Today, there are potentially billions of dollars in unclaimed pension benefits that sit as uncashed checks. These checks may be months, years, or even decades old. Over the last 10 years, this problem has intensified with the increase of involuntary distributions brought about by forced distribution plan rules. Although some will debate that unclaimed benefits are no longer a plan asset, there is evidence that the U.S. Department of Labor (DOL) does consider these funds to be plan assets and therefore a fiduciary responsibility. In most cases, these uncashed benefits are held in the general accounts of the institutions that hold the money and they earn "float" interest for these entities. The float interest is considered as a fee under most contracts and therefore not credited back to the plan. This practice is an approved industry standard if disclosed properly. However, these unclaimed assets have the possibility of becoming a liability for plan sponsors if they are allowed to sit for extended periods of time. They should be addressed to avoid potential penalties.
Some institutions do not consider uncashed checks to be plan assets; however, the DOL has implied in an advisory letter1 that sponsors' uncashed checks continue to be plan assets until they are cashed by the participant or their beneficiaries. Assuming this is the case, navigating the administration of unclaimed benefits presents its own set of challenges.
Plan sponsors may feel like the khaki-clad adventurer who has to navigate the Amazon jungles while avoiding quicksand, tar pits, and alligators when attempting to create policies and procedures regarding uncashed checks or unclaimed benefits. This document’s purpose is to help sponsors become aware of the growing problem of uncashed benefit checks and to provide discussion topics to cover with their attorneys and/or third-party administrators (TPAs). The guidelines outlined below will help you navigate the complexities of uncashed checks and avoid pitfalls that may arise.
What are unclaimed benefits?
Unclaimed benefits as referenced in this document are outstanding checks issued by a plan to either existing or terminated participants or to beneficiaries. They are considered assets of the plan trust. Unclaimed benefits also include assets that remain in the trust and belong to “lost” participants.
While the Internal Revenue Service (IRS) and DOL have provided no formal guidance on how to administer uncashed checks within active qualified plans, it is expected that sponsors take steps to ensure participants ultimately receive their benefits.
The DOL issued guidance in Field Action Bulletin (FAB) 2002-3 to help fiduciaries avoid prohibited transactions related to income earned on uncashed checks. Ultimately, the trust or bank should not be allowed to earn float interest on uncashed checks over a prolonged period of time. It is up to plan sponsors to monitor uncashed checks and address them on a timely basis.
Avoid the pitfalls
As recommended in the DOL’s FAB 2002-3, make sure your bank, trustee, or custodian has provided full and fair disclosure regarding the use of (float) earnings for unclaimed benefit checks and put a process in place to address the outstanding checks on a regular basis.
How do I identify the uncashed checks?
Ask your trustee or custodian or your TPA for a list of all uncashed checks.
Can the expense associated with unclaimed benefit administration be applied to the plan?
The full administration associated with locating “lost” participants and paying out benefits can become costly when you factor in certified mailing costs, stop pay and/or reissue fees, vendor search fees, and administration time. Reasonable fees associated with unclaimed benefits may be paid from the plan or offset directly from lost participant accounts.
Avoid the pitfalls
Before you are able to pay these fees from the plan, they must be disclosed in your annual 404(c) fee disclosure notices and distributed to participants before the fee goes into effect.
What steps should be taken once unclaimed benefits are identified?
Many plan documents provide guidance on unclaimed benefits, procedures for locating lost participants, and the forfeiture of prolonged unclaimed benefits. To establish your plan’s procedures you should first refer to your plan document. However, many documents are very general or silent on some of these issues and the plan sponsor must determine what to do. When we advise plan sponsors on options for establishing procedures, we reference the DOL steps outlined for terminating plans2 and use it as a guideline for creating procedures for active qualified plans. Generally, we recommend three main steps to process uncashed checks; 1) notification, 2) reversion of assets back to the plan, and 3) forfeiture of benefits for lost participants. The scenario below assumes checks are void or become “stale” 180 days after the issue date and the process is repeated on a quarterly basis.
Avoid the pitfalls
While checks cashed after the void date should be a rare occurrence, take note that even if they are past their “void” date and a “stop pay” has been placed on them, these checks may still be taken to a bank or check-cashing institution and cashed. Placing a “stop pay” on a void check does not ensure the funds will not be cashed at a later date. Potentially it can lead to a double payment to a participant that the plan administrator must reimburse to the trust. The reimbursement can be done by requesting payment back from the former participant or making a deposit from the company. An article by Emily Mitchell from Reinhart Boerner and Van Deuren3 outlines possible risks associated with stopped checks.
