Termination of Abandoned Individual Account Plans
[04/21/2006]
Volume 71, Number 77, Page 20819-20854
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Part IV
Department of Labor
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Employee Benefits Security Administration
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29 CFR Parts 2520, 2550, and 2578
Termination of Abandoned Individual Account Plans; Final Rule
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Parts 2520, 2550, and 2578
RIN 1210-AA97
Termination of Abandoned Individual Account Plans
AGENCY: Employee Benefits Security Administration.
ACTION: Final regulations.
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SUMMARY: This document contains three final regulations under the
Employee Retirement Income Security Act of 1974 (ERISA or the Act) that
facilitate the termination of, and distribution of benefits from,
individual account pension plans that have been abandoned by their
sponsoring employers. The first regulation establishes a procedure for
financial institutions holding the assets of an abandoned individual
account plan to terminate the plan and distribute benefits to the
plan's participants and beneficiaries, with limited liability. The
second regulation provides a fiduciary safe harbor for making
distributions from terminated plans on behalf of participants and
beneficiaries who fail to make an election regarding a form of benefit
distribution. The third regulation establishes a simplified method for
filing a terminal report for abandoned individual account plans.
Appendices to these rules contain model notices for use in connection
therewith. These regulations will affect fiduciaries, plan service
providers, and participants and beneficiaries of individual account
pension plans.
DATES: All three regulations are effective May 22, 2006.
FOR FURTHER INFORMATION CONTACT: Stephanie L. Ward or Melissa R.
Spurgeon, Office of Regulations and Interpretations, Employee Benefits
Security Administration, (202) 693-8500. This is not a toll-free
number.
SUPPLEMENTARY INFORMATION:
A. Background
Thousands of individual account plans have, for a variety of
reasons, been abandoned by their sponsors. Financial institutions
holding the assets of these abandoned plans often do not have the
authority or incentive to perform the responsibilities otherwise
required of the plan administrator with respect to such plans. At the
same time, participants and beneficiaries are frequently unable to
access their plan benefits. As a result, the assets of many of these
plans are diminished by ongoing administrative costs, rather than being
paid to the plan's participants and beneficiaries.
Over the past few years, the Department of Labor's Employee
Benefits Security Administration (the Department or EBSA) has seen an
increase in the number of requests for assistance from participants who
are unable to obtain access to the money in their individual account
plans. According to these participants, even though a bank or other
service provider of the plan may be holding their money, neither the
bank nor the participants are able to locate anyone with authority
under the plan to authorize benefit distributions.
In some cases, plan abandonment occurs when the sponsoring employer
ceases to exist by virtue of a bankruptcy proceeding. In other cases,
abandonment occurs because the plan sponsor has been incarcerated,
died, or fled the country. Whatever the causes of abandonment,
participants in these so-called ``orphan plan'' or ``abandoned plan''
situations are effectively denied access to their benefits and are
otherwise unable to exercise their rights guaranteed under ERISA. At
the same time, benefits in such plans are at risk of being
significantly diminished by ongoing administrative expenses, rather
than being distributed to participants and beneficiaries.
EBSA responded to those participants' requests for assistance with
a series of enforcement initiatives, including the National Enforcement
Project on Orphan Plans (NEPOP), which began in 1999. NEPOP focuses
primarily on identifying abandoned plans, locating their fiduciaries,
if possible, and requiring those fiduciaries to manage and terminate
(including making benefit distributions to participants and
beneficiaries) the plans in accordance with ERISA. When no fiduciary
can be found, the Department often requests a federal court to appoint
an independent fiduciary to manage, terminate, and distribute the
assets of the plan. EBSA had opened over 1,500 civil cases involving
defined contribution orphan plans as of September 30, 2005. In the over
1,000 orphan plan cases closed with results through that date, there
were approximately 50,000 participants affected and $255 million in
assets involved. As of September 30, 2005, there were approximately 400
active cases involving orphan plans.
During 2002, the ERISA Advisory Council created the Working Group
on Orphan Plans to study the causes and extent of the orphan plan
problem. On November 8, 2002, after public hearings and testimony, the
Advisory Council issued a report, entitled Report of the Working Group
on Orphan Plans,\1\ concluding that the problems posed by abandoned
plans are very serious and substantial for plan participants,
administrators, and the government. In particular, the Report states
that ``[p]lan participants may suffer economic hardship as a result of
their inability to obtain a distribution from an orphan plan; plan
service providers may be besieged with requests for distributions,
although unauthorized to act; and the government may be forced to
handle the termination of hundreds or thousands of plans that have been
abandoned.'' Although the Advisory Council's Report estimated that
abandoned plans currently represent only about two percent of all
defined contribution plans and less than one percent of total plan
assets for such plans, the Report also indicated that the orphan plan
problem may grow in difficult economic times.
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\1\ A copy of the Report can be found on the About EBSA page
under the heading ERISA Advisory Council at http://www.dol.gov/ebsa.
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Taking into account the problem of abandoned plans and the
Department's efforts to date, the Advisory Council generally
recommended measures (whether regulatory, legislative, or both) to
encourage service providers to voluntarily terminate abandoned plans
and distribute assets to participants and beneficiaries. Specific
recommendations of the Advisory Council included new regulations for
determining when a plan is abandoned, procedures for terminating
abandoned plans and distributing assets, and rules defining who may
terminate and wind up such plans.
On March 10, 2005, the Department published in the Federal Register
(70 FR 12046) a notice of proposed rulemaking that, upon adoption,
would facilitate the termination of, and distribution of benefits from,
individual account pension plans that have been abandoned by their
sponsoring employers. The Department invited interested persons to
submit written comments. The Department received 16 written comments
representing plan sponsors, independent fiduciaries, and plan service
providers including financial institutions and plan recordkeepers.
These letters are available under Public Comments on the Laws &
Regulations page at http://www.dol.gov/ebsa.
In addition to the notice of proposed rulemaking, the Department
published for public comment a related class exemption addressing
various
[[Page 20821]]
transactions related to the regulations. The final class exemption
appears elsewhere in the notice section of today's Federal Register.
Set forth below is an overview of the three regulations and the
public comments received in response to the proposals.
B. Abandoned Plan Regulation (29 CFR 2578.1)
In general, Sec. 2578.1 sets forth a regulatory framework under
which an individual account plan will be considered abandoned and
terminated and pursuant to which a qualified termination administrator
can take steps to wind up the affairs of the plan and distribute
benefits to the plan's participants and beneficiaries.
1. Qualified Termination Administrator
Like the proposal, the final regulation authorizes a ``qualified
termination administrator'' (QTA) to determine that an individual
account plan is abandoned and to carry out related activities necessary
to the termination and winding up of the plan's affairs. The conditions
for being a QTA are set forth in paragraph (g) of Sec. 2578.1. That
section, as proposed, established two conditions for QTA status. First,
the QTA must be eligible to serve as a trustee or issuer of an
individual retirement plan within the meaning of section 7701(a)(37) of
the Internal Revenue Code (Code) and, second, the QTA must be holding
assets of the plan on whose behalf it will serve as the QTA.\2\
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\2\ Section 7701(a)(37) defines the term individual retirement
plan to mean an individual retirement account described in section
408(a) of the Code and an individual retirement annuity described in
section 408(b) of the Code.
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A number of the commenters on the proposed regulation suggested
that the Department expand the types of persons that could serve as a
QTA under the regulation. In this regard, several of the commenters
recommended expanding the proposed QTA definition to include
recordkeepers, third-party contract administrators, accountants, and
other service providers of plans, indicating that in many, if not most,
instances, recordkeepers, third-party contract administrators and other
service providers will be in a better position than financial
institutions to determine that a plan has been abandoned and reconcile
the information necessary to a plan's termination because of their
ready access to plan documents and records.
Although the Department recognizes the critical role that
recordkeepers, third-party contract administrators and other service
providers to plans can and will play in the process of winding up the
affairs of an abandoned plan, the Department nonetheless believes that,
given the authority and control over plans vested in QTAs under the
regulation, QTAs must be subject to standards and oversight that will
reduce the risk of losses to the plans' participants and beneficiaries.
In developing its criteria for QTAs, the Department limited QTA status
to trustees or issuers of an individual retirement plan within the
meaning of section 7701(a)(37) of the Code because the standards
applicable to such trustees and issuers are well understood by the
regulated community and the Department is unaware of any problems
attributable to weaknesses in the existing Code and regulatory
standards for such persons. Accordingly, the Department believed that
the Code and regulatory standards could be adopted for purposes of this
regulation without imposing unnecessary costs and burdens on either
plans or potential QTAs. The Department notes that, while commenters
did propose varying procedures and criteria for defining QTA status,
there was no consensus among the commenters as to what regulatory
standards might be applicable to such persons. For these reasons, the
Department is adopting the definition of ``qualified termination
administrator'' without change from the proposal.
As noted above, the Department anticipates that recordkeepers and
other providers of services to abandoned plans will play an important
role in winding up the affairs of the plan and that QTAs will, to the
extent necessary to discharge their responsibilities under the
regulation, utilize existing service providers as a means of maximizing
efficiencies in the termination process and keeping administrative
costs attendant to plan termination as low as possible. Paragraph
(d)(2)(iv) of the final regulation makes clear that a QTA may engage,
on behalf of the plan, such service providers as are necessary for the
QTA to carry out its responsibilities.
One commenter, noting the possibility that an abandoned plan might
have assets invested with more than one financial institution, asked
whether each such institution could be a QTA of that plan with respect
to the assets held by that institution. The Department intends that
there will be only one QTA for an abandoned plan and to the extent that
one or more institutions is determined to hold assets of an abandoned
plan subsequent to the approval of a QTA, such institutions will be
expected to cooperate with the QTA in winding up the plan. To
facilitate this process, the Department has added a new paragraph to
the limited liability section of the regulation, paragraph (e)(3), that
limits the liability of a party holding plan assets when transferring
or disposing of a plan's assets at the direction of the QTA. Paragraph
(e)(3) is discussed in greater detail under subsection 6 of this
preamble, entitled ``Limited Liability.''
Two commenters argued in favor of conferring QTA status on court
appointed bankruptcy trustees in liquidation cases where the debtor
also is the plan administrator. The Department did not adopt this
suggestion. Such individuals are empowered by virtue of their court
appointment to take the steps necessary to terminate and wind up the
affairs of a plan and, therefore, do not need the authority conferred
by the regulation. The final regulation does not limit, in any way, the
ability of other parties who may be acting pursuant to court
appointment, court order, or otherwise acting on behalf of the sponsor
of the plan, to terminate and wind up the affairs of a pension plan,
without regard to whether the plan is considered abandoned under this
regulation.
One commenter raised the issue of whether an affiliate of an
otherwise eligible financial institution could itself be a QTA. As
noted above, paragraph (g) of the final regulation provides that, in
order to be a QTA, an entity must both (1) be eligible to serve as a
trustee or issuer of an individual retirement plan under section
7701(a)(37) of the Code, and (2) hold assets of the abandoned plan.
Accordingly, by definition, an entity that does not satisfy these two
conditions could not itself be a QTA even if it is affiliated with a
financial institution that does satisfy the conditions. Of course, a
QTA may engage any of its affiliates to provide administrative services
necessary to the termination and winding-up process, provided that all
of the requirements of the regulation and prohibited transaction class
exemption are satisfied.
