Failure to make mandatory distribution by 12/31/2005

[Richard Anderson]

Admittedly, we are slackers with respect to this issue. There will be quite a few mandatory distributions that we should be doing automatic rollover to IRAs for, but we got started late. This post is not related to the issue of not amending; assume that the amendment is done by 12/31/2005 for a calendar year plan.

I have several questions regarding this:

1). Are we the only ones who aren't going to be distributing by 12/31/05?

2). What is the correction for not following the terms of the document? We should have done automatic RO distributions by 12/31/05?

3). I think we can self correct as an insignificant failure and distribute in Jan or Feb of 06. Assuming the self correction is done properly; does anyone see much risk in doing this?

Different, but somewhat related situation: Assume "Good Faith" amendment is timely done and automatic RO done before 12/31/05 for a participant. But, this participant terminated in 2003 and per plan document should have had a mandatory distribution prior to 2005. Am I correct in that the IRS relief for automatic ROs done by 12/31/2005, is only relief for distributions that should have been done some time after 3/28/05? What would you do in this case?:

4). EPCRS self correction?

5). Nothing, other than the distribution

6). Something else

Second different, but somewhat related situation: We took over a plan recently that had already done an amendment lowering the mandatory threshold from $5,000 to $1,000. But, this plan has several participants who have balances between 1,000 and 5,000 that should have had mandatory distributions in prior years based on the plan document in effect in prior years.

7). Is there a correction for this? The plan no longer allows mandatory distributions on balances over $1,000.

Thanks

[Nate X]

1. Most documents that I've seen do not use the last day of the plan year as a determination date for paying mandatory distributions. So for most practitioners (I assume) the 12/31/05 date is irrelevant other than making sure the amendment is signed by this date. More common language would be "as soon as administratively feasible".

2. Worst case scenario: Plan Disqualification. You should be doing mandatory distributions by the terms of your document.

3. I don't want to comment on the correction programs for any of the situations. It is too subjective. There are many factors that play into this.

The new rule was effective for distributions made after March 28, 2005. It does not matter when the distribution was supposed to be done. It only matters what the rule is on the date of distribution.

[E as in ERISA]

It depends on each plan's formal or informal policy with regard to the timing of mandatory distributions. I think that most are informal. A plan that does them once every year in March (balance forward plan) would be able to delay to 3/2006. But a plan that has been doing them monthly should try and be up and running again and caught up by the end of the year. Technically you have an operational violation (failure to follow plan terms) if you don't. But the correction would be to make the distribution. I think that you're safer the sooner you get caught up. Best by 12/31. But unclear what the ramifications are for going beyond that by a month or two or more.