges for plan sponsors seeking to
maintain compliance with applicable law and governing plan documents. The Internal
Revenue Code (IRC) 17 mandates when a plan must begin making distributions. It is
unclear how plan sponsors can satisfy this requirement for benefits payable to Missing
Participants. Issues related to the payment of required minimum distributions (RMDs)
has become a focus of recent U.S. Department of Labor (DOL) examinations and the
DOL has issued findings in recent investigations which conflict with IRS guidance. The
EP Subgroup recommends the IRS issue further guidance to help plan sponsors
navigate these challenges and maintain compliance with applicable law.
16 https://www.gao.gov/assets/670/667151.pdf at 26. 17 All section references are to the Internal Revenue Code of 1986, as amended, and the regulations thereunder, unless otherwise specified.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
23
EMPLOYEE PLANS
II. BACKGROUND
Scope of the Missing Participant Problem
Sponsors of qualified plans are concerned about how to comply with IRS requirements
involving payments to Missing Participants. Plan sponsors often first discover that
participants are missing when participant statements, summary annual reports or other
communications are returned to the plan sponsor as undeliverable with no forwarding
address provided. Plan sponsors generally seek to inform participants that they have a
duty to keep their contact information up-to-date, yet problems abound. 18 Plan sponsors
have no automatic method to keep information updated if former employees fail to
inform their employer of changes in name and/or address. 19 Participants are classified
on Form 5500 (Annual Return/Report of Employee Benefit Plan) as (a) active, retired or
separated receiving benefits; (b) retired or separated entitled to future benefits, or (c)
deceased with beneficiaries receiving or entitled to benefits. 20 The DOL estimates that
during 2014 alone, there were more than 42 million inactive participants in qualified
plans and some portion of those are missing. 21 According to a U.S. Government and
Accountability Office (GAO) report called “Greater Protections needed for Forced
Transfers and Inactive Accounts” issued in November 2014, which analyzed protections
needed for inactive plan accounts, the scope of the problem is substantial. The GAO
reported that millions of employees change jobs each year. Low-wage workers and
young workers are particularly likely to become Missing Participants because they
change jobs more often. 22 The median tenure for workers age 20 to 24 is just 1.3
years. 23 The scope of the problem is concerning. Although the total dollars attributable
to Missing Participants has not been determined, the larger population of separated
18 Susan Bernstein, Esq., IRS Provides Some Relief On Missing Participant Compliance Concern, Tax Management Compensation Planning Journal, Vol. 46, No. 1, p. 10, 01/05/2018. 19 https://www.gao.gov/assets/670/667151.pdf%20.at 25. 20 https://www.dol.gov/sites/default/files/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting- and-filing/form-5500/2016-instructions.pdf at 17. 21 https://www.dol.gov/sites/default/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin- historical-tables-and-graphs.pdf. 22 https://www.gao.gov/assets/670/667151.pdf at 21. 23 Data from the U.S. Bureau of Labor Statistics for both men and women in January 2012. http://data.bls.gov/cgi- bin/print.pl/news.release/tenure.t01.htm.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
24
EMPLOYEE PLANS
employees has left 16 million accounts unclaimed that exceeded $8.5 billion between
2004 and 2013. 24 Not all these separated employees are Missing Participants and not
all the unclaimed accounts are treated by plans as forfeitures. It is estimated that the
majority of Missing Participant accounts are valued individually at less than $3,000. 25
The GAO acknowledges that when participants terminate, the “onus is on them to
update former employers with address and name changes, and to respond to their
former plan sponsor’s communications.” 26 This is a critical point – plan sponsors have to
do their part to search for Missing Participants, but when reviewing plan sponsors for
compliance, regulators should keep in mind that participants have obligations to do their
part as well.
