When a participant experiences a distribution event (e.g., terminating service with the employer), and when the participant does not affirmatively elect to take the distribution, a plan document may require that an account balance of $5,000 or less be distributed immediately, and without the participant’s consent, by rolling the account over to an IRA. This is sometimes called a “forced rollover.” When making a forced rollover, a plan must comply with the applicable plan provisions and related Internal Revenue Service (“IRS”) and Department of Labor (“DOL”) guidance.
A forced rollover can only be made if a participant’s vested account balance is $5,000 or less. If a participant’s vested account balance is greater than $5,000, the account cannot be distributed without participant consent. The only exception to that limit is for terminating defined contribution plans. Additionally, although the Code does not require a forced rollover for distributions of $1,000 or less (where a “forced” distribution can be used in lieu of a rollover), the plan document can require that mandatory distributions of $1,000 or less be rolled over to an IRA.
The DOL has established a forced rollover “safe harbor” for the selection of the IRA provider and the investment of the rolled-over funds. See 29 C.F.R. § 2550.404a-2(c). Under this safe harbor, a plan fiduciary (e.g., a plan committee) will be deemed to satisfy its fiduciary duties under ERISA if the following five conditions are satisfied:
- the distribution must be mandatory (i.e., it generally cannot exceed $5,000);
- the forced rollover must be made to an IRA;
- the plan fiduciary must enter into a written agreement with the IRA provider;
- the summary plan description (or a summary of material modifications) must describe the forced rollover provisions to participants; and
- the selection of the IRA provider and the investment must not be a prohibited transaction under ERISA.
In addition, the rolled-over funds must be invested as follows:
- in an investment product that:
- is designed to preserve principal and provide a reasonable rate of return consistent with liquidity;
- seeks to maintain, over the term of the investment, the dollar value that is equal to the amount invested in the product by the IRA;is offered by a state or federally regulated financial institution (i.e., a bank, a credit union, an insurance company, or a registered investment company);
- the IRA’s fees and expenses (e.g., charges to establish and maintain the IRA, investment expenses, termination costs, and surrender charges) must not exceed the fees and expenses charged by the IRA provider for comparable IRAs that are not forced rollover IRAs; and
- the participant must have the right to enforce the terms of the IRA agreement (with regard to his or her rolled-over funds) against the IRA provider.
A practical issue that arises in connection with forced rollovers is what do the plan fiduciaries need to do so that the affected participants qualify as missing or unresponsive participants in order to use the forced rollover procedure. Under ERISA’s provisions, plan fiduciaries must make “reasonable efforts” to locate missing participants. The DOL has issued guidance—aimed at plan sponsors of terminating defined contribution plans—on the responsibilities of plan fiduciaries who encounter missing or unresponsive participants when terminating those plans.
Under that guidance, a responsible plan fiduciary should take reasonable steps to locate a missing participant before determining that the participant cannot be found. These steps include (i) using certified mail; (ii) checking the records of the employer and related plans (e.g., the employer’s group health plan) for up-to-date information; (iii) attempting to identify and contact the missing participant’s beneficiaries under the terminated plan or a related plan; and (iv) using free electronic search tools (such as internet search engines, public record databases, obituaries, and social media).
If a missing participant cannot be located using the initial search steps, the fiduciaries must consider whether additional search steps are appropriate. In making that decision, the fiduciaries should consider the size of a participant’s account and the cost of further search efforts. Possible additional steps include using internet search tools that charge a fee, commercial locator services, credit reporting agencies, information brokers, investigation databases, and analogous services that may involve charging a fee. Note that, if additional fee-based search steps are utilized, the fee may be charged against the participant’s account, if the fee is reasonable.
In early 2021, the DOL issued additional guidance intended to help retirement plan fiduciaries locate and distribute benefits to missing or nonresponsive participants. The guidance, as discussed in our prior blog post, lists steps that a retirement plan fiduciary could follow to help reduce the incidence of missing participants, based on practices that the Employee Benefit Security Administration (“EBSA”) division of the DOL identified as effective at minimizing missing participants during its investigations. The best practices are grouped into four broad categories, with a number of specific practices listed under each category:
- Maintaining accurate census information for the plan’s participant population. This could include, among other practices, regularly auditing census information and correcting data errors.
- Implementing effective communication strategies. This list includes, but is not limited to, building steps into the plan and employer onboarding and enrollment processes for new employees, and exit processes for separating or retiring employees, to confirm or update contact information.
- Conducting missing participant searches. The practices listed in this category include a number that are consistent with prior DOL and IRS guidance (such as using free online search records and attempting contact via USPS certified mail) and some additional practices (such as using social media to locate individuals, registering missing participants on public and private registries, reaching out to colleagues, and/or publicizing a list of missing participants on the company’s intranet). It is important to note that some of the listed practices may raise privacy concerns that should be discussed and addressed prior to implementation.
- Documenting procedures and actions. This list includes establishing a written policy or procedure, documenting key decisions and steps taken to implement the policies and, for a plan that uses a third-party administrator (“TPA”), working with the TPA to identify shortcomings and taking steps to ensure the TPA is providing agreed-upon services.
The DOL guidance also lists a number of “red flags” that EBSA has identified as warnings or indicators of a problem with missing or nonresponsive participants. These include “more than a small number” of missing or nonresponsive participants; missing, inaccurate or incomplete contact information or census data (e.g., placeholder entries); and an absence of policies and procedures for undeliverable mail and/or uncashed checks (e.g., a failure to reclaim stale uncashed check funds in distribution accounts).
Contact your Faegre Drinker benefits attorney with questions or for assistance with forced rollovers and missing or unresponsive participants.