New DOL guidance on ‘abandoned’ 401(k)s improves retirement plan payouts
The Labor Department is amending the Abandoned Plan Program, originally adopted in 2006, so trustees can distribute assets from bankrupt companies' retirement plans to workers and retirees, starting July 16, 2024.
After the Department of Labor sidelined the rule for over a decade, Chapter 7 bankruptcy trustees will now be able to distribute retirement plan assets to beneficiaries of the plans of bankrupt companies under an updated DOL rule.
The Employee Benefit Security Administration’s Abandoned Plan Program, originally adopted in 2006, includes streamlined procedures for the termination and distribution of benefits from individual account retirement plans, such as 401(k) plans, that sponsoring companies have abandoned. The program allows benefits to be distributed and substantially reduces the fees charged to participants’ accounts for annual reporting, legal compliance and other administrative services, such as termination costs.
The Labor Department will consider a plan considered abandoned if:
- No contributions to or distributions from the plan have been made for a period of at least 12 consecutive months; and
- Following reasonable efforts to locate the plan sponsor, it is determined that the sponsor no longer exists, cannot be located or is unable to maintain the plan.
Before these regulatory updates, Chapter 7 bankruptcy trustees were ineligible to use the Abandoned Plan Program, despite being responsible for administering retirement plan functions on behalf of bankrupt entities. Using the program’s streamlined process, these trustees now can reduce the time and resources needed to wind up a bankrupt company’s retirement plan.
The agency also has amended an associated prohibited transaction class exemption to permit Chapter 7 bankruptcy trustees and their designees to select and pay themselves for services in connection with terminating and winding up bankrupt companies’ retirement plans.
“By opening the Abandoned Plan Program to Chapter 7 bankruptcy trustees, the interim final rules we announced today will improve the process for winding up retirement plans,” said Lisa M. Gomez, assistant secretary for employee benefits security. “These changes will get promised retirement savings into the hands of workers and their families more quickly and efficiently and fulfill the commitment their employer made to its plan participants.”
In addition, the interim final rules include a new, optional online method to submit required notices to supplement existing email and paper-based systems. Following its launch, the online system will be available on the agency’s website.
“The online filing system will make it significantly easier to participate in the program and helps ensure that retirement plans accomplish their core mission of paying benefits to their participants and beneficiaries,” Gomez said.
The interim final rules and amended exemption will make the Abandoned Plans Program and related exemptive relief available to Chapter 7 bankruptcy trustees as of July 16.
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“This guidance is welcome, to be sure,” said Allison Wielobob, chief legal officer for the American Retirement Association. “More participants and beneficiaries will be able to access their benefits sooner.”