November 22, 2016
The Department of Labor (DOL) wants pension plans to do a better job of paying benefits to terminated vested participants who have become eligible for payment. To underscore this concern, it has launched a nationwide project to investigate the payment practices of large defined benefit (DB) plans with regard to “unpaid benefits.” Unpaid benefits are benefit payments due to terminated vested participants because they have attained either normal retirement age (generally age 65) or 70½. Anecdotal evidence indicates that the agency is already rigorously pursuing these investigations.
The project began as a regional initiative with the identification of a group of large DB plans, including multiemployer plans, with significant numbers of terminated vested participants, as identified from data on their previously filed Forms 5500. The payment practices investigated included plan policies, procedures and actual practices for identifying and communicating with terminated vested participants eligible for payment and for locating terminated vested participants who were “missing” or “lost.” These investigations revealed a number of important findings:
The investigations also revealed that there were multiple reasons why so many benefits were not being paid. These included:
The fiduciary obligations of the Employee Retirement Income Security Act (ERISA) cover all aspects of plan administration, including the payment of benefits. The DOL believes that the failures identified above could indicate potential violations of one or more of those duties including the duties of prudence and loyalty, the duty to follow the terms of the plan, and the duty to maintain adequate records. However, the DOL’s main concern at this point appears to be more fundamental: plans need to do more to deliver benefits to their participants.
The Internal Revenue Service (IRS) also has an interest in timely payment of terminated vested participants. Its primary focus is on the commencement of required age-70½ benefits both because it is a problem that the IRS finds frequently on audit and because it raises qualification and excise tax issues.
A related focus of the IRS is the proper calculation of normal retirement age (NRA) benefits that commence after NRA. That is because another commonly found error in IRS plan audits is the failure to actuarially increase the NRA benefit to account for the delay in payment.
Although the DOL, the IRS and the Pension Benefit Guaranty Corporation all have provided guidance to some degree on searching for missing and lost participants, that guidance so far has been limited to specific circumstances (plan terminations, or in the case of the IRS, corrections). There has been no guidance for ongoing plans on either general standards for missing and lost participant searches or standards for communicating with terminated vested participants. Many plan sponsors consider their compliance with the Social Security registration and notice requirements (i.e., IRS Form 8955-SSA and the related notice to vested participants following termination) as fulfilling their obligations with regard to terminated vested participants, and rely on participant benefit applications (as required by plan language) to trigger benefit payments, at least with respect to terminated vested participants who have not reached age 70½.
With the expansion of unpaid benefit investigations to all DOL Regional Offices, however, it appears that the agency is sending a clear signal that plans need to do more. Employers should take advantage of the DOL’s advance notice on this issue, and while the original investigations were limited to DB plans, there is no reason to believe that defined contribution plans will not be included going forward.
Working with their attorneys and other advisors, employers should consider taking steps now to help ensure that they will not be caught off-guard if they receive a notice for one of these investigations. Those steps could include the following:
Policies and Procedures Related to Paying Terminated Vested Participants
These could include policies and procedures about the following:
With both the DOL and the IRS making timely benefit payments to terminated vested participants a priority, plans need to look at, and revise if necessary, the policies and procedures, documents, and operations related to the way they fulfill this purpose. Sibson has considerable experience working with plans in all of these areas to improve their compliance with the law and their service to participants and beneficiaries. Please contact your Sibson consultant to discuss what assistance you need.
Update is Sibson Consulting’s electronic newsletter summarizing compliance news. Update is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.
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