2. Finding of Plan Abandonment
As in the proposal, the final regulation describes the
circumstances under which a QTA may find an individual account plan to
be abandoned. Such circumstances are when there have been no
contributions to (or distributions from) a plan for a consecutive 12-
month period, or where facts and circumstances known to the QTA (such
as a plan sponsor's liquidation under title 11 of the United States
Code, or communications from
[[Page 20822]]
plan participants and beneficiaries regarding the plan sponsor, benefit
distributions, or other plan information) suggest that the plan is or
may become abandoned. Inasmuch as there were no negative comments on
this provision as proposed, it was adopted without modification. See
Sec. 2578.1(b)(1)(i).
With respect to the facts and circumstances clause, one commenter
suggested adding language to expressly cover situations in which the
plan sponsor has been dissolved without a successor under applicable
State law. Although the Department agrees that the dissolution of the
sponsor may cause the plan to become abandoned, the Department believes
it is unnecessary to add this particular example to the regulation. The
examples listed in the regulation are not exclusive. Rather, the
Department anticipates that a variety of circumstances, regardless of
whether they are listed as examples in the regulation, might justify a
finding of immediate abandonment.\3\ For example, the Department
expects that effects of natural disasters, such as Hurricane Katrina,
might in some cases warrant that a QTA not have to wait for 12
consecutive months of plan inactivity before taking action, even though
a natural disaster is not a listed example.
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\3\ As noted in the preamble of the proposed regulation, the
facts and circumstances standard is intended to permit immediate
findings of abandonment where facts and circumstances clearly
obviate the need for 12 consecutive months of plan inactivity. See
70 FR 12047.
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As a second condition to a finding of abandonment, the proposal
provided that the QTA must, following reasonable efforts to locate or
communicate with the known plan sponsor, determine that the plan
sponsor no longer exists, cannot be located, or is unable to maintain
the plan. Because there were no negative comments on this provision, it
was adopted without modification. See Sec. 2578.1(b)(1)(ii).
With respect to the proposal's requirement of reasonable efforts to
locate the missing plan sponsor, one commenter objected to the
provision requiring the QTA to communicate with the sponsor's corporate
agent for service of legal process. The commenter argued that this is
an unnecessary and unhelpful provision and suggested eliminating it.
The Department notes that the provision of the regulation referenced by
the commenter is not a mandate, but rather part of a safe harbor under
which the QTA will be deemed to have made a reasonable effort to locate
or communicate with the plan sponsor if the corporate agent receives
notification. Accordingly, if a QTA determines that contacting the
agent for service of legal process is unnecessary or unhelpful, it is
not required to do so. No changes were made to paragraph (b) in
response to this comment.
One commenter requested that the Department confirm that the
regulation would apply to a situation where a plan becomes abandoned
after the plan sponsor decides to terminate the plan, but before the
sponsor actually completes the termination and winding-up process.
While the regulation would cover this situation, the Department notes
that a sponsor's decision to terminate a plan would not relieve a QTA
from following the entire process established by the regulation,
including the requirements in paragraph (c) of the final regulation
relating to deemed termination.
Under the proposal, a QTA was precluded from finding a plan to be
abandoned if at any time before the plan is deemed terminated under the
regulation the QTA receives an objection, whether oral or written, from
the plan sponsor regarding the QTA's finding and the proposed
termination. One commenter suggested the final regulation should
mandate that such objections be put in writing and include
representations regarding the sponsor's ability and willingness to
administer the plan in accordance with plan documents. While the
Department has not modified the final regulation in response to this
comment, the Department notes that, given the facts that would give
rise to a QTA's determination that the plan at issue may have been
abandoned, the QTA may wish to inform the Department of the situation
involving the plan and the sponsor's objection to the plan's
termination.
3. Deemed Termination
The final regulation provides that following a QTA's finding that a
plan is abandoned, the plan will be deemed to be terminated on the
ninetieth (90th) day following the date of the letter from EBSA's
Office of Enforcement acknowledging receipt of the notice of plan
abandonment. The furnishing of notice to the Department, in conjunction
with the 90-day delay in the deemed termination of the plan, is
intended to afford the Department an opportunity to review the
circumstances of the proposed plan termination and, if appropriate,
object to the termination. If the Department objects to a termination
within the 90-day period, the plan is not deemed terminated until such
time as the Department informs the QTA that the Department's concerns
have been addressed. See Sec. 2578.1(c).
The proposal provided that the 90-day period starts when the notice
is furnished to the Department. For this purpose, paragraph (c)(4) of
the proposal provided that a notice would be considered furnished to
the Department on receipt, unless sent by certified mail, in which case
the notice would be considered furnished when mailed. Given the
significance of the 90-day period to potential QTAs, plans,
participants, and the Department, the Department has revised the
regulation to ensure actual receipt by the agency and to eliminate any
ambiguity concerning the running of the 90-day period. In this regard,
the regulation now provides, in paragraph (c)(1), that, subject to the
waiver exception in paragraph (c)(2), a plan shall be deemed to be
terminated on the ninetieth (90th) day following the date of the letter
from EBSA's Office of Enforcement acknowledging receipt of the notice
of plan abandonment described in paragraph (c)(3) of the regulation. A
conforming change has been made to paragraph (c)(2) and proposed
paragraph (c)(4) has been eliminated from the final regulation.
As with the proposal, the Department, in its sole discretion, may
waive some or all of the 90-day waiting period. Such a waiver might
occur, for example, in the case of plans with few participants and few
assets or if the facts relating to the abandonment are not very
complicated, and if it is readily apparent to the Department that the
proposed termination would be unlikely to put the participants'
interests at risk. If the Department waives some or all of the 90-day
period, the plan would be deemed terminated when the Department
furnishes notification of the waiver to the QTA. See Sec.
2578.1(c)(2)(ii). This provision was adopted without change.
The proposal provided that the notification to the Department must
be signed and dated by the QTA and include certain information about
the QTA and the abandoned plan. Except as provided below, the
notification requirements of the proposal were adopted without
modification. See Sec. 2578.1(c)(3).
Under the proposal, the notification to the Department was required
to include certain information about the QTA, including whether the
person electing to be the QTA (or any affiliate of the person) is, or
within the past 24 months has been, the subject of an investigation,
examination, or enforcement action by the Department, Internal Revenue
Service, or Securities and Exchange Commission concerning such entity's
conduct as a fiduciary or party in interest with respect to any plan
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covered by the Act. One commenter suggested that the term affiliate
needs to be defined in the final regulation. Another commenter urged
deletion of this disclosure requirement on the basis that such
disclosure is difficult, costly, and possibly not relevant to the
termination and winding-up process contemplated under the regulation,
particularly with respect to affiliates of the QTA. This commenter
noted that QTAs are likely to be among the largest and most affiliated
companies in the marketplace, thereby making it very difficult, if not
impossible, for a QTA to determine whether any of its affiliates are,
or within the past 24 months have been, the subject of an
investigation, examination, or enforcement action by the Department or
other specified federal agencies.
In response to these comments, the Department is adding a
definition of ``affiliate'' that is intended to provide certainty to
the identification process. As set forth in paragraph (h), the term
affiliate under the regulation generally means any person directly or
indirectly controlling, controlled by, or under common control with,
the person; or any officer, director, partner or employee of the
person. See Sec. 2578.1(h)(1). However, for purposes of the
notification requirement in paragraph (c)(3)(i)(C), the regulation
adopts a narrower definition, focusing on those affiliates that a QTA
should have no difficulty identifying--those affiliates that are a 50
percent or more owner of a QTA or any affiliate (within the meaning of
paragraph (h)(1)) that provides services to the plan. See Sec.
2578.1(h)(2).
The content requirements for this notification also are amended to
include a statement by the QTA that it has received no objection to the
plan termination from the plan sponsor. This change merely clarifies
the intent of the requirement that a QTA has made a reasonable effort
to contact the plan sponsor. See Sec. 2578.1(c)(3)(iii).
The final regulation, like the proposal, includes, at Appendix B, a
model notice that may be used by a QTA to satisfy the notice
requirement of Sec. 2578.1(c)(3).\4\ Except for some minor changes,
the model notice is essentially the same as the model notice that
accompanied the proposed regulation. One substantive change to the
notice involves the inclusion of an item in Part I--Plan Information
entitled ``Other'' (item 4). This item was added to the model notice to
enable a QTA to report delinquent contributions that the QTA may have
identified in the course of providing services to the plan or in
connection with becoming a QTA under the regulation. As discussed in
subsections 4 and 6 of this preamble entitled ``Winding up the Affairs
of the Plan'' and ``Limited Liability,'' respectively, if the QTA knows
about delinquent contributions, the QTA must disclose them to the
Department.
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\4\ The Department has provided model notices to facilitate
compliance with the requirements in paragraphs (b)(5), (c)(3),
(d)(2)(vi), and (d)(2)(ix) of the final regulation. These models are
contained in Appendices A through D of this rulemaking. While the
Department intends that use of an appropriately completed model
notice would constitute compliance with the content requirements of
the previously mentioned paragraphs, the Department is not requiring
the use of any of the models and anticipates that a variety of other
notices could satisfy the notice requirements of the regulation.
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In the preamble to the proposed regulation, the Department invited
comment on whether notices to be submitted to the Department (i.e., the
notifications required by paragraphs (c)(3) and (d)(2)(ix) of Sec.
2578.1) should be required to be submitted electronically. No
commenters supported mandated electronic notification, but some
commenters indicated they might choose to submit such notifications by
e-mail depending on the circumstances of the particular case. Although
the Department is not requiring notifications under this regulation to
be submitted electronically, the Department encourages QTAs to utilize
electronic media (especially e-mail) in providing information to the
Department. In this regard, the Department will establish a special
Abandoned Plan section on its website (http://www.dol.gov/ebsa) for
information concerning the abandoned plan program and the electronic
submission of information under the program.
4. Winding Up the Affairs of the Plan
The proposal set forth specific steps that a QTA must take to wind
up an abandoned plan and, with respect to most such steps, the
standards applicable to carrying out the particular activity.\5\ In
particular, paragraph (d)(2)(i)(A) of the proposal provided that the
QTA shall undertake reasonable and diligent efforts to locate and
update plan records necessary to determine benefits payable under the
plan. Paragraph (d)(2)(ii) of the proposal provided that the QTA must
use reasonable care in calculating the benefits payable based on the
plan records assembled. Paragraph (d)(2)(iii) of the proposal provided
the QTA with the authority to engage, on behalf of the plan, such
service providers as are necessary for the QTA to wind up the affairs
of the plan and distribute benefits to the plan's participants and
beneficiaries. Paragraph (d)(2)(iv)(A) provided that reasonable
expenses incurred in connection with the termination and winding up of
the plan may be paid from plan assets. Paragraph (d)(2)(v) of the
proposal provided that the QTA must furnish to each participant or
beneficiary a notification of termination, apprising the individual of
his or her account balance and requesting that such individual elect a
form of distribution. Paragraph (d)(2)(vi) of the proposal addressed
distributions of benefits to participants and beneficiaries.
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\5\ In the preamble to the proposal, the Department explained
that these prescribed standards are intended to both clarify and
limit the responsibilities and liability of QTAs in connection with
the termination and winding up of an abandoned plan. See 70 FR
12048.
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(a) Calculating Benefits
The proposal provided that the QTA must use reasonable care in
calculating benefits payable based on the plan records assembled. Two
commenters raised issues concerning the calculation of benefits and the
likelihood of missing or incomplete plan and other employment records
in the abandoned plan context. One commenter noted that defined
contribution plans often use allocation formulas based on employee
compensation levels but that a QTA is unlikely to have access to
employment records showing such levels. Another commenter noted that
many defined contribution plans provide for a reversion of unallocated
assets to the plan sponsor at termination, which generally would be
unfeasible given that the plan sponsor is usually missing in the
abandoned plan context.
