It’s [Not] Too Late Baby, Now It’s [Not] Too Late…for Required Minimum Distributions

by Lyn Domenick

If you have participants in your retirement plan who are old enough to identify Carole King as the artist who released the song “It’s Too Late” some 50 years ago, this blog’s for you. Late payment of required minimum distributions (RMDs) is an ongoing source of plan sponsor headaches. What do you do when they occur?  As background, qualified plans are subject to the minimum distribution rules that generally require participants to commence payments no later than the April 1st following the year in which the participant attains age 72 (prior to January 1, 2020, age 70-1/2) unless the participant is still actively employed and is not a 5% owner. For various reasons the RMD deadline is sometimes missed and the plan administrator is faced with how to correct the late RMD error. Proper correction of missed RMDs is essential to ensure continued plan qualification. However, plan participants are also subject to stiff penalty taxes equal to 50% of the missed RMD amounts, which is a headache of a different sort.

The IRS Employee Plans Compliance Resolution System (EPCRS) includes a process under the voluntary correction program (VCP) whereby a plan sponsor can request relief from late RMDs. If the RMDs extend over many years, VCP might be the only avenue available for the sponsor to fix the error and maintain Plan qualification. IRS user fees to file a VCP range from $1,500 to $3,500 depending on the amount of plan assets. The first step is to distribute the RMDs adjusted for earnings. As part of the VCP application the sponsor can request relief from the 50% penalty tax that would otherwise be levied on the affected participants. But there is a simpler way to correct if the RMD failures are recent.

If RMD failures do not extend beyond the past three years, the sponsor can correct using the self-correction program (SCP). The end of the SCP correction period is the last day of the third plan year following the plan year for which the failure occurred. SCP involves distributing the late RMDs with earnings and documenting the failure and correction. The written SCP summary should include a description of the correction steps and measures taken to prevent the failure from occurring in the future. Further, in order to help the affected plan participants with avoidance of the heavy 50% penalty, the sponsor should inform participants about IRS Form 5329 which can be filed to request a waiver of the penalty tax. Affected participants need not pay the 50% tax up front, but rather would file Form 5329 with zero entered on the appropriate line to reflect no penalty tax due, and include a letter asking for a waiver. The letter should state that the failure was due to reasonable error and that reasonable steps have been (or are being) taken to remedy the error. Plan sponsors would be well-advised to provide participants with guidance on completion of Form 5329 as well as language for the letter requesting the waiver. It can seem a little complicated but it’s never too late [baby] to correct a missed RMD.