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Managing Missing Plan Participants: New IRS Guidance on RMDs for 401(k), 403(b) and Other Qualified PlansAvoiding Tax Penalties, Maintaining Qualified Status, Addressing ERISA Fiduciary Issues, Formulating Search Procedures

Today’s faculty features:

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TUESDAY, MAY 15, 2018

Presenting a live 90-minute webinar with interactive Q&A

Felicia M. Gardner, Partner, McGuireWoods, Charlotte, N.C.

Robert R. Gower, Director, Trucker Huss, San Francisco

Benjamin F. Spater, Director, Trucker Huss, San Francisco

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REQUIRED MINIMUM DISTRIBUTIONS:COMPLIANCE BACKGROUND

© Copyright Trucker Huss, APC | One Embarcadero Center, 12th Floor, San Francisco, California 94111 Telephone: 415-788-3111 | Facsimile: 415-421-2017 | www.truckerhuss.com

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Required Minimum Distributions (RMDs)

Required Minimum Distribution Rules:

> Internal Revenue Code section 401(a)(9) and implementing regulations

Penalties for Failing to take Required Minimum Distributions:

> Excise tax under Internal Revenue Code section 4974

Corrections for Failing to take Required Minimum Distributions:

> Employee Plans Compliance Resolution System (Revenue Procedure 2016-51)


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Background: What is an RMD?

Retirement benefits from qualified plans are intended to be paid during the lifetime of the participant.

RMD rules ensure that participants do not accumulate retirement accounts, defer taxation, and leave these accounts to beneficiaries as an inheritance. RMDs require the participant to withdraw funds as taxable distributions while still alive. RMDs are not eligible for rollover.


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Background: RMD Timing

Under Code section 401(a)(9), a participant in a qualified retirement plan (defined benefit or defined contribution plan such as a 401(k), profit sharing plan, and a 403(b) plan) generally must commence payment of retirement benefits no later than April 1 following the year such participant turns age 70 1/2.

The terms of a plan may permit an active participant who is not a 5% or greater owner of the sponsor company to delay commencement of benefits until retirement.

Commonly known as the “Required Beginning Date.”


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Background: RMD Timing – Beneficiary Payments

If a participant dies (1) before reaching his or her Required Beginning Date, and (2) the participant’s sole beneficiary is his or her spouse, beneficiary payments must commence by the later of:

> December 31 of the year in which the participant would have attained age 70 1/2; or

> December 31 of the year following the year of the participant’s death.


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If the participant dies (1) before reaching his or her Required Beginning Date, and (2) at least one beneficiary is not the surviving spouse, beneficiary payments must:

> Commence by December 31 of the year following the year of the participant’s death; or

> Be paid in full by the end of the year containing the fifth anniversary of the participant’s death.

If any beneficiary is an entity, benefits must be taken in full by the end of the year containing the fifth anniversary of the participant’s death.


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If a participant dies after reaching his or her Required Beginning Date, beneficiary payments must commence in the year after the year of the participant’s death. The participant’s RMD for the year of death is paid to the beneficiary or beneficiaries if the participant didn’t receive that RMD before he or she died.


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Background: RMD Amount

The annual amount of an RMD payment is designed to approximate the amount that would prudently be withdrawn by a participant over the course of his or her life expectancy (or in the case of a participant with a spouse as beneficiary, over the course of the joint lives of the participant and spouse).

> Annual RMDs are calculated by dividing the prior December 31 balance of the account by a life expectancy factor that IRS publishes in mortality tables in Publication 590-B.


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If a participant dies before his or her required beginning date, and the sole beneficiary is the surviving spouse:

> RMD amounts payable to the surviving spouse are based on the surviving spouse’s life expectancy, determined each year using IRS mortality tables.

If a participant dies after his or her required beginning date, and the sole beneficiary is the surviving spouse:

> RMD amounts can be spread over the greater of the participant or spouse’s life expectancy determined using IRS mortality tables.


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If a participant dies before his or her required beginning date, and at least one beneficiary is not the surviving spouse:

> If RMDs commence by December 31 of the year following the year of the participant’s death, they can be calculated based on the life of the oldest beneficiary using IRS mortality tables, or, if the account is divided into separate shares for each beneficiary by December 31 of the year following the year of the participant’s death, each beneficiary’s life expectancy can be used to determine his or her RMDs.


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If a participant dies after his or her required beginning date, and at least one beneficiary is not the surviving spouse:

> RMD payments may be spread over the greater of the oldest beneficiary’s single life expectancy in the year following the year of death, or the participant’s single life expectancy in the year of death.


