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?

[Tom Poje]

Using EPCRS as a guideline - it indicates you are supposed to adjust the account balance by reducing what should have been paid, so I don't think you ever get to the point you are talking about.

I assume you are talking about a death benefit, which the rules usually say it is 5 years and done, and I think the reg cite you are noting is simply saying, if by chance you have anything left after 5 years, stop calculating and get the whole thing paid out.

Appendix A
.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.