The un-cashed 401(k) check dilemma

Un-cashed checks create a problem for 401(k) plan sponsors. The DOL mandates that funds technically remain part of the plan until the check is cashed. If the check is not cashed, the account is ongoing and must be credited with future earnings.

While it doesn’t seem logical that people would leave funds without claim, it is a common problem. Many employees leave companies without providing a forwarding address, and after future address changes, the paper trail is lost. Provisions for abandoned funds need to be included in the plan document. You have two options: restore funds to the plan after a designated time period, or search for participants and establish safe harbor IRA automatic rollovers for them. The IRS has a program that can help you search for participants. The Letter-Forwarding program protects the privacy of individuals, yet uses the resources of the IRS to deliver your communication. The inquiring company is not given the address.

You also need to specify in your plan document the ownership of the float earned on the plan assets. The float must be disclosed as a fee. At no time may the money go back to the employer instead of the plan. If a financial institution handles asset distribution for your plan, you will have to make sure that the transactions are completed, and be aware of incomplete transactions so that the funds remain on the books of the plan.

Terminating a plan creates additional issues, as a plan cannot terminate until all assets are distributed. Plan sponsors must take all steps possible to locate plan participants. If a participant never responds, then the fiduciary may distribute the funds to an IRA that qualifies for a safe harbor. Once safe harbor IRAs are established, the plan sponsor’s fiduciary duty is met and there is no longer any obligation to try to contact former employees. The funds are also no longer the responsibility of the plan.