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Failure to Commence RMDs

When RMDs are not paid in a timely manner:

> The plan sponsor must show that the participant or beneficiary was “missing” or . . . face potential disqualification of the plan for failure to timely pay benefits when due, which ultimately affects all plan participants in a negative manner.

> The plan participant who should have received the RMD is liable for an excise tax under IRC Section 4974 equal to 50% of the amount of the RMD not received.

> Fiduciary implications, discussed later.


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Plans subject to Form 5500 filing requirements are required to report failures to pay RMDs.

> Schedule H, Part IV, Line 4l: Has the plan failed to provide any benefit when due under the plan?

> Beginning with the 2015 Form 5500 instructions, the failure to provide any benefit when due under the plan clearly includes the failure to pay RMDs.


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The Department of Labor (DOL) began conducting RMD audits in 2016.

The Internal Revenue Service issued memoranda to all exam agents regarding RMDs on October 19, 2017 and February 23, 2018.


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The failure to commence RMD payments can be corrected under the IRS Self Correction Program (SCP) program of the Employee Plans Compliance Resolution System (EPCRS), but the participant-owed excise tax under Code section 4974 can’t be waived under SCP.

Correction involves distributing the late RMD, plus earnings.

If SCP is used, the participant must File IRS Form 5329 with his or her income tax return and pay the 50% excise tax penalty. If the participant believes there was reasonable cause for the failure to commence his or her RMD, they may request a waiver on Form 5329.

> Generally a high bar to obtain a waiver.


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As an alternative to SCP, the plan sponsor may submit an application under the Voluntary Correction Program (VCP) of EPCRS. Participant-owed excise tax under Code section 4974 can be waived with IRS approval under VCP.

Correction steps are the same as under SCP.

VCP application fees vary from $1,500 to $3,500 (fee is based on total plan assets).

No limit to the number of RMD failures to be corrected under VCP.


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FIDUCIARY RESPONSIBILITIES(Section 404 of ERISA)


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ERISA Section 404

Section 404 of ERISA sets forth the basic rules on the responsibilities of fiduciaries under ERISA as follows:


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#1 THE EXCLUSIVE BENEFIT RULE

A fiduciary shall discharge his or her duties with respect to a plan solely in the interest of the participants and beneficiaries for the exclusive purpose of:

> providing benefits to participants and their beneficiaries; and

> defraying reasonable expenses of administering the plan;


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#2 THE PRUDENT PERSON RULE

A fiduciary shall act:

> with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;


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#3 THE DIVERSIFICATION RULE

A fiduciary shall:

> diversify the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and


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#4 THE PLAN DOCUMENT RULE

A fiduciary shall act:

> in accordance with the documents and instruments governing the plan insofar as they are consistent with the provisions of ERISA.


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MISSING PARTICIPANTS AND REQUIRED MINIMUM DISTRIBUTIONS

(Section 404 of ERISA)

IRS Memoranda for Employee Plans (EP) Examination Employees

(dated, October 19, 2017 for Qualified Plans)(dated, February 23, 2018 for 403(b) Plans)


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Basic Questions

To whom are the Memoranda directed?

> The memoranda are directed to EP examiners

What are the Memoranda’s Effective Dates?

> It applies to exams open on or after the date of issuance.


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Basic Questions II

Which type of Plans are affected?

> Qualified plans and 403(b) plans subject to Required Minimum Distribution (RMD) rules.

What authority does the Memoranda have?

> Not a pronouncement of law.

> Not subject to use, citation or reliance.

> Does not affect the operation of any other provision of the IRC, Treasury Regulations, or related guidance.


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Basic Questions III

What are the Memoranda’s Purposes?

> Directs EP examiners not to challenge a qualified plan or 403(b) plan as failing to satisfy the RMD rules.

> Provides plans under examination a “safe harbor” if certain efforts to locate missing participants are made.

> Clarifies which search methods the IRS considers sufficient to avoid an examiner’s challenge.


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Background on Missing Participants

Missing participants

> A participant or beneficiary that the plan has been unable to locate at a time when benefits are payable or when certain distributions are required by law, like RMDs.

> A participant to whom mailings are consistently returned due to an incorrect address is also missing.

Which government bodies/agencies are concerned?

> Congress, the DOL, the PBGC, and the IRS.


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Background on Missing Participants II

What are some issues for Plans?

> Breach of Fiduciary Duty for failure to locate missing

participants.

> Forfeiture of benefits owed to unresponsive/missing participants

may be a Prohibited Transaction.

> Violation of IRC Required Minimum Distribution (RMD) Rules.

> Compliance with Form 5500 and other filings.