In an effort to provide QTAs with more certainty with respect to
satisfying their obligations in making benefit determinations under the
regulation, the final regulation includes a new provision addressing
the allocation of expenses and unallocated assets. See Sec. 2578.1
(d)(2)(ii)(B). In instances where a plan document is unavailable,
ambiguous, or if compliance with the terms of the plan document is not
feasible, the regulation provides that, for purposes of allocations in
connection with calculating benefits payable under this regulation, the
QTA shall be deemed to have used reasonable care when allocating
expenses to the individual accounts of participants and beneficiaries
if such expenses are allocated either on a pro rata basis
(proportionately in the ratio that each individual account balance
bears to the total of all individual account balances) or on a per
capita basis (allocated
[[Page 20824]]
equally to all accounts). See Sec. 2578.1(d)(2)(ii)(B)(2).
In the case of unallocated assets (including forfeitures and assets
in a suspense account), a QTA, under the new provision, will be deemed
to have used reasonable care if such assets are allocated on a per
capita basis (allocated equally to all accounts). See Sec.
2578.1(d)(2)(ii)(B)(1). A more restrictive approach to allocations of
unallocated assets was adopted due to concerns that allocating such
assets on a pro rata basis (proportionately in the ratio that each
individual account balance bears to the total of all individual account
balances) would tend to result in discrimination in favor of highly
compensated employees that is not permitted under the Code.\6\
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\6\ See section 401(a)(4) of the Code.
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A number of commenters requested guidance on the handling of an
individual account with respect to which the amount in the account is
less than the anticipated administrative cost of processing and
distributing that account in accordance with the regulation. These
commenters noted that payment of administrative expenses from plan
assets frequently extinguishes very small accounts. It was explained
that expenses unable to be paid out of a specific individual account
are then charged back to the plan as a whole, thereby reducing the
account balances of other plan participants or beneficiaries. In order
to reduce overall administrative costs, these commenters generally
recommended that any account balance worth less than its share of
anticipated expenses be treated as forfeited and reallocated to the
remaining accounts.
In response to these comments, the final regulation provides that a
QTA shall not have failed to use reasonable care in calculating
benefits payable solely because the QTA treats as forfeited an account
balance that, taking into account that account's share of estimated
forfeitures and other unallocated assets, is less than the estimated
share of plan expenses allocable to that account. See Sec.
2578.1(d)(ii)(A). This provision also requires the QTA to use forfeited
account balances to defray plan expenses or to allocate them to other
plan participant or beneficiary accounts on a per capita basis. This
provision is intended to minimize accrual of unnecessary administrative
expenses at the plan level in connection with individual accounts that
have little, if any, likelihood of ever being distributed due to their
size.
(b) Delinquent Contributions
In response to questions raised about a QTA's obligations with
respect to collecting delinquent employer and employee contributions on
behalf of the plan, the Department has included in the final regulation
a new paragraph (d)(2)(iii). Paragraph (d)(2)(iii)(A) of the final
regulation provides that a QTA must notify the Department of known
delinquent contributions owed to the plan. This information must be
included in either the notice of plan abandonment (Sec. 2578.1(c)(3))
or the final notice (Sec. 2578.1(d)(2)(ix)). Paragraph (d)(2)(iii)(B)
of the final regulation provides that the QTA is not required to
collect delinquent contributions on behalf of the plan. The final
regulation includes minor conforming amendments to the content
requirements of the notice of plan abandonment and the final notice to
reflect the new requirement to report delinquent contributions. See
Sec. Sec. 2578.1(c)(3)(iv)(D) and (d)(2)(ix)(F). In addition, the
model notice of plan abandonment (Appendix B) and the model final
notice (Appendix D) were changed by adding a new box, entitled
``Other,'' in which the QTA may identify such delinquencies, thereby
entitling the QTA to the special relief provided under the regulation.
Further discussion of this issue can be found in subsection 6 of this
preamble, entitled ``Limited Liability.''
(c) Reasonable Expenses
As noted above, the proposal provided that reasonable expenses
incurred in connection with the termination and winding up of a plan
may be paid from plan assets. In this regard, paragraph (d)(2)(iv)(B)
of the proposal provided that an expense shall be considered reasonable
if it is not in excess of rates charged by the QTA (or affiliate) to
other customers (i.e., customers that are not plans terminated under
this regulation) for comparable services, if the QTA (or affiliate)
provides comparable services to other customers. One commenter
questioned whether this comparability standard would require QTAs to
perform services for abandoned plans at the discounted rates generally
afforded only to favored customers, based on existing business
relationships, volume of business, or developing business
opportunities. The Department recognizes that many QTAs, in the normal
course of their business, may provide discounts to favored customers,
based on a variety of factors. The comparability standard of the
regulation is not intended to ensure that abandoned plans are
necessarily provided the lowest or discount rate, but rather that in
winding up the affairs of a plan, the plan (and therefore the plan's
participants and beneficiaries) are not charged more than the QTA would
charge similarly situated customers. If, for example, a QTA provides
all or a significant portion of its customers a discount on the cost of
services, the Department would expect that such discounts would be
available to abandoned plans for whom the QTA provides the same or
similar services. In an effort to further clarify this issue, the word
``ordinarily'' has been added to the final regulation, with the
limitation now reading, in relevant part, that such expenses ``are not
in excess of rates ordinarily charged by the qualified termination
administrator (or affiliate) for same or similar services. * * *'' See
Sec. 2578.1(d)(2)(v)(B)(2)(ii).
(d) Notifying Participants
The proposal provided that a QTA shall, as one of its duties in
winding up the affairs of a plan, furnish to each participant or
beneficiary a notice concerning the termination of his or her plan. The
content requirements of this notice were adopted largely as proposed.
See Sec. 2578.1(d)(2)(vi). Minor modifications were made to reflect
other changes to the regulation, such as the inclusion of additional
distribution options in the case of missing or non-responsive
participants or beneficiaries. See Sec. 2578.1(d)(2)(vi)(A)(5)-(8).
This notice of plan termination must include, among other things,
the individual's account balance and date on which the balance was
calculated. The reason for mandating this information in the notice is
to inform participants of the immediacy of their distribution and help
them choose an appropriate distribution option in light of the amount
of their benefits. The proposal did not mandate a specific calculation
date, but given the purpose and timing of the notice, the calculation
date ordinarily should be on or about the date the notice is sent to
the participant or beneficiary. One commenter inquired whether a QTA
could omit the account balance and calculation date from notices if
participants and beneficiaries could access their daily account
balances via telephonic or web-based systems. This commenter indicated
that its current notification system is able to produce this
information only at predetermined intervals (e.g., monthly, quarterly,
semiannually, or annually). Modifying existing notification systems,
according to the commenter, would increase costs attendant to
terminating and winding up plans under the regulation.
[[Page 20825]]
The Department believes it is important to keep administrative
costs of winding up an abandoned plan as low as possible, thereby
preserving assets for distribution to participants and beneficiaries.
Accordingly, a telephonic or web-based system that makes daily account
balances readily accessible to participants and beneficiaries complies
with the content requirements set forth in paragraph
(d)(2)(vi)(A)(3)(i) of the final regulation if, in lieu of specific
account information, the required notification includes the following:
(1) A description of the method for accessing the system and account
information, such as relevant telephone numbers, passwords, and access
codes; (2) a statement indicating that participants and beneficiaries
have a right to request a paper version of their specific account
information; and (3) a description of the procedures for obtaining such
a paper statement from the QTA.
Like the proposal, the final regulation mandates that the notice of
plan termination must include a description of the plan's distribution
options and the procedure for a participant or beneficiary to make an
election. One commenter indicated that it currently sends to
participants in tax-qualified plans, upon a distributable event, a
booklet containing, among other things, a description of the
distribution options available under the plan. As described by the
commenter, the booklet is intended to meet the notice requirements
under section 402(f) of the Code, outlining the participant or
beneficiary's distribution options and explaining the tax consequences
associated with each such option. The commenter asked if a QTA could
exclude from the termination notice information on distribution options
if such information was furnished simultaneously to participants and
beneficiaries as part of the disclosure required under section 402(f)
of the Code. Recognizing that furnishing duplicative information to
participants and beneficiaries about their distribution options may be
both confusing and costly, it is the view of the Department that the
requirement of paragraph (d)(2)(vi)(A)(4) of the final regulation does
not preclude the furnishing of information concerning the distribution
options of participants and beneficiaries in a separate document that
complies with section 402(f) of Code and is included in the same
mailing as the termination notice.
(e) Distributions
In general, QTAs must distribute benefits in accordance with the
form of benefit elected by the participant or beneficiary. See Sec.
2578.1(d)(2)(vii)(A). Because spousal consent is sometimes required for
a distribution, this section has been modified to add the clause ``with
spousal consent, if required.''
Commenters noted that, if participants and beneficiaries fail to
make a timely election concerning the form of benefit distribution, and
the plan is subject to the survivor annuity requirements in sections
401(a)(11) and 417 of the Code, a QTA might not be able to comply with
the distribution requirements of Sec. 2550.404a-3 (Safe Harbor for
Distributions from Terminated Individual Account Plans) as required by
the proposal. In recognition of this problem, the final regulation has
been amended to provide that, if a QTA determines that the survivor
annuity requirements of the Code prevent a distribution in accordance
with Sec. 2550.404a-3, the QTA shall distribute benefits ``in any
manner reasonably determined to achieve compliance with those
requirements.'' See Sec. 2578.1(d)(2)(vii)(B)(2). In those cases where
a QTA is required to select an annuity provider, it is expected that
the selection process will be carried out in accordance with the
fiduciary standards under section 404 of ERISA. See Sec.
2578.1(e)(1)(iii).
Further discussion relating to annuity purchases pursuant to
paragraph (d)(2)(vii)(B)(2) is contained in subsection 6 of this
preamble, entitled ``Limited Liability,'' and subsection 7, entitled
``Internal Revenue Service.'' Also, it should be noted that an
additional change was made to 29 CFR 2550.404a-3 for distributions on
behalf of missing or non-responsive participants in situations where
the present value of the benefits does not exceed $1,000. See 29 CFR
2550.404a-3(d)(1)(iii) and the preamble discussion related to that
final regulation for an explanation of this change.
In the context of plan distributions, several commenters requested
guidance concerning a QTA's duties with respect to assets for which
there is no readily ascertainable fair market value (e.g., limited
partnership/joint venture interests, employer securities, participant
loans, defaulted mortgages and bonds, and employer real property).
Recognizing that there is no one course of action that would be
appropriate to all types of assets that QTAs might confront in the
course of winding up the affairs of abandoned plans, QTAs, as with plan
fiduciaries generally, will be required to evaluate the options and
costs and make a determination as to what course of action is in the
best interest of participants and beneficiaries. The actions of a QTA
in liquidating hard to value plan assets are not covered by the safe
harbor in paragraph (e) of the final regulation. The Department notes
that significant holdings of hard to value or illiquid assets by a plan
may indicate that the plan is not suitable for termination under this
regulation. Rather, it might be more appropriate for the plan
termination to occur under the Department's National Enforcement
Project on Orphan Plans (NEPOP).\7\ Information about NEPOP may be
obtained through the Abandoned Plan section of EBSA's website (http://www.dol.gov/ebsa
).
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\7\ See infra Background section of this document.
