Employment Law Update

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Employer-Sponsored Retirement Plans Must Make RMDs Timely – Even For Participants Who Don’t Come Forward to Apply for Benefits

RMD Requirement

Section 401(a)(9) of the Internal Revenue Code generally requires tax qualified retirement plans to make required minimum distributions (RMDs) to participants by their “required beginning dates” (RBDs).  Generally, a participant’s RBD is April 1st of the calendar year following the later of (i) the year in which the participant attains age 70½, or (ii) effectively retires from employment with the employer.  (While there is no IRS guidance on how much an individual must work so that they are not considered to be effectively retired from employment, employers should be careful to avoid a situation where the IRS regards a minor amount of work as a sham to avoid RMDs.)  5% owners of the company sponsoring the plan cannot delay RMDs until after retirement. 

Failure to timely make RMDs is an operational failure that puts the plan’s tax qualified status at risk and could subject the employer to substantial penalties.  Further, participants who do not receive RMDs timely are subject to a 50% excise tax; and, a participant facing the excise tax could allege their employer breached a fiduciary duty for causing the RMD failure.

There is no exception to the RMD requirement merely because a participant does not come forward to apply for benefits.

To avoid a RMD failure, employers should track and contact participants about their RMDs well in advance of their RBDs.  Even if a participant does not take any action before their RBD, employers should nonetheless commence RMDs timely, in accordance with Section 401(a)(9).   

The Issue of Missing Participants

Employees have become increasingly mobile over the last several decades. Every year, millions of Americans leave behind money in retirement plans when they leave their jobs.  If former employees cannot reasonably be located, what should an employer do about RMDs?

Recent IRS Internal Guidance

The IRS recently issued an internal Memorandum for its “Employee Plans (EP) Examinations” agents, addressing the steps plan administrators should take to locate missing participants who are due RMDs.  The guidance outlined in the IRS’s memo has been incorporated into Internal Revenue Manual 4.71.1.

In the Memorandum, the IRS directs EP examiners not to challenge the qualified status of a plan for a failure to timely make RMDs to a missing participant, provided the plan has taken the following steps to locate the missing participant:

  • searched plan and related plan, sponsor, and publicly-available records or directories for alternative contact information;
  • used a commercial search locator service, credit reporting agency, or proprietary internet search tool for locating individuals; and
  • attempted contact via USPS certified mail to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone numbers).

The Memorandum states that, if a plan has not completed the above steps, EP examiners may challenge a qualified plan for failing to make RMDs timely.

Existing DOL Guidance

Missing participants also raise fiduciary issues under ERISA.  In 2014, the U.S. Department of Labor (DOL) issued Field Assistance Bulletin No. 2014-01 (FAB 2014-01), which addressed the missing participant issue in the context of a terminated defined contribution plan (e.g., 401(k) plan). The DOL’s position is that ERISA’s duties of prudence and loyalty require a plan fiduciary to make reasonable efforts to locate missing participants in order to obtain benefit elections from participants.  The DOL indicated that the following search steps constitute the minimum required for a plan fiduciary:

  • send a notice using certified mail;
  • check records of the employer or any related plans of the employer;
  • send an inquiry to the designated beneficiary of the missing participant; and
  • use free electronic search tools.

Although terminated plans were at issue in FAB 2014-01, the DOL suggested that the guidance has equal application to on-going plans.

Key Takeaways for Employers

  • RMDs must be made no later than the date applicable for each participant– even for terminated participants who do not come forward to apply for benefits. Failing to comply with the Code’s RMD requirements exposes an employer to significant potential liabilities.
  • Employers should review and update their policies and procedures for maintaining participant and beneficiary contact information (and should at minimum incorporate the steps described in FAB 2014-01 and the recent IRS Memorandum).
  • Employers should proactively identify and contact participants who are nearing their RBDs, with the goal of obtaining affirmative distribution elections.
  • The IRS Memorandum only applies to missing participants. For participants who have not come forward but who can be easily located, plans must make RMDs timely in accordance with Section 401(a)(9).
  • Employers discovering a RMD failure should contact their benefits counsel about correction options.
    • Employers can seek approval of a correction method under the IRS’s voluntary correction program (VCP). A successful VCP filing relieves participants of the 50% excise tax.
    • Alternatively, depending on the circumstances, employers may have the option to self-correct (without filing for IRS approval). However, an employer using the self-correction procedure cannot obtain relief for a participant’s excise tax.

We are available to help employers with RMDs and issues related to missing participants.  Please contact:

Mary L. Porter
410-576-4003
Chase A. Tweel
410-576-4080

Robert C. Kellner
410-576-4239