Form 5500 / Form 5500-SF

> Checking the Box: “Has the plan failed to provide any benefits

when due under the plan?”

> IRS clarified filers do not need to report unpaid RMD amounts.


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The Memo’s “Safe Harbor”

“EP examiners shall not challenge . . .” a failure to pay RMDs if all of the following steps are taken:

1. Search of the plan, related plan, sponsor, and publically-available records or directories for alternative contact information.

2. Use of any of these search methods:

• Commercial Locator Service.

• Credit Reporting Agency.

• Proprietary internet search tool for locating individuals.


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The Memo’s “Safe Harbor”

3. Attempt to contact the participant/beneficiary via:

• United States Postal Service (USPS) certified mail to the last know mailing address, and

• Through appropriate means for any address or contact information (including email addresses and telephone numbers).

But, if the above steps are not taken – an examiner may challenge a plan for a violation of the RMD rules.


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Other Guidance on Search Methods

Both Memoranda provide a “safe harbor” from RMD rules if certain search methods are used.

But neither Memoranda gives much detail regarding any given search method.

Where else should Plans look? DOL? PBGC?


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IRS Points Plans to DOL Guidance

In clarifications to instructions for Form 5500, the IRS states:

“Also, although the Department of Labor’s Field Assistance Bulletin (FAB) 2014-01 is specifically applicable to terminated defined contribution plans, employers and plan administrators . . . may want to consider periodically using one or more of the search methods described in the FAB in connection with making reasonable efforts to locate RMD-eligible missing participants.”


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Required Search Methods in FAB 2014-01

The FAB states that in the eyes of the DOL failure to use the following search methods “would violate the fiduciary obligations of prudence and loyalty”:1. Certified Mail,

2. Check Plan and employer records,

3. Check with designated beneficiary,

4. Use Free electronic search tools:

• Online search engines, public records databases, obituaries and social media.

FAB 2014-01 states these methods involve so little cost with such high potential for success that they should always be taken – regardless of the size of the participant’s account.


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Optional Search Methods in FAB 2014-01

Duties of loyalty and prudence may require additional search methods if the account balance is large enough:

> Internet search tools.

> Commercial locator services.

> Credit reporting agencies.

> Information brokers.

> Investigation databases (that may involve charges).

The size of the account and cost of the search method are factors in deciding whether additional steps are appropriate.


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The PBGC also looks to DOL Guidance

On December 22, 2017, the PBGC published its final rule revising and expanding its program, under Section 4050 of ERISA, to hold retirement benefits for missing participants and beneficiaries in terminated retirement plans and help such participants and beneficiaries find and receive those benefits.

The final rules states that the PBGC “adopts in its final regulation without change the provision that compliance with DOL’s fiduciary search guidance satisfies PBGC’s diligent search standard.”

Also that a “plan must search in accordance with regulations and other applicable guidance issued by the Secretary of Labor.”

- PBGC Final Regulations (Fed Reg. Vol. 83, No. 245 (December 22, 2017).


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Summary

Violation of RMD rules expose plans to risks like:

> Paying excise taxes and potential disqualification under the IRS.

> Breach of fiduciary duty under ERISA.

Plans have a “safe harbor” against RMD violations if certain prescribed search methods are used.

Harmonization of search standards between agencies makes compliance a little easier.


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Contact

Robert Gower, [email protected]

Benjamin Spater, [email protected]

Trucker Huss, APC

One Embarcadero Center, 12th FloorSan Francisco, CA 94111

(415) 788-3111

www.truckerhuss.com

mailto:[email protected]

mailto:[email protected]


42

Disclaimer

These materials have been prepared by Trucker Huss, APC for

informational purposes only and constitute neither legal nor tax advice

Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship

Anyone viewing this presentation should not act upon this information without seeking professional counsel

In response to new IRS rules of practice, we hereby inform you that any federal tax advice contained in this writing, unless specifically stated otherwise, is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax-related penalties or (2) promoting, marketing or recommending to another party any tax-related transaction(s) or matter(s) addressed herein

www.mcguirewoods.com

Click to edit Master title style


PBGC Final Rule on Missing

Participants and Best Practices for

Dealing with Missing Participants

Felicia Gardner

Charlotte, NC

[email protected]

