Seyfarth Synopsis: Over the years, plan sponsors and administrators have wrestled with the question of what to do with the accounts of participants who left employment years earlier and cannot now be located. Notwithstanding their best efforts, plans continue to maintain accounts of participants who are either missing or unresponsive to plan correspondence (“missing participants”). On January 14, 2025, the DOL issued Field Assistance Bulletin (FAB) 2025-01 that allows sponsors and administrators of ongoing defined contribution (DC) plans to transfer unclaimed small accounts to a state unclaimed property fund of the participant’s last known address provided the fund satisfies certain requirements.
The issue of what to do with the accounts of missing participants is an age-old question. In 2024 the DOL issued FAB 2014-01, stating that an IRA was the preferred destination for unclaimed defined contribution (DC) plan accounts. That same FAB also acknowledged that IRAs may not be available for terminating DC plans, and suggested that in certain circumstances, a state unclaimed property fund or an interest-bearing FDIC-insured bank account might also be appropriate. More recently, the DOL became concerned that IRAs may not be the sole (or even most) appropriate destination for unclaimed plan accounts, as IRAs charge fees that often exceed the investment returns of small accounts, resulting in the account being eaten away by fees. In fact, when plan sponsors started looking to IRAs as the destination of its unclaimed account balances, the sponsors found it challenging to find an IRA provider who would accept all accounts, particularly small accounts, and that the limited choices resulted in front end, back end, and/or annual fees that would quickly exhaust the account balance. From the fiduciary perspective, many plan fiduciaries were reluctant to make such transfers. As time passed, however, more IRA providers became available and fees dropped. But not necessarily to zero.
In FAB 2025-01, the DOL points out that state unclaimed property funds do not deduct fees from the funds they hold, and also notes that the purpose of such funds is to reunite individual with unclaimed property. In fact, according to the National Association of State Treasurers, state unclaimed property funds return billions of dollars of unclaimed property to their rightful owners each year. Additionally, the DOL recognizes that many state unclaimed property funds participate in an unclaimed retirement clearing house, which is designed to simplify the process of a plan sending unclaimed accounts to more than one state, a situation retirements plans would likely face.
Further, SECURE 2.0 Act directed the DOL to establish a “lost and found” searchable database for the purpose of assisting individuals to locate the administrator of a plan which might hold his or her unclaimed benefit. While this database is in the early stages of development and roll out, the DOL has mentioned that in conjunction with the database, it is contemplating issuing formal guidance allowing ongoing DC plans to transfer unclaimed accounts to state unclaimed property funds.
FAB 2025-01 provides that until the DOL issues formal guidance, the DOL will take no enforcement action (e.g., a claim of fiduciary breach) if an unclaimed account of no more than $1,000 (inclusive of rollover contributions but disregarding any outstanding loan balances) is transferred to a state unclaimed property fund, provided, among other conditions,:
- the plan’s fiduciary determines such a transfer to be prudent following the unsuccessful completion of a diligent search for the missing participant,
- the transfer be made to the fund of the state of the participant’s last known address,
- and most noteworthy, the plan’s summary plan description (SPD) includes a description and contact information of any fund that the plan has or may transfer missing accounts to.
Additionally, the fund itself must meet certain requirements, including that the fund:
- allows individuals to make claims for such funds in perpetuity,
- does not charge fees,
- maintains a no-fee searchable online database,
- participates in a national unclaimed property database operated by State Treasurers,
- conducts annual searches for property owners for funds in excess of $50, and
- allows a plan to obtain reimbursement from the fund if the plan located and paid the benefit to the missing participant.
A plan may rely on a fund’s certification to satisfy these requirements.
One issue that the DOL defers to the IRS, however, is the federal income tax withholding treatment on a transferred account. Accordingly, unless and until the IRS speaks to this question, plans should withhold and remit income taxes upon transfer to a state fund.
This guidance, while not complete relief or necessarily permanent, is welcome news for the sponsors and administrators of ongoing DC plans with significant numbers of unclaimed participant accounts. Benefits to both the plan and the missing participant include that fees are not charged to the account once transferred, and the plan no longer needs to expend the time and expense to locate the missing participant. Of course, this “no enforcement policy” applies only to unclaimed plan accounts up to $1,000, so a plan still needs to consider its treatment of larger unclaimed account balances. And most importantly, any plan that intends to take advantage of this relief needs to have its SPD reviewed for inclusion of the necessary language to satisfy this DOL policy.
Please do not hesitate to contact your Seyfarth Employee Benefits attorney if you would like further information.