ERISA Advisory Council Calls for Guidance on Uncashed Checks

The DOL’s Advisory Council on Employee Welfare and Pension Benefit Plans has released a report addressing transfers of uncashed distribution checks that ERISA plans issue to state unclaimed property programs.

 

In “Voluntary Transfers of Uncashed Checks from ERISA Plans to State Unclaimed Property Programs,” the Council, also known as the ERISA Advisory Council, reports the findings of its review of transfers of uncashed checks from ERISA plans to state unclaimed property funds and the procedures states use regarding those funds. The ERISA Advisory Council provides support and advice to the DOL’s Employee Benefits Security Administration (EBSA).

The Council says that its focus was to gain an understanding of the nature and operation of state unclaimed property programs and to evaluate the extent to which they might advance the goal of reuniting missing participants with their retirement savings, and whether there are circumstances under which a plan fiduciary might voluntarily transfer uncashed checks to a state unclaimed property program.

 

While the Council did not address what steps are necessary or appropriate to locate missing participants, the review is relevant nonetheless to plan administrators’ efforts to locate plan missing participants and provide them their funds.

 

The Council explored whether there are circumstances under which a defined benefit or defined contribution plan might consider voluntary transfers of uncashed distribution checks to a state unclaimed property program in order to advance the goal of reuniting participants and beneficiaries who cannot be found or who are nonresponsive with their retirement savings. 

 

 

The Council observed that on the whole, it is unlikely that beneficiaries and amounts attributable to uncashed distribution checks of participants that conventional search methods fail to locate will be reunited.

 

Furthermore, recordkeepers and IRA providers who testified did not offer any information on the extent to which missing participants are ever reunited with their retirement savings, and generally conceded that the odds of that happening are low.

 

The Council says that “This raises the specter that the use of mandatory distributions to IRAs or taxable accounts merely defers transfers to state unclaimed property programs after the imposition of what may be substantial IRA fees for little if any economic benefit.  Similarly, it suggests that forfeiture-and-reinstatement may be largely forfeiture.”

 

In contrast, the Council says, state unclaimed property programs have a number of features that may increase the likelihood of success in reuniting missing participants and their retirement savings. But the Council also indicates that it does not consider state programs to be a panacea.

 

The Council cited the administrative complexity of transferring amounts attributable to uncashed checks to 50 different states as well as U.S. territories. It also reports that state witnesses generally said that a plan could not transfer all uncashed checks to the state in which the plan administrator or the plan trust is domiciled, and that the appropriate state to receive amounts attributable to uncashed checks is the state where a participant’s last known address is located. But even that is an imperfect solution, the Council says, given that there are plans with participants who reside in multiple states.

 

Furthermore, the Council says, while “there are certain core features of state unclaimed property programs that are common across their programs,” the approaches that each state takes to satisfy its fiduciary obligation vary. And it adds that these differences often are appropriate, given differences in population, demographics and each state’s “particular character.” And, it says, an additional consideration is the extent to which states credit interest on amounts attributable to uncashed benefit checks.

 

However, the Council says that based on testimony it received, some plans may be leaving assets attributable to uncashed checks in the plan’s or recordkeeper’s disbursement account and not trying to locate missing participants. “Amounts attributable to these checks may sit indefinitely in the disbursement account. These assets are unlikely to be reunited with missing participants and are not benefiting the plan,” it says.

 

The Council says that “this may be occurring in no small part because there is a lack of guidance about whether uncashed checks are assets of the plan with the fiduciary obligations that accompany plan asset status.” It notes that there is no guidance addressing whether uncashed checks are plan assets, and that plan asset regulations do not directly address the issue. “It is natural that plan fiduciaries would be uncertain about the status of uncashed checks because the IRS generally treats the uncashed checks as having been paid in a taxable distribution to the participants,” says the Council, continuing, “Moreover, uncashed checks usually are not reflected in the plan’s trust or other financial reports.”

 

 

The Council recommends that the DOL issue guidance that: 

 

As reflected above, in the absence of guidance, it is not entirely clear that plan administrators may transfer uncashed check amounts to a state unclaimed property program consistent with their fiduciary obligations to use plan assets exclusively to pay plan expenses or plan benefits.  The Council believes that it would be helpful to clarify that a transfer of amounts attributable to an uncashed check is a payment of benefits and, as a result, the plan’s obligation with respect to the participant has been satisfied to the extent of the transfer.

 

The Council says that, consistent with a voluntary approach, a plan could choose to transfer uncashed checks only for participants or beneficiaries residing in certain states.  

 

The Council says that it expects states to “readily agree” to get involved despite the difficulties associated with doing so. “The Council is keenly aware of the administrative complexities associated with state unclaimed property programs,” it says, adding that at the same time it “has kept in mind that the issue at hand is not a mandate for plans to transfer unclaimed property to the states but rather an option that a plan administrator may voluntarily choose to utilize.” The Council says that it “anticipates that the states, which seem desirous of receiving unclaimed property from ERISA plans and then attempting to return the property to property owners, will readily agree to early and off-cycle transfers of uncashed checks from ERISA-governed plans.