Strafford Presentation

May 15, 2018

McGuireWoods | 44

CONFIDENTIAL

Background

• Three agencies oversee plans with missing participants

• No singular rule that coordinates what steps plan administrators

must do to locate missing participants

• PBGC rule is the latest effort and most formalized of the

guidance to date

• RPA of 1994 – created the PBGC missing participant program

under ERISA Section 4050

• PPA of 2006 – expanded the program to allow terminated

multiemployer pension plans and non-Title IV retirement plans

• Proposed regulations issued Sept. 20, 2016

• Final regulations issued December 22, 2017

McGuireWoods | 45

CONFIDENTIAL

Today’s Presentation Will…

• Review the changes under the PBGC rule

• Discuss the expansion of the PBGC missing participant program

• Outline potential administrative strategies and design alternatives

for locating missing participants in defined contribution plans

McGuireWoods | 46

CONFIDENTIAL

Overview of the Final Rule

• Allows terminating DC plans to voluntarily transfer missing

participant benefits to PBGC

• Creates an unclaimed retirement benefit database of information

of missing participants

• Allows DC plans to treat unresponsive participants as “missing”

under the program

• Decreases the benefit categories and actuarial assumptions used

for DB plans when determining the amount to transfer

• Otherwise streamlines the benefit transfer process for DB plans

generally

McGuireWoods | 47

CONFIDENTIAL

Good News With the PBGC Final Rule

• PBGC coordinated and consulted with IRS and DOL

• Utilization of the voluntary program for DC plans will not

disqualify a plan

• Amounts transferred by a DC plan to the PBGC are not taxable

distributions

• DOL will be reviewing its safe harbors to consider transfers to

the PBGC appropriate as similar to transfers to IRAs

McGuireWoods | 48

CONFIDENTIAL

PBGC Final Rule – Purpose and Scope

• The final rule is broken into four parts with respect to how the

program is set up:

– Single employer plans subject to Title IV of ERISA*

– Defined contribution plans

– Small professional service defined benefit plans not subject to Title

IV of ERISA*

– Multiemployer plans subject to Title IV of ERISA*

*Not discussed for purposes of this presentation*

McGuireWoods | 49

CONFIDENTIAL

PBGC Rule – Scope for Terminating DC Plans

• Terminating DC plans can elect to follow the final rule

– Applies to all defined contribution plans as so defined under Section

3(34) and 3(35) of ERISA and Section 4021 of ERISA without

regard paragraphs (1), (5), (12), or (13)

• Eg., 401(k) plans, 403(b) plans, and other individual account 401(a)

plans, including DC components in a DB plan and abandoned plans

– Applies only if the terminating plan is closing out

– Applies whether the plan is single employer, multiple employer or

multiemployer

McGuireWoods | 50

CONFIDENTIAL

PBGC Final Rule – Terminating DC Plans

• Who is a Missing Participant*?

– Unlocatable – Plan does not know with reasonable certain a location

– Unresponsive – Does not elect distribution upon notice

– Unaccepting – Does not cash lump sum distribution check

• Options

– Transferring Plan – transferring benefits to PBGC

– Notifying Plan – notifying PBGC of where benefits were transferred

– Anti-cherry picking rule – must transfer all missing participant

balances or none

*“Missing Participant” include missing beneficiaries*

McGuireWoods | 51

CONFIDENTIAL

PBGC Final Rule – Terminating DC Plans (continued)

• Benefits

– PBGC pays benefits

• Single - an annuity or if elected a lump sum*

• Married – a J&S 50/50 annuity or elected and spousal consent a lump

sum or other annuity*

• Deceased – A lump sum if qualified survivor is not spouse or if is the

spouse as a single life annuity or lump sum if elected

• Requirements

– Must conduct a diligent search**

• Applies to any missing participant whose location is not known with

reasonably certainty at close-out

• Must be done within 9 months of the filing date

• Must be done in accordance with applicable DOL guidance

* Only lump sum if de minimis

**Only applies the missing participants identified in the filing for notifying plans

McGuireWoods | 52

CONFIDENTIAL

PBGC Final Rule – Terminating DC Plans (continued)

• Requirements (continued)

– Must file with the PBGC*

• Use forms and instructions (available on PBGC website)

• Certification required

• $35/missing participant fee if transferred amount is greater than $250,

due at filing*

• Transferred benefit due at filing*

– If amount is different than plan balance because of reduction (i.e., plan

expenses or QDROs) must look to DOL and IRS rules

• Deadline the later of 90 days after last distribution or 1 year after

termination date under plans document (see Rev. Rule 89-87)

*Not applicable for notifying plans

McGuireWoods | 53

CONFIDENTIAL

Missing Participants Generally

• Issues with missing participants can arise in a number of contexts

– Un-cashed/returned checks

– Terminated plans

– Implementation of plan corrections

– Claims by beneficiaries

– DOL examinations

• Limited regulatory guidance

– IRS guidelines for locating participants in order to implement plan

corrections

– DOL guidelines on finding missing participants for terminated plans

– Now the final PGBC rules related to terminated plans

McGuireWoods | 54

CONFIDENTIAL

Missing Participants – Plan Corrections

• IRS requires that plan corrections be implemented for all affected

participants

• “Reasonable actions must be taken to find all current and former

participants and beneficiaries to whom additional benefits are

due, but who have not been located after a mailing to the last

known address.” (Rev. Proc. 2016-51, section 6.05(2)(d)(i)).

