rmd missed in 2008 and 2010

[Guest Mk9522]

A spousal bene missed taking a rmd in 2008 and 2010. This was due to admin error by recordkeeper

All RMD's were made in 2011. Did earnings have to be calculated on the missed RMD's?

In what year are the missed RMD's taxed ? In 2080 and 2010, when they should have been made? or when they were received?

[ETA Consulting LLC]

The distributions will be taxed in the actual year received. The spouse should file for a waiver of the excise penalty for the missed RMD. Typically, I would not distribute earnings (as the amounts may be neglible with respect to the RMD amounts). That would be a judgement call. In addition to the spouse, the plan has an issue as it has failed to operate under it's written terms.

Good Luck!

[Tom Poje]

the long winded answer (from EPCRS Appendix A

06 Failure to timely pay the minimum distribution required under § 401(a)(9). In a

defined contribution plan, the permitted correction method is to distribute the required

minimum distributions (with earnings from the date of the failure to the date of the

distribution). The amount required to be distributed for each year in which the initial

failure occurred should be determined by dividing the adjusted account balance on the

applicable valuation date by the applicable distribution period. For this purpose, adjusted

account balance means the actual account balance, determined in accordance with

§ 1.401(a)(9)-5 Q&A-3, reduced by the amount of the total missed minimum distributions

for prior years. In a defined benefit plan, the permitted correction method is to distribute

the required minimum distributions, plus an interest payment representing the loss of use

of such amounts.

................

all that being said you are supposed to follow the following process (or at least these are the notes I have picked up over the years from other sources):

You can’t ask for the penalty to be waived until you have actually taken the distribution. This is proof you are trying to fix the situation as soon as possible.

Fill out form 5329.

Write letter begging for mercy, explaining the reason you didn’t receive the minimum distribution was the incompetence of the investment house or something similar.

Years ago, it was required to send in the 50% penalty and hope the IRS would have leniency and waive the penalty and return the money. Now simply send in the letter with the Form 5329, and if they don’t accept your lame excuse they will bill you.

.............

Finally, of course we all know these things are never our fault, but the following sums up well the situation

It's not my job to run the train.

The whistle I don't blow.

It's not my job to say how far,

the train's supposed to go.

I'm not allowed to pull the brake,

or even ring the bell.

But let the damn thing leave the track,

And see who catches hell!

[Guest Mk9522]

If the spousal beneficiary takes a full distribution from the account within 5 years of death ...is the excise tax automatically waived?

[masteff]

If the spousal beneficiary takes a full distribution from the account within 5 years of death ...is the excise tax automatically waived?

Did the original participant die before or after their required beginning date? If it was before, then yes, the spouse could use the 5-year rule. And the way I read form 5329, it's not that the tax would be waived but that it simply wouldn't be due because the MRD would be taken by it's due date, ie by the end of 5 years.

If you're unsure or it's after, you might post the details (ee and spouse's DOBs and ee's date of death), in case we can spot something you're missing.

[Kevin C]

If you go the VCP route, you can request that the excise tax be waived. We've done that a couple of times and had it waived.

Rev. Proc. 2008-50, Section 6.09(2) As part of VCP and Audit CAP, if a failure involves the failure to satisfy the minimum required distribution requirements of § 401(a)(9), in appropriate cases, the Service will waive the excise tax under § 4974 applicable to plan participants. The waiver will be included in the compliance statement or in the closing agreement in the case of Audit CAP. Under VCP, the Plan Sponsor, as part of the submission, must request the waiver and, in cases where the participant subject to the excise tax is either an owner-employee as defined in § 401©(3) or a 10% owner of a corporation, the Plan Sponsor must also provide an explanation supporting the request. See section 12.02(2) relating to the applicable compliance fee for certain § 401(a)(9) failures. Under Audit CAP, the Plan Sponsor must make a specific request for waiver of the excise tax under § 4974. The Plan Sponsor should also provide an explanation supporting the request for a waiver. Upon reviewing the request, the reasons for the failure, and other facts or circumstances of the case under examination, the Service will determine whether it is appropriate to approve the waiver of the excise tax as part of the closing agreement negotiated under Audit CAP.

[Guest doh5557]

If the spousal beneficiary takes a full distribution from the account within 5 years of death ...is the excise tax automatically waived?

Did the original participant die before or after their required beginning date? If it was before, then yes, the spouse could use the 5-year rule. And the way I read form 5329, it's not that the tax would be waived but that it simply wouldn't be due because the MRD would be taken by it's due date, ie by the end of 5 years.

If you're unsure or it's after, you might post the details (ee and spouse's DOBs and ee's date of death), in case we can spot something you're missing.

there are 3 missed MRDs

1. Participant died after starting MRD's.... benefeficiary is the son..participant died in 2009... missed 2010 MRD

2. Participant dies after starting MRD's...bene is wife, 5 years younger...missed 2008 and 2010 MRD

3. Particiapnt died after starting MRD's...bene is wife 3 years younger...missed 2008 and 2010 MRD

[masteff]

1) I asked about DOBs simply to make sure you were correctly apply the regs regarding required beginning date... a distribution is only a 401(a)(9) MRD if it occurs after the RBD, which generally speaking is April 1st of the year after attaining age 70 1/2 or retiring (eg, a distribution at age 68 that otherwise resembles an MRD is not a 401(a)(9) MRD). The regs at 1.401(a)(9)-2 discuss required beginning date.

2) Based on how I read the code at 401(a)(9) and Q&A-5 at 1.401(a)(9)-5, when death is after the required beginning date, then the 5-year option is not allowed. So, I believe you'll need to look at EPCRS and possibly file w/ the service.

In addition to Tom and Kevin's citations from EPCRS, I'll point out that if you do determine you need to file... at least it won't be grossly expensive:

"(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 KennyH]

the long winded answer (from EPCRS Appendix A

06 Failure to timely pay the minimum distribution required under § 401(a)(9). In a

defined contribution plan, the permitted correction method is to distribute the required

minimum distributions (with earnings from the date of the failure to the date of the

distribution). The amount required to be distributed for each year in which the initial

failure occurred should be determined by dividing the adjusted account balance on the

applicable valuation date by the applicable distribution period. For this purpose, adjusted

account balance means the actual account balance, determined in accordance with

§ 1.401(a)(9)-5 Q&A-3, reduced by the amount of the total missed minimum distributions

for prior years. In a defined benefit plan, the permitted correction method is to distribute

the required minimum distributions, plus an interest payment representing the loss of use

of such amounts.

I am curious about the bolded, in particular does the term earnings strictly refer to an increase in the account balance or does it also include a reduction in accoun balance due to losses? For example, if the 2010 RMD is $1,000 and is payable 12/31/2010, but the account has decreased due to investment losses between 12/31/2010 and the distribution date, does the RMD decrease or is it still $1,000?