Plan didn't make required minimum distribution for 1996 and 1997 to t

[Guest kurt johansen]

I'm dealing with a plan that did not make RMDs for 1996 and 1997 to two employees who attained age 701/2 in those years. Because of changes made by SBJPA, employees who are still working and aren't 5% owners are not required to take distributions. However, according to the IRS, a plan cannot take away the option to take a distribution at age 701/2 because it is a protected benefit. The Irs published Notice 97-70 which gave employers until December 31, 1997 to offer employees an election to defer. Our employer did not provide the election until December 28, 1998. (Both employees opted to defer).

I originally thought that this was a failure to make a RMD subject to excise tax and so on. However, upon furthere analysis, these employees were not required to take distributions under 401(a)(9) because they were still employed. The failure was that the plan did not follow its own terms and make distributions when the employees turned age 701/2. Do you agree with that analysis?

if so, would the proper correction be to make the required minimum distributions for the 1996 and 1997 years based on the terms of the plan? Would earnings need to be calculated and added into the minimum distributions?

[M R Bernardin]

Just curious, does the plan permit in-service distributions prior to age 59-1/2? If so, the plan could probably eliminate the minimum distribution option without worrying about cutbacks.

I agree with your analysis that no excise tax should be owing. However, since the employees eventually elected to defer anyhow, rather than take a distribution, it might be enough of a fix to simply get their elections on file (sort of similar to getting a spouse to consent to an optional payment form when the plan administrator failed to get consent initially). It should only be when they do not elect to defer that a distribution ought to be required. You might want to check other guidance issued by the IRS in late 1997/early 1998 on this, because there were many employers who failed to issue timely election notices.

[Richard Anderson]

Check Code Section 1.411(d)-4 Q&A 10. Relief from the anti-cutback rules of 411(d)(6)is provided for plan amendments that eliminate preretirement distributions commencing at age 70 1/2 to non 5% owners.

A plan can be amended to eliminate the in-service distribution to non 5% owners, therefore if your plan amends there would be no RMD before retirement for the two employees that attained age 70 1/2 in 96 and 97.

The amendment must be done by the end of the remedial amendment period for SBJPA.

[M R Bernardin]

The regulations cited provide relief from the anti-cutback rules, but only with respect to people who turn 70-1/2 in a calendar year after the calendar year in which an amendment eliminating the RMD option is adopted. For example, if you adopt an amendment in 1999, you don't have to worry about RMDs for people who turn 70-1/2 in 2000, but that does not mean you can retroactively eliminate the RMD for those who turned 70-1/2 in 1999 or earlier years. If you don't amend within the remedial amendment period, you will not be able to eliminate the RMD option at all, except with respect to future accruals.