All participant communications provided to participants must be continued until a participant is formally paid out from the plan and there is no longer an account balance maintained. Terminated employees can increase the cost of maintaining a plan. This is especially true if the company is paying any service providers on a per participant basis. Other considerations:
IRS reporting requirements − Participants who still have money in the Plan at the end of the year after the year in which they terminate employment must be reported on Form 8955-SSA, which goes to the Social Security Administration (SSA). Then, when the employee does finally make a complete withdrawal of funds, he should be reported again on Form 8955-SSA to remove his plan information from the Social Security files.
Time spent researching the whereabouts of a "lost" participant − You should be mailing various participant communications to former employees at least annually. Often, the longer an employee is gone, the greater the likelihood that you will lose track of his current whereabouts. Finding a missing participant can be very time consuming, and may involve using the IRS locator service, contacting beneficiaries or family members (if known), or searching social networking sites. Time spent researching the current address of a former employee is time that could have been spent elsewhere.
Qualified plan audit by an independent public accountant − Former employees with money in the plan count as plan participants on the Form 5500 and are included when determining if the plan is a “large” plan (greater than 100 participants). Large plans are subject to an annual independent audit, which costs thousands of dollars each year to complete. If the number of plan participants is approaching the large-plan size, terminated employees who still have money in the plan may put your headcount over the 100 participant level and force you to start having an annual audit performed.
Qualified Domestic Relations Orders, required minimum distributions at age 70½, and death benefits − These are situations that may arise over time which will require research and special handling. Obviously, the longer an ex-employee keeps his money in the plan, the greater the chance that some of these special situations will need to be addressed.
Under some plans, there is a waiting period before a terminated employee can request a distribution, but in general most plans allow employees to take their money out of the plan soon after termination. During the exit interview, the company’s representative will offer information on distribution options and may even provide the distribution paperwork. What should the employer do next?
- Keep a list of former employees who still have money in the plan and follow up with them regularly.
- Understand whether the plan allows or requires a “force out” distribution under certain conditions (typically when the employee’s balance is under $5,000) and if so, develop and follow procedures to force distributions on terminated employees who are under the threshold.
- Maintain and periodically request updates for beneficiary and address information.
- Take the opportunity to remind former employees about distribution options when mailing the Summary Annual Report. If correspondence mailed to a former employee comes back as undeliverable, know what options exist to locate him or her.
- Understand the reporting requirements of Form 8955-SSA, and use the list of former employees to help stay on track with reporting both the former employees who still have money in the plan, as well as the ones who have withdrawn their funds and closed their accounts.
And remember, just because you have signed off on distribution paperwork, you cannot assume you are finished. When a cash distribution is mailed in the form of a check, there is the risk the check will not be cashed. It will be up to you to follow up, before you lose track of the participant. Do your best to encourage employees to take a rollover or withdraw their funds as soon as allowed upon termination of employment − this is the least complicated means of keeping down the costs associated with former employees in your retirement plan.
The Nationwide Group Retirement Series includes unregistered group fixed and variable annuities and trust programs. The unregistered group fixed and variable annuities are issued by Nationwide Life Insurance Company. Trust programs and trust services are offered by Nationwide Trust Company, FSB, a division of Nationwide Bank. Nationwide Investment Services Corporation, member FINRA. In MI only: Nationwide Investment Svcs. Corporation. Nationwide Mutual Insurance Company and Affiliated Companies, Home Office: Columbus, OH 43215-2220.