How to enforce RMD requirements?

[Carol V. Calhoun]

Any thoughts on what to do if a plan participant who should be receiving RMDs does not apply for benefits in a defined benefit plan, even after numerous reminders?  The application would include an election of a specific form of benefits and providing bank account information for the deposits.

I'm assuming that one should then start providing benefits in the form of a joint and survivor annuity, or a life annuity if the person is not married, using paper checks.  (It's actually a governmental plan, so a joint and survivor annuity does not have to be the default form, but that would at least satisfy the RMD requirements.)  But if the person later wants to select a lump sum form, can they be permitted to do so if the plan otherwise does not permit a change of elections after beginning to receive benefits?  Alternatively, can they be forbidden from making the election (because obviously there is the potential for adverse selection if participants can elect a lump sum after starting a J&S)?

Also, what happens if checks are sent but never cashed?  There are procedures for dealing with missing participants, but I have not located any for dealing with participants whose whereabouts are known but who simply ignore checks.

[Bri]

My layman's opinion -

I'd think the 401(a)(9) requires the PA to issue checks regardless of an election.

I also think payments have not been pursuant to the participant's affirmative election, so he could make a formal election for "the rest of his benefits" at any subsequent time in his preferred form.

And the plan issues a 1099-R for the checks written, even if they remain uncashed and show up on the balance sheet as a payable.  The participant might need to cash a couple of those checks to cover the taxes due.

[Peter Gulia]

For your first question, many BenefitsLink mavens would say Read The Fabulous Document. But you, as one of a very few national experts on governmental plans, know that a governmental pension plan might not be tidily stated by one document, or even one consolidated or compiled set of statutes. You do what you can to discern and interpret the plan’s provisions. Or sometimes one must invent a provision.

If a participant has permanently left government employment and reached an age such that a distribution, perhaps an involuntary distribution, must begin, the plan’s normal form might be a life-contingent annuity, with or without a survivor provision, and with or without a years-certain provision.

If that is the plan’s provision and the State or local government is considering amending the plan to allow some election after the annuity commenced, one would consult actuaries to design a provision unlikely to result in increased cost. For example, an after-commencement election might be limited to a specified period after the annuity commencement date, and the amount available as a nonannuity sum might be something less than the commuted value of the plan’s annuity obligation released. Those and other points might help protect the plan against adverse selection.

About payments not collected, consider that the pension plan might be required or permitted to follow the abandoned-property law of the State of which the plan’s participating employers are agencies, instrumentalities, or political subdivisions.

[david rigby]

17 hours ago, Carol V. Calhoun said:

Any thoughts on what to do if a plan participant who should be receiving RMDs does not apply for benefits in a defined benefit plan, even after numerous reminders? 

Every pension actuary (and Plan Administrator) has worried about this since RMDs became a thing.  To date, there is no consensus.  (I'm mostly retired, so it's possible my info is out-of-date.) 

This problem has a corollary: what do we do now to minimize the problem later?  My recommendation is to "put the fear of God" into them as they are walking out the door; ie, remind them that (1) keep the paperwork that we give you because it means you have a deferred benefit and there might be a surviving spouse benefit, and (2) it is your responsibility to keep us informed of your mailing address, and (3) you will be taxed on the benefit at NRD even if you don't start receiving it.  

@Carol V. Calhoun, I don't pretend this is foolproof, but I have seen some HR departments recognize that it helps.  Having the sponsor's attorney reinforce the actuary's suggestion might also be helpful.

[Bob the Swimmer]

David's suggestion is a good one--we have advised participants where an employer is terminating a plan and distributions will follow in the same manner.

I remember one client with a national retail chain that had several hundred missing persons on their census which is a real nightmare.

[AMDG]

Peter's advice regarding state unclaimed property laws is a good idea.  Uncashed checks from governmental retirement plans are generally subject to escheatment because there is no ERISA preemption. It doesn't matter if the payee's address is correct or not.  The plan administration complexity occurs because the  applicable state law is generally that of the payee, not the payor (although exceptions apply).  Here's a handy site:

What is unclaimed property? – National Association of Unclaimed Property Administrators (NAUPA)

 

 

[Peter Gulia]

Among the many differences of working with governmental plans:

A State’s law (from multiple sources) might be ambiguous about whether a State or local government is required, or permitted, to follow the State’s abandoned-property regime.

If a State follows the State’s internal law about abandoned property, it might not follow another State’s law. A State might find that the State (including its agency, instrumentality, or political subdivision) cannot be compelled, and might not volunteer, to follow the law of another State.

[Carol V. Calhoun]

On 8/12/2022 at 1:26 PM, Peter Gulia said:

For your first question, many BenefitsLink mavens would say Read The Fabulous Document. But you, as one of a very few national experts on governmental plans, know that a governmental pension plan might not be tidily stated by one document, or even one consolidated or compiled set of statutes. You do what you can to discern and interpret the plan’s provisions. Or sometimes one must invent a provision.

If a participant has permanently left government employment and reached an age such that a distribution, perhaps an involuntary distribution, must begin, the plan’s normal form might be a life-contingent annuity, with or without a survivor provision, and with or without a years-certain provision.

If that is the plan’s provision and the State or local government is considering amending the plan to allow some election after the annuity commenced, one would consult actuaries to design a provision unlikely to result in increased cost. For example, an after-commencement election might be limited to a specified period after the annuity commencement date, and the amount available as a nonannuity sum might be something less than the commuted value of the plan’s annuity obligation released. Those and other points might help protect the plan against adverse selection.

About payments not collected, consider that the pension plan might be required or permitted to follow the abandoned-property law of the State of which the plan’s participating employers are agencies, instrumentalities, or political subdivisions.

Alas, the plan has no normal form.  It merely states that the participant has a choice of various forms, and assumes they will select one.  And it will not surprise you to know that international treaties have been signed with less effort than getting the plan document amended.  So I think the best we can probably do is to pick a form of benefits to be the normal one, send out the checks, and use state unclaimed property law if the checks are not cashed.  And I'm inclined to favor an annuity form as the "normal" one, inasmuch as we don't really want to get into having to set up IRAs for these people.

[Susan L.]

Carol and Peter, as an attorney who has worked on pension statutes for the past seven years, I wholeheartedly agree with your responses (and the others, for that matter). I have heard that one law firm that has made a name for itself in the public pension plans arena has advised a governmental pension plan that it does not have to pay out an RMD if the member does not elect to receive it for the reason that the plan does not have a normal benefit form. I much prefer Carol's approach of picking a normal benefit form and paying out the RMD. If the IRS were to audit the member who did not receive the RMD and assessed an excise tax, I'm not sure how this would play out vis a vis the pension plan that did not pay out the RMD. 

[Luke Bailey]

These are great questions and like the others I'm not sure there is an answer to most, but I believe that if you can find your way to making the distribution (a) the amount is includible in the participant's income, whether they cash the check or not, and (b) you can withhold the default amount if they have not made a withholding election. See Rev. Rul. 2019-19.

Since the plan is required to comply with 401(a)(9), in the absence of more specific language, I would probably advise distributing the smallest amount that could be distributed under any of the benefit options and then periodically sending the participant a letter that they can elect a different election and the actuarial value of the distributions already made will reduce the amount available for distribution after the election.