RMD's not made and plan is now being audited

[Sully]

I have a client that did not make the required 401(a)(9) distributions for the 2003 calendar year. The missed distribution amounts were $2,000 to NHCE’s and $6,600 to HCE’s (> 5% owner). The distributions ended up being made on January 26, 2004. To my knowledge, none of the participants reported the late distributions and paid the associated penalty tax. Also, no VCP filing was done.

The plan has received notice from the IRS that the 2004 plan year (calendar year) will be audited. I am sure the IRS will have questions about the distributions that were made in January and I am at wit’s end trying to figure what can be done, if anything.

Anybody have any suggestions on what we can be done at this point or do we just wait and see what the IRS says and go from there?

Thanks for any thoughts.

[AndrewZ]

As I recall EPRSC (Rev Proc 2003-44) allows a plan to self-correct by making the RMD at the time the failure is discovered. I don't remember the details off-hand, but you can review the Rev Proc. I'm not sure if there's a deadline, or if you can do it for the year under axamination, but it might help.

I have a client that did not make the required 401(a)(9) distributions for the 2003 calendar year. The missed distribution amounts were $2,000 to NHCE’s and $6,600 to HCE’s (> 5% owner). The distributions ended up being made on January 26, 2004. To my knowledge, none of the participants reported the late distributions and paid the associated penalty tax. Also, no VCP filing was done.

The plan has received notice from the IRS that the 2004 plan year (calendar year) will be audited. I am sure the IRS will have questions about the distributions that were made in January and I am at wit’s end trying to figure what can be done, if anything.

Anybody have any suggestions on what we can be done at this point or do we just wait and see what the IRS says and go from there?

Thanks for any thoughts.

[Sully]

I've been through Rev. Proc. 2003-44 and it's not much use now since the plan is under examination.

My real concern is whether or not the IRS would try to disqualify the plan since the 401(a)(9) distributions for 2003 were not made until 1/26/04. Any thoughts?

[AndrewZ]

I would seriously doubt they would disqualify the plan, that's a pretty minor issue, not abusive nor harmful to any participants. I think worst-case they would make you do the distributions now, and possibly impose the 50% penalty on the participants.

I've been through Rev. Proc. 2003-44 and it's not much use now since the plan is under examination.

My real concern is whether or not the IRS would try to disqualify the plan since the 401(a)(9) distributions for 2003 were not made until 1/26/04. Any thoughts?