Failure to make RMDs for several years

[Dennis Povloski]

We have a takeover plan that has maybe 15 participants that are older than 70.5 and no longer employed. The plan has never paid an RMD to anyone as far as I can tell. I'm reading Rev. Proc 2013-12 regarding the VCP program. It says that the plan sponsor should pay out the distributions that should have been made plus an additional interest payment based on the plan's actuarial equivalence factors.

A couple questions.....

Since they refer to an "interest payment", should there be any adjustment for post retirement mortality? The participant didn't die yet, so I suppose that could be a really dumb question.

Does the additional interest payment come from the plan, or does the employer pay that from outside of the plan (like they would an excise tax)?

If the plan goes through VCP, and they request relief with regard to the Excise tax, how does the participant prove to the IRS that the excise tax was waived? Should the plan give them a copy of the compliance letter they get as a result of the VCP filing?

[mming]

If it can be presumed that all 15 participants attained their NRA before they were due any RMDs, I wouldn't think there would be any actuarial adjustments needed, as the RMDs would've been 12 times their monthly benefit. It would seem reasonable to have the plan pay these amounts increased to date with the interest rate specified in the document's definition of actuarial equivalence without any consideration for mortality. I don't believe the IRS' decision on whether or not to waive the excise tax would affect the participants.

[Peter Gulia]

To respond to Dennis Povloski's query about what (if anything) the employer must pay concerning interest payments, what do BenefitsLink mavens think?

Must the fiduciary that breached (by failing to administer the plan according to its terms), restore the plan's losses that result from the breach?

Or is it enough that the employer regularly pays in at least a minimum contribution based on what the actuary reports as necessary to fund the plan's benefits?

[Tom Poje]

these are the notes that I have (which were written for DC plans and I think self correcting but not through VCP):

of course with DC plans it was a little easier because you are playing with an account balance not a benefit.

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.

so when you ask how does the participant prove the IRS waived the tax, it sounds like a vicious circle. I thought the idea of VCP was you were asking if your suggested method was ok, so you wouldn't know at that point if the excise fee was waived or not.