PBGC Issues Proposed Regulations Expanding Missing Participants Program

Practical Law Legal Update w-003-5053 (Approx. 8 pages)

PBGC Issues Proposed Regulations Expanding Missing Participants Program

by Practical Law Employee Benefits & Executive Compensation

Background

Plan administrators of retirement plans governed by ERISA must make distributions of a participant's benefit by particular dates. When attempting to make the required distributions, a plan administrator may be unable to locate certain participants or beneficiaries entitled to the required distribution. In these situations, ERISA's fiduciary responsibility provisions require plan administrators to make reasonable efforts to locate the missing participants.

The issue of missing participants commonly arises in plan terminations, which require distribution of all participant benefits under the plan before a plan termination. To address this, the PBGC created a missing participants program, which outlines the steps that a plan administrator must take to attempt to locate missing participants in single-employer defined benefit plan terminations (29 C.F.R. §§ 4050.1 - 4050.12). The Department of Labor (DOL) also issued Field Assistance Bulletin 2014-01 (FAB 2014-01) on August 14, 2014 which provides guidance on the steps fiduciaries of terminating defined contribution plans must take to locate missing participants.

In JCEB Q&As, the PBGC indicated that it was working on a proposed rule that would expand the current missing participants program (see Legal Update, 2015 JCEB Q&As Provide Nonbinding PBGC Responses).

Proposed Regulations

The proposed regulations would redesign the existing missing participants program that currently serves single-employer defined benefit plans to adopt three new missing participants programs for multiemployer defined benefit plans covered under Title IV, small professional service plans not covered under Title IV, and most defined contribution plans. All four programs would follow the same basic design which generally:

Provides the options and duties under the program.
Requires a diligent search.
Explains filing requirements with the PBGC, including fees.
Explains missing participant benefits from the PBGC.
Allows for certain PBGC discretion.

The program would be voluntary for defined contribution plans and small professional service plans. It would be mandatory for multiemployer and single-employer defined benefit plans covered under Title IV.

Terminology

The proposed regulations make certain changes to the terminology from what is used in the current regulations, including:

Replacing the term "missing participant" with "missing distributee" and defining the term to mean:
- for defined benefit plans, the plan did not know where the distributee was (unless the benefit was subject to mandatory cash-out under the plan); or
- for defined contribution plans or distributees subject to a mandatory cash-out, the distributee failed to elect a form or manner of distribution.
Proposing new terminology to clarify how plans are to value missed payments or how the PBGC is to identify which portion of a designated benefit represents missed payments.

Options for Non-Title IV Plans

In the preamble to the proposed regulations, the PBGC distinguishes between the mandatory and voluntary use of the missing participants programs.

For non-Title IV plans, including defined contribution plans and small professional service plans, the program is voluntary. Non-Title IV plans electing to participate must either:

Transfer the accounts of missing distributees to the PBGC.
Send the PBGC information about where accounts of its missing participants were transferred.

If a plan participates by transferring benefits of missing distributees to the PBGC, it must do so for all missing distributees and cannot "cherry pick" among missing distributees.

In contrast, participation is mandatory for Title IV plans, including multiemployer and single-employer defined contribution plans. These plans must either:

Transfer the benefits of missing distributees to the PBGC.
Purchase annuities and send the PBGC information about the annuity provider.

Diligent Search

The proposed regulations distinguish between diligent searches required by defined benefit plans and defined contribution plans. Defined contribution plans satisfy the diligent search requirement if the search is conducted in accordance with DOL guidance (see Legal Update, DOL Addresses Fiduciary Duty to Locate Missing Participants).

The proposed rule modifies and expands the search standards for defined benefit plans to more closely align them with the search guidance in FAB 2014-01. For a search to be diligent, the proposed regulations would require plan administrators to:

Diligently search during a six-month period before the plan closes out and the benefit transfer amount is paid.
Seek information from records from both the plan that is closing out as well as the employer and other plans of the employer (including health plans) to locate the missing individual. Plan administrators must use best efforts where employers, plans, beneficiaries, or records may not be readily identifiable or obtainable (such as where disclosure may be prohibited under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) (see HIPAA Privacy, Security, and Breach Notification Toolkit).
Use a commercial locator service. The PBGC acknowledges that this might not be cost-effective for distributees with relatively small benefits and invites comments on the issue.
Use a no-fee internet search engine or method regardless of benefit size, a new requirement added by the proposed regulations.

Amount to be Transferred to the PBGC

The amount transferred to the PBGC for each missing distributee may include:

A benefit transfer amount.
For some defined benefit plan missing distributees, a plan make-up amount.
A fee.