Step 1: Notification
Letter 1: Outstanding checks greater than 30 but less than 90 days old
For all uncashed checks older than 30 days, a simple letter to the last known address prompting the payee to cash the check or contact the plan administrator to reissue a potential “lost” check can be an effective and cost-efficient way to notify participants. Additionally, leveraging email addresses on file to send notifications is another low-cost method for notifying individuals of uncashed checks. We have found that a gentle reminder in this time period to cash the check has resulted in fewer uncashed checks after 180 days.
Issuing a letter shortly after 30 days of the check being issued also helps ensure that a U.S. Postal Service (USPS) mail-forwarding service is still in effect in the event the participant has moved.
Letter 2: Outstanding checks greater than 90 but less than 180 days old
For all uncashed checks that remain outstanding after 90 days, and with no response received from Letter 1, or if Letter 1 was returned as undeliverable, it is recommended that the plan administrator treat the former participants as “lost.” A third-party search vendor should be used to locate and provide updated address information for participants with unclaimed benefits. Letter 2 should be issued to the old or updated address via certified mail. An additional email should be sent if an email address is on file. If this is the last notification to be sent before restoring accounts, it is recommended that the letter include details of next steps that will be performed if no action is taken to cash the check or reach out to the sponsor (or TPA).
Here is information you may want to include in the letter and email:
- Information on reestablishing accounts back to the plan (if eligible) once the check becomes void
- Fees that will be charged to the accounts
- Possible forfeiture of the accounts after a prolonged period of being unclaimed ("read your plan document for details")
- Right to ultimately claim benefits at any time
- Information on the investment lineup to reestablish the accounts; a prudent choice may be to put the funds back into the investments from which they came or the plan’s default Qualified Default Investment Alternative (QDIA) fund.
Avoid the pitfalls
If using the plan’s QDIA fund when reestablishing the participant’s account, make sure the required QDIA investment language is included in the letter.
Step 2: Reversion of assets back to plan after 180 days (or once check is considered void)
Before proceeding with reverting assets back to the plan, the plan document should be reviewed in detail about this procedure. We cannot overstate the importance of this. Reverting assets can be a confusing quagmire that should be carefully navigated.
After the check becomes void, and with no response from the participant to claim the assets, steps should be taken to stop payment on the “stale” check and return eligible amounts to the plan in an account for the participant. Reestablishing the participant account so that new earnings will accumulate on the previously distributed amounts is a prudent step to ensure compliance with the DOL FAB 2002-3. Reinstating participant accounts back to the plan will allow the participant to accrue earnings rather than the trust to earn prolonged float earnings.
Consideration may be made for “de minimis” outstanding check amounts. Notification letters should be sent in an effort to allow participants to claim such amounts; however, once the checks remain unclaimed and are considered void, they can be swept to offset fees rather than to reestablish accounts. This should be stated in the letter. Also, be sure to report those participants as paid out on the Form 8955-SSA.
When reestablishing accounts, restore amounts back to new “unclaimed benefit” sources, apply after-tax basis amounts, and then, if needed, take applicable fees. Steps should also be taken to tag the participant as “lost” so that reestablished amounts are not forced out of the plan again under the plan’s distribution rule requirements and so that extra postage is not spent sending the required notices and statements.
Once these accounts are established, future benefit statements and required notices should continue to be sent to the last known address provided by the search vendor or the plan sponsor.
Additional steps should be taken at this point to locate individuals with unclaimed benefits. These steps could include, but are not limited to, searching other employee or benefit documents (such as health benefit records or insurance records), reaching out to beneficiaries on file or friends of the participant, or using another vendor search service.
Avoid the pitfalls
In terms of check void dates, in our experience there are several institutions that use the banking regulatory standard of 180 days for active checks. While the DOL uses a period of “90 days or longer” as an example for a prolonged period of time for trusts to earn float amounts on unclaimed benefits, stopping a check that is not yet considered void may introduce additional risk to the plan sponsor. Be sure to outline the float periods within your trust agreements and align them with your void dates to justify the time periods being used. To date we have not seen any action or further guidance regarding the potential mismatch of the timing recommended and the check void dates. Advice should be sought from your attorney on this matter.
