Failure to Take RMD After Five Years - Excise Tax?

[EBECatty]

From the payee's side, a 401(k) participant's non-spouse beneficiary failed to take a full RMD after five years. The plan document required a five-year full distribution. Year 5 ended several years back. No RMDs have been taken, and the entire original balance is still in the plan.

Not concerned about the plan sponsor's side, except to the extent their submission through VCP would help avoid payee's excise taxes.

I'm reading 54.4974-2, Q&A 5 to say that the RMD for each year after Year 5 represents a separate RMD failure for each subsequent year based on the entire remaining balance in each subsequent year.

Say Year 5 end-of-year balance is $100,000. Failure to remove everything results in a $50,000 excise tax in Year 5.

Year 6 end-of-year balance is $110,000. Failure to remove everything during Year 6 (the required RMD for Year 6 per Q&A 5 is the entire remaining balance) results in an additional $55,000 excise tax for Year 6.

Year 7 end-of year balance is $120,000. Failure to remove everything results in an additional $60,000 excise tax for Year 7.

And so on. After three years, the excise tax would be greater than the original plan balance,

I don't see any relief except potentially the IRS's consideration of waiving the excise tax for "reasonable error."

Would someone point out what I'm missing?

[Belgarath]

Does seem pretty harsh, doesn't it? I don't think you are missing anything. However, I do wonder about the plan sponsor being essentially blameless on this.

May very well be true, but you can bet any plan beneficiary facing that kind of an excise tax, if the IRS refuses to waive, will be looking to see who they can sue, and for what reason...

[EBECatty]

It does. You would think, as a practical matter, the IRS would waive maybe all but one year's worth (or hopefully more). Or at the absolute most the entire plan balance. I can't imagine them enforcing an excise tax of 300% of the plan balance....

[Belgarath]

FWIW, my experience is that the IRS has actually been very reasonable about waiving the penalty tax, but you sure hate to have to count on that. The situations I've seen have been "regular" RMD's not under the 5-year rule, so I don't know if they are similarly receptive in those 5-year situations. Good luck!

P.S. - I'd love to know the ultimate resolution on this, when it ever is resolved. Thanks.

[Tom Poje]

If the corrections under EPCRS are any guideline, it never gets to that point - you are supposed to reduce the balance by what should have been paid.

this sounds like a death benefit, which means there shouldn't be anything left after 5 years, so if the balance is reduced by what was missed there shouldn't be anything left.

.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