---------------------------------------------------------------------------
Because the Department is interested in receiving information about
hard to value and illiquid assets held by abandoned plans, the
Department has added a new provision to the Special Terminal Report for
Abandoned Plans to enable the Department to collect data on this topic.
See Sec. 2520.103-13(b)(5). Under this provision, a QTA is required to
identify and report the fair market value and method of valuation of
any assets with respect to which there is no readily ascertainable fair
market value.
(f) Final Notice
The last step in the winding-up process is for the QTA to notify
EBSA's Office of Enforcement that all benefits have been distributed in
accordance with the regulation. Paragraph (d)(2)(viii) of the proposal
set forth the content requirements of this notification. These
requirements have been adopted largely as proposed. See Sec.
2578.1(d)(2)(ix). Unlike the proposal, however, the final regulation
does not require the final notice to include a statement that a special
terminal report meeting the requirements of Sec. 2520.103-13 is
attached to the final notice. This change was made to preserve maximum
flexibility with respect to the filing requirements of the special
terminal report. As explained below in the preamble to Sec. 2520.103-
13, initially all terminal reports will be filed as attachments to
final notices. Ultimately, though, such attachments will be unnecessary
as the Department anticipates an electronic system for filing terminal
reports.
5. Plan Amendments
Paragraph (d)(3) of the proposal provided that the terms of the
plan shall, for purposes of title I of ERISA, be deemed amended to the
extent necessary to allow the QTA to wind up the plan in accordance
with this
[[Page 20826]]
regulation. The purpose of this provision is to enable QTAs to avoid
the potentially significant costs attendant to amending the plan to
permit what is otherwise permissible under this regulation. For
example, a QTA may, without regard to plan terms, engage or replace
service providers and pay expenses attendant to winding up and
terminating the plan from plan assets. Because there were no negative
comments on this provision, it was adopted without modification. See
Sec. 2578.1(d)(3). One commenter raised several questions regarding
the need to amend an abandoned plan for purposes of maintaining that
plan's qualified status under the Code. This issue is addressed in
subsection 7 of this preamble, entitled ``Internal Revenue Service,''
relating to the IRS' treatment of plans terminated under this
regulation.
6. Limited Liability
Paragraph (e) of the final regulation, like the proposal, provides
that, if a QTA carries out its responsibilities with regard to winding
up the affairs of the plan in accordance with paragraph (d)(2) of the
regulation, the QTA will be deemed to satisfy any responsibilities it
may have under section 404(a) of ERISA with respect to such activity,
except for selecting and monitoring service providers. In addition, if
the QTA selects and monitors service providers consistent with the
prudence requirements in part 4 of ERISA, the QTA will not be held
liable for the acts or omissions of the service providers with respect
to which the QTA does not have knowledge. See Sec. 2578.1(e)(1).
With regard to the liability of a QTA, commenters argued that: (1)
The winding-up provisions under the regulation should not be considered
fiduciary acts; (2) the QTA should be protected from lawsuits by plan
sponsors and participants and beneficiaries; and (3) the Department
should adopt a substantial compliance approach to assessing compliance
with the regulation. The Department believes that it has constructed a
regulatory framework that serves to minimize to the greatest extent
possible the liability and exposure of QTAs who carry out their
responsibilities in accordance with the provisions of the regulation.
In this regard, the Department does not believe it can take the
position that acts involving the exercise of discretion are not
fiduciary acts. Nonetheless, the Department has, in many instances,
attempted to define the type of activity that would be viewed as
satisfying the fiduciary requirements under ERISA in the context of
abandoned plans. See Sec. 2578.1(e)(1) (referring to the activities in
paragraph (d)(2) of the regulation). Further, the Department believes
that compliance with the requirements of the regulation will provide a
meaningful defense for the actions of a QTA in the event the QTA is
sued by the plan sponsor or a plan participant or beneficiary.
Two commenters questioned the obligations of a QTA with respect to
the retention of service providers that had been engaged to provide
services to the plan by the plan sponsor (or another plan fiduciary)
prior to the plan's abandonment. It is the view of the Department that
a QTA does not have a duty to second guess the prudence of an earlier
determination by the plan sponsor (or fiduciary) to engage a service
provider for, or on behalf of, the plan. However, the QTA does have an
obligation to monitor those who provide services to the plan,
consistent with the requirements of section 404(a), without regard to
whether the service provider was selected by the plan sponsor (or other
fiduciary of the plan) or by the QTA. Like the proposal, the final
regulation provides, however, that, to the extent that a QTA discharges
its duties to select and monitor service providers in a manner
consistent with section 404(a), the QTA will not be liable for the acts
or omissions of the service provider with respect to which the QTA does
not have actual knowledge. See Sec. 2578.1(e)(1)(ii).
As with the selection and monitoring of service providers, it is
the view of the Department that the selection of annuity providers is
of such significance to plan participants and beneficiaries that the
selection process should be governed by the fiduciary standards of
section 404(a) of ERISA. For this reason, the limited liability
provisions of Sec. 2578.1(e)(1)(i) do not extend to a QTA's selection
of an annuity provider in those instances where a QTA determines that
the survivor annuity requirements of the Code prevent a distribution in
accordance with Sec. 2550.404a-3. See Sec. 2578.1(e)(1)(iii).
Several commenters inquired whether a QTA would have a fiduciary
duty under ERISA to identify and correct fiduciary breaches that were
committed before the person became a QTA (i.e., before the date of the
plan's deemed termination). Most of these inquiries concerned
delinquencies in forwarding participant contributions to the plan. The
commenters noted that correcting such violations could add
significantly to the cost of terminating an abandoned plan.
In an effort to clarify the responsibilities of a QTA with regard
to such circumstances, the Department has added two new provisions to
the final regulation. The first provision makes it clear that a QTA is
not required to conduct an inquiry or review to determine whether or
what breaches of fiduciary responsibility may have occurred with
respect to a plan prior to becoming the QTA for such plan. See Sec.
2578.1(e)(2).\8\ The second provision makes it clear that a QTA is not
obligated to collect delinquent contributions on behalf of the plan.
See Sec. 2578.1(d)(2)(iii). As discussed earlier, however, a QTA is
required to report known delinquent contributions to the Department.\9\
In addition, if an entity, in the course of becoming a QTA or winding-
up a plan, happens to discover other breaches of fiduciary
responsibility that occurred with respect to the plan before that
entity became the QTA, the Department encourages the QTA to identify
such breaches as part of the notification process under the final
regulation, either in the notification of plan abandonment (Sec.
2578.1(c)(3)) or the final notice (Sec. 2578.1(d)(2)(ix)). If the QTA
uses the model notice in Appendix B or D, such identifications may be
included in the section designated for other information.
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\8\ In this regard, section 409(b) of ERISA is clear that no
fiduciary is liable for a breach of fiduciary duty committed before
he or she became a fiduciary or after he or she ceased to be a
fiduciary.
\9\ The requirement to report delinquent contributions is
discussed in more detail above in subsection 4 of this preamble,
entitled ``Winding up the Affairs of the Plan.''
---------------------------------------------------------------------------
Another issue raised by commenters relates to circumstances when
the assets of an abandoned plan are held by more than one institution.
In such circumstances, the Department intends that there will be only
one QTA and that other parties holding plan assets cooperate with the
QTA in winding up the affairs of the plan and distributing assets to
the plan's participants and beneficiaries in accordance with this
regulation. The Department recognizes that persons holding such assets
may have concerns about their potential liability under ERISA in
following a QTA's direction. The Department, therefore, has added a new
paragraph (Sec. 2578.1(e)(3)) to make clear that a person holding
assets of an abandoned plan will not be considered to violate section
404(a) of ERISA to the extent that person cooperates with and follows
the direction of the QTA, as the QTA carries out its responsibilities
under the regulation. The regulation conditions relief on the person
holding plan assets confirming that the person representing to be the
QTA of an abandoned plan is the QTA recognized by the Department
[[Page 20827]]
of Labor. Confirmation of a person's QTA status with respect to a given
plan can be obtained by contacting the Employee Benefits Security
Administration's Abandoned Plan Coordinator or by checking the
Abandoned Plan section of EBSA's Web site (http://www.dol.gov/ebsa).
The Department anticipates that it will dedicate a section of its Web
site to matters pertaining to abandoned plans, including a list of
plans deemed terminated under the regulation and an identification of
the entity electing to be the QTA for each such plan.
7. Internal Revenue Service
In developing the proposed regulation, the Department conferred
with representatives of the IRS regarding the qualification
requirements under the Code as applied to plans that are terminated
pursuant to the regulation. As indicated in the preamble of the
proposed regulation, the Department has been advised by the IRS that it
will not challenge the qualified status of any plan terminated under
the regulation or take any adverse action against, or seek to assess or
impose any penalty on, 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. First, the QTA, based on plan records located and
updated in accordance with paragraph (d)(2)(i) of the proposed
regulation, reasonably determines whether, and to what extent, the
survivor annuity requirements of sections 401(a)(11) and 417 of the
Code apply to any benefit payable under the plan and takes reasonable
steps to comply with those requirements (if applicable). Second, each
participant and beneficiary has a nonforfeitable right to his or her
accrued benefits as of the date of deemed termination under paragraph
(c)(1) of the proposed regulation, subject to income, expenses, gains,
and losses between that date and the date of distribution. Third,
participants and beneficiaries must receive notification of their
rights under section 402(f) of the Code. This notification should be
included in, or attached to, the notice described in paragraph
(d)(2)(v) of the proposed regulation. Notwithstanding the foregoing, as
indicated in the preamble to the proposed regulation, the IRS reserves
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.
The Department received several comments regarding the position of
the IRS, as stated above, particularly with respect to the three
conditions. Many of the commenters stated a need for clarification of
the conditions with respect to specific issues likely to arise in
connection with distributions on behalf of missing or non-responsive
participants or beneficiaries. Other commenters requested that the
Department continue to consult with the IRS throughout the rulemaking
process in order to provide the best possible final regulation under
the circumstances. These commenters suggested that the overall success
of a final regulation would depend, in part, on a clear statement from
the IRS regarding the qualification requirements under the Code as
applied to plans that would be terminated pursuant to the final
regulation. All relevant comment letters were transmitted to the IRS
for its consideration along with the three final regulations being
published in this notice. The IRS has advised that its view, as
expressed above, has not changed. Set forth below is a discussion of
the specific issues raised by the commenters and, where appropriate,
the IRS response.
(a) Survivor Annuity Requirements
With respect to the first IRS condition, one commenter requested
clarification on how a QTA would be able to effect a distribution on
behalf of a missing or non-responsive participant in those
circumstances when the benefit payable is subject to the Code's
survivor annuity requirements.\10\ After consulting with the IRS, the
Department modified the proposal by adding a provision that enables a
QTA to purchase a qualified joint and survivor annuity or a qualified
preretirement survivor annuity on behalf of the missing participant or
beneficiary rather than rolling over the account balance into an
individual retirement plan. The final regulation, in relevant part,
provides that if a QTA determines that the survivor annuity
requirements in sections 401(a)(11) and 417 of the Code prevent a
direct rollover in accordance with Sec. 2550.404a-3, the QTA shall
distribute benefits in any manner reasonably determined to achieve
compliance with the survivor annuity requirements of the Code. See
Sec. 2578.1(d)(2)(vii)(B)(2). The IRS has indicated that it may
request comments in its Employee Plans Compliance Resolution Program
(EPCRS) concerning whether additional correction methods in the context
of an abandoned plan are needed in light of the ability to satisfy
those requirements by purchase of a commercial annuity contract.