Sponsors of qualified plans must navigate all the IRS tax-qualified plan distribution
requirements to maintain the tax-qualified status of their plans. 27 For example, IRC
Sections 411(a)(11) and 401(a)(31) provide that a plan can be designed to force a
distribution of a participant’s benefit upon his or her termination from employment before
normal retirement age, regardless of the participant’s age or service, if the vested
benefit does not exceed $5,000 (or, in some cases, $1,000), referred to as mandatory
small sum cash-outs. Qualified plans are required to commence payment under IRC
Section 401(a)(14) no later than 60 days after the latest of:
the earlier of attainment by the participant of age 65 and normal retirement age defined by the plan,
the tenth anniversary of the date on which the participant commenced participation in the plan,
termination of the participant’s service with the employer, or
the date specified in a written election made pursuant to Treas. Reg. 1.401(a)(14)(b). 28
24 https://www.gao.gov/assets/670/667151.pdf citing SSA analysis of Form 8955-SSA data. 25 http://www.eric.org/uploads/doc/retirement/PBGC_MissingParticipantsRFI_CmtLtr_082013.pdf 26 https://www.gao.gov/assets/670/667151.pdf at 26. 27 Bernstein at 1. 28 IRC Section 401(a)(14); 26 C.F.R. 1.401(a)-(14).
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
25
EMPLOYEE PLANS
Furthermore, IRC Section 401(a)(9) requires that qualified plans commence distribution
of RMDs to employees not later than the required beginning date, which is generally
defined as April 1 of the calendar year following the later of the calendar year in which
the participant attains age 70½ or the calendar year in which the employee retires from
employment. 29
It can be difficult to find financial institutions willing to open rollover accounts for the
mandatory small sum cash-outs. Further, many Missing Participants have benefits that
are in excess of $5,000 and therefore are ineligible to be automatically rolled over to an
IRA without their consent. Plan sponsors commonly use the forfeiture and reinstatement
procedure pursuant to Treas. Reg. Section 1.411(a)-4(b)(6), which provides a
mechanism to forfeit benefits of Missing Participants as long as reinstatement is done if
the Missing Participant subsequently makes a claim. 30 The DOL appeared to agree
when it stated that the authority to interpret the meaning of “forfeited benefit” as used in
Treas. Reg. Section 1.411(a)-4(b)(6) resides with IRS/Treasury. 31 The Pension Benefit
Guaranty Corporation (PBGC) confirmed the forfeiture and reinstatement procedure
when it acknowledged that a forfeited benefit should be “disregarded for purposes of
determining the plan’s current liability” and for the variable-rate premium. 32
Nevertheless, the DOL has subsequently raised informal concerns that the forfeiture
and reinstatement procedure can result in a prohibited transaction triggering a 15
percent excise tax under IRC Section 4975. Given the foregoing, plan sponsors need
consistent inter-agency guidance on the use of the forfeiture and reinstatement
provision; it is unworkable for plan sponsors if the IRS authorizes a method and the
DOL treats such method as a prohibited transaction.
29 IRC Section 401(a)(9); 26 C.F.R. 1.401(a)(9)-2. 30 Bernstein at 4. 31 Questions and Proposed Answers for the Department of Labor Staff for the 2006 Joint Committee of Employee Benefits Technical Session (May 3, 2006). (https://www.americanbar.org/content/dam/aba/migrated/2011_build/employee_benefits/2006_qa_dol.authcheckdam. pdf). 32 PBGC Blue Book 2004, Q&A-2.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
26
EMPLOYEE PLANS
What happens when a plan sponsor cannot timely comply with one or more of the
applicable IRS distribution requirements because the payees are Missing Participants
despite best efforts to locate them? The consequences of noncompliance can be
extreme. If a plan fails to comply with applicable qualification requirements such as a
mandatory distribution, the plan risks the loss of its tax-qualified status. 33
Furthermore, we understand from conversations with EP Staff that EP examiners get
stuck on some of these very same issues, which causes delays in closing examinations.
EP Staff indicate that they also would welcome further guidance and/or field directives.
