If you were to receive a notice from the Social Security Administration saying you might be owed some money from a long-ago former employer’s retirement plan, you would probably think, “Cool. I’m owed some money from a long-ago former employer’s retirement plan.” Unfortunately, there is a chance that it would not be true.

Personal finance writer Bruce Williams recently answered a letter in his column from a reader that worked for Kmart 30 years ago. The reader thought he had gotten paid in full from the Kmart 401(k) when he left the company, but he recently received a notice from Social Security saying he is owed $6,400. The reader has not been able to get assistance on this matter from Sears Holdings, which now owns Kmart. Mr. Williams encouraged the reader to keep trying and eventually the money would be paid.

I will bet $20 from my first Social Security check that I know what happened. There is no money in that 401(k) for this former employee. The notice from the SSA is erroneous and was caused by lack of foresight and/or attention to detail.

Completing Form 8955-SSA Can Notify Separated Employees of Old 401(k) Balances

First, let’s examine how SSA would even know in the first place that someone has an account balance in an old 401(k). When an employee leaves a company and will not be paid out of the retirement plan until later, plan sponsors are required to submit that employee’s information to Social Security using Form 8955-SSA. (Before 2009, this reporting was done on an attachment to Form 5500.)

When the employee eventually files for Social Security benefits years later, the SSA instructs the employee to check with the former employer about the retirement plan benefits he may be owed. This system works great most of the time. It is a good reminder for employees who worked somewhere decades ago, like the Kmart employee who wrote to the financial columnist, who may not realize they have old 401(k) account balances somewhere.

Submit Another Form 8955-SSA When an Employee is Paid Out of the 401(k)

What happens if the employee isn’t paid out of the 401(k) right when he terminates, but instead maybe two years later? If the employee’s information has already been submitted to the SSA, the plan sponsor is supposed to send in another Form 8955-SSA announcing that the benefits are no longer owed – deleting these benefits from the SSA’s records. The employee would therefore not receive a notification about those benefits at retirement age.

While the vast majority of employers and their service providers comply with the requirement to report a terminated employee’s benefits to the SSA, not all of them follow through and report when those benefits are subsequently paid out. It has not always been clear whether there is a requirement to do so. Even so, doesn’t it seem like common sense that you would want to report the benefits as having been paid and remove them from the SSA database so there is no confusion later? If there has been a merger or acquisition or change in service provider and you don’t know if the former employee was reported to the SSA when he terminated, play it safe and assume he was reported properly. It can’t hurt.

Perhaps the Form 8955-SSA instructions should contain a warning like those found on cigarette packs, something like:

If you choose not to report when an employee is paid out, you will waste hours when the employee shows up at your office or your client’s office decades from now asking for benefits. Or, since you will probably be retired by then, your successors cleaning up your mess will get a doll that looks like you and stick pins all over it.

Keep Plan Records Forever to Prove a Terminated Employee 401(k) Payout

In all seriousness, this has been a nagging problem for some of our clients that only figures to get worse as more young employees from the 1970s and 1980s start applying for Social Security. The best defense, of course, is to keep all your plan records forever so there is proof someone was paid out.

If the past records are gone, you could have a fight on your hands. The participant will probably show up with Form SSA-L99-C1. Point out that the letter says he MAY be owed benefits, not that he definitely is. Direct him to the Frequently Asked Questions section on the DOL website which mentions that the benefit on the SSA letter might have been paid already.

All the while, you can think bad thoughts about the person who didn’t take the time to fill out the Form 5500 or Form 8955-SSA completely, who is probably sitting on the deck of a beach house while you waste your day searching in vain for long-destroyed benefit payout records.

Have more questions about your company’s 401(k) plan? We are here to help!