---------------------------------------------------------------------------
\10\ See sections 401(a)(11) and 417 of the Code.
---------------------------------------------------------------------------
(b) Vesting
With respect to the second IRS condition, one commenter asked for
guidance from the IRS regarding compliance with the partial termination
requirements of section 411(d)(3) of the Code. The IRS has advised as
follows. The partial termination provisions apply in this context only
if there is a forfeiture account (not a Code 415 suspense account) with
plan assets as of the date of deemed termination under paragraph (c)(1)
of the final regulation. In such a circumstance, the Code generally
requires an evaluation, based on plan records located and updated in
accordance with paragraph (d)(2)(i) of the final regulation, of whether
a partial termination occurred at any point during the plan year
preceding the year in which the plan is terminated. If the QTA
determines there was a partial termination, the benefits of affected
participants, if any, would have to be fully vested in accordance with
section 411 of the Code. However, no such evaluation, vesting, and
distribution would be necessary if the QTA reasonably determines that
the cost of carrying out those acts would exceed the value of the
benefits that would otherwise vest under the partial termination
provisions.
(c) Code Section 402(f) Notice
With respect to the third IRS condition (regarding the written
explanation requirement imposed by Code section 402(f)), the view of
the IRS is that the section 402(f) notice should be included in, or
attached to, the participant notification of termination described in
paragraph (d)(2)(v) of the proposed regulation. Paragraph (d)(2)(vi)(B)
of the proposed regulation required that a participant be given at
least 30 days from the furnishing of the notification described in
paragraph (d)(2)(v) of the proposal to elect a form of distribution,
after which the QTA is required to distribute the participant's
benefits in accordance with the regulation. One commenter suggested
that the timing requirements for when a plan administrator must furnish
the Code section 402(f) notice might not always be consistent with the
``at least 30 days'' requirement in paragraph (d)(2)(vi)(B) of the
proposed regulation. After consulting with the IRS, the Department has
decided to adopt paragraph (d)(2)(vi)(B) of the proposed
[[Page 20828]]
regulation without modification.\11\ The IRS advised that, in its view,
the third condition relating to notification of rights under section
402(f) of the Code is not satisfied unless the QTA furnishes the Code
section 402(f) notice, or an eligible summary thereof, within a 60-day
window that is no less than 30 days and no more than 90 days before the
date of a distribution. See 26 CFR 1.402(f)-1, A-2. In the view of the
Department, when a QTA provides a combined notification within the
period for providing the notice under Code section 402(f), the QTA will
not be transgressing the 30-day requirement in paragraph (d)(2)(vii)(B)
of the final regulation.
---------------------------------------------------------------------------
\11\ Due to reordering of provisions in paragraph (d)(2) of the
proposal, the language formerly in paragraph (d)(2)(vi)(B) of the
proposal appears in paragraph (d)(2)(vii)(B) of the final
regulation. See Sec. 2578.1(d)(2)(vii)(B).
---------------------------------------------------------------------------
(d) Restrictions on Certain Mandatory Distributions
One commenter asked for clarification regarding compliance with the
Code's consent requirements in cases where the present value of a
missing or non-responsive participant's vested accrued benefit exceeds
$5,000.\12\ In this regard, the proposal provided that a QTA must roll
over the account balance of any missing or non-responsive participant
into an individual retirement plan in accordance with proposed Sec.
2550.404a-3 without regard to whether the vested account balance
exceeds $5,000. The Department has been advised that the position of
the IRS is that, if a plan is terminated (as provided in Sec. 2578.1)
and the three conditions described above are satisfied, a QTA may
distribute a missing or non-responsive participant or beneficiary's
vested accrued benefit without that participant's consent and without
regard to the present value of such benefits. Thus, for example, in the
case of a profit sharing plan that is not subject to the survivor
annuity requirements of sections 401(a)(11) and 417 of the Code, a QTA
may make such a distribution to a missing or non-responsive participant
or beneficiary even if the plan offers an annuity option.
---------------------------------------------------------------------------
\12\ See Code section 411(a)(11).
---------------------------------------------------------------------------
(e) Plan Amendments/Restatements
One commenter requested clarification on the position of the IRS as
to whether, in addition to satisfying the three conditions discussed
above, a QTA would be expected or required under the Code to amend an
abandoned plan at or before termination for qualification purposes. The
commenter specifically mentioned the general practice of amending or
restating a tax-qualified plan to reflect legislative or other updates
to the Code, such as adopting plan amendments for the Economic Growth
and Tax Relief Reconciliation Act of 2001. The Department has been
advised that the position of the IRS is that, if a plan is terminated
(as provided in Sec. 2578.1) and the three conditions described above
are satisfied, a QTA would not be required or expected to amend the
plan to reflect future guidance under the Code.
C. Safe Harbor for Distributions From Terminated Individual Account
Plans (29 CFR 2550.404a-3)
1. Scope
On March 10, 2005, the Department published in the Federal Register
(70 FR 12046) a proposed regulation that would add to part 2550 of the
Code of Federal Regulations a new section 2550.404a-3. The proposal was
intended to provide a fiduciary safe harbor for use in connection with
making distributions from terminated individual account plans on behalf
of participants and beneficiaries who fail to make an election
regarding a form of benefit distribution. The need for a fiduciary safe
harbor in this context was discussed in the preamble to that
regulation. The public response to the proposal was generally
favorable. Therefore, the safe harbor was adopted in final form largely
without modification.\13\
---------------------------------------------------------------------------
\13\ The final safe harbor regulation codifies those parts of
Field Assistance Bulletin 2004-02 (September 30, 2004) relating to
the distribution of assets to an individual retirement plan from
terminating individual account plans in those instances where a
participant or beneficiary fails to make a distribution election.
FAB 2004-02 did not address abandoned plans.
---------------------------------------------------------------------------
2. Conditions
Like the proposal, the final regulation provides that if the
conditions of the safe harbor are met, a fiduciary (including a QTA in
the case of an abandoned plan) is deemed to have satisfied the
requirements of section 404(a) of the Act with respect to the
distribution of benefits, selection of an individual retirement plan
provider or other account provider, and the investment of funds in
connection with the distribution. See Sec. 2550.404a-3(c). In this
regard, the proposal set forth three conditions. These conditions
related to the qualifications of individual retirement plan providers,
permissible investment products, limits on fees and expenses, a written
agreement requirement, participant enforcement rights, and prohibited
transactions. Except as otherwise indicated below, the final regulation
retains each of these conditions without modification.
(a) Rollover Distribution to an Individual Retirement Plan
The proposal conditioned relief on, among other things, the
rollover of distributions to an individual retirement plan, as defined
in section 7701(a)(37) of the Code.\14\ This condition applied without
regard to the present value of the benefit distribution. Several
commenters objected to this condition where benefit distributions would
be $1,000 or less. The commenters asserted that few, if any, financial
institutions offer, or will offer, an individual retirement plan for
initial investments of $1,000 or less. Thus, it was argued, the
potential inability of a QTA to identify an individual retirement plan
provider willing to receive a rollover distribution of $1,000 or less
may prevent a QTA from completing the termination and winding-up
process set forth in 29 CFR 2578.1. Similarly, the inability of a QTA
to identify an individual retirement plan provider willing to receive
such small accounts may dissuade some financial institutions from
serving as QTAs, particularly where the institution views its QTA
status as forcing it to accept the rollover distribution at a financial
loss.
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\14\ In the case of a distribution on behalf of a non-spousal
distributee (e.g., child of participant), the proposal required that
the distribution must be rolled over into an account, other than an
individual retirement plan, maintained by an entity that is eligible
to serve as a trustee or issuer of an individual retirement plan.
This provision was added to the proposal at the request of the IRS
to reflect the fact that a distribution to a non-spousal beneficiary
is not an ``eligible rollover distribution'' under the Code and
therefore cannot be transferred into an individual retirement plan
within the meaning of section 7701(a)(37) of the Code. See 26 CFR
1.402(c)-2, Q&A-12. This provision has been adopted in the final
regulation without modification. See Sec. 2550.404a-3(d)(1)(ii).
The IRS has advised the Department that a distribution under this
provision, as well as distributions pursuant to Sec. 2550.404a-
3(d)(1)(iii)(A) and (B), will be subject to income taxation,
mandatory income tax withholding and a possible additional tax for
premature distributions.
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In response to these comments, the final regulation includes an
alternative to direct rollovers to individual retirement plans. Under
this alternative, a QTA may make distributions to certain bank accounts
or State unclaimed property funds. This alternative is available only
in the case of a distribution by a QTA with respect to which the amount
to be distributed is $1,000 or less and that amount is less than the
minimum amount required to be invested in an individual retirement plan
product offered by the QTA to the
[[Page 20829]]
public at the time of the distribution. See 2550.404a-3(d)(1)(iii).
For example, a financial institution offers to the public an IRA
with a minimum initial investment requirement of $200. The financial
institution also is the QTA of an abandoned plan, with respect to which
there are two missing or non-responsive participants. The present value
of the benefits for one of the participants is $900 and the present
value of the other participant's benefits is $175. After determining
that the Code's survivor annuity rules do not apply to either
distribution, the QTA must distribute the benefits totaling $900
directly to an individual retirement plan within the meaning of section
7701(a)(37) of the Code. The benefit distribution of $175 must, at the
election of the QTA, be distributed to an interest-bearing federally
insured bank or savings association account in the name of the
participant, to the unclaimed property fund of the State in which the
participant's last known address is located, or, if available, to an
individual retirement plan offered by an institution other than the
QTA.\15\ Any of these options will satisfy the requirements of the
regulation and entitle the QTA to safe harbor relief.
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\15\ A QTA is not required to solicit bids in connection with
electing to distribute benefits to an individual retirement plan
offered by another financial institution.
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(b) Investment Products
Paragraph (d)(2)(i) and (ii) address the types of investments that
are permitted under the safe harbor in the case of distributions to
individual retirement plans (pursuant to paragraph (d)(1)(i) or
(d)(1)(iii)(C)) or to other accounts in the case of distributions on
behalf of non-spousal beneficiaries (pursuant to paragraph
(d)(1)(ii)).\16\ While one commenter suggested expanding the types of
investments that would be permitted under the regulation, the
Department has decided not to adopt the commenter's suggestions at this
time. Therefore, like the proposal, the final regulation provides that
there must be a written agreement entered into by the plan fiduciary
(including QTA) and an individual retirement plan (or other account)
provider. This agreement must provide, with respect to investment of
individual retirement plan (or other account) funds, that (i) the
rolled-over funds shall be invested in an investment product designed
to preserve principal and provide a reasonable rate of return, whether
or not such return is guaranteed, consistent with liquidity; (ii) for
purposes of (i), the investment product selected for the rolled-over
funds shall seek to maintain, over the term of the investment, the
dollar value that is equal to the amount invested in the product by the
individual retirement plan (or other account); and (iii) the investment
product selected for the rolled-over funds shall be offered by a State
or federally regulated financial institution, which shall be: A bank or
savings association, the deposits of which are insured by the Federal
Deposit Insurance Corporation; a credit union, the member accounts of
which are insured within the meaning of section 101(7) of the Federal
Credit Union Act; an insurance company, the products of which are
protected by State guaranty associations; or an investment company
registered under the Investment Company Act of 1940. The Department
notes that although the final regulation does not reflect the
suggestions of the commenter, the Department has not ruled out the
possibility of eventually expanding the types of investments that would
be permitted under the regulation. The Department, in a different
context, is currently considering possible amendments to the section
404(c) regulation that would serve to encourage more retirement-
appropriate investments for participants who fail to provide direction
or opt for a managed fund with respect to which participant direction
is not required. In the course of considering amendments to the section
404(c) regulation, the Department will continue to evaluate the
suggestions made by the commenter on this regulation.
