Tips for Fielding Lost Participant Claims

“You can’t guarantee yourself a win,” says employee benefits lawyer David Weiner, describing claims appeals and litigation involving missing retirement plan participants, “but you can guarantee a loss.”

Weiner, a principal at David Weiner Legal, says what makes dealing with benefits claims from “missing” participants—those who left an employer years or even decades ago and subsequently fell out of contact with the plan sponsor—so difficult is that oftentimes key records of distribution payments to such participants have been lost or destroyed. Perhaps the company underwent a bankruptcy and reorganization in the years since an employee left or was terminated, causing ambiguity as to where the documents were stored. Or an overly aggressive record reduction policy could have been implemented following a big merger or acquisition, Wiener notes, and it’s not entirely unheard of for a flood or fire to destroy old paper records.

Whatever the circumstances, sponsors are often faced with the perplexing and highly sensitive task of fielding benefits claims from participants for whom no real records exist—making it difficult to prove whether the participant took cash distributions of benefits or if he still, in fact, has a stake in plan assets. An informal poll taken in early June at the PLANSPONSOR National Conference showed somewhere in the ballpark of eight in 10 plan sponsors had fielded this type of claims inquiry in the last year.

It is an especially pressing problem for pension plans that have large numbers of participants with deferred vested benefits. The participant assets underlying these deferred benefits can remain in a pension fund for 20 or 30 years before benefits payments are claimed, making it likely that at least some of those with vested balances will fall out of contact after a job change.

Weiner shares a list of best practices for sponsors facing this situation, but the main point, he says, is to treat all claims seriously, even if no record of the participant exists or the sponsor is confident the benefits in question have already been paid out. Sponsors should have a well-reasoned process in place and take care to document decisions.

“Plan sponsors are seeing these lost or missing participants come out of the woodwork at really an unprecedented pace,” Weiner tells PLANADVISER. “The best piece of advice I can probably give to plan officials is: Treat this like a genuine claim. Don’t treat it like an inconvenience or as being unworthy of your time.”

Weiner says there seems to be a coming surge of “missing participants” who are re-engaging with old benefits plans—driven in large part by certain efforts at the Social Security Administration and the accelerating pace of Baby Boomer retirements. As part of the process of filing for Social Security, Weiner explains, individuals are now presented with a “notice of potential private pension benefits” form. The language on this form can be quite misleading, Weiner notes, because it tells individuals they “may be entitled to some private pension benefits upon retirement,” depending on whether they have already collected due benefits in the form of a cash distribution. Indeed, another sentence on the form warns pre-retirees that, “If you have already received payments from the plan, the amount shown on this notice should be disregarded.”

“Well, we all know it’s hard for people to remember if they cashed a check a few months ago—let alone whether they cashed out a small pension benefit a few decades ago,” Weiner explains. “So it’s not surprising that individuals who have already collected their benefit could read this form and think they have more money coming. So they turn around and file a new claim with the sponsor.”

Once a claim is filed, it becomes the sponsor’s duty to review the claim and hand down a timely yes or no decision, as described in the Employee Retirement Income Security Act (ERISA). Oftentimes it will turn out that the participant does, in fact, deserve a benefit. Or records will be found that indicate the individual was already paid out. Either way, Weiner says, it's all about process. 

“The way ERISA is set up, if someone makes a formal claim for a benefit, even if there is no record that the individual was ever a participant or the sponsor suspects he was already paid, the plan still has an obligation to say either yes or no to that claim,” Weiner explains. “And if you look at the DOL [Department of Labor] regulations governing claims and claims processes, there is an obligation there as well. If you’re saying no, you need to explain clearly why your conclusion is no.”

Once a sponsor has jumped these hurdles and carefully developed a response, he will likely be able to get a court or other mediator to defer to the findings of the plan—so long as the plan’s findings are not arbitrary or capricious, Weiner adds.

Weiner says he has yet to see many claims disputes of this nature make it into the federal courts, but he believes it is only a matter of time before the floodgates open. “And again, the way for sponsors to protect themselves is to have good policies and procedures in place that will show you can rationally answer the claim,” he says.

Weiner says plan sponsors recently received a quiet but significant nod of support from the federal courts on a key question related to claims from long-lost participants—coming in the form of a favorable opinion handed down by the 6th U.S. Circuit Court of Appeals.

In the case at hand, Watkins v. JP Morgan Chase U.S. Benefits Executive, the participant had asked for a distribution in 1998, but didn't follow up on the unmet claim until 2006. As Weiner explains in a recent blog post, there was some evidence that a check had been issued but had never arrived, but the more important matter at hand was whether the participant’s claims appeal could be time-barred by the statute of limitations even though the benefits administrator did not technically reject the claim outright. 

Weiner says the court reasoned that, in the year that the distribution was requested, the participant needed to treat the fact that she did not receive a check as a "clear repudiation" of her claim. Thus, the statute of limitations for filing an appeal did, in fact, begin to run in 1998 and had run out by the time the participant followed up in 2006. Before this decision, which Weiner says is a big win for sponsors and service providers, it was unclear whether the statute of limitations could be used to time-bar such a complaint.

Weiner is quick to add that this decision does not really have a bearing on new claims from missing participants, but there is likely no small number of people in the plaintiff’s position, so it could save plans a lot of money in the long run. 

It is still hard to forecast how new missing participant claims appeals will be viewed by courts and judges, Weiner says, but he is sure the courts “will go out of their way to make sure the individual participants are getting a fair shake, which will pressure sponsors to do this right.” Weiner points to one example in which a client was able to settle a missing participant claim outside of court by demonstrating that, based off the plan design features that were in effect at the time of the employee's earlier departure, he would have received a lump-sum payment. Weiner says that, by taking the time to listen to the missing participant's concerns, then sitting down and clearly explaining the plan's position and it's conviction that he had already been paid, “we were able to make this situation go away, despite the fact that no positive record existed that the participant had been paid out.”

“The greater degree of care, documentation and process a plan can show—as opposed to cases where there are a bunch of unorganized print documents in the basement—those are the sort of factors that could sway a close one in one direction or the other,” he adds. “It brings up an important point: You can’t control the nature of the plaintiff or the makeup of the court you end up in front of, but you can control how you handle a claimant.”