Under Internal Revenue Code 401(a)(9), minimum distributions are required for certain participants who attain age 70½. As the Plan Administrator, how do you handle RMDs for missing participants in defined contribution plans? A “missing participant” can be either one where there is not a valid address or contact information or, an individual who is unresponsive to communications from the plan sponsor.
The Required Beginning Date (RBD) for non-owners is the later of the April 1 of the calendar year following the calendar year in which an employee reaches age 70½ or the April 1 of the calendar year following the calendar year in which employee terminates employment. An owner’s RBD is the April 1 of the calendar year following the calendar year in which employee attains age 70½. For additional information about the RMD rules, read Required Minimum Distributions from Defined Contribution Plans.
An RMD failure puts the plan at risk for its qualification status. Fortunately, the IRS issued a Memorandum for Employee Plans (EP) Examinations on October 19, 2017 for plans that are unable to make a RMD distribution due to the plan’s inability to locate the participant. The memorandum states that during an audit EP examiners shall not challenge a qualified plan for violation of the RMD standards for the failure to commence or make a distribution to a participant or beneficiary to whom a payment is due, if the plan has taken the following steps:
- Searched plan and related plan, sponsor and publicly-available records or directories for alternative contact information
- Used a commercial locator service; a credit reporting agency; or a proprietary internet search tool for locating individuals; and
- Attempted contact via the United States Postal Service (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).
If the above steps are not followed, then examiners may challenge a plan for violation of the RMD requirements. Therefore, plan sponsors should keep documentation of their search efforts as proof these steps were taken.
As noted in the IRS instructions for Fixing Common Plan Mistakes – Failure to Timely Start Minimum Distributions, if participants or beneficiaries do not receive their minimum distribution timely, they (not the plan) are subject to a 50% penalty tax. However, the IRS may waive the penalty if reasonable cause can be shown and steps are being taken to correct the error.
Please contact Watkins Ross if you have specific questions pertaining to your plan participants’ RMDs.