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Participant not cashing RMD checks


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We have a couple of participants who have not been cashing their required minimum distribution checks for a few years.  The plan administrator is moving the funds from the stale checks into a forfeiture account (this is for a 401(k) plan) to be used to pay plan expenses.  Is this kosher?  I guess the participants have already been taxed on the distributions.

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How sure are you the checks are getting to the people? 

I guess put another way is the problem the checks not getting cashed or do you have lost participants? 

Have they done some kind of address search to see if they have a good address or are they in contact with the people? 

I would make sure you don't have a lost participant problem first.  If you do and you haven't done  a search forfeiting the money is problematic in my mind.  

If they are sure the people are getting the checks but not cashing them have they contacted the people to find out why? 

I guess what I am saying if the plan is making just assumptions about them not cashing the checks vs knowing they aren't cashing them makes a big difference in my mind.  the DOL is looking hard at lost participants the past year and they are taking a very dim view of lazy plan administrators. 

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The other thing that occurred to me is that they may have taken the total required from an IRA or some other account.   They do not have to take an RMD from a specific account if they have more than one.

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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1 minute ago, Patricia Neal Jensen said:

 They do not have to take an RMD from a specific account if they have more than one.

This sounds correct for IRAs.  Is it true for qualified plans?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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57 minutes ago, david rigby said:

This sounds correct for IRAs.  Is it true for qualified plans?

§ 1.401(a)(9)–8 Special rules. Q–1. What distribution rules apply if an employee is a participant in more than one plan?

A–1. If an employee is a participant in more than one plan, the plans in which the employee participates are not permitted to be aggregated for purposes of testing whether the distribution requirements of section 401(a)(9) are met. The distribution of the benefit of the employee under each plan must separately meet the requirements of section 401(a)(9). For this purpose, a plan described in section 414(k) is treated as two separate plans, a defined contribution plan to the extent benefits are based on an individual account and a defined benefit plan with respect to the remaining benefits

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First, the RMD from a qualified plan must be separate from RMDs from IRAs.

Second, why is the assumption always that the uncooperative former employee is defying the company by not cashing checks?  Am I missing something, why can't there be an electronic fund transfer directly to the former employee's account?  It would eliminate complications of health and dementia from the situation.  It's not like one has to live in the same city as the bank to have an account there, so the former employee could move anywhere and the link would be through the bank.

Third, I'm assuming that the RMD was issued in 2017 since it seems unreasonable to be forfeiting the money in under 12 months.  The 1099R has already been issued.  They have already been taxed and that did not change the situation.

 

 

Kristina

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We used to deliver and forfeit RMD checks, but I modified the forfeiture to a deposit back to the account since it seemed you'd either have to forfeit the entire participant balance or give the money back to the participant account to sustain the integrity of the participant account balance.  Then, with legal oversight, the process modified to any participant that could not be located didn't have a RMD processed (as a lesser of 2 evils). 

Technically, the regulations require distribution; however, it was determined the IRS would prefer the preservation of the account more.  Documentation of all amounts forfeited for each participant (and for each RMD payment) and attempts to locate the participants is of utmost importance regardless of the method of operation chosen.  Reasonableness and consistency are powerful responses to any IRS inquiry regarding the matter.

ERPA

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