Amount to be Transferred by Defined Benefit Plans

ERISA Section 4050 provides rules to follow in valuing a missing distributee's benefits to determine the amount to pay the PBGC for the distributee. The rules for valuing benefits under the missing participants program are different for different categories of benefits.

The current regulations provide four categories of benefits and a different valuation method for each category.

Among other things, the proposed rule would simplify the current rules by adopting a three-category approach:

De minimis benefits.
Benefits payable only as annuities.
Benefits for which cash-out is elective.

Additionally, the PBGC plans to create an online spreadsheet to enable a plan administrator to value a missing participant's benefit with the new PBGC missing participant assumptions. The plan administrator would enter the data and the spreadsheet would do the calculations necessary to determine the present value of benefits, making the new assumptions easier to use.

The proposed rule also provides guidance on how to value benefits payable in the future and the value of missed benefit payments.

Amount to be Transferred by Defined Contribution Plans

For defined contribution plans, the benefit transfer amount would be the amount available for distribution to the missing distributee (generally the participant's account balance). The PBGC acknowledges that the benefit transfer amount may also reflect a deduction for administrative expenses (such as the cost of conducting a diligent search or paying PBGC fees for participating in the program).

Fees Charged by PBGC

The PBGC proposes to charge fees for participation in the missing participants program, which would cover the costs of services including periodic searches for missing distributees, tracking distributees' accounts, and processing benefit payments. The fees would be set out in the missing participants forms and instructions.

The regulations propose a one-time $35 fee per missing distributee, payable when benefit transfer amounts are paid to the PBGC. There would be no maintenance fees or distribution fee. There would also be no charge for:

Amounts transferred to the PBGC of $250 or less.
Plans that only send information about missing participants to the PBGC.

Additionally, the preamble to the proposed regulations outlines the PBGC's proposed methodology for setting future fees, which includes:

Collecting no more than the PBGC's out-of-pocket costs for services of private-sector contractors to perform non-governmental functions.
Using cost-smoothing methods when projecting estimated contractor costs and breaking down costs into:
- system costs (such as costs associated with hardware, software, and other infrastructure items), amortized over five years; and
- processing costs (such as costs for labor, office supplies, and utilities), treated as incurred and satisfied currently.
Setting fees as one-time charges, payable when benefit transfer amounts are paid to the PBGC. There would be no continuing maintenance fees or distribution fees. Fees would not be charged for reporting the disposition of benefits where no amount is transferred to the PBGC.

Filing Deadlines

The filing deadlines would be:

For Title IV single-employer plans, 90 days after the distribution deadline.
For all other plans, 90 days after completion of all distributions not subject to the missing participants program.

Pay-Out of Missing Participant Benefits

Under the proposed regulations, the pay-out rules differ significantly for defined benefit and defined contribution plans. The preamble details the pay-out rules for defined benefit and defined contribution plans and also includes tables summarizing the pay-out rules for each type of plan under the proposed regulations.

However, certain principles would be shared by both defined benefit and defined contribution plans, including:

The PBGC may connect claimants with their benefits by:
- paying benefits itself where the amount has been transferred to the PBGC; or
- providing information from the plan about how benefits not transferred to the PBGC can be claimed.
Pay-out rules are organized based on the circumstances of the distributee (instead of type of annuity benefit under the current regulations).
Certain rules about qualified survivors.

PBGC Discretion

To preserve flexibility, the PBGC is proposing to incorporate a section in each of the missing participants programs authorizing it to:

Grant waivers.
Extend deadlines.
Adapt to unforeseen circumstances and provide similar treatment in similar situations.

In conjunction, the proposed regulations would omit most provisions in 29 C.F.R. §§ 4050.11 and 4050.12 as unnecessary.

Applicability

The proposed rule would be applicable to terminations of plans, other than multiemployer plans covered by Title IV, where the date of plan termination is after 2017. For multiemployer plans covered by Title IV, the proposed rule would be applicable where the close-out is completed after 2017.

The amendments in the proposed rule would not apply to the PBGC's payment of missing participant benefits for prior plan terminations.

Practical Implications

The proposed regulations significantly expand and modify the PBGC's current missing participants program. Plan administrators of the newly eligible covered plans should familiarize themselves with the new programs to determine whether they would benefit from taking advantage of the programs upon termination. However, plan administrators of plans in termination status before the applicability date should note that the proposed rule would not apply.

Additionally, interested parties should note that the PBGC is requesting comments on the proposed regulations. In particular, the PBGC has requested comments on several issues, including:

Whether defined benefit plans would be better served by a different search standard.
Whether defined contribution plans would have an interest in participating in the proposed missing participants program.
The fees charged by the PBGC and fee schedule.

PBGC Issues Proposed Regulations Expanding Missing Participants Program | Practical Law