• To meet this standard, IRS requires:

– Mailing to last known address by certified mail

– “If that is unsuccessful, an additional search method, such as the use

of a commercial locator service, a credit reporting agency, or

Internet search tools”

McGuireWoods | 55

CONFIDENTIAL

Missing Participants – DOL Guidelines for

Terminating DC Plans

• DOL – actions to implement a plan termination are fiduciary

actions, including the act of finding participants and distributing

their plan benefits to them (Field Assistance Bulletin 2014-01)

• Reasonable expenses to locate missing participants can be

charged to their accounts

• Plan expense allocations – need to be done in accordance with

DOL and IRS guidance on same.

• DOL breaks down its guidelines into two steps:

– Search steps that must be taken in all cases

– If unsuccessful, consideration of whether other alternatives should

be used

McGuireWoods | 56

CONFIDENTIAL

Missing Participants – DOL Guidelines continued

• “Some search steps involve so little cost and such high potential

for success that a fiduciary should always take them before

abandoning efforts to find a missing participant, regardless of the

size of the participant’s account balance. The failure to take such

steps would violate the fiduciary obligations of prudence and

loyalty, as set forth in section 404(a) of ERISA.”

• Required searches:

1. Certified mail

2. Review of related plan and employer records

3. Contact designated plan beneficiaries

4. Use of free electronic search tools (internet search engines, public

record data bases, obituaries, social media)

McGuireWoods | 57

CONFIDENTIAL

Missing Participants – DOL Guidelines (continued)

• Consideration of whether other steps are appropriate

• Factors to take into consideration

– Size of the participants’ accounts

– Cost of further search efforts

• Possible additional search steps:

– Internet search tools that require a fee

– Commercial locator services

– Credit reporting agencies

– Information brokers

– Investigation databases

– Other similar services

McGuireWoods | 58

CONFIDENTIAL

Missing Participants – DOL Guidelines (continued)

• Available distribution options when participant cannot be located

1. Rollover to an IRA - preferred method under FAB 2014-01

• Avoids immediate taxation

• Further defers income tax

• Avoids mandatory tax withholding

• Avoids 10% tax on early distribution

2. Transfer to PBGC – unclear whether this may become

preferred

3. Open and interest-free federally insured bank account - alterative

4. Transfer to a state unclaimed property fund - alternative

• 100% income tax withholding is never an acceptable

distribution option

McGuireWoods | 59

CONFIDENTIAL

Missing Participants – Ongoing Plan

• The DOL’s search guidelines for terminated plans should be applicable to

ongoing plans, by analogy

– Same search methods and considerations should apply

– Consider a routine frequency (i.e., 6-12 months?)

• How to handle un-cashed checks?

– Procedures should be in place with the recordkeeper to have the amount of

the check returned to plan’s trust within a specified time after issuance.

– Reasonable steps should be taken to claim a refund of withheld taxes on the

distribution that was never made to the missing participant

– Plan document terms should be reviewed to determine whether they permit

the benefit to be forfeited

• IRS regulations allow for forfeiture so long as the plan provides for

reinstatement of the forfeited benefit if the participant makes a claim

(Treasury Regulation section 1.411(a)-4(b)(6)).

McGuireWoods | 60

CONFIDENTIAL

Missing Participants – Ongoing Plan

• Recordkeepers typically earn “float” income while checks are

pending distribution.

• DOL takes the position that plan fiduciaries have a duty to

understand float arrangements and have appropriate safeguards in

place to make sure the plan does not pay unreasonable float

– “Fiduciaries also should understand that float will be earned on such

disbursements until checks are presented for payment by the payee,

the timing of which is beyond the control of the plan and service

provider. In this regard, fiduciaries should review periodic

statements or reports of distribution checks to determine the extent

to which checks tend to remain outstanding for unusually long

periods of time (e.g., 90 or more days).” (Field Assistance Bulletin

2002-03)

McGuireWoods | 61

CONFIDENTIAL

Questions or Comments?


Documents

Managing Missing Plan Participants: New IRS Guidance on ...media.straffordpub.com/products/managing-missing... · 15/05/2018 · 1-866-258-2056 and enter your PIN when prompted