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\16\ The conditions on permissible investment products do not
apply in the case of a distribution to an interest-bearing bank or
savings association account (pursuant to paragraph (d)(1)(iii)(A))
or to a State unclaimed property fund (pursuant to paragraph
(d)(1)(iii)(B)).
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3. Miscellaneous
As noted above, this regulation provides a fiduciary safe harbor
for distributions from terminated individual account plans (whether
abandoned or not) on behalf of missing or non-responsive participants
and beneficiaries, without regard to the value of such distributions.
In the context of distributions from non-abandoned plans, one commenter
requested guidance on the application of the consent requirements in
section 411(a)(11) of the Code to a distribution of vested accrued
benefits in excess of $5,000 where the plan offers an annuity option
(purchased from a commercial provider), or where the sponsoring
employer, or any entity within the same controlled group as the
employer, maintains another defined contribution plan (other than an
employee stock ownership plan as defined in section 4975(e)(7) of the
Code) into which the benefits could be transferred.\17\ The Department
transmitted this comment to the IRS as part of the development of this
safe harbor regulation. The IRS has advised as follows for situations
involving distributions from non-abandoned plans.\18\ Defined
contribution plans that are not subject to the joint and survivor
requirements and that offer immediate payment in a single sum
distribution may be amended at or before plan termination to eliminate
all annuity options without violating the Code's anti-cutback
rules.\19\ Where such an amendment occurs and the plan terminates, then
the plan fiduciary may distribute a participant's vested accrued
benefits in accordance with this safe harbor regulation without the
participant's consent and without regard to the present value of such
benefits.
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\17\ See Treas. Reg. 26 CFR 1.411(a)-11(e)(1) for rules when a
defined contribution plan terminates and the plan does not offer an
annuity option.
\18\ Subsection 7 of the preamble to 29 CFR 2578.1, entitled
``Internal Revenue Service,'' discusses the application of the
consent requirements in section 411(a)(11) of the Code to a
distribution of vested accrued benefits in excess of $5,000 by a QTA
from an abandoned plan.
\19\ See Treas. Reg. Sec. 1.411(d)-4, Q&A-2(e) for further
information, including when a defined contribution plan is permitted
to be amended to eliminate annuity options under the plan. However,
the following defined contribution plans are only permitted to be
amended to eliminate annuity options to the extent that they retain
sufficient annuity options to comply with the survivor annuity
requirements: (1) A defined contribution plan that is subject to the
funding requirements under section 412 of the Code; (2) a defined
contribution plan that is a direct or indirect transferee of a plan
subject to the joint and survivor annuity requirements; and (3) a
defined contribution plan that fails to provide for full payment of
the nonforfeitable accrued benefit (i.e., account balance) to the
surviving spouse upon the participant's death. For defined
contribution plans that are not permitted to be amended to eliminate
all annuity options, the IRS has indicated that it may request
comments under the EPCRS on whether additional correction methods
are needed under EPCRS in order for such plans that are abandoned to
take advantage of the fiduciary safe harbor regulation.
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The proposed fiduciary safe harbor was limited to distributions
from plans described in section 401(a) of the Code to reflect the tax
deferred nature of the rollover in the safe harbor.\20\ In the preamble
of the proposal, the Department solicited comments on
[[Page 20830]]
whether the safe harbor regulation should be extended to distributions
from plans described in section 403 of the Code.\21\ One commenter
recommended that the proposal be changed to include such plans. After
consulting with the IRS on this issue, the Department has agreed with
this recommendation.\22\ Accordingly, paragraph (a)(2) of the proposal
was modified by adding the clause ``section 401(a), 403(a), or 403(b)''
to make it clear that fiduciaries of such plans may use the safe
harbor. See Sec. 2550.404a-3(a)(2).
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\20\ Specifically, in the case of distributions from a plan that
is not an abandoned plan, such plan would have to be in compliance
with the requirements of section 401(a) of the Code at the time of
each such distribution. In the case of distributions from an
abandoned plan, the safe harbor would be available if the plan was
intended to be tax-qualified in accordance with the requirements of
section 401(a) of the Code, even if such plan was not operationally
qualified at the time of a distribution from the plan. See 70 FR
12051.
\21\ The Department notes that the proposed abandoned plan
regulation was not limited to plans described in section 401(a) of
the Code. As with the proposal, the final abandoned plan regulation
is available to any individual account plan as defined in section
3(34) of the Act. This includes plans described in section 401(a),
403(a), or 403(b) of the Code. See Sec. 2578.1(a).
\22\ Plan fiduciaries would have to determine whether use of the
safe harbor is inconsistent with rules or regulations of the IRS. In
this regard, the Department notes that the IRS has published
proposed regulations addressing the circumstances under which a Code
section 403(b) plan may be terminated. See 69 FR 67075, 82.
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One commenter expressed concern over the application of the
customer identification and verification (CIP) procedures of the USA
PATRIOT Act (the Patriot Act) in connection with a rollover by a QTA on
behalf of a missing participant. Generally, the perceived difficulties
concern situations where a QTA is required to make a direct rollover to
an individual retirement plan, but the participant cannot be located or
is otherwise not communicating with the plan concerning the
distribution of plan benefits. If the CIP provisions of the Patriot Act
were construed to require active participant involvement at the time an
individual retirement plan is established on his or her behalf, QTAs
would be unable to comply with the distribution requirements under
Sec. 2578.1 (d)(2)(vii)(B) and, consequently, would be unable utilize
the rollover safe harbor in Sec. 2550.404a-3.
In response to this comment, the Department notes that it has been
advised by Treasury staff, along with staff of other Federal functional
regulators,\23\ that they interpret the CIP requirements of section 326
of the Patriot Act, including implementing regulations and other
guidance thereunder, to require that banks and other financial
institutions implement their CIP compliance program with respect to an
account, including an individual retirement plan, established by a QTA
in the name of a former participant (or beneficiary) of an abandoned
plan terminated under Sec. 2578.1, only at the time the former
participant or beneficiary first contacts such institution to assert
ownership or exercise control over the account. CIP compliance will not
be required at the time a QTA establishes an account and transfers the
funds to a bank or other financial institution for purposes of a
distribution of benefits in compliance with Sec. 2550. 404a-3.\24\
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\23\ The term ``other Federal functional regulators'' refers to
other agencies responsible for administration and regulations under
the Patriot Act.
\24\ This position is consistent with guidance published by the
staff of the Treasury, FinCEN, and the other federal functional
regulators regarding accounts established under section 657(c) of
the Economic Growth and Tax Relief Reconciliation Act of 2001. See,
e.g., OCC Bulletin 2005-16 (April 28, 2005).
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Like the proposed safe harbor, the final regulation includes a
model notice of plan termination in the appendix to facilitate
compliance with the requirement to notify participants and
beneficiaries of their distribution options and to request that each
such participant or beneficiary elect a form of distribution. While the
Department intends that use of an appropriately completed model notice
would be considered compliance with paragraph (e) of the final
regulation, the Department does not intend to require its use and
anticipates a variety of other notices could satisfy the requirements
of the regulation.
D. Terminal Report for Abandoned Plans (29 CFR 2520.103-13)
On March 10, 2005, the Department published in the Federal Register
(70 FR 12046) a proposed regulation that would add to part 2520 of the
Code of Federal Regulations a new section 2520.103-13. The purpose of
this new section is to provide annual reporting relief relating to
abandoned plan filings by QTAs. The comments regarding the proposal
were generally favorable. Accordingly, except as otherwise described
below, the proposal was adopted without modifications.
Like the proposal, the final regulation addresses the content,
timing, and method of filing rules for the reporting requirement
imposed on qualified termination administrators pursuant to 29 CFR
2578.1(d)(2)(viii). With respect to content requirements, in addition
to basic identifying information of the plan and QTA, the report is
required to specify the plan's total assets as of a particular date,
termination expenses paid by the plan, and the total amount of
distributions, along with other relevant information. Regarding timing,
the report must be filed within 2 months after the month in which all
of the plan's affairs have been completed (except for the requirements
in Sec. 2578.1(d)(2)(viii) and (ix)).
With respect to method of filing rules, the report must be filed on
the latest available Form 5500 in accordance with the Form's special
instructions for abandoned plans terminated pursuant to Sec. 2578.1.
The instructions to the Form 5500 do not currently address plans
terminated pursuant to Sec. 2578.1. Until such time as the Department
revises the instructions to the Form 5500 to reflect the requirements
of Sec. 2520.103-13, the terminal report should be completed in
accordance with temporary instructions which will be posted on the
Abandoned Plan section of EBSA's website and the EFAST website.
The proposed regulation provided that the filing of a terminal
report with the Department would be accomplished when a report meeting
the requirements of proposed Sec. 2520.103-13 is furnished to the
Department as an attachment to the notice described in Sec.
2578.1(d)(2)(ix) (i.e., the final notice). This provision was
eliminated from the final regulation in order to preserve maximum
flexibility with respect to the filing requirements of the special
terminal report. Initially, all terminal reports will be filed as
attachments to final notices. Upon implementation of an electronic
filing system for the Form 5500 Annual Return/Report, the Department
anticipates that terminal reports filed by QTAs also will be filed
electronically, rather than as an attachment to the final notice.
Paragraph (e) of Sec. 2520.103-13 addresses concerns regarding the
responsibilities of QTAs under part 1 of title I of ERISA. This
paragraph clarifies that a QTA is not subject to the generally
applicable reporting requirements in part 1 of title I of ERISA, and
that the filing of a report in accordance with this section does not
relieve the plan's administrator (within the meaning of section 3(16)
of ERISA) of any obligation it has under ERISA. Similarly, any failure
by the QTA to meet the requirements of 29 CFR 2520.103-13 does not for
that reason make the QTA subject to the requirements of part 1 of title
I of ERISA, although it would prevent compliance with Sec. 2578.1.
One commenter recommended an extension of the deadline for filing
the report. The commenter was concerned that 60 days would be an
insufficient period of time to complete and file the report. As noted
above, the proposal required the report to be filed within two months
after the month in which all of the plan's affairs have been
[[Page 20831]]
completed. In many cases, depending on when the plan's affairs have
been completed, the time for filing actually will be in excess of 60
days. After careful consideration of this issue, it is the Department's
view that the proposed time period is adequate given the simplified
reporting requirements of the report. See Sec. 2520.103-13(d).
A new provision was added to the report to enable the Department to
collect data on the extent to which abandoned plans hold assets for
which there is not a readily ascertainable fair market value, (e.g.,
limited partnership/joint venture interests, employer securities,
participant loans, defaulted mortgages and bonds, and other employer
real property). See Sec. 2520.103-13(b)(5). Under this provision, a
QTA is required to identify and report the fair market value and method
of valuation of any assets with respect to which there is no readily
ascertainable fair market value. As noted above, in the discussion
regarding a QTA's duties with respect to these assets in connection
with winding up an abandoned plan, the Department also will use the
information reported to ensure that QTAs are acting reasonably and in
good faith with respect to such assets.
E. Regulatory Impact Analysis
Summary
This regulatory initiative comprises three separate regulations.
