Recent headlines involving the Central States Teamsters Pension Fund and the Pension Benefit Guaranty Corporation’s (PBGC) Special Financial Assistance (SFA) Program highlights an issue with meaningful consequences for multiemployer defined benefit plans—unreported deceased participants. In fact, PBGC’s alleged overpayment of $127 million under the American Rescue Plan Act’s SFA Program covering an estimated 3,500 deceased participants sparked PBGC to implement specific death certification measures for future applicants to the SFA Program.
Deceased participants generally fall into one of two categories of defined benefit plan participants—retirees and terminated vested participants—and each category has unique issues.
For the retiree category, the primary issue is overpayments that occur because the plan is not timely informed of the retiree’s death (for example, single life annuity payments that continue to be made after the retiree’s death). These overpayments may be incorrectly included in the retiree’s estate or accessed by a family member who may have no knowledge that under the terms of the plan, these payments cease with the death of the retiree. Another common form of retiree overpayment occurs when a widowed spouse, who is due a 50% joint and survivor benefit, continues to receive a full benefit after the retiree’s death.
These retiree overpayments are often not identified because of the use of direct deposit. The absence of physical checks that need to be endorsed to be cashed results in payments continuing postmortem to the retiree’s designated bank account.
Recovery of retiree overpayments can be difficult and costly, as recipients often have spent the overpayment proceeds. Plan fiduciaries will need to determine whether the overpayment was inadvertent or whether the recipient was culpable with respect to the overpayment, and the amount of the overpayment that may be recovered without incurring more cost than the recovery. Moreover, depending on the facts, Section 301 of the SECURE 2.0 Act of 2022 may prohibit recoupment or limit the methods for recovery of inadvertent benefit overpayments.
For the terminated vested participant category, a plan’s failure to promptly identify deceased participants may result in untimely payment of survivor annuities and death benefits and regulatory investigation. Issues with deceased participants can surface during a regulatory audit, and plan fiduciaries may face regulatory scrutiny and possible penalties for a failure to properly administer the plan.
Both categories may result in the plan carrying deceased participants on its books, which can be problematic because this artificially increases headcount and projected benefit liabilities. For terminated vested participants, plans are receiving no additional contribution income, but year after year, plan liabilities grow through actuarially adjusted benefits, which may cause a plan’s funded status to appear lower than reality.
Another economic disadvantage of carrying deceased participants on a plan’s books is PBGC premiums. PBGC premiums have been steadily increasing in the past decade and for 2024, the flat-rate premium for a multiemployer plan is $37 per participant. This means that for each deceased participant that a plan carries, the plan overpays PBGC by $37 each year.
Given these concerns, plan fiduciaries may want to revisit the plan’s processes for identifying deceased participants (terminated vested and retirees) to ensure that these processes reflect a proactive, rather than reactive, posture. Below are several practices plans may wish to consider:
- Engage one or more life verification/death certification services to perform regular periodic death searches (at least once annually). These services draw data from sources like the Social Security Administration and other public databases and match death records with participant census data. For plans that are eligible for SFA, the PBGC requires a third-party death audit to be submitted with a plan’s application. PBGC is also now engaging in a more robust process, including the PBGC itself performing a death record audit.
- Establish an annual process for verifying if participants are alive. One example is mailing retirees annual “right to receive” letters. These are letters that require an affirmative response from participants for benefit payments to continue. If retirees do not respond, pension payments are suspended until confirmation is received. Otherwise, the plan’s missing participant procedure is commenced to attempt to locate the retiree. Another example, if confidentiality and privacy are not barriers, may be to cross reference defined benefit plan records with records of related multiemployer funds, such as health and welfare funds, to identify deceased participants.
- Maintain a robust missing participant procedure, in accordance with US Department of Labor guidance. When a participant is first identified as “missing” (for example, the plan receives mail returned undeliverable) immediately commence searches under the plan’s established missing participant procedures. All too often, missing participants are later identified as deceased participants.
- Keep in frequent contact with participants and retirees and encourage them to update their contact information often.
- Maintain internal policies and procedures for updating participant census data and contact information when received.
- Establish an overpayment correction/recoupment policy to be applied in the event that an overpayment in connection with a discovered deceased participants occurs.
If you have any questions about strategies for addressing potential deceased participants in your multiemployer plans, please do not hesitate to contact Morgan Lewis.