The Missing Participant problem recently reached the attention of Congress with the
introduction of bipartisan legislation. On February 28, 2018, Republican Senator Steve
Daines of Montana and Democratic Senator Elizabeth Warren of Massachusetts
introduced bipartisan legislation, the Retirement Savings Lost and Found Act of 2018, to
help address the Missing Participant problem. 34 If enacted, the bill would direct the
Commissioner of Social Security and the Secretary of the Treasury to jointly establish
an online mechanism to help locate and track Missing Participants. The legislation
would create the Office of Retirement Savings Lost and Found, which would act as a
clearinghouse for retirement plan information and require employers to provide data to a
national searchable database. It would also require plan sponsors to send lost,
uncashed checks of less than $1,000 for nonresponsive participants who are not
necessarily missing to Treasury so that participants can locate the money and save for
retirement. The legislation has the support of AARP and the ERISA Industry Committee
(ERIC). 35
33 Bernstein at 2. 34 “S. 2474-115th Congress: Retirement Savings Lost and Found Act of 2018.” www.GovTrack.us/congress/bills/115/s2474. 35 https://www.warren.senate.gov/imo/media/doc/Retirement%20Savings%20Lost%20and%20Found%20Act%20of%20 2018%20(fact%20sheet)1.pdf.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
27
EMPLOYEE PLANS
DOL Guidance on Missing Participants
The DOL issued guidance to sponsors of terminated qualified plans on what it considers
to be reasonable steps to search for Missing Participants in the context of terminated
plans. According to DOL Field Assistance Bulletins (FAB) 2004-02 and 2014-01, a plan
fiduciary of a terminated defined contribution plan has the responsibility to locate
Missing Participants and, when efforts to communicate with a Missing Participant fail to
secure a distribution election, distribute the account balance into a federally-insured
bank account in the name of the missing participant or, in certain states, escheat the
account balance to a state unclaimed property fund. According to the DOL, when trying
to locate Missing Participants, plan fiduciaries should: (i) use certified mail; (ii) check
related plan and employer records for more up-to-date information; (iii) identify and
contact the participant’s designated beneficiary (such as, spouse, children and so on) to
find updated contact information; and (iv) use free electronic search tools including
internet search engines, public record databases, obituaries and social media. Further,
if none of the foregoing methods result in locating the Missing Participant, then the plan
sponsor must use additional search steps as appropriate, including commercial locator
services, credit reporting agencies, information brokers, investigation databases and
analogous services that may involve charges. 36
The ERISA Advisory Council 37 provided recommendations to the DOL in three areas: (i)
developing industry best practices, (ii) updating and supplementing guidance
addressing Missing Participant issues and (iii) working with other governmental
agencies to create a coordinated approach to addressing Missing Participant issues. 38
Specifically, the ERISA Council recommended that the DOL (i) expand FAB 2004-02
and 2014-01 to specify the required steps that should be taken by ongoing plans to
satisfy fiduciary duties, and (ii) confirm use of the forfeiture and reinstatement procedure
36 FAB 2004-02, FAB 2014-01. 37 Advisory Council on Employee Welfare and Pension Benefit Plans, Locating Missing and Lost Participants, November 2013 (https://www.dol.gov/sites/default/files/ebsa/about-ebsa/about-us/erisa-advisory- council/2013ACreport3.pdf). 38 2013 ERISA Advisory Council report.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
28
EMPLOYEE PLANS
for uncashed benefit checks. As of this writing, the DOL has not responded to any of
these recommendations. As a result, many plan sponsors continue to rely on DOL FABs
2004-02 and 2014-01 as the relevant authority on how to address Missing Participants.
While the DOL has made it clear that locating Missing Participants is a fiduciary duty
under the Employee Retirement Income Security Act of 1974, as amended (ERISA),
plan sponsors have been left without clarity on how often they need to employ various
search methods during the life of an ongoing plan. DOL regional offices have been
actively examining large plans through a national, large-scale initiative to help deferred
vested participants obtain benefits that are reported on their Social Security notices.
Through this effort, some plan sponsors have reported that DOL investigators have
been finding fiduciary breaches subject to penalties and personal liability where the
sponsors have not been sufficiently aggressive in their efforts to locate Missing
Participants. Some plan sponsors have reported that DOL investigators have issued
findings that plans have inadequate procedures to find deferred vested participants who
terminated employment prior to normal retirement age, especially those who are past
their required beginning dates (generally age 70½) and must take corrective action.
