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In 2019, the Department of Labor ("DOL") received recommendations from the ERISA Advisory Council to permit fiduciaries of qualified plans to allow uncashed checks of missing participants to be transferred to state unclaimed property funds. https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/2019-eac-voluntary-transfers-to-state-programs.pdf
Now, the IRS is making sure employer’s withhold taxes from those uncashed checks. See Revenue Ruling 2020-24, 2020-45 IRB. https://www.irs.gov/pub/irs-drop/rr-20-24.pdf
The DOL and IRS used to not like plan fiduciaries getting rid of their missing participants via transfers to unclaimed funds and withholding to the IRS. Now , it seems that they are encouraging this as a method for cleaning up qualified plans with missing participants and un-distributable account balances.
Employers should consider this after making sure they have exceeded the IRS and DOL requirements for locating missing participants. Once the plan settlor and the fiduciaries have done their duties to locate and get participant’s their retirement accounts, they can now use the DOL and IRS guidance to help move these accounts to a state’s unclaimed funds and the IRS via withholding.
A difficulty may exist for Employers to figure out how to do withholding before having the remaining “uncashed check” delivered to a state unclaimed funds account. Furthermore, notice must be given via a 1099-R. However, where does the Employer mail the 1099-R? The participant is already missing otherwise we wouldn’t be in this situation.
As a fiduciary, I am not sure if this is better than the alternatives. Some plan sponsors will just keep the money and let it sit forever. Fees may make that harder for the Employer to swallow. The accounts may whittle down over time if they are allocated fees, but I would be careful with unfairly allocating participant fees. Remember to review your plan document to see what you can and cannot do. I have seen some plan sponsors treat these account balances like forfeitures and will make up the amount if a missing participant is ever found or comes asking for the money.
Again, be careful and review your plan document. Best practices are to have a robust missing participant locator process and a rigorous, continuous use of those processes no matter what you do if you truly cannot find the participant.