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Late MRD


jpod

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Terminated participant left money in employer's plan, and received annual MRDs for a few years through 2015.  The 2016 MRD was not distributed in 2016.  Participant died in 2017, and 2016 RMD still hasn't been distributed.  Assume Plan document has normal 401(a)(9) provisions that REQUIRE that MRDs be distributed by year-end.  Is there any doubt that the participant's estate, rather than the death beneficiary, is entitled to receive the late 2016 RMD amount?  (Executor is not worried much about the 50% excise tax, but even so he feels he has a fiduciary obligation to the estate to collect this money from the Plan.)      

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10 minutes ago, Flyboyjohn said:

Death beneficiary (and not the estate) is entitled to 100% of the account, including the 2016 and 2017 unpaid RMDs.

I agree.  I cannot fathom an argue where the beneficiary does not get 100% of the account at death.  Beyond that, distributing RMDs timely is a qualification requirement for the plan.  Hence, the onus is not squarely on the participant.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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Really?  The plan, which in essence is a contract, says it must pay money to the participant by 12/31/16, but it doesn't.  So, as you enter 2017 there is an account payable, a debt if you will, owed to the participant, and eventually to his estate as his successor in interest.  Given that simple fact please explain why you think the Beneficiary should get it? 

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I agree with you that the missed 2016 RMD that would be paid now is a corrective distribution and not a death benefit distribution, and in that regard is due to the (now deceased) participant which is now represented by his estate. I think the only way it can be paid to a beneficiary is if it is a death benefit and, I believe as you do, this is not a death benefit.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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This is a very interesting topic so I did some googling to dig up other similar situations.

It appears that a similar question was asked on these boards back in 2014: 

The answer then was: Failure to take RMDs is the deceased's responsibility, and don't transfer to the beneficiary. They will need to take the 2017 RMD, but too bad for the IRS for the other years! And too bad for the estate that they don't get the RMDs. 

Here's a little more discussion about late RMDs (and that they are not the responsibility of the beneficiary): https://www.irahelp.com/forum-post/25904-decedents-failure-re-title-deceased-spouses-ira-no-rmds-taken - but it's a different situation and doesn't really apply to the beneficiary vs. estate argument.

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This is not a question of "responsibility."  It is solely a question of who is entitled to the money that per the plan's terms was required to be paid to the participant by 12/31/16.  Not sure IRA situations are relevant because there typically is not the same kind of compulsory pay out language in IRA trust agreements or custodial account agreements (if only because if you have multiple IRAs you don't have to take an RMD from each one).

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I think we all agree that the unpaid 2017 RMD has to be paid to the death beneficiary and I don't see how any unpaid prior year RMDs rise to the level of a liability of the plan to the estate. I'm pretty certain that the plan/contract says "pay everything left at my death to the death beneficiary" without any exception for perceived liabilities. 

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Count me amongst those who say that the beneficiary is not entitled to any portion of the 2016 RMD other than his/her share of the estate proceeds.  Further, if there is a 2017 RMD in this circumstance that is also payable solely to the estate.   However, if the death obliterates the requirement to distribute a 2017 RMD to the participant and replaces that requirement with specific timing rules related to the beneficiary then those distributions would of course be payable to the beneficiary. If it were my client I'd pull the a9 regs and see if there isn't clear guidance on this issue.  And, of course, see whether the document provisions provide a bit of clarity.

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Mike, in my situation everyone agrees that the beneficiary is entitled to everything other than the 2016 RMD.  I am surprised you think the beneficiary is entitled to the 2016 RMD.  What does a compulsory payout provision mean if it doesn't establish a fixed liability to the participant as of 11:59 pm on December 31, 2016?

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56 minutes ago, Mike Preston said:

Count me amongst those who say that the beneficiary is not entitled to any portion of the 2016 RMD other than his/her share of the estate proceeds.  Further, if there is a 2017 RMD in this circumstance that is also payable solely to the estate.   However, if the death obliterates the requirement to distribute a 2017 RMD to the participant and replaces that requirement with specific timing rules related to the beneficiary then those distributions would of course be payable to the beneficiary. If it were my client I'd pull the a9 regs and see if there isn't clear guidance on this issue.  And, of course, see whether the document provisions provide a bit of clarity.