The first, entitled Termination of Abandoned Individual Account Plans
(29 CFR 2578.1), establishes a procedure that financial institutions
holding assets of abandoned individual account pension plans may follow
to terminate the plan and distribute benefits to the plan's
participants and beneficiaries, with limited liability. The first
regulation includes, as appendices, model forms that can be used to
provide the notices required under the regulatory termination
procedures. The second regulation, entitled Safe Harbor for
Distributions from Terminated Individual Account Plans (29 CFR
2550.404a-3), provides a fiduciary safe harbor for making distributions
from terminated plans on behalf of participants and beneficiaries who
fail to make an election regarding a form of benefit distribution. The
third regulation, entitled Special Terminal Report for Abandoned Plans,
establishes a simplified method for filing a terminal report for
abandoned individual account plans. The Department is also publishing,
simultaneously with this regulatory initiative, a final class exemption
for services provided in connection with the termination of abandoned
individual account plans. As described further in the preamble to the
exemption, published elsewhere in this issue of the Federal Register,
the Department has taken into account the availability of conditional
relief under the exemption, which the Department believes is essential
to achievement of the purposes underlying these regulations, in
assessing the economic costs and benefits of the regulations.
These regulations address the problems caused when the employer
sponsor of an individual account pension plan abandons the plan,
relinquishing the responsibility to either administer the plan or to
appoint an administrator. The assets of such plans often languish in
financial institutions that hold the funds under a limited delegation
of authority without the power to distribute them. The establishment of
the standards and procedures set forth in these regulations will reduce
the difficulties that participants and beneficiaries often face in
seeking to gain access to the account balances attributable to them
under an abandoned plan. By establishing an efficient method of winding
up the plan's affairs and distributing account balances, the
regulations will also eliminate unnecessary expenses that are charged
to the plan assets being passively held by the financial institution
and increase the likelihood that participants and beneficiaries will
receive the benefits due them under abandoned plans. The following
section summarizes the Department's economic analysis of these
regulations. Additional sections describe the basis of the analysis and
the Department's conclusions in more detail.
Although abandoned plans will pay certain additional costs as a
result of these regulations, their qualitative and quantitative
benefits are expected to be substantial. Most significantly, they will
produce the qualitative benefit of facilitating voluntary, timely,
efficient termination of abandoned plans. These regulations will
encourage appropriate financial institutions to serve as QTAs to wind
up the affairs of abandoned plans. The regulations' requirements for
timing and content of notices to the Department and to participants and
beneficiaries; specification of QTA obligations with respect to the
condition of plan records, the selection and monitoring of service
providers, and the payment of fees and expenses; and standards for plan
amendments all protect the benefits of affected participants and
beneficiaries in the termination of abandoned plans.
The orderly termination of abandoned plans will also produce
quantitative benefits by maximizing the account balances ultimately
payable to participants and beneficiaries. First, prompt, efficient
termination of an abandoned plan will eliminate future administrative
expenses charged to the plan that would otherwise diminish the plan's
assets. Second, through the specific standards and procedures, the
regulations will reduce the overall cost of terminating an abandoned
plan.
The regulations will result in abandoned plans' incurring costs to
wind up their affairs. However, the magnitude of such costs is
meaningful only when compared to the savings that will result from
reliance on the regulations' procedures and termination of the plans.
The Department's analysis, detailed below, shows that, although a
plan's termination costs in some cases may exceed the anticipated
administrative cost savings in the actual year of termination, the
administrative cost savings produced by the termination will exceed the
termination costs by the year next following termination. To the extent
that a plan, if not terminated, would have continued to be abandoned
for more than one year, therefore, the aggregate savings resulting from
termination will substantially exceed the termination costs, resulting
in a substantial preservation of plan assets and larger benefits for
participants and beneficiaries.
Because the specific circumstances of abandoned plans are thought
to vary considerably, the Department's quantitative estimates of
savings from efficiency gains are subject to some uncertainty.
Regardless of the variations in termination costs across the spectrum
of abandoned plans, however, if the regulations are successful in
reducing termination costs in the aggregate by 10 percent, the
Department estimates that they would reduce the aggregate (one-time)
cost of terminating the currently existing abandoned plans by at least
$800,000. If the regulations further increase efficiency in the
termination process and therefore reduce termination costs by 20
percent overall, about $1.7 million in aggregate termination costs will
be saved. Under this assumption, the benefits of terminating existing
abandoned plans under these regulations will exceed the administrative
costs these plans would otherwise incur by about $900,000, even in the
year of termination. For the estimated currently existing abandoned
plans, this net benefit is expected to increase to $6.6 million, if it
is presumed that abandonment would continue for a year beyond the year
of
[[Page 20832]]
termination, and to $27 million, if abandonment continued instead for
an additional four years beyond the year of termination.
Similar effects will be seen for the somewhat smaller number of
plans that become abandoned and are terminated in future years. In
future years, termination of an additional 1,650 plans that become
abandoned annually is expected to result in a net benefit ranging from
about $400,000 to $2.7 million at the year beyond the year of
termination or to $14.5 million at the fourth year beyond the year of
termination. A more detailed discussion of the data, assumptions, and
methodology underlying this analysis will be found below.
Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether
a regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and review by the Office of
Management and Budget (OMB). Under section 3(f) of the Executive Order,
a ``significant regulatory action'' is an action that is likely to
result in a rule (1) having an annual effect on the economy of $100
million or more, or adversely and materially affecting a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local or tribal governments or communities
(also referred to as ``economically significant''); (2) creating
serious inconsistency or otherwise interfering with an action taken or
planned by another agency; (3) materially altering the budgetary
impacts of entitlement grants, user fees, or loan programs or the
rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in the Executive Order. OMB has
determined that this action is significant under section 3(f)(4)
because it raises novel legal or policy issues arising from the
President's priorities. Accordingly, the Department has undertaken an
analysis of the costs and benefits of the regulations. OMB has reviewed
this regulatory action.
Costs
Termination of Abandoned Individual Account Plans (29 CFR 2578.1)
This regulation establishes the process for terminating abandoned
plans. It will have the effect of causing abandoned plans to incur
certain costs in connection with termination and distribution of their
assets. These costs include, among others, the costs associated with
determining whether the plan is abandoned; notifying participants,
beneficiaries, and the Federal government of the abandonment;
distributing benefits to participants and beneficiaries; and reporting
the termination of the plan to the Federal government.
Estimation of the total cost attributable to this regulation
depends on the number of abandoned plans to which it will apply. To
estimate the number of abandoned plans, the Department examined
information on Form 5500 filings that describes the contribution and
distribution activity of individual account pension plans. This data,
although not conclusive as to whether a plan has been abandoned, was
considered the only reliable source of information available for
approximating the total number of abandoned plans.
Using 1999 plan year data, the Department first ascertained the
number of plans that had filed a Form 5500 indicating both no
contributions received by the plan and no distributions made to
participants or beneficiaries. The Department then examined Form 5500
filings for these same plans for each subsequent year from 2000 to 2002
to determine whether, at any time during those years, the plans had
received contributions or made distributions. The Department considered
a plan to be abandoned, for purposes of this analysis, if neither
activity was reported for the plan throughout this entire period. The
Department emphasizes that it adopted this methodology merely to
produce a reasonable estimate of existing abandoned plans for the
purpose of conducting this economic analysis; the Department's use of
this methodology is not intended to reflect a view on the regulatory
requirements for finding abandonment; nor does it indicate any view
regarding whether a particular plan included in this survey was or is
in fact abandoned.
This approach yielded an estimate of approximately 4,000 plans
currently existing in a state of abandonment. Because witnesses before
the Working Group had indicated that most abandoned plans are small
plans with 20 or fewer participants, the Department estimated that the
estimated 4,000 abandoned plans would cover 78,500 participants. Other
analysis of Form 5500 data suggested that, in the future, an estimated
additional 1,650 plans, with an aggregate 33,000 participants, and an
estimated $868 million in assets, may become newly abandoned annually.
The Department notes that this use of Form 5500 data to estimate
the number of abandoned plans results in a fair degree of uncertainty.
For example, these estimates do not include an estimate of abandoned
plans that did not file a Form 5500 in 1999 or a later year. Further,
each plan counted within the 4,000-plan estimate represents a plan for
which an annual report was actually filed, indicating that some
administrative activities were conducted on behalf of the plan and
suggesting that circumstances other than abandonment may explain the
apparent lack of financial activity.\25\ Testimony by service providers
before the Working Group and information gathered under NEPOP indicate,
however, that a plan may be abandoned despite evidence of some
continued administrative activity. Although the Department acknowledges
the uncertainty of its assumptions, the methodology described above
provides the best available basis for reaching an estimate of the
number of abandoned plans for purposes of assessing the relative costs
and benefits of this regulation.
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\25\ For example, in any particular year, a profit sharing plan
may not receive any contributions, without there being any
imputation of abandonment.
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The Department has estimated the net impact of the regulation by
comparing the ongoing administrative costs of maintaining an abandoned
plan with the cost of terminating such a plan. Assuming that
termination costs will be significantly affected by the degree to which
plan administration was maintained following abandonment, the
Department expected an inverse relationship between continuing
administration and termination costs of abandoned plans, such that a
well-maintained plan would be less costly to terminate and a less-well-
maintained plan would be relatively more costly to terminate.
Based on available information regarding plans in general, the
ongoing administrative costs for abandoned plans are estimated to range
from approximately $900 to $3,000 per plan annually, or $3.5 million to
$11.8 million annually for 4,000 currently abandoned plans. Testimony
before the Working Group indicated that terminating an abandoned plan
can add ten percent to the ordinary expenses related to plan
administration. As such, termination costs are expected to range from
$1,000 to $3,300 per plan, or $3.9 million to $13 million for all
currently abandoned plans.\26\ Weighting the
[[Page 20833]]
number of abandoned plans equally between those that have been more and
less well-maintained produces an aggregate annual administrative cost
for 4,000 abandoned plans of approximately $7.7 million; the one-time
cost to terminate these same plans would be $8.4 million. Similarly,
the annual administrative costs for the 1,650 additional plans
estimated to become abandoned annually in the future is estimated at
$3.2 million, while the one-time cost of terminating those plans would
be $3.5 million annually.
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\26\ One commenter on the proposed regulations suggested that
the Department's estimate of the costs of terminating abandoned
plans was too low, particularly for plans that had been poorly
administered for some time after abandonment. This commenter
suggested that termination of a neglected plan could take up to ten
hours per participant. The Department recognizes the difficulty of
anticipating actual termination costs for specific plans and has
therefore developed an estimate based on a range of such costs,
which the Department continues to consider adequate and appropriate
for purposes of estimation.
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Regardless of whether costs of terminating abandoned plans would
exceed ongoing administrative costs in the year the plans are
terminated, the future savings of eliminating continuing administrative
expenses that result from termination will quickly exceed those
termination expenses. The Department expects, however, that the one-
time termination costs under this regulation may actually be less than
one year's ongoing administrative expenses for such plans because its
specific standards and procedures will increase the efficiency of
terminating abandoned plans. The aggregate savings that would arise
from this greater efficiency is subject to uncertainty. However, each
10 percent reduction in the cost of termination is assumed to produce
savings in excess of $800,000. Assuming that this regulation reduces
the costs of terminating abandoned plans by at least 20 percent, $1.7
million in termination costs will be saved, and total one-time
termination costs would amount to $6.7 million. Savings of about
$700,000 would arise from greater efficiency in terminating plans that
become abandoned in each future year, reducing ongoing estimated annual
termination costs from $3.5 million to $2.8 million.
