Missed RMD's - IRS waiver of penalties

[Belgarath]

EGTRRA restatement didn't change to the option not to require RMD's if still working (an oversight, apparently) so missed RMD's are applicable for one person for 3 years for an employee. Total of maybe $25,000 or so, since the "RMD" in a DB plan is the monthly benefit...(Governmental plan, no HC's)

I've found the IRS to be pretty reasonable about waiving the penalties in DC situations, but haven't happened to request a waiver in a DB situation. Anyone have similar luck with DB's?

[Calavera]

Same in DB. So, pay the proper amount to participant before end of this year. Then:

Option 1: VCP - cost $500 + preparation fees - excize tax relief is a part of the filing

Option 2: Advise to file Form 5329 together with tax forms including "tear-stained" letter explaining the situation and ask for forgiveness. See instruction for the Form 5329 https://www.irs.gov/pub/irs-pdf/i5329.pdf

[My 2 cents]

If a plan that continues to provide for "RMDs" for non-owners over 70 1/2 who remain in employment (assuming that is the situation) does not issue those payments, would that failure (although it could be a failure to follow plan provisions issue) result in there being missed RMDS subject to excise taxes? The law pretty clearly does not require that they be made or else. So I would not think that the participants would have to suffer any penalties. I would not expect the rules to be more stringent for a governmental plan than for a corporate plan.

I don't wish to cast aspersions on the EGTRRA restatement, but that requirement (required beginning date = 4/1 after year of age 70 1/2 even for active non-owner employees) went away a very long time ago, not just due to the passage of EGTRRA. SBJPA, effective c.1997? GUST restatements should have provided that non-owners would not have to receive RMDs until after the later of retirement or age 70 1/2. What else might be wrong with the EGTRRA restatement?

[Belgarath]

My 2 cents - excellent question, and I'm not certain of the answer. By any reasonable standards, you are correct. But 1.401(a)(9)-2, A-2 (e) says that "A plan is permitted to provide that the required beginning date "for purposes of 401(a)(9)" for all employees is April 1 of the calendar year following, etc....

I don't know if the phrase I put in quotations subjects the individual to the penalty or not. I prefer the "not" - in this case, it would allow for SCP as an operational error.

Any other opinions? Does the phrase in quotations subject the individual to the penalty?

[Slider]

See Reg Sec 54.4974-2 Q&A 4 (b)(4) (the penalty regs)

[My 2 cents]

I guess I stand corrected, but why would a sponsor want to provide that? If the sponsor can provide that, maybe it could lead to there being an excise tax (since it says for purposes of 401(a)(9) which may be sufficient to make the benefit payments an RMD).

It all sounds like the sponsor's fault. If they wanted to provide that, they should have administered the plan accordingly. If the excise tax cannot be waived, the sponsor should have to make the participant whole. The participant is not the one who should have to shed the tears to produce a tear-stained letter for the IRS.

[Slider]

The reg that I cited above basicaly says that the excise tax is payable based on the "later of 70 1/2 or retirement" (except for 5% owners), even if the plan requires payments at 70 1/2.

So, there would be no excise tax for the employee.

However, the plan administrator did not operate the plan in accordance with the document and for that the plan has to follow the correction procedures.

[Belgarath]

Thanks!!

[karl]

We have a 401k plan that missed processing the first RMD for a participant by the 4/1/2015 Required Begin Date. Looking to correct through VCP but have no experience in what forms to use. From what I can tell looks like we need a Form 8950, Form 8951, Form 14568, and Form 14568-H.

Are these correct? Any tips or suggestions are appreciated.

[Tom Poje]

These are my notes from an ASPPA talk I gave years ago.

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 payment and include a copy with form 5329

Fill out form 5329. (questions 50-53)

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.

.........................................................................

the IRS instructions found at https://www.irs.gov/instructions/i5329/ch02.html#d0e992, but I listed the important points below.

The form is found at https://www.irs.gov/pub/irs-pdf/f5329.pdf

Waiver of tax. The IRS can waive part or all of this tax if you can show that any shortfall in the amount of distributions was due to reasonable error and you are taking reasonable steps to remedy the shortfall. If you believe you qualify for this relief, attach a statement of explanation and file Form 5329 as follows.

1.Complete lines 50 and 51 as instructed.

2.Enter “RC” and the amount you want waived in parentheses on the dotted line next to line 52. Subtract this amount from the total shortfall you figured without regard to the waiver, and enter the result on line 52.

3.Complete line 53 as instructed. You must pay any tax due that is reported on line 53.

[i can't imagine anything but 0 here unless there is some other amount that was due]

The IRS will review the information you provide and decide whether to grant your request for a waiver.

..............

sorry, that is as far as I go.