Refusal to take Minimum Required Distribution

[Guest crosseyedtester]

A formerly missing terminated vested participant who is now age 72 has come forward with her new name and asked to begin receiving her monthly payments.

An amount was calculated to cover the period from age 70 1/2 to present and the participant has decided she does not want to receive benefits because the increase in her income will affect her eligibility for some kind of benefit (which has not been clarified).

The participant has stated that even if the plan issues her a check, she will not cash it. Is there any way around this for the plan not to pay her? As one possibility, can she be paid an actuarially equivalent value to present age instead of making up her missed RMD payments?

[mbozek]

The plan is required to pay RMDs to a participant who has attained age 70 1/2 as calculated under the plan in order to remain a qualified plan. The fact the the participant does not want to receive benefits does not change that requirement. Under IRC 402(a) the participant will be taxed on amounts actually distributed by the plan regardless of whether she cashes the checks.

[Guest Gregory]

If she refuses, which I am sure you got in writing, I don't see how you force a distribution if vested balance is over $5,000.

What's the SPD say?

Now this doesn't excuse the 50% penalty she'll still have to pay. She should check to see if the benefits she''s concerend about are worth paying the 50%.

Also curious to know what benefits she's worried about i.e. state tax, Social Security, subject to AGI floor?

[Appleby]

Gregory,

I think the plan would be required to pay the RMD to avoid having an operational failure, i.e. failure to pay minimum required distributions under Code section 401(a)(9) on a timely basis, which result in plan disqualification ( given that a plan must provide that RMD amounts are distributed by certain deadlines…but as WDIK’s signature says “...but then again, What Do I Know?”…except that WDIK is being modest, and I am being honest

[Earl]

If I don't cash my paycheck its still on my W-2

[SoCalActuary]

Your document has a default method for computing the minimum, even if the participant does not make a choice. The trustee must cut the check, even if it is not cashed. At the end of the year, 1099r is issued, even if not cashed. This protects the plan.

The participant should get either one-year back payments, or actuarial increase for delayed retirement (DB).

The plan administrator is not responsible for the tax consequences or other financial problems of the participant, merely for following the document terms.

[mbozek]

Gregory: Do you ever read plan documents? All qualified plans must provide that benefits must be payable no later than than age 65 but the plan can permit the participant to defer until age 70 1/2. An inactive participant's benefits can be commenced without the participant's consent at age 62. A missing participant's benefits can be forfeited at age 65 subject to reinstatement if the participant claims the benefits at a later date. At 70 1/2 the RMD must commence unless the participant is employed which is why benefits are forfeited if the missing participant does not claim them. These provisions are in the plan document.

[Guest crosseyedtester]

SoCalActuary - when a terminated vested participant over 70 1/2 who was missing is found, generally, shouldn't we calculate the benefit payable at age 70 1/2 and make a lump sum to cover all missed payments to present and then continue at that same amount. Is there really an option for an MRD to just do an actuarial adjustment to the current age and start the payment at that amount? (I could not find in the plan document details about treating a missing participant.)

While we do not know the exact reason this participant does not want to take the benefit, we believe that upon seeing the lump sum catch up amount, the participant got scared that the increase in income could actually result in being kicked out onto the street from where the participant receives care.