Avoid the pitfalls
While in theory checks issued less than three years previously that had taxes withheld from the original distribution should have the taxes reversed and redeposited to the trust with the reinstated distribution, this is a lot of work and it is sometimes difficult or impossible to get any state taxes returned after a fairly short period of time. For Roth money, separate Roth sources should be reestablished with their prior first contribution dates noted and the basis added to properly track the taxability of future earnings. Steps should be taken to comply with reversing taxes if possible. If not, the reinstated accounts should be set up on an after-tax basis so that the original distribution is not taxed again when distributed. In the article “Uncashed Checks: The Billion Dollar Question,” by Ilene H. Ferenczy and Peter E. Preovolos4, the authors provide guidance behind the need to reverse taxes before reestablishing accounts as well as additional details to consider when reviewing unclaimed benefits.
Avoid the pitfalls
Only reestablish amounts that are eligible plan assets. Many times, you may have stale checks that represent required minimum distributions (RMDs), refunds of excess contributions, loans taken and paid back, or overpayment of loan repayments. These distributions were either required to be distributed from the plan or were not considered plan assets in the first place. Be careful not to redeposit amounts that would not be viewed as plan assets. Additionally, unless otherwise stated in your plan document, it is recommended that uncashed check amounts representing past RMD or excess benefits (with the 1099-R codes 7 or 8) be brought back into the plan but forfeited immediately rather than reverting amounts back to participant accounts. Use your 1099-R codes as a guide when determining whether to reestablish accounts. RMDs may be harder to identify without reviewing additional plan census data.
Avoid the pitfalls
Amounts should be 100% vested. Measures should be taken to reestablish unclaimed benefits in separate accounts and to ensure they are not placed back in the same sources in which they were distributed.
Step 3: Forfeiture of accounts
Once assets have been reverted back to accounts, additional monitoring will be needed to eventually forfeit amounts if not claimed after a designated period of time. Your plan document will typically have language to establish the required time period that benefits can remain in the trust before they are forfeited.
Avoid the pitfalls
Participants still retain the right to claim former benefits even after amounts have been forfeited. The sponsor must honor these benefit claims, and therefore the amounts forfeited must be tracked to ensure participants would be able to receive benefits if they make a claim at a later date. If sufficient funds do not exist in the plan’s forfeiture account at the time benefits are requested, such amounts will need to be paid to the participant directly from the sponsor. Be sure you retain the list of forfeited benefits when changing recordkeepers. Also, make sure to delete the person off the list and file them as paid on the Form 8955-SSA.
Step 4: Escheatment
In general, escheating unclaimed benefits should be reserved for the following circumstances:
- Terminated plans that need to escheat funds to complete the plan termination process.
- Amounts in an existing plan that are not (and were never) considered plan assets.5 One example is loan overpayments.
Additional rules and forms may be required for each state in which you pursue escheatment.
How can sponsors reduce or eliminate uncashed checks?
- As part of the termination process, notify individuals of potential plan balances and the need to provide updated address information.
- If possible, provide the ability for distributions of lump sum cash-outs to be sent via Automated Clearing House (ACH) for direct deposit rather than issuing a check.
- Mandatory rollovers: Reducing the rollover threshold for forced distributions from $1,000 to a lesser amount may provide fewer uncashed checks for the plan to administer. It should be noted that this may just shift the responsibility of lost participants to the rollover institutions to locate and distribute assets.
Milliman’s goal is to help educate our sponsors on the growing problem of uncashed benefit checks and to partner with them to ease the administrative burden and “pitfalls” that can accompany uncashed check processing. In the absence of formal guidance from the IRS or DOL on this issue, we believe implementing a sound plan will create confidence that prudent steps are being taken to ensure participants receive their benefits. Until such time that more guidance is available, we encourage clients to review their plan documents, partner with their TPAs to implement procedures for processing uncashed checks, and review these procedures periodically with your plan’s attorney for approval and additional guidance.
1U.S. Department of Labor (September 13, 1993). Advisory Opinion 93-24A.
2U.S. Department of Labor (September 30, 2004). Field Assistance Bulletin 2004-02.
3Mitchell, Emily L. & Van Deuren, Reinhart Boerne: “You may pay twice for being too nice: When you may have to pay on an original check after issuing a stop payment order and replacement check."
4Ferenczy, Ilene H. & Preovolos, Peter. Uncashed checks: The billion dollar question?
5U.S. Department of Labor (December 7, 1994). Advisory Opinion 94-2A.