It’s easy to use FreeERISA’s 5310 database of terminating pension plans to generate leads in your market.
This article summarizes ideas for contacting leads and turning them into participants you can counsel and rollover assets you can capture. Keep in mind that many “5310 terminations” occur when a company changes from one type of plan to another, such as converting from a defined benefit or money purchase plan to a profit-sharing or 401(k) plan.
From a plan fiduciary’s perspective, there are two separate areas of responsibility regarding terminations. One involves handling money. The other involves notifying participants of their rights and options.
In terms of handling money, a plan technically does not terminate until the last distribution is made. However, this event occurs at the end of a long chain of complex requirements involving participant notification.
Changes in U.S. tax laws have made this chain even more difficult for plans to manage. For example, the law and IRS regulations have created an excise tax, which applies when a plan administrator fails to provide timely notice prior to the effective date of any plan amendment that provides for a significant reduction in future benefit accruals.
The excise tax is assessed at the rate of $100 per participant per day. It applies to all plans subject to Section 204(h) notification requirements of ERISA, including defined benefit and “individual account” plans subject to minimum funding requirements.
Under an IRS Revenue Ruling, when a money purchase plan is partially terminated and its assets are converted to a profit-sharing plan, the notice requirements of 204(h) do apply.
Section 204(h) notification is one of the most difficult compliance burdens in pension law, because it mandates that notification be made within a “reasonable time” (usually 45 days prior to an amendment’s becoming effective) and in a manner “calculated to be understood by the average participant.” It’s not enough to post notices on bulletin boards and company Web sites. Section 204(h) also contains “receipt requirements” that specify acceptable delivery to each individual.
Aside from 204(h), which does not require action on the participant’s part, terminating defined contribution plans must notify participants of their right to receive plan money in four ways:
Rollover to a new company plan, if one if offered.
Transfer or rollover to an IRA.
Transfer to an annuity, for participants who do not choose one of the three options above.
A participant in a terminating defined contribution plan is generally entitled to immediate vesting of all employer contributions, and the participant may not be forced to roll over money to a new company plan. In selecting the “default choice” of an annuity, the plan administrator or trustee is subject to ERISA fiduciary requirements. Participants may not elect an IRA rollover within 30 days of the time they have been notified by the plan of their ability to make a direct IRA transfer, unless this right is waived.
What Plan Sponsors Need
Given these complex rules, what do most companies want in their “participant notification” campaign?
They need help from professionals who fully understand all applicable laws and regulations.
If a terminating plan is being replaced, they usually want participants to elect a transfer of assets to the new plan, while also understanding their rights and choices.
If the terminating plan is not being replaced, they usually want participants to make direct transfers to an IRA of their choice, based on professional guidance. They don’t want the fiduciary responsibilities of making an annuity default choice. Some companies don’t want “salesmen” involved in this process. They want objective, unbiased communicators and educators.