Because of cultural and economic shifts, employee benefit plans are seeing greater numbers of lost participants than ever. Unfortunately, the phenomenon leaves plan sponsors and administrators to face accounting and auditing dilemmas. And depending on how they are handled, the scenarios could open those who are “lost” to threats of fraud.
Lost participants lead to unclaimed or uncashed benefits
A lost participant is one whose contact information is no longer correctly held by the plan. Two scenarios involving lost participants are becoming more common. The first is the “unclaimed benefit.” Typically this is an individual who is eligible for a benefit payment, but has not requested one, and the plan administrator cannot locate the person to deliver the payment. The second is the “uncashed benefit check.” This happens when a benefit payment or an automatic disbursement has been sent, yet the check remains uncashed.
The increasing occurrence of plan participants becoming lost
Historically, lost participant situations have not been encountered often enough for a plan to consider them material. But as cultural norms change, we’re seeing trends that make these scenarios more common, and thus, in some cases, material.
Employees are more often holding multiple jobs within their careers. This trend is projected to become stronger, with job changes becoming more frequent. When you combine that with a growing employer trend toward automatic enrollment in 401(k) plans, you understand the uptick in unclaimed benefits.
Now add in the realities of our address-changing society, as well as the frequent plan decision to auto-distribute balances of less than $1,000, and you see the perfect storm that leads to a growing number of uncashed checks.
Plan sponsors and administrators left with accounting dilemmas
It’s not clear at this time how sponsors and administrators should account for unclaimed and uncashed benefits in a plan’s records and on its Form 5500. The result is that plans vary in their record-keeping.
Plan sponsors often remain unaware of uncashed benefits until a significant plan change. Particular problems arise when benefits are paid from a plan trustee’s bank account, because the trustee could fail to communicate information about outstanding benefit checks to the plan sponsor, or even fail to keep records about it. This obviously presents an issue with understanding the financial state of the plan.
It’s simply unclear when a defined benefit plan’s benefit obligation has been fulfilled: when the check is cut or when the check is cashed. The result is that plans vary in their interpretation of the situation, and then their approach to accounting for it.
Some plans – specifically defined contribution plans -reinstate accounts for lost participants; other plans treat uncashed checks as forfeitures. Unfortunately, when lost participants are occasionally found, the financial information needed to restore their account balances may no longer available.
Other administrative issues come into play as well. For instance, it’s impossible for administrators to meet the requirement for providing participants with investment information if they cannot make contact with a certain number of participants. Or consider the challenge in terminating an insurance contract within a 403(b). Participants’ elections are required for this action, but lost participants cannot make such elections. Even more troublesome, terminating plans cannot distribute to lost participants, so it’s unclear when, or even if, they terminate.
Auditors face challenging considerations
The myriad of accounting issues presented when plans lose participants also poses challenges for auditors. Auditors must consider if the potential amount of uncashed checks is material. And we have to consider asking plan management about omitted balances held by the plan sponsor, trustee, custodian or TPA.
Very importantly, we need to consider the greater potential for fraud in the accounts of lost participants because those individuals don’t receive statements, and because uncashed checks pose a fraud risk.
Auditors are put in the position of determining if a lack of records on long-lost participants results in a scope limitation. That could further result in a disclaimer of opinion. And that’s generally unacceptable to the DOL.
Auditors also need to make a determination in the following situation. Let’s suppose that a terminating plan is left with more than 100 participants who have not cashed their checks. And those checks cannot be rolled over into IRAs or escheated to the state. Does this plan require a financial statement audit? As of now, the answer is unclear.
ERISA is taking this seriously
Because of the above issues just discussed, I was pleased to be asked to testify on this subject before an ERISA advisory board. I outlined the relevant matters faced by plan administrators, sponsors, auditors and participants, and recommended the department should provide appropriate accounting clarity.
My team at Clark Schaefer Hackett is kept up to date on the latest ERISA advisement, and when these lost participant matters are clarified, we will share that with you.
To learn more contact Jim Haubrock at [email protected]