RMD - Please confirm that my thinking is right

[Guest MikeD]

Just met with a client who has a 401k plan. One of the owners should have started taking RMDs in 2010 or 2011, but did not. I am helping them correct this. I know, under Self Correction, they can correct this. However, if I am reading correctly, we will need to go through VCP for a waiver of the 50% excise tax. Is that correct?

Should they go ahead and process all prior RMDs before the end of the year or wait until the VCP submission to do the prior year distributions and just do the current year distribution in 2013?

Thanks so much for your thoughts.

[Tom Poje]

these were my notes from a few years ago. I don't think you have to go through VCP, but not 100% sure on that.

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.

since no matter what happens you get blamed, the following is applicable:

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 trains 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!

[Calavera]

It is too late to use Self Correction for the 2010 missing RMD if it is considered to be a significant operational failure. You can correct this through Self Correction if it is considered to be an insignificant operational failure (facts and circumstances). Review RevProc 2013-12 for more details.

Otherwise you need to go through VCP - $750 + cost of preparing the filing. As part of VCP filing you can ask for excise tax forgiveness without any specific letter. Without VCP filing, use form 5329 as Tom outlined in his post.

[justanotheradmin]

My understanding is that if the RMD failure only involves Owners - there has to be a really, really good reason for the IRS to agree to waive the excise tax. I did get the excise tax waived on through a VCP on two owners who had missed RMDs, but there was also one rank and file terminated participant's whose RMD was missed, and it was a matter of the distribution paperwork being submitted timely, and just not being processed.

I haven't been successful in getting the excise taxed waived through VCP if the only missed RMDs were for owners. But its been awhile since I tried, so maybe something has changed.