Missed RMDs for numerous years

[cpc0506]

Client has come to us. The client had a SEP and then dropped the SEP and added a Profit Sharing Plan.

Has not filed any Form 5500s. They did not know they had to (their words). This I can fix using DFVC Program.

There are also a number of missed RMD payments. How can this be corrected without penalty to affected participant?

[Tom Poje]

These are my notes from a distribution talk I gave a few years ago regarding missed min distributions

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!

well, all kidding aside

1.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. so make the distributions.

2. Fill out form 5329

3. 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. include copies as proof that the distribution has been made.

By the way, 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.

good luck.

[Kevin C]

You can request a waiver of the excise tax as part of a VCP filing. If it involves 50 or fewer participants, the filing fee is $500. If the participant is an owner-employee or a 10% owner of a corporation, you have to include an explanation. The details are scattered around in Rev. Proc. 2008-50.

[cpc0506]

Client now tells me that the distributions were made but from the wrong plan. This was confirmed. This was an Advisor error, as the advisor calculated the amount for both the SEP and the Profit Sharing Plan and took entire amount from the SEP. Advisor claims he was not aware of the rule regarding where the funds needed to be distributed from. The distributions were ‘timely’ in one sense, but not ‘timely’ in the legal sense.

How would you handle this?

[rcline46]

Sue the advisor for malpractice. Why was the service provider of the plan not consulted? Make the advisor pay the fees to prepare the VCP submission and the IRS penalties under EPCRS.

[K2retire]

Client now tells me that the distributions were made but from the wrong plan. This was confirmed. This was an Advisor error, as the advisor calculated the amount for both the SEP and the Profit Sharing Plan and took entire amount from the SEP. Advisor claims he was not aware of the rule regarding where the funds needed to be distributed from. The distributions were ‘timely’ in one sense, but not ‘timely’ in the legal sense.

How would you handle this?

It is a common misunderstanding among advisors. Because IRAs can be considered as a group and the RMD need not be taken from each separately, people assume the same is true of qualified plans.

[jpod]

How much more did the client take out of the SEP IRA than he had to take? The unnecessary loss of tax deferral could be additional damages caused by the advisor's bad advice, and if the $$ are big enough a lawsuit may be worthwhile here if client can find a lawyer willing to take the case on a contingency basis.