October 7, 2016
Authored by: Denise Erwin and Steven Schaffer
For many years, the PBGC has been helping reunite missing participants with their benefits under single-employer defined benefit plans. Now, a new PBGC proposed rule may open up the program to missing participants under other terminated plans.
Under this proposed rule, terminated defined contributions plans may choose to transfer benefits of missing participants to the PBGC or to establish an IRA to receive the transfer and send information to the PBGC about the IRA provider. The PBGC will attempt to locate the missing participants and add them to a searchable database. The PBGC notes that once the program is established, it may issue guidance making the reporting requirement mandatory for defined contribution plans as authorized under section 4050 of ERISA.
The PBGC will accept the transfer of accounts of any size. If a plan sponsor chooses to transfer accounts to the PBGC, it must transfer the accounts of all missing participants. There will be no fee for transfers of $250 or less. For transfers above that amount, a one-time flat fee will apply which the PBGC indicates will not exceed its costs associated with the program. Initially, the fee has been set at $35.
This newly-proposed voluntary program for defined contribution plans has certain limitations. For instance, it would only be available to locate missing participants upon plan termination. It would not be available to locate missing participants for ongoing plans. For example, the program would not be available to find missing participants in connection with a plan correction under EPCRS. In addition, although the program would be available to many types of single-employer and multiemployer defined contribution plans, including abandoned plans, it would not be available to governmental plans and church plans.
The proposed rule also establishes a similar voluntary program for terminated professional service defined benefit plans with 25 or fewer participants and a mandatory program for terminated multiemployer plans covered by title IV of ERISA, similar to the existing program for single-employer defined benefit plans.
Finally, the proposed rule contains numerous changes to the existing rules. Most notable for defined contribution plans, the proposed rule modifies the criteria for being “missing” to include distributees of defined contribution plans who fail to elect a form or manner of distribution although their whereabouts are known. The PBGC notes that this change is consistent with existing DOL regulations which currently treat such individuals similarly to individuals who cannot be found for purposes of the safe harbor for terminated defined contribution plans. For terminating defined benefit plans, it would include distributees subject to mandatory “cash-out” who do not return an election form. According to the PBGC, it can be difficult to find the benefits of non-responsive distributees after they have been transferred to IRAs. It hopes to address this problem by bringing non-responsive distributees “into the PBGC fold” with its centralized governmental repository and pension search capability. Defined benefit plan distributees whose benefits are not subject to a mandatory cash-out provision would only be considered missing if the plan did not know their whereabouts. In making this distinction, the PBGC indicates that individuals with benefits that are not subject to cashout enjoy rights and features not available to those whose benefits may be cashed out and, absent an election, their benefits will be annuitized, preserving those rights and features. In addition, for title IV plans the identity of the insurer issuing the annuity must be provided to the PBGC if their whereabouts are unknown.
Other changes include more detailed requirements for diligent searches for defined benefit plans similar to those already required of defined contribution plans by DOL guidance, simplification of the existing rules and assumptions used for valuing benefits to be transferred to the PBGC, and changes in the defined benefit plan rules for paying benefits to missing participants and their beneficiaries.
The new rule is generally proposed to be effective for plan termination dates after calendar 2017. In addition to the proposed rule, the PBGC has issued a set of FAQs as well as draft forms with instructions for each of the proposed programs. Additional information can be found on the PBGC website here.