The Department of Labor has announced new rules for dealing with “orphaned” retirement plans, or plans which have been abandoned by their sponsors. The rules are limited to individual account plans; defined benefit plans cannot use these rules even if the plan is not under the aegis of the PBGC. The proposed rules address four specific aspects of orphaned plans:
- Orphan plan termination procedures
- Reduced 5500 reporting requirement
- Safe harbor rollover rules for terminating plans
- Prohibited transaction exemption
The DOL has requested comments on its proposals. The proposals would go into effect 60 days after the DOL issues final regulations.
Qualified Termination Administrator (QTA)
The proposals rely on a Qualified Termination Administrator, or QTA. A QTA is an eligible IRA custodian (bank, mutual fund house, insurance company, etc.) that holds the assets of the orphaned plan. So, if a 401(k) plan uses a mutual fund house to hold plan assets, the fund could be a QTA. By contrast, if the owners of an employer self-trustee a money purchase pension plan, there would not be a QTA and the plan could not make use of the new termination procedures.
The proposals allow a QTA to find that a plan has been abandoned. A QTA can make that finding after 12 months have elapsed in which there were no contributions to, or distributions from, the plan. Also, a QTA can make that finding based on other information (such as a bankruptcy filing or participant calls).
Once the QTA has made its initial finding, the QTA must make reasonable efforts to contact the sponsor and must determine that the sponsor no longer exists, cannot be located, or is otherwise “unable to maintain the plan” (e.g., the sponsor is in jail).
The QTA then sends the sponsor a notice of intent to terminate, giving the sponsor a 30-day deadline to object. If the sponsor objects any time prior to deemed termination, the process ends and the plan continues.
After this, the QTA must send a notice of abandonment to the DOL. The plan will be deemed terminated 90 days after that notice, unless the DOL objects or shortens the time.
The proposed regulations give a step-by-step blueprint for the QTA to accomplish the termination. It must gather records, calculate benefits, engage needed service providers, pay reasonable expenses, notify participants, distribute benefits, prepare a Special Terminal Report and give a final notice to the DOL. There is no need to amend the plan to accomplish this; the plan is “deemed amended to the extent necessary” to allow the QTA to terminate the plan. The regulations limit the ERISA liability of the QTA for the termination, so long as the QTA follows the DOL’s rules.
The proposed regulations excuse the QTA from most 5500 filing requirements. Regardless of the length of the termination process, the QTA only needs to file a Special Terminal Report. This report, filed on Form 5500, will include identifying information, total assets prior to distribution, termination, total distributions, and total safe harbor rollovers. The plan sponsor remains liable for filing regular 5500 forms until final distribution.
Safe Harbor Rollovers
The proposed regulations include a set of provisions very similar to the terminating plan guidance under FAB 2004-2. These new rules relate not only to plans a QTA terminates which were intended to be qualified plans, but also to other terminating individual account plans which in fact were qualified at the time of termination. The rules allow a fiduciary to roll over a balance for a nonresponsive participant. If a QTA or fiduciary complies with the conditions of the safe harbor, the proposals deem the fiduciary to have satisfied its fiduciary responsibilities in connection with the rollover. The conditions are essentially the same as for the mandatory distribution automatic rollover safe harbor, except that there is no maximum amount. The plan must notify the participant prior to making the rollover. The proposals include sample forms for all the required notices.
Prohibited Transaction Exemption
Finally, the proposals included a prohibited transaction exemption to allow the QTA to hire itself and its affiliates and to receive compensation at industry standard rates, not to exceed the QTA’s “regular” rates. Additionally, the QTA can use itself as the rollover IRA custodian for nonresponsive participants, use its investment products, and receive fees in connection therewith, under conditions similar to PTE 2004-16 (dealing with automatic rollovers), but with no amount limitation.
In the preamble to the proposed regulations, the DOL states that the IRS will not challenge the qualified status of a plan the QTA terminates, or take any adverse action against the plan, the QTA, or any participant as a result of the termination, so long as the QTA satisfies three conditions:
- The QTA, based on plan records, must reasonably determine whether, and to what extent, the plan is subject to the joint and survivor annuity rules.
- All participants must be fully vested as of the date of deemed termination.
- Participants and beneficiaries must receive the normal 402(f) notice, along with required DOL notices.
The DOL proposals, when finalized, will close an important gap in the retirement system, especially for small plans. The DOL estimates that 1,600 small plans every year become orphaned. Until now, the situation has been fraught with uncertain and complications. The DOL proposals, in allowing the QTA to hire service providers and to proceed to close the plan, provide ready solutions for many fiduciaries holding orphan plan assets and important protections for innocent participants.
SunGard Corbel will explore the implications of these proposals in both the Form 5500 Workshop and the 401(k) Plan Workshop this spring, and will explain how the proposals relate to the new automatic rollover guidance.