What to Do With Abandoned Accounts?
Kimberly DeMenge, JD, QKA
Can a retirement plan participant account that is determined to be abandoned be forfeited?
Generally, no. The Department of Labor (DOL) has issued guidance on handling missing or nonresponsive participant accounts in Field Assistance Bulletin (FAB) 2014-01.
A plan administrator must take all necessary steps, as determined by the facts and circumstances of the participant’s situation, to determine if the participant is truly missing or nonresponsive. This includes sending a certified letter to the last known address, searching other employee records, or reaching out to a participant’s beneficiaries—if beneficiaries are named— to attempt to contact the participant. The plan administrator also may perform an internet search or work with a commercial locator service or credit reporting agency, but the costs associated with these should be considered beforehand. Expenses may be charged against the specific individual’s account if reasonable. When considering if the fee is reasonable, the DOL allows the account size to be considered.
If the plan is still active, consent is almost always needed to process a distribution. The plan administrator should follow the document’s cash-out provisions if this option is contemplated. The plan document may also list options available to a plan administrator if a participant is found to be missing. If a missing participant’s balance is greater than the cash-out provisions, the balance in very limited circumstances may be forfeited. In general, this option cannot be done before the plan’s normal retirement age or age 62, if later.
But be careful when considering forfeiture. Plan document provisions may be even more restrictive than statutory options allow, and the employer might have to reinstate a forfeited balance if the participant later makes a claim for his benefit. Complications also may arise regarding participant required minimum distributions (RMDs); it may be difficult to track money in a forfeiture account that would be subject to distribution when the participant in question reaches RMD age.
The DOL says that plan fiduciaries must always consider distributing missing participants’ benefits into individual retirement plans, such as individual retirement (IR) accounts, IR annuities, or another defined contribution plan of the employer. When an employer has determined that a missing participant’s account cannot be paid according to the plan’s cash-out provisions, the plan administrator should roll over the participant’s assets to an IRA, or if an IRA is not available, review the terms of the plan document for other potential options. Typically, transfer to a state unclaimed property fund would be a last resort. Note that a terminating plan has special rules for payouts processed without participant consent (see FAB 2014-01 and the PBGC’s Missing Participants Program, now an option for defined contribution plans).
Any time plan administrators make decisions to move participant account balances outside of the plan that are beyond the document’s cash-out provisions, they are engaging in a fiduciary decision. So the plan administrator should be sure to do what is best for the participant and her beneficiaries.
What is a state unclaimed property fund?
Unclaimed (or abandoned) property refers to accounts held by financial institutions or financial services companies that have had no contact with the owner and there has been no activity within the account for a long period of time. Whether such property can be considered unclaimed is a state law issue, and each state has its own laws and factors for determining when an account may, or must, be considered abandoned.
Common forms of unclaimed property include savings or checking accounts, IRAs, and uncashed checks. Once determined to be abandoned, the unclaimed property is turned over to the state for safe keeping in an unclaimed property fund.
What should a plan administrator do if a participant’s account balance was turned over to the state as unclaimed property and the participant later comes forward requesting it?
Because the proceeds of the account are now in a state’s unclaimed property fund, the individual needs to work with that state to reclaim them.
Most states, if not all, have a free online search tool that allows individuals to determine if their state has unclaimed property belonging to them. Assuming that moving the individual’s balance to the unclaimed property fund was valid, there is nothing more that a plan administrator can do.
