Failure to timely make minimum required distributions

[Guest rtriche]

How do people handle making minimum required distributions (mrd) from qualified plans to participants who are no longer employed by the plan sponsor on their required beginning date (rbd)? Do people just wait for the participant to come and ask for the mrd? (Many plan sponsors I have spoken with take this approach since the excise tax is levied on the participant). This seems to be an incorrect approach since 401(a)(9) of the Code state that the mrd "shall" be distributed... And, the EPCRS program provides for correction of this operational failure...

If plans are making the mrd at the rbd, what do they do when the check is returned because of an out-of-date address? Do they then use a commercial participant locating service? If no luck there, do they use the IRS forwarding service? How far do you have to go to comply with the "shall be distributed" requirement in order to keep the plan qualified?

Any thoughts would be appreciated.

Ron

[Mike Preston]

Hi, Ron. Good to see you here.

There has always been this tension between the rights of the participant to delay distribution and the mandates of the statute to provide for benefits at various ages.

Many, many union plans basically say: "Hey, when you are eligible for a benefit, better contact us, because we won't try very hard to contact you, other than sending a letter to your last known address." There are many cases where participants have shown up late and then tried to get past benefits (the UAW cases in California recently were prime examples of where the union plan bent over backwards to provide restorative payments - I know I saw on the news where one union member received a $94,000 restorative payment at a very advanced age). I think there are just as many cases where participants have shown up late and the courts have held that they can start benefits on the spot (in an actuarial equivalent form) but no past benefits are required. One case I know of is from New York where somebody not only showed up late but tried to get the court to increase the benefits payable based on a revised birth date - but the court wasn't buying either argument.

You can already see where I'm going with this.

The terms of the plan control in determining the participant's benefit when, and if, they do show up.

But, getting back to your specific question, I don't think I've ever seen a case where the IRS held that a plan that did not have a participant to pay was in trouble. As you point out, the key issue is how much effort should (must) a plan go through in order to try and find somebody?

I don't think it is a qualification issue at all.

I think it is a fiduciary issue.

In the case of a union plan with literally thousands of no-shows, they might be able to make the argument that doing the equivalent of a "diligent" search on each no-show is prohibitively expensive and not fiduciarially sound.

In the case of a single employer plan with just a handful of people that haven't been located by the time they are 70 and 1/2, I can't see advising a client to do anything other than a diligent search.

[mbozek]

While some participants do show up at a later age to claim benefits, there is a real possibility that participants who fail to claim benefits at 70 1/2 are dead or may have used a stolen identity. Also a participant will receive a notice of a deferred vested benefit payable from a plan when applying for SS benefits. The problem with this notice is that many participants will be unable to contact their employer to claim their benefits because subsequent mergers, consolidations, bankruptcies, name changes, etc. will make it impossible to find the Plan Admin to claim benefits. This is especially true in certain industries such as telecom.

Under IRS rules a plan can forfeit the benefits of a participant who cannot be located when the benefits are payable subject to reinstatment if the participant claims the benefits at a later date. The plan can make a reasonable search to locate the participant such as through a locator service. I dont know if the IRS will notify the plan if it is unable to deliver the notice to the employee and in any event the PA should have the current address of a participant in order to send a certified letter with notice of the benefits in case the participant or beneficaries show up at a later date to claim back benefits.