Lost Participant found many years after required minimum distributions should have started

[gle318612]

I am looking for any thoughts or regulatory guidance (please cite such if it exists) to deal with the following scenario...a participant with a qualified defined benefit pension plan was a lost participant for a lengthy period of time (25+ years or more). The participant had not been employed with the company for many years prior to what should have been the date his plan benefit should have been commenced (it should have been commenced on his normal retirement date of 2-1-94) based on the plan provisions. He was recently found July 2011...at the age of 82)...long after the date that his benefit should have been commenced (normal retirement date)and long after required minimum distributions should have commenced. He is not a 5% owner...thus required minimum distributions should have commenced by April 1 following the end of the calendar year in which he achieved age 70 and 1/2....based on current applicable law and associated regulatory guidance.

The benefit is not insignificant..being slightly over $1,000 per month (single life annuity at normal retirement date...he is not married)...and he is due that amount per month back to 2-1-94 and continuing until his death.

If participants or beneficiaries do not receive their minimum distribution on time, they (not the plan) are subject to a 50% additional tax on the underpayment. To pay the additional tax, the participant or beneficiary must attach Form 5329 to their federal income tax return for the calendar year in which the minimum distribution was due. The IRS may waive the additional tax for reasonable cause, if reasonable steps are being taken to make up the distribution. I understand, however, if there is reasonable error, the individual may file for a waiver following the procedure described in the Form 5329 instructions.

Is there any specific guidance (maybe some "special dispenation") allowed in a case of a lost participant such as this that avoids the necessity of the participant having to file for a waiver per the procedure described in the Form 5329 Instructions? Any other thoughts/guidance? Do the retroactive annuity starting date regulations/guidance have application in some form here? How about thoughts on required withholding (federal) of what will be a rather large payment to "catch him up"? We're still figuring out what the state withholding (if any would be).

Thanks for any help. Odd case. Bit of a brainteaser...at least for me.

[Guest Sieve]

A correction for missed MRDs can be applied for by the Plan under VCP (in Rev. Proc. 2008-50). The calculation is reasonably straight forward (see Appendix A, .06). Waiver of the excise tax can be applied for, as well (see Section 6.09(2)). I have applied for, and received, correction for at least 10 missed MRDS for the "un-lost" President of the plan sponsor, without including payment of any interest.

I guess you could seek a waiver of the excise tax without proceeding under EPCRS, but, since failure to make the payment is a tax-qualification issue, why not use EPCRS to protect the Plan? (Except, of course, the correction fees can be high for large plans.)

[Kevin C]

There is a special $500 VCP filing fee for missed RMD's, unless you have a lot of other participants with missed RMD's.

Rev. Proc. 2008-50, Section 12.02(2) If (a) a VCP submission involves the failure to satisfy the minimum distribution requirements of § 401(a)(9) for 50 or fewer participants, (b) such failure is the only failure of the submission, and © the failure would result in the imposition of the excise tax under § 4974, the compliance fee is $500.

[Guest Sieve]

My, oh my! The Sieve fanned on another bouncer from the red line!! . . .

[EPCRSGuru]

I have an almost identical situation but it affects multiple participants. Does anyone know how the VCP program and the participant's filing of the 5329 interact, if they do?

We are a cash-balance plan whose determination letter application has been in limbo for many years. No determination letter = no VCP.

The affected participants are asking us to provide letters documenting the situation to attach to their 5329, but we are being advised not to do so pending the VCP, which of course has not even been filed yet. I figure we can put the participants off until 12/31 if we have to, but we won't get our VCP resolved by then either, so what's a participant to do?

Any thoughts?

[Kevin C]

You can contact the IRS and ask if your determination letter request on perpetual hold would still qualify the plan for VCP. You might be surprised at the answer you get. Here is a page I found on their site with contact info.

http://www.irs.gov/retirement/article/0,,id=96919,00.html

Or, you could file VCP as a John Doe and disclose the DL status. You may want to do this even if they tell you the plan is currently eligible for EPCRS.