RMD Failures
Rev. 08/05/10; E-mail Alert 2010-12

IRA RMD Failures TIGTA Summary and Report

CORRECTING QUALIFIED PLAN RMD FAILURES USING EPCRS

Preliminary Considerations
Code Section 401(a)(9) is a qualification requirement that all qualified plans must meet by distributing required minimum distributions (RMDs). If the full RMD is not distributed, then there is a 50% penalty based on the amount of the RMD that has not been distributed. The 50% penalty for a missed RMD is required to be paid by the participant.

Complying with the required minimum distribution process is complex

Reasons RMD Errors Occur
There are many reasons that an RMD may be missed. For example, the employee’s date of birth may be incorrect on system. There could have been a typo upon the input of the date of birth. There may have been a transposition, e.g. 1934 typed as 1943 in either the typing or when it was written. The employee’s handwriting might have been illegible or inaccurate. The employee’s data may have been lost in an implementation, merger and/or acquisition. The list of the group to become age 70½ may have been created using incorrect birth dates. Maybe an RMD was paid but for an insufficient amount.

The required beginning date (RBD) is complex. Is the employee retired or not? What is the definition of RBD in the document? Is it being administered correctly? Is this the first participant to ever attain RBD in this plan? Maybe the participant couldn’t be located and the employer didn’t know what to do in such a case, so they didn’t pay the RMD.  These are but a few of the many reasons that an RMD may be missed.

EPCRS Procedure to Correct Missed RMDs
Rev. Proc. 2008-50, Section 12.02
IRS recognizes the complexity of paying RMDs correctly and the widespread occurrence of an RMD being missed or insufficient. Therefore, the IRS created a reduced fee correction method under EPCRS in Rev. Proc. 2006-27. This process has been carried forward and clarified in the Rev. Proc. 2008-50 EPCRS.

The IRS EPCRS procedure for missed RMDs states that if there are 50 or less RMDs missed, the Voluntary Correction Program (VCP) fee is $500, regardless of the number of participants in the plan. This reduced fee is available for plans that file with the IRS under VCP, provided that this is the only error for which the plan is filing under VCP.  Citation: Rev. Proc. 2008-50, Section 12.02 (Page 62). Specifically:

“If
(a) a VCP submission involves the failure to satisfy the minimum distribution requirements of §401(a)(9) for 50 or fewer participants, and
(b) such failure is the only failure of the submission, and
(c) the failure would result in the imposition of the excise tax under §4974, the compliance fee is $500.”

EPCRS Permits Plan Sponsor to Apply for Waiver of 50% Penalty [Section 6.09(2)]
EPCRS (RP 2008-50, Page 38) does not automatically waive the 50% penalty when the employer files under VCP. As part of VCP or Audit CAP in appropriate cases, the IRS may waive the (Code Section 4974) 50% excise tax applicable to plan participants. Note that the waiver is not available under the self-correction program (SCP). 

Under Audit CAP, the plan sponsor must make a specific request for waiver of the Code Section 4974 excise tax and provide an explanation supporting the request. The IRS will review the request/explanation and, if appropriate as part of CAP; the waiver will be granted in the compliance statement or closing agreement.

Under VCP, the plan sponsor, as part of VCP submission, must request the waiver of the Code section 4974 50% excise tax. This is accomplished by checking the box on the Appendix F, Schedule 8, Part III., Request for Relief, Section A; which states "The Applicant requests relief with regard to excise taxes under §4974."

If anyone subject to the excise tax is either an owner-employee as defined in section 401(c)(3) or a 10% owner of a corporation, then the plan sponsor must provide a written explanation to support the request. 

The waiver eliminates the need for relief to be requested individually by each affected participant. If VCP is not used to waive the excise tax, then each affected individual is responsible for his or her own 50% penalty and must file Form 5329. However, if there is reasonable error, the individual may file for a waiver following the procedure described in the Form 5329 instructions.   

EPCRS RP 2008-50,  Section 11.02(h) (Page 55)
If the plan failed to make RMDs, and proposes to correct such failure using the VCP method (in Appendix A, section .06), then the Plan Sponsor should submit Appendix F, Schedule 8 with the VCP application. Note that the correction must include earnings. This is addressed in EPCRS also.

Correction Includes Distribution of Missed RMDs Plus Earnings
EPCRS RP 2008-50, Appendix A, Section .06, (Page 74-75)

In a Defined Contribution plan, the permitted correction method is to distribute the missed RMDs with earnings from the date of the failure to the date of the distribution. If more than one year’s RMD has been missed, the amount required to be distributed for each year, starting when the initial failure occurred, is to be determined by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period.

For this purpose, adjusted account balance means the actual account balance as determined in accordance with Treasury Regulation §1.401(a)(9)-5 Q&A-3, reduced by the amount of the total missed minimum distributions for prior years. Q&A 3 states that the balance to use is the value on the preceding December 31. However, if the last valuation was before December 31, then adjust for contributions and/or distributions after the valuation date until December 31.

Correction of Missed DC RMD Plus Earnings - Example
A plan missed an individual’s RMDs for 2005, 2006 and 2007

2005 missed RMD calculated as follows:
       12-31-04 FMV $100,000/25.6 (age 72) = 3906.25*

2006 missed RMD would be calculated:
       12-31-05 FMV $108,000-3906.25/24.7 (age 73) = $4,214.32*

2007 missed RMD would be calculated:
       12-31-06 FMV $115,000-3906.25-4214.32/23.8 (age 74) = $4,490.73*

* Gains/Losses to be calculated and distributed on each RMD amount from date it should have been distributed until distribution date.

Bill Grossman, ERPA, QPA

For more information on Advanced Required Minimum Distribution issues,
click here for information on our Advanced RMD eSeminar; or
click here for information on our Pracititioner Seminar in September.