The IRS’s Tax Exempt and Government Entities Division recently issued a memorandum (the memo) to its auditors that directed them not to challenge a 403(b) plan as failing to satisfy the required minimum distribution (RMD) standards under circumstances set out in the memo. This guidance is helpful to 403(b) plan sponsors and consistent with missing participant procedures that the IRS set forth for qualified plan sponsors last year. For those 403(b) plans that are governed by ERISA, however, we note that the Department of Labor (DOL) requires plan sponsors to follow additional standards. We describe these issues below.
RMD rules for 403(b) plans
Qualified plans must satisfy RMD requirements, which generally require participants who are not 5 percent owners to commence distribution of the accrued benefit by April 1 of the year following the later of the calendar year in which the participant attains age 70 ½ or retires. The regulations under IRC Section 403(b) require 403(b) plans to comply with the RMD rules too. Otherwise, amounts deferred under a 403(b) plan could lose their tax-deferred status.
IRS missing participant procedures
Plan sponsors often find it challenging to locate missing participants. This issue raises a concern over the amount of resources a plan sponsor should devote to locating missing participants when an RMD must be made to that participant. In the memo, the IRS instructs its auditors not to challenge a 403(b) plan as failing to satisfy the RMD rules for missing participants if the plan sponsor takes each of the following steps:
- Searches its records, those of related plans, and publicly-available records or directories for alternative contact information
- Uses any of the following search methods:
- A commercial locator service
- A credit reporting agency
- A proprietary Internet search tool for locating individuals
- Attempts to contact the missing participant via United States Postal Service (USPS) certified mail to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone numbers)
The memo makes clear that a plan sponsor must complete all three steps to avoid a challenge from an IRS auditor.
DOL missing participant procedures
While the memo provides welcome relief to 403(b) plan sponsors, it is important for sponsors of plans subject to ERISA to remember that the DOL previously published its own separate missing participant procedures that sponsors must follow to avoid a breach of ERISA’s fiduciary duties. In Field Assistance Bulletin 2014-01, the DOL requires plan sponsors to follow all of the following steps to avoid a challenge upon DOL audit:
- Attempt to contact the participant by USPS certified mail
- Check records of the employer and any related plans that it sponsors
- Check with the designated beneficiary of the plan
- Use free electronic search tools
The DOL procedures largely overlap with the IRS procedures, but include the additional requirement that sponsors of 403(b) plans governed by ERISA take the additional step of attempting to contact the missing participant’s beneficiary.
Of course, as with most things ERISA related, a best practice is to document, document and document. In other words, if a plan sponsor is having difficulty locating a participant, it not only should follow the appropriate IRS and DOL procedures, but record the efforts it took to locate these participants and the results of those efforts in written documentation. That documentation can insulate the sponsor from potential liability if the plan is later audited by the IRS or DOL.