In response to public comments on the proposals, as explained
above, the Department has modified the two model notices (the Notice to
the Department and the Final Notice) to provide QTAs with the
opportunity to inform the Department of known delinquent contributions.
Because this modification imposes only a very small additional cost
relative to the overall range of cost estimates for the regulation, the
Department has not increased its cost estimates for these two model
notices. The Notice to the Department and the Final Notice are
discussed more fully below in the section of the preamble on the
Paperwork Reduction Act.
Safe Harbor for Distributions From Terminated Individual Account Plans
(29 CFR 2550.404a-3)
The safe harbor provided in section 2550.404a-3 requires a notice
to be furnished to participants and beneficiaries informing them of the
plan's termination and the options available for distribution of their
account balances. The Department's estimate of the number of notices
that will be sent and the cost for these notices is based on the number
of missing or non-responsive individuals whose account balances are
likely to be directly transferred by a fiduciary.
Based on data about terminating plans that are not abandoned plans
from the year 2000 Form 5500 Annual Report, the Department estimates
that, annually, there are 2.3 million participants and beneficiaries in
terminating plans. Although it is not known how many of these
participants and beneficiaries will fail to make an election concerning
distribution of their benefits, other information about participants
and beneficiaries in defined benefit plans has led the Department to
assume that approximately one percent, or 23,500, individuals will fail
to do so annually. As such, it is estimated that plan administrators
will be required to furnish 23,500 notices to participants in order to
take advantage of the safe harbor under section 404(a). The cost for
these notices, at two minutes per notice and $.38 each for mailing, is
$62,170.
Special Terminal Report for Abandoned Plans (29 CFR 2520.103-13)
The Department has modified the proposed regulation for simplified
reporting for abandoned plans to add a provision to collect data on
abandoned plan assets for which there is not a readily ascertainable
fair market value. Despite this minor modification, the Department has
not attributable any costs to the changes in reporting for abandoned
plans provided by this regulation. This simplified reporting is
treated, for purposes of this analysis, as a benefit to abandoned
plans, as explained below.
Benefits
Termination of Abandoned Individual Account Plans (29 CFR 2578.1)
The final regulation has both qualitative and quantitative
benefits. The standards and procedures it provides will encourage
timely, efficient termination of abandoned plans and appropriate,
careful distribution of account balances, thereby increasing the
benefit security of participants and beneficiaries. The regulation's
requirements for timing and content of notices to the Department and to
the participants and beneficiaries; specification of QTA obligations
with respect to the condition of plan records, selection and monitoring
of service providers, and payment of fees and expenses; and standards
for plan amendments protect the benefits of participants and
beneficiaries during the termination of abandoned plans.
The orderly termination of abandoned plans will also produce
quantitative benefits by maximizing account balances ultimately payable
to participants and beneficiaries. First, prompt, efficient termination
of an abandoned plan will eliminate future administrative expenses that
would otherwise diminish the plan's assets. Second, application of the
regulation's specific standards and procedures will reduce costs of
termination. Both of these effects will reduce the extent to which
benefits held in individual accounts under abandoned plans are drawn
upon to pay for expenses.
The most significant qualitative benefit of the regulation will
arise from encouraging QTAs to terminate abandoned plans. Absent the
standards and procedures of this regulation, including its provisions
limiting a QTA's liability in certain circumstances, the institutions
holding assets of abandoned plans would likely lack the necessary
authority and/or incentive to properly terminate the plans and
distribute benefits. Termination of abandoned plans further will
produce the benefit of making previously inaccessible plan accounts
available to the participants and beneficiaries of abandoned plans. The
regulation's specifications for how the QTA should wind up the affairs
of an abandoned plan will also protect benefits in the course of that
process.
Benefits ultimately payable to participants and beneficiaries will
be maximized in two important ways. First, termination will eliminate
future administrative expenses that would diminish plan assets (and
therefore participant account balances). Second, the regulation's
specific standards and procedures will reduce the costs associated with
plan termination. Each of these effects will moderate the extent to
which benefits will be reduced due to either continued administration
or termination.
The magnitude of the costs incurred by a plan to wind up its
affairs under
[[Page 20834]]
this regulation is meaningful only when compared to the savings of
future administrative expenses that will also result from termination.
A comparison of termination costs with administrative savings is
complicated by the fact that the termination costs will be incurred
only once, while the savings in eliminated administrative costs will
accrue throughout the years during which the plan would have continued
to exist in its abandoned state. In order to assess the balance of
costs and benefits, the Department has estimated the present value of
future ongoing administrative expenses using a three percent discount
rate over a period from one year to five years after termination. The
actual duration of abandonment cannot be determined with certainty;
however, a period from one to five years is thought to offer a
reasonable illustration of potential administrative cost savings that
could arise in future years from the termination of abandoned plans.
The comparison of estimated termination costs of $8.4 million with
the present value of future administrative costs discounted over the
range of durations noted above shows that, while termination costs are
estimated to exceed the estimated $7.7 million savings of
administrative expenses in the year of termination, the present value
of administrative expenses that would otherwise be paid in the year
following termination exceeds the estimated termination cost by $6.6
million, resulting in a substantial preservation of account balances
and therefore retirement benefits. The present value of administrative
expenses that would otherwise be paid over the five years following
termination exceeds the termination cost by $27 million. Similarly, the
cost of termination of the 1,650 additional plans assumed to become
newly abandoned each year would be slightly greater than eliminated
administrative costs for the year of termination, but termination would
have the effect of eliminating over $2.8 million in administrative
expenses by the end of the next year following termination, and $11.6
million if those plans had remained abandoned for five years. These net
benefits would also represent account balances preserved for retirement
benefits.
As noted earlier, the estimates of reduction in termination costs
that might arise from efficiency gains due to this regulation's
specific standards and procedures are subject to some uncertainty.
However, each 10 percent reduction in the cost of terminating abandoned
plans under these new standards is assumed to produce savings in excess
of $800,000. Assuming that the specific provisions of the regulation
will increase efficiency and reduce costs by at least 20 percent, an
additional $1.7 million in termination costs will be saved, further
preserving retirement benefits for participants and beneficiaries of
currently abandoned plans. With that assumption, the benefits of these
terminations would be estimated to exceed their costs by about $900,000
in the year of plan termination. Efficiency gains for the 1,650 plans
that become abandoned from year to year would be expected to amount to
$710,000 annually, such that the benefits of terminating these
abandoned plans would exceed their termination costs by about $400,000
each year.
Safe Harbor for Distributions From Terminated Individual Account Plans
(29 CFR 2550.404a-3)
By providing a safe harbor for plan fiduciaries that directly
transfer individual account balances to appropriate investment
vehicles, this regulation will increase retirement security and reduce
fiduciaries' uncertainty regarding how to comply with ERISA section
404(a). The benefits of greater retirement savings protection for
participants and increased certainty for fiduciaries under the safe
harbor cannot be specifically quantified.
The regulation will provide qualitative benefits to fiduciaries by
affording them greater assurance of compliance and reduced exposure to
risk; the substantive conditions of the safe harbor will benefit many
former participants by directing their retirement savings to
appropriate retirement savings investment vehicles that minimize risk
and offer preservation of principal and liquidity.
Special Terminal Report for Abandoned Plans (29 CFR 2520.103-13)
This regulation provides for simplified reporting to the Department
for QTAs that wind up the affairs of an abandoned plan. The time
savings resulting from abbreviated reporting requirements will reduce
administrative costs for abandoned plans and preserve account balances,
resulting in increased benefits to participants and beneficiaries.
Paperwork Reduction Act Statement
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data
will be provided in the desired format, that the reporting burden (time
and financial resources) imposed on respondents is minimized, that
collection instruments are clearly understood, and that the Department
can properly assess the impact of its collection requirements on
respondents.
The Department first solicited comments concerning the information
collection request (ICR) included in the Proposed Regulations on
Termination of Abandoned Individual Account Plans (29 CFR 2578.1), the
Proposed Safe Harbor for Rollovers From Terminated Individual Account
Plans (29 CFR 2550.404a-3), and the Proposed Class Exemption for
Services Provided in Connection with the Termination of Abandoned
Individual Account Plans when these documents were published in the
Federal Register on March 10, 2005 (70 FR 12046). No comments were
received from the public about the hour and costs burdens attributed to
the information collection request (ICR). The ICR was reviewed by OMB
and approved on April 11, 2005, under the control number 1210-0127.
Subsequent to this approval, the ICR was changed to include in the ICR
the hour burden for the Department's Class Exemption for the
Establishment, Investment and Maintenance of Certain Individual
Retirement Plans Pursuant to a Mandatory Distribution (69 FR 57964).
OMB approved the change to the ICR on September 19, 2005, under the
same control number. The OMB approval will expire on April 30, 2008.
Currently, the Department is soliciting comments concerning
revisions in the burden estimates for the ICR resulting from the
promulgation of these final regulations, in particular with respect to
the Termination of Abandoned Individual Account Plans Regulation (29
CFR 2578.1) (the Abandoned Plan Regulation) and the Class Exemption for
Services Provided in Connection with the Termination of Abandoned
Individual Account Plans (published simultaneously with this document)
(the QTA Exemption). The Department has submitted the revised ICR to
OMB in accordance with 44 U.S.C. 3507(d) for review of its information
collections. All other paperwork burdens covered by the ICR, including
the recordkeeping burden under the Department's Class Exemption for the
Establishment, Investment and Maintenance of Certain
[[Page 20835]]
Individual Retirement Plans Pursuant to a Mandatory Distribution (69 FR
57964), which are included in this ICR under the OMB approval described
above, remain unchanged. The following discussion describes only the
changes in the burden estimates for which the Department is now seeking
OMB approval. A copy of the ICR may be obtained by contacting the
person listed in the PRA addressee section below. The Department and
OMB are particularly interested in comments that:
Evaluate whether the collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
Comments should be sent to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Room 10235, New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Employee Benefits Security Administration. Although comments may be
submitted through June 20, 2006 OMB requests that comments be received
within 30 days of publication of the Notice of Final Rulemaking to
ensure their consideration.
PRA Addressee: Address requests for copies of the ICR to Susan G.
Lahne, Office of Policy and Research, U.S. Department of Labor,
Employee Benefits Security Administration, 200 Constitution Avenue,
NW., Room N-5647, Washington, DC 20210. Telephone: (202) 693-8410; Fax:
(202) 219-5333. These are not toll-free numbers.
Abandoned Plan Regulation (29 CFR 2578.1)
The information collection provisions of these rules are intended
to ensure that, in the case of an abandoned plan, a plan sponsor has
been determined to be unavailable to fulfill its responsibilities to
the plan before further action is taken by a QTA; to facilitate federal
oversight of the actions taken by a QTA in winding up the affairs of an
abandoned plan; to ensure that participants and beneficiaries are
apprised of actions that might affect their rights and benefits under
the plan; and to provide for a final notice and reporting regarding the
resolution of the affairs of the plan. The Department has included
model notices that may be used to satisfy these notice requirements and
has provided for reporting in the format of the Form 5500 for purposes
of minimizing compliance burden.
The Department has modified the requirements for the content of the
notices to the Department under the final Abandoned Plan Regulation to
require a QTA to report any delinquent contributions discovered in the
course of terminating an abandoned plan in either the Notice to the
Department or the Final Notice. The regulation provides that, if a QTA
provides such information to the Department in either notice, nothing
in the regulations will be construed to require the QTA to collect the
delinquent contributions. Although a QTA may elect to report delinquent
contributi |
