IRS Letter on Missing Participant Program
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D. C. 20224
OFFICE OF CHIEF COUNSEL
February 26, 1997
Stuart A. Sirkin
Director, Corporate Policy and Research Department
Pension Benefit Guaranty Corporation
445 12th Street SW, Washington, DC 20024-2101
This is in response to your letter of February 4, 1997 regarding whether withholding tax applies to transfers from a defined benefit pension plan to the PBGC under the PBGC Missing Participants program. Under section 4050(a)(1) of ERISA, when a Title IV plan terminates and there are benefits owed to a plan participant who cannot be located, the plan administrator must either purchase an annuity for the missing participant or transfer the value of the participant's benefit to the PBGC. Section 4050(a)(2) provides that a transfer to the PBGC under this section shall be treated as a transfer of assets from a terminated plan to the PBGC as trustee.
Section 3405(c)(1) of the Code generally requires the payor of a designated distribution that is an eligible rollover distribution to withhold from the distribution an amount equal to 20 percent of the distribution. The term "designated distribution" is defined as any distribution or payment from or under an "employer deferred compensation plan," which, in turn, is defined as any pension, annuity profit-sharing, or stock bonus plan. Section 402(c)(4) of the Code defines the term "eligible rollover distribution" as any distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified trust (with certain exceptions not relevant to this discussion). Therefore, withholding applies only to designated distributions that are made to the employee.
The Missing Participant program requires the plan administrator to transfer the amount of the missing participant's benefit to the PBGC or to purchase an annuity for the participant. At the time of the transfer from the plan, no amount is paid to the employee. Therefore, a transfer to the PBGC is not an eligible rollover distribution under section 402(c)(4) of the Code and the 20 percent withholding under section 3405(c)(1) does not apply. Similarly, the withholding provisions do not apply if the plan administrator satisfied the requirements of section 4050(a)(1) of ERISA by purchasing an annuity because it would not be an eligible rollover distribution to the employee.
We hope you will find the foregoing information helpful. If you need further assistance, please contact Susan Lennon of Branch 1 at (202) 622-6030.
Assistant Chief Counsel
Office of the Associate
(Employee Benefits and