What to Do with Those Uncashed Checks and Lost Participants Sunday, April 28, 2013

Transcription

1 What to Do with Those Uncashed Checks and Lost Participants Sunday, April 28, 2013 Peter Preovolos, APA, RIA, AIFA, President, PenChecks, Inc. Jean Ackerman, DOL Guidance Neither ERISA law nor DOL regulations adequately address this issue, so the burden is on the fiduciary to determine the appropriate course of action. * *Journal of Pension Benefits, Issue in Administration, Design, Funding, and Compliance, Volume 18, Number 1, Autumn

2 Background Benefit Processing can be frustrating IRS and DOL requirements mandate that distribution packages given to participants communicate all the distribution options available under the plan Types of Unclaimed Benefits Four (4) scenarios of unclaimed benefits: 2

3 Types of Unclaimed Benefits Scenario 1. (Individual Trustee) Participant A completes his distribution package and requests that his $10,000 account balance be paid to him in a lump sum. a. The distribution is made less the $2,000 mandatory withholding that is sent directly to the IRS b. The trustee issues a check from the plan checking account, but the check is never cashed c. The plan continues to show the $8,000 among its assets, as the issuance of the check in this example is only paperwork until it is cashed. d. IRS has received its $2,000 and a 1099R issued showing the $10,000 paid and is taxable income in the year of distribution. Types of Unclaimed Benefits Scenario 2. (Corporate Trustee / Custodian) The Plan Administrator authorizes the fund-holder / record-keeper a financial institution to distribute to Participant B the $10,000, minus the $2,000 withholding. a. Fund-holder / record-keeper issues what is tantamount to a cashier s check for $8,000, pays the withholding and shows the entire $10,000 as being removed from the plan account. b. Again the check never gets cashed and the institution issues a 1099R. 3

4 Types of Unclaimed Benefits Scenario 3. (Individual Trustee) Participant C terminates employment with an account balance of $950. a) A distribution package is sent to the participant, but the participant never completes the benefit election package. b) Trustee issues a check to the participant for $950, less the $190 withholding, and sends it to the last known address. c) Check is never cashed. Types of Unclaimed Benefits Overview of Scenarios 1, 2 and 3 1. The Trustee (whether corporate or individual) is in a position to know that participant A, in scenario 1 and participant C in scenario 3 have not cashed their checks. 2. On the other hand participant B, in scenario 2 is not so lucky. For her benefit under the plan reflects that her full benefit was paid years ago, regardless of whether she received the money: 4

5 Types of Unclaimed Benefits Outcome The 20% withholding has been forwarded to the IRS, and the participant may not have realized that he/she had some obligations to claim the income and gets the proper tax credited to his/her tax return. 1. Barring a notice from the IRS which could be generated by Form 1099R the participant remains unaware of the entire issue. 2. Once three years have expired, the participant is unable to amend his/her tax return to claim this unrecognized withholding and realize the total benefit still due to him/her. 3. Also if three years have passed the entity issuing the check is stopped from restoring the taxes in order to re-establish the tax exempt status of the funds. Types of Unclaimed Benefits Scenario 4. There is one other similar circumstance that gives rise to an uncashed check concern: the uncashed IRA rollover IRS guidance permits a plan trustee to effect a direct rollover at a participants request by sending a check made payable to the recipient plan trustee or IRA Institution, to the participant for forwarding to the trustee/custodian. If the participant takes no further action when the check is received, the rollover is never consummated and the check is never cashed. 5

6 The Billion Dollar Question Are uncashed amounts plan assets? If they are then the plan fiduciaries retain some level of duty to the participants for these funds. Certainly in scenario 2 the money remains in the plan s coffers. The Billion Dollar Question Does it matter that the money was considered Distributed for tax purposes? 1. The argument is that even though the check was issued but remains uncashed, the plan has considered it to be distributed for three important reasons: a. For removing from plan accounts b. For payment of withholding taxes c. For issuance of a form 1099R 2. Therefore it is not possible for the plan to readjust the funds in the pretax accounts without restoring the taxes withheld. 6

7 Fiduciary Responsibility Does a fiduciary therefore have ongoing responsibility for unclaimed funds? 1. Yes - if one believes the fiduciary has responsibility under ERISA for uncashed funds regardless of whether they have been taxed or not. 2. What might those responsibilities be? o Unfortunately this is not flushed out in the law or regulations. o Even if we believe the funds are not plan assets, it is still possible that a failure to take some action could be considered to be a breach of fiduciary duty Fidcuciary Responsibility 3. Does the financial institution that issues the check have any responsibility? While there is no specific guidance regarding un-cashed checks, it is hard to imagine that simply handing over the money terminates all fiduciary obligations when Fiduciaries are held to such higher standards on all other transactions, that is, as one court expounded, the highest responsibility known to law. The idea that these funds are no longer protected in any way is directly contrary to the DOL s analogues guidance in regards to automatic rollover, where the plans administrator is responsible for identifying a reliable rollover account provider that meets significant criteria, as well as providing notice to participants and beneficiaries about where to find these rollover accounts. 7

8 Other Issues A. Who benefits from the uncashed check? B. What about escheatment? C. What about the tax withholding and income reporting? D. What should the fiduciary do? E. Actual Case Actual Case Bechtel Corporation Crown Zellerback Nolanger in existence Levi Strauss Samsonite Luggage 1. Wells Fargo Bank was the trustee/custodian of each of these qualified plans 2. Each year the plan sponsor sent their outside auditors to the bank to audit the movement of cash out of the plan 3. Two weeks after the audit a report was presented to the bank on all un-cashed checks. 4. Payment of Interest 5. Return funds to the trust 8

9 What do you do with un-cashed participant distribution checks? 1. Don t know Plan Sponsor 2. Vanguard takes care of it for us Plan Sponsor 3. We don t have any TPA 4. Escheat to the State Insurance Company 5. The amount is so small in relationship to the total plan assets it is immaterial Plan Audit Accounting Firm 6. The funds are put back into the Plan and allocated as forfeitures TPA 7. My TPA takes care of it Plan Sponsor 8. That s the responsibility of the Plan Sponsor TPA 9. We put the funds in a missing participant IRA TPA What SHOULD a Fiduciary do? Establish a procedure that deals with un-cashed checks. Step 1 - Get the financial institution or the Plan Sponsor to identify the un-cashed checks. Step 2 - Try again to find the participant. Step 3 - Have the funds transferred to an account for the participant outside of the plan. Step 4 - Setup a website or use an established website such as to register the participant. 9

10 The source for this presentation comes from an article Peter Preovolos co-authored with Ilene Ferenczy. The article appeared in the Journal of Pension Benefits, Volume 18 / Number I / Autumn 2010 issue. The article was based on my 45 years of experience in trust administration and related services. Peter E. Preovolos 10