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On December 22, 2017, the Pension Benefit Guaranty Corporation published a final regulation revising its missing participant program for terminating defined benefit plans and extending it to terminating defined contribution plans.
While the PBGC program only applies to terminating/terminated plans and there is no comprehensive guidance on the treatment of missing participants under ongoing plans, PBGC’s (and DOL’s related) guidance for terminated plans is in some respects, e.g., the definition of when a participant becomes “missing” and what constitutes a “diligent search,” considered by many to provide a framework for the treatment of missing participants under ongoing plans.
In this regard, we note that, as we discuss in our article Missing participants – part 1, the treatment of missing participants in ongoing plans is currently a DOL audit target.
In this article we briefly review PBGC’s new regulation.
Prior to the adoption of this regulation, PBGC’s missing participant program only covered terminating ERISA single employer DB plans. Under PBGC’s final regulation, that program is (among other things) expanded to cover, on a voluntary basis, missing participants under terminating DC plans.
A key goal of PBGC’s expansion of its missing participant program is to enhance the ability of individuals to find retirement benefits they are owed, where the plan owing them those benefits has been unable to find them. In the preamble to its original proposal, PBGC explained:
An important part of all of the missing participants programs would be a new unified pension search database. This database would … include information about missing participants and their benefits and a directory through which members of the public could easily query the database (using a choice of fields) to determine whether it contained information about benefits being held for them. PBGC anticipates that its new pension search database would provide a comprehensive, nationwide, authoritative, reliable, easy-to-use source of information about missing participants and the benefits being held for them.
As noted, however, application of the PBGC program to DC plans is voluntary. PBGC said it intends to revisit this issue, “to reevaluate the decision [to make DC plan compliance voluntary] after plans and PBGC gain actual experience with the program.” The PBGC regulation is part of other efforts to develop a retirement benefits clearinghouse, e.g., the 2016 proposal of Senators Warren (D-MA) and Daines (R-MT) to create a standalone agency, the Retirement Savings Lost and Found, overseen by the Commissioner of Social Security and the Secretary of the Treasury, as a clearinghouse for retirement benefits for which the participant could not be found.
It’s worth noting that 6 (out of a total of 14) commenters on PBGC’s proposed rule “encouraged PBGC to look past a plan’s terminated status and assert authority to permit ongoing plans (particularly ongoing DC plans) with missing participants to use the program too.” PBGC demurred, stating that “[n]otwithstanding the importance of the issues raised by these commenters, such an expansion of the program is beyond the scope of this rulemaking.”
As noted above, DOL rules also only explicitly deal with terminated plans.
In what follows we summarize the final rule as it revises current PBGC missing participant rules for terminating DB plans and provides new rules for terminating DC plans.
The final regulation provides different definitions of “missing participant” for DB and DC plans.
A participant is missing under a terminating DB plan if either:
(1) The plan administrator does not know with reasonable certainty the location of the participant.
(2) In accordance with the plan, the participant is to be paid in a lump sum without her consent, and she has not responded to a notice about the distribution.
(3) In accordance with the plan and any participant election, the benefit is to be paid in a lump sum, but she does not accept the lump sum.
Items (1) and (3) are the same for determining whether a participant is missing under a terminating DC plan. With respect to item (2), a DC plan participant is missing if she has not elected a form of distribution in response to a notice about the distribution.
To be clear about what is going on here, it’s possible, with respect to items (2) and (3), that the plan administrator may actually know where the participant is but that the participant may still be treated as missing (and therefore may, e.g., have her benefit transferred to the PBGC). As PBGC notes in the preamble, though, “diligent searches are required only for missing [participants] whose location the plan doesn’t know with reasonable certainty.”
(Note: the regulation uses the term “distributee” to mean both participants and beneficiaries. For simplicity, in this article we only discuss participants, but similar rules apply to beneficiaries.)
With respect to any missing participant, an ERISA single employer DB plans generally must on termination either purchase an annuity for the participant or transfer her benefits to the PBGC.
Diligent search: If the plan administrator does not know the location of a participant with reasonable certainty, the plan administrator must have conducted a “diligent search” within 9 months of filing with the PBGC. For this purpose, a “diligent search” means either (1) by paying a commercial locator service to search for information to locate the participant or (2), if the participant’s normal retirement benefit is not more than $50 per month, by using the “records search method.”
The “records search method” means all of the following to the extent reasonably feasible and affordable:
Searching plan records.
Searching the records of the plan sponsor/most recent employer.
Searching the records of each retirement or welfare plan of the plan sponsor in which the participant participated.
Contacting the participant’s beneficiaries.
Using a free internet search method.
Filing: In the final regulation PBGC left the specification of filing requirements to the relevant PBGC forms and instructions, to preserve flexibility.
Compliance with the PBGC missing participant program by terminating DC plans is voluntary. A terminating DC plan may (but need not) elect to be either:
A “transferring plan,” and pay a benefit transfer amount to PBGC for each missing participant, or
A “notifying plan,” and notify PBGC of the disposition of the benefits of one or more participants.
The idea here is that, if the DC plan is transferring missing participants’ benefits to PBGC, it must transfer all missing participants’ benefits – it cannot, e.g., give PBGC its small accounts, while transferring larger (and more profitable) accounts to IRAs. On the other hand, if it is merely notifying PBGC of the disposition of benefits, it may do so with respect to some but not all of its missing participants. In the latter case, PBGC diligent search and filing requirements would only apply to those selected participants.
Diligent search: The plan administrator must have searched for the participant in accordance with DOL fiduciary regulations and other applicable guidance – e.g., in compliance with the requirements of FAB 2014-01. (We discuss these rules in our article Missing participants – part 1.) The search generally must be made within 9 months before the relevant filing is made.
Filing: As with DB plans, the final regulation leaves the specification of filing requirements to the relevant PBGC forms and instructions.
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While these rules do not explicitly apply to sponsors of ongoing plans, they are part of an evolving “template” for the treatment of missing participants.
We will continue to follow this issue.