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Required Minimum Distributions – Fulfilling the promise

Required Minimum Distributions – Fulfilling the promise

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Plan sponsors: Your participants cannot keep retirement funds in your defined benefit and defined contribution plans indefinitely. Required Minimum Distributions (RMDs) must begin on time to keep the tax-qualified status of a plan and avoid costly excise taxes to the participant.*

And this year the IRS announced that it is including RMD compliance on their list of priority audit points.

The Department of Labor (DOL) and Internal Revenue Service (IRS) have a mutual interest in ensuring that sponsors pay participants on time and make appropriate efforts to locate missing participants who are owed money. In recent years, DOL random plan audits have targeted payments and included detailed questions regarding plan administrative procedures associated with the payment of RMDs.

So what happens if RMDs are not made on time because a participant can’t be located?

There are potentially severe penalties, including plan disqualification and excise taxes assessed against the participant.  Plan fiduciaries could also be subject to claims of breach of fiduciary duty. Recently issued DOL guidance on dealing with missing participants makes it clear that failing to begin paying benefits on time (generally by age 72) needs to be reported on Form 5500 filings.

Gaps and failures 

Administrative practices change over time and for older plans in particular, changes in internal and external administrators can make it difficult to keep track of plan participants who have left the employer and have not kept the plan’s administrator informed of address changes, changes in name, etc.  This is an even bigger issue for defined benefit plans where someone might have left the company maybe 40 years earlier and there is no up-to-date contact information on record.

Searching for participants can be a distraction and resource drain to a company’s core business and HR activities, but it is required. Failure to make this effort, can lead to severe penalties from regulators if the plan is found to be negligent.

Certain events or situations can signal it is a good time to look for missing RMDs:

  • Acquisition of a company can introduce new challenges and issues related to inheriting the acquired plan’s administrative history.
  • A change in outside administrator and/or turnover, or reorganization of internal administrators can result in knowledge gaps in the plan’s administrative practices.
  • A lengthy lapse since the last “sweep” of the plan looking for missing participants. Both IRS and DOL have indicated that sweeps should be a continual practice that is built into the plan’s regular course of administration.  The longer you wait the more challenging the task.

Correcting the problems

What can a plan sponsor do after it discovers that a required distribution has not been made? The IRS’s Employee Plans Compliance Resolution System provides methodologies for correcting RMD operational failures.

Self correction

The Self Correction Program (SCP) permits a plan sponsor to correct certain failures without contacting the IRS or paying a fee. This is used for insignificant failures where the correction occurs within the two plan years after the failure occurred. Under this program the RMD is corrected by paying the participant all of the missed distributions, as well as updating the administrative procedures that allowed the failure to occur so that it is not repeated.

Under SCP the sponsor cannot request that the IRS waive the excise tax associated with the failure, so the participant is liable for the tax.

Voluntary correction by application

The other program that may be used in connection with RMD failures is the Voluntary Correction Program that permits a plan sponsor to, any time before audit, pay a fee (based on net plan assets) and receive IRS approval for correction of plan failures. This requires a formal filing with the IRS where the failures and corrective measures, including those that will prevent future occurrences, must be described. The sponsor may request a waiver of the associated excise tax.

Any missed RMDs will need to be corrected by the SCP or VCP methods. Corrections will likely involve complicated calculations, investigation of circumstances, correspondence with affected participants, a search for similarly situated individuals, and explanations to the IRS.

(Note that if an RMD failure comes to light during a DOL audit, DOL penalties can be costly.)

Avoiding trouble

Stay up to date on the rules. And check for the availability of new tools and methods for locating participants. Here are some basic steps that the plan sponsor can take to pay participants on time and be prepared for possible random IRS and/or DOL audits:

  • Put a reminder in all benefit communications that participants must keep the plan informed of any address changes.
  • Cross check contact information between company records and all employee benefit plans.
  • When mail is returned as undelivered, search plan records and related plan information as well as public records for alternative contact information. Options include using a commercial locator service, credit reporting agency, or internet search tool.
  • When a participant does not respond to correspondence such as a required distribution package, send a letter by certified mail with a return receipt and try to contact the participant by phone.
  • Develop a written, regular routine for finding missing participants and most importantly, follow the process – IRS has said that failure to follow plan procedures is as bad as having no procedure at all.

These steps represent an overview of what a plan can do to stay out of trouble, but the goal should be to find the participants even if these methods fall short.  Even well-defined procedures, consistently applied, should be reviewed periodically to ensure they continue to be the best practice in the current environment.

Keeping the promise

The DOL recently issued guidelines on best practices for locating missing participants.  Use of all of the rules is not mandatory but it gives a plan sponsor a good idea of what the agencies are looking for and provides a big picture of how to keep a plan compliant.

The pension promise – of an income to help support you through retirement – is a benefit that makes a difference. When the time comes for that critical promise to be fulfilled, it must be kept. Beyond the renewed emphasis by DOL and IRS on RMD compliance, sponsors need to do the right thing and take the necessary steps to track down their participants and make good on their benefit promises.


* Check the IRS website and the DOL’s Employee Benefits Security Administration website for specific details on when RMDs need to begin.