Others have reported that DOL investigators are asking plan sponsors to solicit updated
contact information from coworkers of Missing Participants and to send annual notices
to participants who reach normal retirement age even though there are no IRS
requirements for such notices. The American Benefits Council strongly urged the DOL
to issue comprehensive guidance with respect to Missing Participants and cease taking
the ad hoc positions that plan sponsors are currently experiencing. 39
PBGC Guidance on Missing Participants
The PBGC maintains a Missing Participants program for terminated single-employer
PBGC-insured defined benefit plans. The PBGC recently issued a final rule on
December 22, 2017, expanding and updating its existing Missing Participants program
to cover defined contribution plans (PBGC 2017 Final Rule). Plan sponsors that
39 https://www.americanbenefitscouncil.org/pub/?id=d68a50ca-908c-9e37-d53d-3111689f91ff.
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
29
EMPLOYEE PLANS
terminate 401(k) and other defined contribution plans can now turn to the PBGC for help
in distributing benefits. 40 Under the PBGC 2017 Final Rule, a participant or beneficiary
is considered to be missing if: (i) the plan administrator does not know with reasonable
certainty the location of the distributee; (ii) under the terms of the plan, the distributee’s
benefit is to be paid in a lump sum without the distributee’s consent, and the distributee
has not responded to a notice about the distribution of the lump sum or (iii) under the
terms of the plan and any election made by the distributee, the distributee’s benefit is to
be paid in a lump sum, but the distributee does not accept the lump sum and it remains
uncashed for at least 45 days after either the issuance of the check or the check’s stale
date (Missing Distributee). The PBGC 2017 Final Rule also now defines a “commercial
locator service” as “a business that holds itself out as a finder of lost persons for
compensation using information from a database maintained by a consumer reporting
agency.”
The PBGC 2017 Final Rule provides a new voluntary option for defined contribution
plans to deal with Missing Distributees when closing out a plan and makes it more likely
that Missing Distributees will receive their benefits from terminated plans. Ongoing
plans, however, may not turn benefits over to the PBGC for Missing Participants. The
PBGC disclosed in its 2017 Annual Report that it has been working on an initiative with
the DOL to enable the DOL’s Chicago regional office to work with the PBGC database
to reunite participants with benefits. 41 The PBGC reported its intention to expand this
pilot program. To date, neither the DOL nor the PBGC has issued guidance to sponsors
of ongoing qualified plans.
Existing IRS Guidance on Missing Participants
The IRS has addressed Missing Participants in the following four ways. First, Rev. Proc.
2016-51 “Employee Plans Compliance Resolution System” (EPCRS) addressed
locating Missing Participants in the context of making corrections to participants and
40 https://www.federalregister.gov/documents/2017/12/22/2017-27515/missing-participants (Dec. 22, 2017). 41 https://www.pbgc.gov/sites/default/files/pbgc_advocate_report_2017.pdf
ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) 2018
30
EMPLOYEE PLANS
beneficiaries to whom additional benefits are due, but who have not been located after a
mailing to the last known address. In this context, the IRS stated:
In general, such actions include, but are not limited to, a mailing to the individual’s last known address using certified mail, and, if that is unsuccessful, an additional search method, such as the use of a commercial locator service, a credit reporting agency, or Internet search tools. Depending on the facts and circumstances, the use of more than one of these additional search methods may be appropriate. A plan 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 are provided to the individual at that time. 42
Second, the IRS addressed Missing Participants in the context of notifying participants
in multiemployer plans that are in critical status of benefit suspension. Where notices
are returned as undeliverable, as long as the plan sponsor takes steps to contact the
individual beyond the initial mailing, the plan sponsor can satisfy the applicable notice
requirement. In the example provided in Treas. Reg. Section 1.432(e)(9)-1(5), Example
2, the plan sponsor takes several steps to locate the Missing Participants:
The plan sponsor contacts the bargaining parties for the plan and the plan administrators of any other employee benefit plans that the plan sponsor reasonably believes may have information useful for locating the missing individuals, and the plan sponsor requests contact information for the missing individuals. The plan sponsor then uses an Internet search tool, a credit reporting agency, and a commercial locator service to search for individuals for whom it was not able to obtain updated information from bargaining parties. 43
Get a plain-English answer with a citation back to this text.
Ask AI about this code