I'm hardly a maven but I agree completely with the original post and this answer. Correct the missed RMD exactly as you would have were the participant still alive (except that the estate is now the payee), restoring them to the position they would have been in had the correction been made immediately prior to death, follow the Plan/Code on any 2017 RMD, then worry about the survivor's benefit.

I would not endorse the "tough luck for the IRS on the 2016 distribution" approach; you have an operational failure that needs to be corrected and they have examiners looking for RMD problems.

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My concern is not the plan's qualified status or the need to correct an operational failure.  My concern is only as the lawyer for a creditor, or possible creditor:  the executor of the estate.  With that said, the operational failure is corrected if the late RMD is paid to the person entitled to it, but first you have to figure out who is entitled to it!  

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Plan made an error and now needs to fix it to retain qualification. Fix is to pay $$ out of the participant account. I'll bet that nowhere in the plan document does it permit payment of benefits to anybody but the participant (if alive) or the death beneficiary. To do otherwise is another error in failing to follow the terms of the plan.

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7 minutes ago, jpod said:

My concern is not the plan's qualified status or the need to correct an operational failure.  My concern is only as the lawyer for a creditor, or possible creditor:  the executor of the estate.  With that said, the operational failure is corrected if the late RMD is paid to the person entitled to it, but first you have to figure out who is entitled to it!  

Sorry, I should have clarified: that comment was a response to an earlier comment, not your original post!

Had the failure not occurred, there's no way the 2016 RMD would have been payable to the beneficiary, so I don't believe any correction that pays it to them is restoring the participant/estate to the position they would otherwise have been in.

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6 hours ago, Flyboyjohn said:

Plan made an error and now needs to fix it to retain qualification. Fix is to pay $$ out of the participant account. I'll bet that nowhere in the plan document does it permit payment of benefits to anybody but the participant (if alive) or the death beneficiary. To do otherwise is another error in failing to follow the terms of the plan.

I would comment again, but Flyboyjohn is saying everything that I would say.  So, I guess my comment would be 'Ditto' :-) 

CPC, QPA, QKA, TGPC, ERPA

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jpod, if your client is the personal representative of the participant/decedent's estate (and the plan or its administrator isn't), don't you:  (1) submit your client's claim to the plan's administrator; (2) if it's denied, exhaust the plan's claims procedure; and (3) if it's still denied, provide to your client your candid advice to inform the personal representative's cost-benefit analysis about whether it makes sense (or doesn't) to pursue the claim in litigation?

If the administrator followed the plan's claims procedure, is it likely a court would defer to the administrator's interpretation of the plan as long as the interpretation isn't implausible?

Many courts' opinions have said an administrator's finding need not be the one the court would have made; rather, it need be only not so obviously wrong that it could not have been an exercise of the administrator's discretion to interpret the plan.

But whatever might happen for step (3), wouldn't modest expense mean that a prudent personal representative should pursue the claim at least under the plan's claims procedure?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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FGC:  I am not sure what point you are trying to make here.  I have made an assessment of the likelihood that the Executor will succeed on his claim, and was just curious what other BL mavens thought about it, just for the heck of it I suppose.    

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My points were that the correct reading of the plan might not matter, and that the personal representative might not need to know which interpretation is correct to find a responsibility to pursue the estate's claim.

But I didn't mean to impede anyone's curiosity about how to interpret the plan.

 

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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14 hours ago, ETA Consulting LLC said:

I would comment again, but Flyboyjohn is saying everything that I would say.  So, I guess my comment would be 'Ditto' :-) 

Jumping in late here, but I'll ditto that.  I don't buy into the "debt" to the participant/estate theory; it's just a mistake and any money in the plan at this point is payable to the benefiary.

Ed Snyder

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If you want another vote, the RMD was due to the participant, and is now the estate.  The fact that plan failed to pay the RMD in accordance with plan terms or the IRC does not change that.  The executor is right to be concerned about marshaling the assets of the estate.  But also the plan administrator should be concerned about liability for its failure to make the distributions required by the plan terms.

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RTK: I am happy for your vote but I do think that the fact that the terms of the plan - i.e., the contract - require a compulsory distribution is critical to the analysis, not irrelevant as you suggest.   

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