The DOL has announced in a press release the issuance of long-awaited guidance governing “orphan” or abandoned plans:
Each year approximately 1,650 401(k) plans holding $868 million in assets and covering 33,000 workers are abandoned. Today, the U.S. Department of Labor announced proposed rules to allow financial institutions to take responsibility for these plans and distribute the plans’ assets to workers and their families. . .The department currently deals with abandoned plans on a case-by-case basis, often with the involvement of the courts. The proposed rules provide standards for determining when a plan is abandoned and establishes a process for winding up the affairs of the plan and distributing benefits to workers. When implemented, the process would eliminate the need for costlier court approvals and allow workers to regain access to their benefits sooner. The proposal also provides guidance on the application of tax qualification rules to plans terminated under this regulation.
Access a Fact Sheet here and the proposed regulations here.
The regulatory initiative consists of three proposed regulations. One proposal, entitled “Rules and Regulations for Abandoned Plans,” establishes procedures and standards for the termination of, and distribution of benefits from, an abandoned pension plan. The second proposal, entitled “Safe Harbor for Rollovers From Terminated Individual Account Plans,” provides relief from ERISA’s fiduciary responsibility rules in connection with a rollover distribution on behalf of a missing or unresponsive plan participant. The last proposal, entitled “Special Terminal Report for Abandoned Plans,” provides annual reporting relief for terminated abandoned plans.
Highlights of the new rules:
(1) A plan generally will be considered abandoned under the proposal if no contributions to or distributions from the plan have been made for a period of at least 12 consecutive months and, following reasonable efforts to locate the plan sponsor, it is determined that the sponsor no longer exists, cannot be located, or is unable to maintain the plan.
(2) Only a qualified termination administrator (QTA) may determine whether a plan is abandoned under the proposal. To be a QTA, an entity must hold the plan’s assets and be eligible as a trustee or issuer of an individual retirement plan under the Internal Revenue Code (e.g., bank, trust company, mutual fund family, or insurance company).
(3) QTAs that follow the regulation will be considered to have satisfied the prudence requirements of ERISA with respect to winding-up activities.
(4) Also, accompanying the proposed regulations is a proposed class exemption that would provide conditional relief from ERISA’s prohibited transaction restrictions. The proposal would cover transactions where the QTA selects and pays itself to provide services in connection with terminating an abandoned plan, and for selecting and paying itself in connection with rollovers from abandoned plans to IRAs maintained by the QTA, including payment of investment fees as a result of the investment of the IRA’s assets in a proprietary investment product.
Finally, the proposed regulations state that the DOL has conferred with representatives of the IRS regarding the qualification requirements under the Code as applied to abandoned plans that would be terminated under the new rules. The IRS has agreed that it will not challenge the qualified status of any such plan or take any adverse action against the QTA, the plan, or any participant or beneficiary of the plan as a result of such termination, including the distribution of the plan’s assets, provided that the QTA satisfies three conditions:
However, the IRS makes it clear that they reserve the right to pursue appropriate remedies under the Code against any party who is responsible for the plan, such as the plan sponsor, plan administrator, or owner of the business, even in its capacity as a participant or beneficiary under the plan.
What is the proposed effective date for the new rules? The DOL states that it is considering making the three proposed regulations, i.e., sections 2578.1, 2550.404a-3, and 2520.103-13, effective 60 days after the date of publication of final rules in the Federal Register. However, the Department invites comments on whether the final regulations should be made effective on an earlier or later date.